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

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

                  For the fiscal year ended July 31, 2003

                                       Or

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

               For the transition period from           to           .

                        Commission File Number: 000-28369

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

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

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

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

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

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

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

    Indicate by check mark whether the  Registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]

    As of September 30, 2003,  there were 57,047,288  shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates  of the Registrant as of September 30, 2003 (based on the closing
price for the  Common  Stock on the  NASDAQ  National  Market for such date) was
approximately $213,418,950.  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 2003 Annual Meeting of Stockholders
("Proxy  Statement") to be held on December 3, 2003, and to be filed pursuant to
Regulation 14A within 120 days after the Registrant's fiscal year ended July 31,
2003,  are   incorporated  by  reference  into  Part  III  of  this  Form  10-K.
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                                       1

<PAGE>



                                Table of Contents

<TABLE>
<CAPTION>
                                                               PART I

 Item 1      Business
<S>                                                                                                                              <C>
                  Overview....................................................................................................   3
                  Sales and  Marketing........................................................................................   4
                  Research and Development....................................................................................   5
                  Competition.................................................................................................   5
                  Significant Customers.......................................................................................   6
                  Seasonality.................................................................................................   6
                  Intellectual Property Rights................................................................................   6
                  Employees...................................................................................................   6
                  Segments....................................................................................................   6
                  Investor Information........................................................................................   7
 Item 2      Properties.......................................................................................................   7
 Item 3      Legal Proceedings................................................................................................   7
 Item 4      Submission of Matters to a Vote of Security Holders..............................................................   8

                                                               PART II

 Item 5      Market for the Registrant's Common Stock and Related Stockholder Matters                                            8
 Item 6      Selected Consolidated Financial Data............................................................................   10
 Item 7      Management's Discussion and Analysis of Financial Condition and Results of Operations...........................   11
 Item 7A     Quantitative and Qualitative Disclosures About Market Risk......................................................   33
 Item 8      Financial Statements and Supplementary Data.....................................................................   34
 Item 9      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................   58
 Item 9A     Controls and Procedures.........................................................................................   58

                                                               PART III

 Item 10     Directors and Executive Officers of the Registrant                                                                 58
 Item 11     Executive Compensation..........................................................................................   58
 Item 12     Security Ownership of Certain Beneficial Owners and Management..................................................   58
 Item 13     Certain Relationships and Related Transactions..................................................................   59
 Item 14     Principal Accounting Fees and Services. ........................................................................   59
                                                               PART IV

 Item 15     Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................   60
              Signatures.....................................................................................................   60
</TABLE>

                                       2
<PAGE>


                                     PART I
Item 1.  Business

Special Note Regarding Forward-Looking Statements

    This Form 10-K contains  forward-looking  statements  that involve risks and
uncertainties.  Words such as "intend," "expect,"  "believe," "in our view," and
variations of such words and similar expressions,  are intended to identify such
forward-looking  statements,  which include,  but are not limited to, statements
regarding our  expectations and beliefs  regarding future revenue growth;  gross
margins;  financial performance and results of operations;  technological trends
in,  and  emergence  of  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,  reductions in force and new business model on
our operating expenses and the amount of cash utilized by operations; our intent
to  continue  to  invest  significant  resources  in  development;  competition,
competitors  and our ability to compete;  liquidity and capital  resources;  the
outcome of any litigation to which we are a party; our accounting policies;  and
sufficiency  of  our  cash   resources,   cash  generated  from  operations  and
investments  to meet our  operating  and working  capital  requirements.  Actual
results  may  differ   materially  from  those  expressed  or  implied  in  such
forward-looking  statements due to various factors, including those set forth in
the  Risk  Factors   contained  in  the  section  of  this  Form  10-K  entitled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations." We undertake no obligation to update the forward-looking statements
to reflect events or circumstances occurring after the date of this Form 10-K.

Overview

     We were  incorporated in California in January 1995 and  reincorporated  in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development  Network,  Inc. ("OSDN"),  a network of Internet Web
sites.

     SourceForge   is   proprietary   software   designed  for   corporate   and
public-sector   information   technology   ("IT")   professionals  and  software
engineering  organizations.  SourceForge is a Web-based application that enables
IT and software engineering organizations to manage application development more
effectively.  SourceForge  combines software development and collaboration tools
with the ability to track,  measure,  and report on software project activity in
real-time. With SourceForge,  developers and project managers gain access to the
information they need to reduce risk and become more productive.  SourceForge is
a  relatively  new product  and  additional  development  and  enhancements  are
expected in the future.

    OSDN is a network of media and  e-commerce  Internet  sites  serving  the IT
professionals and software  development  communities.  As of September 30, 2003,
OSDN  reaches 10 million  unique  visitors and serves more than 180 million page
views per month. Our OSDN Web sites include:

    o   SourceForge.net,  our flagship Web site and software development center.
        As of September 30, 2003,  SourceForge.net  was the development home for
        more than 68,000 software development projects and had more than 707,000
        registered users.

    o   Slashdot.org,  our  leading  discussion  site  for  technically-inclined
        individuals.  Slashdot is  dedicated  to  providing  the IT and software
        development  communities  with  cutting-edge  technology,   science  and
        culture news and interactive commentary.

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

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

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

    o   NewsForge.com,  the online newspaper of record for Linux and open source
        software.

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

                                       3
<PAGE>


SourceForge

    Software  application  development   organizations  are  increasingly  under
pressure to manage  software  development  more  efficiently  and effectively --
controlling  costs and risks while improving  software  quality and process.  We
believe  that  SourceForge  will  help our  target IT and  software  engineering
customers  efficiently  address  challenges  associated  with  software  process
improvement;   quality  standards   certification;   and  software   development
outsourcing  in  various  sectors  such  as  financial  services,   defense  and
aerospace,  technology,  manufacturing  and  government.  By  aligning  software
development  with  business  goals,   SourceForge  helps  organizations  improve
operational efficiency and build better quality software.

    SourceForge is a comprehensive  solution:  a single application  integrating
software   development,   collaboration   and  management   tools.  It  provides
organizations  with a central repository for all software  development  activity
and information.  SourceForge  supports software development process improvement
initiatives by capturing and archiving software development code,  documentation
and communication in a central location.  SourceForge helps companies  outsource
software development more effectively by providing a standard set of development
tools for in-house and third-party development teams, a central repository,  and
a secure environment for managing and safeguarding intellectual property.

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

       SourceForge  helps companies  build better quality  software by providing
managers and  developers  with improved  visibility  into  software  development
activity,  enabling  better  resource and  requirements  management,  as well as
better defect tracking.  SourceForge  helps companies manage the costs and risks
associated with software  development by enabling  managers to gain insight into
project  status  and to resolve  critical  problems  earlier in the  development
cycle. Organizations with distributed teams and offshore development centers can
achieve  improved  productivity,  communication,   coordination,  collaboration,
project clarity and insight.  We therefore  believe that adoption of SourceForge
can significantly improve our customers' operational efficiency.

OSDN

    We believe that OSDN is the most dynamic  community-driven  media network on
the Web. The cornerstone of the open source software development community, OSDN
attracts  every  level of IT  decision-maker  and buyer,  from chief  technology
officers  (CTOs) to  project  managers.  Technologists,  developers  and  system
administrators turn to OSDN sites to create,  debate, and make or break IT news.
OSDN is  supported  by  sponsors  and  advertisers  who want to reach the unique
demographic of IT professionals and developers that visit the Web sites monthly.
In addition,  OSDN runs e-commerce  sites to allow its visitors to buy a variety
of retail goods of interest to the software development and IT communities.


Sales and  Marketing

  SourceForge

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

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


  OSDN

    We primarily market and sell our Internet  advertisements  via OSDN's direct
sales  organization  and its  Web  sites.  We  primarily  market  and  sell  our
e-commerce  products online via OSDN's Web sites.  In addition,  we have entered
into  co-marketing  agreements  with  certain  third  parties  with  respect  to
marketing OSDN Web sites.

Research and Development

                                       4
<PAGE>


  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  and the  United  States  to
perform  software  development  projects  and  consulting  services  for us on a
contractual  time and  material  basis.  We  coordinate  our  internal  software
engineering with ongoing development at CSS using SourceForge.


  OSDN

    We believe  that the  success of OSDN 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. We  continue  to invest in  improving  the
E-commerce customer service, order processing, shipping and tracking systems. We
also continually develop new animations to meet the needs of Animation Factory's
markets.

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,  Collab.Net,   Inc.,  IBM  Corporation,   Merant  plc,  Microsoft
Corporation,  Oracle  Corporation,  Borland  Software  Corporation,  as  well as
numerous other public and privately held software  application  development  and
tools suppliers.  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.

  OSDN

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

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

                                       5
<PAGE>


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

Significant Customers

    For the fiscal year ended July 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.  We do not  anticipate  that any customer will represent more than
10% of net revenues during the fiscal year ended July 31, 2004.

Seasonality

    With the exception of our ThinkGeek e-commerce  business,  our revenues have
not  been  significantly  impacted  by  seasonality.  Our  ThinkGeek  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 ThinkGeek e-commerce
revenues  occurred in our second fiscal quarter,  which in fiscal year 2004 will
begin on November 1, 2003,  and end on January  31,  2004.  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.

Intellectual Property Rights

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

    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,  Slashdot,  ThinkGeek,  Freshmeat, OSDN, VA Software and the VA
logo 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.

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, 2003,  our employee  base totaled 115,
including  37 in  operations,  27 in sales and  marketing,  34 in  research  and
development and 17 in finance and administration.

Segment and Geographic Information

    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.  During fiscal 2001,  the Company had two  reportable  business
segments for revenue:  systems and services and OSDN. The Company  allocated its
resources and evaluated  performance of its separate  segments based on revenue.
As a result of the Company's decision to exit the systems business in the fourth
quarter of fiscal 2001 and focus on its software  application  business,  during
fiscal 2002 the Company operated as one business segment,  providing application
software  products and related

                                       6
<PAGE>


OSDN  products  and  services.  During the fourth  quarter of fiscal  2003,  two
separate  businesses  emerged  and  as of  July  31,  2003,  we  operate  as two
reportable business segments: software and online. Due to the significant amount
of  shared  operating  resources  that  are  utilized  by both  of the  business
segments,  the Company only reports segment information for revenues and cost of
sales. See Note 11 to the Consolidated Financial Statements.

    The Company  markets its  products in the United  States  through its direct
sales force. Revenues for each of the fiscal years ended July 31, 2003, July 27,
2002 and July 28, 2001 were  primarily  generated from sales to end users in the
United States.


Investor Information

     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.  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.

Item 2.  Properties

    Our  headquarters  is located in Fremont,  California.  At July 31, 2003, VA
Software's  facilities in the United States  represented  leased aggregate floor
space of 266,630  square feet. Of this amount at July 31, 2003,  145,457  square
feet was vacant  and  64,299  square  feet was being  leased to non-VA  Software
businesses.  VA Software has no  facilities  outside of the United  States.  For
additional  information  regarding  obligations under leases,  see Note 5 to the
Consolidated Financial Statements.

Item 3.  Legal Proceedings

      The Company,  two of its former officers (the "Former Officers"),  and the
lead underwriter in its initial public offering ("IPO") were named as defendants
in a consolidated  shareholder  lawsuit in the United States  District Court for
the Southern  District of New York,  captioned In re VA Software  Corp.  Initial
Public Offering Securities  Litigation,  01-CV-0242.  This is one of a number of
actions  coordinated  for  pretrial  purposes as In re Initial  Public  Offering
Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001.
Plaintiffs in the  coordinated  proceeding are bringing claims under the federal
securities  laws against  numerous  underwriters,  companies,  and  individuals,
alleging  generally  that  defendant   underwriters   engaged  in  improper  and
undisclosed  activities  concerning the allocation of shares in the IPOs of more
than 300  companies  during late 1998  through  2000.  Among other  things,  the
plaintiffs  allege  that  the  underwriters'  customers  had  to  pay  excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable  allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported  class of purchasers of its common stock between  December 9, 1999 and
December  6,  2000.  In October  2002,  the court,  pursuant  to a  stipulation,
dismissed all claims against the Company's Former Officers without prejudice. On
February  19,  2003,  the court denied in part and granted in part the motion to
dismiss filed on behalf of the  defendants,  including the Company.  The court's
order did not dismiss any claims against the Company. As a result, discovery may
now proceed.  A proposal has been made for the  settlement and release of claims
against the issuer defendants,  including VA Software. 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 February 28, 2003, a related  case,  captioned Liu v. Credit Suisse First
Boston, et al., Case No. 03-20459, was filed in the United States District Court
for the Southern District of Florida.  The Liu plaintiff was not alleged to have
bought or sold VA  Software  stock.  The  Company  was not  served  with the Liu
complaint. The Complaint related generally to the ongoing IPO-related litigation
currently  pending in the United States District Court for the Southern District
of New York,  described  above.  On June 19, 2003,  the Liu  plaintiff  filed an
amended complaint that dropped the VA Software defendants from the litigation.

                                       7
<PAGE>


    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.

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

    No matter was submitted to a vote of VA Software's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2003.

                                     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 6,  2003,  there were 944  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, 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
          Fiscal Year Ended July 27, 2002:
          Fourth Quarter.............................     $    1.37   $    0.61
          Third Quarter..............................     $    2.42   $    1.20
          Second Quarter.............................     $    3.23   $    1.22
          First Quarter..............................     $    2.26   $    0.78

    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, 2003, all of which have been approved by our stockholders:
<TABLE>
<CAPTION>
                                             A                         B                                   C
<S>     <C>                       <C>                          <C>                  <C>
        Plan Category (1)         Number of securities to      Weighted average      Number of securities remaining available for
                                  be issued upon exercise      exercise price of     future issuance under equity compensation plan
                                  of outstanding options       outstanding options   (excluding securities reflected in column A)
    Equity compensation plan
    approved by stockholders           9,318,632 (2)                 $3.19                       15,081,997 (3) - (6)
</TABLE>


(1)      The table does not include  information for equity  compensation  plans
         assumed by the Company in acquisitions. As of July 31, 2003, a total of
         113,880  shares of the  Company's  common  stock  remain  issuable  and
         outstanding upon exercise of options granted under plans assumed by the
         Company in its acquisition of OSDN. The weighted average exercise price
         of all  outstanding  options granted under these plans at July 31, 2003
         is $37.78.  The Company  does not grant  additional  awards under these
         assumed plans.
(2)      Includes  8,818,632 options outstanding  under the Company's 1998 Stock
         Plan  and   500,000  options  outstanding  under  the  Company's   1999
         Director's Plan.
(3)      Includes 2,225,391 shares of common  stock reserved for issuance  under
         the Company's 1999 Employee Stock Purchase Plan.


                                       8
<PAGE>


(4)      Subject to the terms of the 1998 Stock Plan,  an annual  increase is to
         be added on the first day of the  Company's  fiscal  year  equal to the
         lesser of: 4,000,000 shares,  or 4.9% of the outstanding  shares on the
         first day of the new fiscal year or 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,  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,  1% of the  outstanding
         shares on the first day of the new fiscal year or an amount  determined
         by the Board of Directors.

                                       9
<PAGE>


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,  2003,  July 27,  2002 and July 28,  2001 and the
balance  sheet data as of July 31, 2003 and July 27,  2002 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, 2000
and July 31, 1999 and the balance sheet data as of July 28, 2001,  July 28, 2000
and July 31, 1999 are derived from audited financial statements not appearing in
this Form 10-K.  Historical  results are not  necessarily  indicative of results
that may be expected for any future period.

                          Summary Financial Information
                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                             For the years ended
                                                                  ------------------------------------------------------------------
                                                                    July 31,      July 27,      July 28,      July 28,      July 31,
                                                                      2003         2002           2001          2000         1999
                                                                  ------------  ------------  -----------    ----------   ----------
 Selected Consolidated Statements of Operations Data:
<S>                                                               <C>           <C>           <C>            <C>          <C>
   Net revenues.................................................. $     24,228  $     20,385  $   134,890    $  120,296   $  17,710
   Cost of revenues..............................................       12,780         9,661      154,103        98,181      17,766
                                                                  ------------  ------------  -----------    ----------   ---------
   Gross margin..................................................       11,448        10,724      (19,213)       22,115         (56)
   Loss from operations..........................................      (14,643)      (93,248)    (531,798)      (95,387)    (14,531)
   Net loss......................................................      (13,798)      (91,038)    (525,268)      (89,758)    (14,512)
                                                                  ============  ============= ===========    ==========   =========
   Dividend related to convertible preferred stock...............           --            --           --        (4,900)         --
                                                                  ------------  ------------  -----------    ----------   ---------
   Net loss attributable to common stockholders.................. $    (13,798) $    (91,038) $  (525,268)   $  (94,658)  $ (14,512)
                                                                  ============  ============= ===========    ==========   =========

   Basic and diluted net loss per share.......................... $      (0.25) $      (1.72) $    (10.78)   $    (3.52)  $   (2.62)
                                                                  ============  ============  ===========    ==========   =========
   Shares used in computing basic and diluted net loss per share.       54,110        53,064       48,741        26,863       5,530
                                                                  ============  ============  ===========    ==========   =========

 Selected Balance Sheet data at year-end:
   Cash, cash equivalents and investments........................ $     38,847  $     53,046  $    80,083    $  174,032   $  18,653
   Working capital............................................... $     28,825  $     33,486  $    62,444    $  169,930   $  16,230
   Total assets.................................................. $     48,495  $     66,968  $   173,033    $  585,099   $  27,595
   Liabilities, net of current portion........................... $     11,953  $     15,575  $    13,178    $    1,656   $     424
   Total stockholders' equity (deficit).......................... $     27,202  $     39,388  $   126,362    $  543,875   $  18,363
</TABLE>


Quarterly Financial Data
<TABLE>
<CAPTION>
                                                                                        Fiscal Year 2003
                                                                                        ----------------
                                                                                    For the three months ended
                                                                       -----------------------------------------------------
                                                                        October 26     January 25    April 26      July 31
                                                                       ------------   ------------  ----------   -----------
<S>                                                                    <C>            <C>           <C>          <C>
 Net revenues......................................................... $    5,075     $    6,560    $    6,037   $    6,556
 Loss from operations.................................................     (4,459)        (3,909)       (3,862)      (2,413)
 Net loss attributable to common stockholders......................... $   (4,133)    $   (3,672)   $   (3,610)  $   (2,383)
 Per share amounts:
   Basic and diluted net loss per share............................... $    (0.08)    $    (0.07)   $    (0.07)  $    (0.04)
   Shares used in computing basic and diluted net loss per share......     53,717         53,859        53,935       54,895

</TABLE>

<TABLE>
<CAPTION>
                                                                                           Fiscal Year 2002
                                                                                           ----------------
                                                                                    For the three months ended
                                                                       -----------------------------------------------------
                                                                        October 28     January 27    April 27      July 27
                                                                       ------------   ------------  ----------   -----------
<S>                                                                    <C>            <C>           <C>          <C>
 Net revenues......................................................... $    5,578     $    5,052    $    5,140   $    4,615
 Loss from operations.................................................    (55,963)       (10,701)       (7,906)     (18,678)
 Net loss attributable to common stockholders......................... $  (54,881)    $   (9,656)   $   (7,729)  $  (18,772)
 Per share amounts:
   Basic and diluted net loss per share............................... $    (1.04)    $    (0.18)   $    (0.15)  $    (0.35)
   Shares used in computing basic and diluted net loss per share......     52,678         53,005        53,210       53,485

</TABLE>

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

                                       10
<PAGE>


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

Overview

     We were  incorporated in California in January 1995 and  reincorporated  in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development  Network,  Inc. ("OSDN"),  a network of Internet Web
sites.

    SourceForge is proprietary software designed for corporate and public-sector
information   technology   ("IT")   professionals   and   software   engineering
organizations.  SourceForge  is a  Web-based  application  that  enables  IT and
software  engineering  organizations  to  manage  application  development  more
effectively.  SourceForge  combines software development and collaboration tools
with the ability to track,  measure,  and report on software project activity in
real-time. With SourceForge,  developers and project managers gain access to the
information they need to reduce risk and become more productive.  SourceForge is
a  relatively  new product  and  additional  development  and  enhancements  are
expected in the future.

    OSDN is a network of media and  e-commerce  Internet  sites  serving  the IT
professionals and software  development  communities.  As of September 30, 2003,
OSDN  reaches 10 million  unique  visitors and serves more than 180 million page
views per month. Our OSDN Web sites include:

    o   SourceForge.net,  our flagship Web site and software development center.
        As of September 30, 2003,  SourceForge.net  was the development home for
        more than 68,000 software development projects and had more than 707,000
        registered users.

    o   Slashdot.org,  our  leading  discussion  site  for  technically-inclined
        individuals.  Slashdot is  dedicated  to  providing  the IT and software
        development  communities  with  cutting-edge  technology,   science  and
        culture news and interactive commentary.

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

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

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

    o   NewsForge.com,  the online newspaper of record for Linux and open source
        software.

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

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  eight  quarters of  operations  focused on building  our
application  software  business,  and  accordingly  have a very short  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
continues to be derived from our online  business and we face numerous risks and
uncertainties  that  commonly  confront new and emerging  businesses in emerging
markets, some of which we have identified in the "Risk Factors" section below.

                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            For the years ended
                                                                                     ---------------------------------
                                                                                     July 31,     July 27,    July 28,
                                                                                      2003         2002        2001
                                                                                      ----         ----        ----
            Consolidated Statements of Operations Data:
<S>                                                                                   <C>           <C>          <C>
              Software revenues................................................       12.1%         5.3%         0.0%
              Online revenues..................................................       84.8         78.4         10.9
              Other revenues...................................................        3.1         16.3         89.1
                                                                                     -----        -----        -----
                 Net revenues..................................................      100.0        100.0        100.0
              Software cost of revenues........................................        8.2         11.7          0.0
              Online cost of revenues..........................................       46.1         51.0          7.8
              Other cost of revenues...........................................       (1.6)       (15.3)       106.4
                                                                                     -----        -----        -----
                 Cost of revenues..............................................       52.7         47.4        114.2
                                                                                     -----        -----        -----
              Gross margin.....................................................       47.3         52.6        (14.2)
                                                                                     -----        -----        -----
              Operating expenses:
                 Sales and marketing...........................................       40.4         61.4         29.6
                 Research and development......................................       32.3         39.8         13.3
                 General and administrative....................................       26.6         53.2         16.3
                 Restructuring costs and other special charges.................       (1.1)       230.2         84.1
                 Amortization of deferred stock compensation...................        0.6          8.2         45.4
                 Amortization of goodwill and intangible assets................        8.9         57.5         72.6
                 Impairment of long-lived assets...............................        0.0         59.6        118.6
                                                                                     -----        -----        -----
                   Total operating expenses....................................      107.7        509.9        379.9
                                                                                     -----        -----        -----
              Loss from operations.............................................      (60.4)      (457.3)      (394.1)
              Interest and other income, net...................................        3.5         10.8          4.8
                                                                                     -----        -----        -----
              Net loss.........................................................      (56.9)%     (446.5)%     (389.3)%
                                                                                     =====        =====        =====
</TABLE>

  Net Revenues

    We had two reportable business segments for revenue during fiscal year 2001:
systems  and  services  and OSDN.  We  allocated  our  resources  and  evaluated
performance  of our  separate  segments  based on  revenue.  As a result  of our
decision to exit the systems  business in the fourth  quarter of fiscal 2001 and
focus on our software  application  business,  during fiscal 2002 we operated as
one business segment,  providing  application software products and related OSDN
products and services.  During the fourth  quarter of fiscal 2003,  two separate
businesses emerged and as of July 31, 2003,we operate as two reportable business
segments: software and online.

    Software Revenues

    Software  revenues are derived from our  application  software  business and
include  software  licenses,  professional  services,  maintenance,  support and
training.  Software revenues represent $2.9 million, or 12.1%, and $1.1 million,
or 5.3%,  of total  revenues  for fiscal  years ended July 31, 2003 and July 27,
2002  respectively.  There were no software  revenues  for the fiscal year ended
July 28, 2001.

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

     For perpetual  licenses,  we use the residual method to recognize revenues.
Under  the  residual  method,  the fair  value of the  undelivered  elements  is
deferred and the  remaining  portion of the  arrangement  fee is  recognized  as
revenue.  If  objective  evidence  of the fair value of one or more  undelivered
elements does not exist,  revenues are deferred and recognized  when delivery of
those elements occurs or when fair value can be established. A typical perpetual
license agreement may include professional  services,  maintenance and training.
Revenue from  non-essential  professional  services is recognized as the work is
performed based on fair

                                       12
<PAGE>


value  derived from  published  professional  service  rates.  When an agreement
includes  professional  services  that  are  significant  or  essential  to  the
functionality  of the  software,  and we can  reasonably  estimate  the  cost to
complete the contract,  we use the percentage of completion  contract accounting
method for the entire arrangement,  including license fees. Maintenance revenues
are recognized  ratably over the term of the maintenance  period  (generally one
year).  Software maintenance  agreements provide technical support and the right
to unspecified  updates/upgrades on an  if-and-when-available  basis. Fair value
for the ongoing maintenance obligations are based upon renewal rates, if stated,
or separate sales of maintenance sold to customers.  The unrecognized portion of
amounts paid in advance for licenses,  maintenance and professional services are
recorded as deferred revenue.

     For term  arrangements  where we are unable to establish fair value for the
individual  contract  components  such  as  software  license,  maintenance  and
support,  we recognize  the entire  contract  value ratably over the term of the
contract.  In the  event  that  the  contract  includes  essential  professional
services,  we defer  revenue  until the  professional  services  have been fully
delivered.  At that  time,  we then  recognize  the  revenue  ratably  over  the
remaining contract term.

     If the fee due from the customer is not fixed or determinable, we recognize
revenues  at the  earlier  of the due  date or when  cash is  received  from the
customer,  assuming all other revenue  recognition  criteria have been met. If a
significant  portion of the fee is due after the  shorter of our normal  payment
terms or 120 days, we presume the fee not to be fixed or determinable.

     Online Revenues

     Online revenues include online advertising and e-commerce  revenues.  Total
Online revenues of $20.6 million,  $16.0 million and $14.7 million,  represented
84.8%,  78.4% and 10.9% of total  revenues  for the fiscal  years ended July 31,
2003, July 27, 2002 and July 28, 2001, respectively. Online advertising revenues
of $10.4 million,  $9.0 million and $9.4 million,  represented  43.0%, 44.2% and
7.0% of total  revenues for the fiscal years ended July 31, 2003,  July 27, 2002
and July 28, 2001,  respectively.  Online  advertising  revenues  included  $2.0
million,  $2.0 million and $2.4  million of barter  revenue for the fiscal years
ended July 31, 2003, July 27, 2002 and July 28, 2001,  respectively.  E-commerce
revenues of $10.1  million,  $7.0 million and $5.3 million,  represented  41.8%,
34.2% and 3.9% of total revenues for the fiscal years ended July 31, 2003,  July
27, 2002 and July 28, 2001, respectively.

     Advertising  revenues are derived from the sale of advertising space on our
various Web sites.  We recognize  advertising  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.

     E-commerce  revenues are derived from the online sale of consumer goods and
digital animations.  We recognize  e-commerce revenues from the sale of consumer
goods in accordance with SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition  in  Financial  Statements."  Under SAB 101,  product  revenues  are
recognized  when  persuasive  evidence of an  arrangement  exists,  delivery has
occurred,  the  sale  price  is fixed 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. The majority of the revenues derived from digital animation sales are
related to membership arrangements.  As a result, we recognize the value ratably
over the term of the contract, normally 3 or 12 months.

     Other Revenues

     Other revenues are derived from our former hardware,  customer support, and
professional  services  businesses.  Other revenues  represent $0.8 million,  or
3.1%, of total revenues for fiscal year 2003, $3.3 million,  or 16.3% for fiscal
year 2002 and $120.2 million, or 89.1% for fiscal year 2001.

     Our  revenue  recognition  policy  related to our former  hardware  systems
business follows SEC SAB No. 101, "Revenue Recognition in Financial Statements."
Under SAB No. 101, we recognized  product  revenues from the sale of Linux-based
servers,  components,  and  desktop  computers  when  persuasive  evidence of an
arrangement   existed,   delivery  occurred,   the  sales  price  was  fixed  or
determinable  and  collectibility  was  reasonably   assured.   In  general,  we
recognized  product  revenue  upon  shipment of the goods.

                                       13
<PAGE>


We did not grant our customers any rights to return products.

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

    Our net revenues  increased to $24.2 million in fiscal year 2003, from $20.4
million in fiscal year 2002.  The $3.8 million  increase in net revenues was due
primarily to an increase in our current software and online  businesses,  offset
by a decrease in other revenue derived from our previous hardware  business.  In
fiscal year 2003, online revenue increased by $4.6 million to $20.6 million from
$16.0  million in fiscal year 2002.  For each of the fiscal  years 2003 and 2002
online revenue included  approximately  $2.0 million,  of barter revenue arising
from web advertising.  In fiscal year 2003,  software revenue  increased by $1.8
million to $2.9 million  from $1.1  million in fiscal year 2003.  In fiscal year
2003,  systems and services revenue  decreased $2.6 million to $0.8 million from
$3.3 million in fiscal year 2002.

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

    Sales for the fiscal  years ended 2003,  2002,  and 2001 were  primarily  to
customers located in the United States of America.

    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,  we do not  anticipate  that any one customer will
represent more than 10% of net revenues.

   Cost of Revenues

    Cost of revenues  increased  to $12.8  million in fiscal year 2003 from $9.7
million in fiscal year 2002.  Gross margin  decreased as a percentage of revenue
to 47.3% in fiscal  year 2003 from 52.6% in fiscal  year 2002.  The  increase in
cost of revenues was  primarily  due to a net credit in fiscal year 2002 of $5.8
million related to the reversal of inventory reserves. This credit was primarily
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 in the  three-month  period ended July 28, 2001.  Cost of revenues for
fiscal year 2003 included a credit of $0.4 million as a result of adjustments to
previous  restructuring  accruals.  Net of these restructuring  credits, cost of
revenues  decreased to $13.2  million in fiscal year 2003 from $15.5  million in
fiscal year 2002.  This decrease was primarily the result of exiting the systems
business which  accounted for $2.8 million of the decrease,  a reduction in cost
of sales in the SourceForge and online  advertising  businesses  which accounted
for a decrease of $1.8  million,  offset by an increase  in  e-commerce  cost of
revenues of $2.4 million as a result of higher revenue levels. Headcount related
to cost of revenues  was 37 at July 31,  2003,  compared to 44 at July 27, 2002.
Gross margin, excluding the reversal of prior period inventory and restructuring
reserves,  increased  as a  percentage  of revenues to 45.5% in fiscal year 2003
from 24.1% in fiscal year 2002.  The  increase in gross  margins  excluding  the
reversal of prior period inventory and restructuring  reserves was the result of
improvements  in the online  advertising  and  software  businesses  as follows:
Online  advertising  gross  margins  increased  to 63.0% for  fiscal  year 2003,
compared to 40.9% for fiscal year 2002;  software  gross  margins  increased  to
31.5% for fiscal year 2003,  compared to a negative 119.8% for fiscal year 2002.
E-commerce  gross  margins  declined to 27.4% for fiscal year 2003 from 29.2% in
fiscal year 2002. The increase in online advertising gross margins was primarily
driven by the  increase in revenues  while  reducing the costs  associated  with
editorial  content  and online  delivery.  The  increase in our  software  gross
margins  was  primarily  due to an  increase in revenues as well as an effort to
align our  software  cost of  revenues  infrastructure  to support  our  current
revenue  levels.  The  decrease in ecommerce  gross  margins was the result of a
shift in product mix to lower gross margin products.  We expect cost of revenues
to continue to increase as revenues increase,  however,  we expect overall gross
margins to improve as a result of leveraging  the fixed cost portion of the cost
of revenues.

  Cost of  revenues  decreased  to $9.7  million in fiscal year 2002 from $154.1
million in fiscal year 2001.  Gross margin  increased as a percentage of revenue
to 52.6% in fiscal  year 2002 from a negative  14.2% in fiscal  year  2001.  The
increase in gross margin as a percentage of net revenue was due primarily to the
exiting of the systems  business and an inventory  provision  allowance of $28.0
million in fiscal year 2001 to establish a reserve for excess material.  Cost of
revenues for fiscal year 2002 included  restructuring

                                       14
<PAGE>


charges of a net credit of $5.8 million  which  included a $6.9  million  credit
adjustment to the fiscal year 2001 fourth quarter systems restructuring composed
of a $2.0  million  reversal of  reserves  for  inventory  (due to a better sell
through of old and excess material  during fiscal year 2002 than  anticipated at
fiscal  year-end  2001)  and a $4.9  million  reversal  of an over  estimate  of
warranty  expense.  We  recorded  a  $1.1  million  restructuring  charge  for a
workforce reduction, which consisted mostly of severance and other related costs
attributable to 50 employees.

  Sales and Marketing Expenses

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

    Sales and marketing  expenses  decreased to $9.8 million in fiscal year 2003
from $12.5  million in fiscal year 2002.  The  decrease in absolute  dollars 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  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.  Headcount in sales and  marketing  decreased to 27 at July 31,
2003 from 29 at July 27, 2002.  Sales and marketing  expenses as a percentage of
net revenues  decreased to 40.4% for fiscal year 2003 from 61.4% for fiscal year
2002.  This  decrease as a  percentage  of net  revenues  was  primarily  due to
decreased  spending  levels  as  described  above as well as  increased  revenue
levels. We believe our sales and marketing  expenses 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.

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

  Research and Development Expenses

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

    Research and development  expenses  decreased to $7.8 million in fiscal year
2003 from $8.1 million in fiscal year 2002. The decrease in absolute dollars 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.  Headcount  in research  and  development
decreased  to 34 at July  31,  2003  from  44 at July  27,  2002.  Research  and
development  expenses as a  percentage  of net  revenues  decreased to 32.3% for
fiscal year 2003 from 39.8% for fiscal 2002. 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.  We expect research and
development  expenses to increase slightly in absolute dollars and decrease as a
percentage of revenue in the future.

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

    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

                                       15
<PAGE>


technological feasibility and, accordingly,  all software development costs have
been charged to research and development expense in the accompanying  statements
of operations.  Going forward,  should technological  feasibility occur prior to
the  completion  of  our  software  development,   all  costs  incurred  between
technological   feasibility   and  software   development   completion  will  be
capitalized.

  General and Administrative Expenses

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

    General and administrative expenses decreased to $6.5 million in fiscal year
2003 from  $10.9  million  for  fiscal  year 2002.  General  and  administrative
expenses  for  fiscal  year  2002  included  the  reversal  of  excess  bad debt
provisions  of $1.0 million and include $0.9 million of accrued  legal  expenses
associated  with  the IPO  Securities  Litigation.  See  Part I - Item 3 - Legal
Proceedings.  Excluding these charges, the decrease in absolute dollars 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.  Headcount in general and  administrative  services decreased to 17 at
July 31, 2003 from 27 at July 27, 2002. General and administrative expenses as a
percentage  of net  revenues  decreased to 26.6% for fiscal year 2003 from 53.2%
for fiscal year 2002. 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  general  and  administrative  expenses  to  remain
relatively  consistent  in absolute  dollars and  decrease  as a  percentage  of
revenue in the future.

    General and  administrative  expenses  decreased to $10.9  million in fiscal
year 2002 from $22.0  million for fiscal year 2001.  General and  administrative
expenses  for  fiscal  year  2002  included  the  reversal  of  excess  bad debt
provisions of $1.0 million and included  $0.9 million of accrued legal  expenses
associated  with  the IPO  Securities  Litigation.  See  Part I - Item 3 - Legal
Proceedings. General and administrative expenses for fiscal year 2001 included a
one-time  provision for bad debts of $2.5 million related to the  reorganization
of the  business.  Excluding  these  charges,  the decrease in absolute  dollars
resulted  primarily from a decrease in administrative  personnel due to our exit
from  the   systems  and   services   businesses.   Headcount   in  general  and
administrative  services  decreased  to 27 in fiscal year 2002 from 70 in fiscal
year 2001. General and  administrative  expenses as a percentage of net revenues
increased  to 53.2% for fiscal  year 2002 from 16.3% for fiscal  year 2001.  The
increase as a percentage of net revenues was primarily due to our  significantly
decreased revenue.

  Restructuring Costs and Other Special Charges

    In  fiscal  2001  and  2002,  we  adopted  plans  to exit  the  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 software and online
businesses  and reduce our  operating  losses to improve cash flow.  We recorded
restructuring  charges of $180.2  million  related to exiting these  activities,
$160.4 million of which was included in restructuring  charges and other special
charges in operating expenses and $19.8 million of which was included in cost of
sales.  Included in the restructuring  were charges related to excess facilities
from  non-cancelable  leases (with payments continuing until fiscal 2010, unless
sublet  completely).  The accrual from  non-cancelable  lease payments  includes
management's estimates of sublease income. These estimates are subject to change
based on actual events. We evaluate and update,  if applicable,  these estimates
quarterly. As of July 31, 2003, we had an accrual of approximately $14.5 million
outstanding related to these non-cancelable  leases, all of which was originally
included in operating expenses.

    We have 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,
2003, we had an accrual of $0.4 million related to these charges.

    In addition to the above,  we recorded a $0.4  million net credit in cost of
revenues in the  consolidated  statement of operations for the fiscal year ended
July 31, 2003. The $0.4 million  consisted of $23,000  associated with severance
and  other  related  costs  attributable  to the  fiscal  2002 plan to align our
infrastructure  with  operations,  net of  adjustments  to  previously  recorded
restructuring  reserves of $0.4 million related to the systems  warranty reserve
and excess facility reserves  originally  established  during fiscal 2001. As of
July 31, 2003, no outstanding  accruals remained related to these  restructuring
charges.

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

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                                                          Total
                                                        Total Charged   Total Charged   Total Charged      Cash       Restructuring
                                                        To Operations   To Operations   To Operations    Receipts\    Liabilities at
                                                         Fiscal 2001     Fiscal 2002     Fiscal 2003    (Payments)     July 31, 2003
                                                         -----------     -----------     -----------    ----------     -------------
<S>                                                       <C>             <C>              <C>          <C>              <C>
Cash Provisions:
  Other special charges relating to
    restructuring activities......................        $  2,159        $   (888)        $     78     $  (1,349)       $      --
  Facilities charges..............................           6,584           9,401              191        (1,287)          14,889
  Employee severance and other related
   charges.......................................            3,498           1,997               37        (5,532)              --
                                                           -------         -------          -------      --------         --------
      Total cash provisions.....................            12,241          10,510              306     $  (8,168)       $  14,889
                                                           -------         -------          -------      ========         ========
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)
  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)
                                                           -------         -------          -------
      Total provisions...........................         $113,478        $ 46,936         $   (263)
                                                           =======         =======          =======
</TABLE>

  Amortization of Deferred Stock Compensation

    In connection  with the grant of certain  stock options to employees  during
fiscal  2000  and  1999,  we  recorded   deferred  stock   compensation   within
stockholders' equity of approximately $37.8 million, representing the difference
between the estimated fair value of the common stock for accounting purposes and
the option exercise price of these options at the date of grant. We amortize the
deferred stock  compensation  expense on an  accelerated  basis over the vesting
period of the  individual  award which is  generally  equal to four years.  This
method of deferred stock expense  amortization  is in accordance  with Financial
Accounting  Standards  Board  Interpretation  No. 28. The  amortization  expense
relates to options awarded to employees in all operating expense categories. The
amortization of deferred stock compensation has not been separately allocated to
these  categories.  The amount of deferred stock  compensation from year to year
has  decreased as options for which accrued but unvested  compensation  has been
recorded  have been  forfeited.  We  recorded  amortization  of  deferred  stock
compensation  related to these options of $0.1  million,  $1.2 million and $10.6
million  for the fiscal  years ended July 31,  2003,  July 27, 2002 and July 28,
2001,  respectively.  In addition, in connection with acquisitions,  we recorded
$0.5 million and $50.7 million of deferred stock compensation  during the fiscal
years ended July 27, 2002 and July 28, 2001,  respectively.  No  amortization of
deferred stock  compensation  related to  acquisitions  was recorded  during the
fiscal year ended July 31, 2003.  Further,  in connection with the restructuring
discussed above, we recorded an expense of  approximately  $35.7 million related
to the  acceleration  of deferred stock  compensation  for the fiscal year ended
July 28, 2001.  Finally,  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. All adjustments have been
included in  restructuring  costs and other special charges in the statements of
operations.  We expect amortization of deferred stock compensation,  in absolute
dollars,  to decrease  through  fiscal year 2004 as a result of the  accelerated
basis of amortization.

  Goodwill and Intangibles and Impairment of Long-Lived Assets

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

    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

                                       17
<PAGE>


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.  See Note 4 in the
consolidated  financial  statements for details on impairment charges recognized
during fiscal years 2002 and 2001.

    We performed an assessment of the carrying value of its long-lived assets to
be held and used including  significant amounts of goodwill and other intangible
assets  recorded in connection  with the Company's OSDN  acquisition at July 28,
2001.  We  performed  the  assessment  pursuant  to  SFAS  No.  144  due  to the
significant  slowdown in the economy affecting  current  operations and expected
future  sales,  as well as the general  decline of  technology  valuations.  The
conclusion of that assessment was that the decline in market  conditions  within
the industry was significant and other than temporary.  As a result, we recorded
during the  fourth  quarter  of fiscal  year 2001 a charge of $160.0  million to
reduce goodwill and other intangible  assets  associated with the acquisition of
OSDN,  based on the amount by which the carrying value of these assets  exceeded
their  fair  value.  The  charge  is  included  in the  caption  "Impairment  of
long-lived assets" in the consolidated statements of operations.  Fair value was
determined based on discounted future cash flows.

    Effective  July 29,  2001,  we adopted  SFAS No.  142,  "Goodwill  and Other
Intangible  assets."  Upon  adoption  of SFAS No.  142,  we no longer  amortized
goodwill.  Pursuant to SFAS No. 142, we test goodwill for  impairment.  SFAS 142
requires that goodwill be tested for  impairment at the  "reporting  unit level"
("Reporting  Unit") at least annually and more frequently upon the occurrence of
certain  events,  as defined by SFAS No. 142.  During the quarter ended July 27,
2002 goodwill was tested for impairment  and we determined  that we had only one
Reporting  Unit,  providing  application  software  products  and  related  OSDN
products and services. First, we 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 carrying value was impaired and
it recorded an impairment  loss of $3.6  million.  The charge is included in the
caption "Impairment of long-lived assets" in the statements of operations. There
was no carrying value associated with goodwill at July 31, 2003 to be tested for
impairment.

    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 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 charge is included in
the caption  "Impairment  of goodwill,  intangible  assets and other  long-lived
assets" in the statements of  operations.  No events or  circumstances  occurred
during the  fiscal  year  ended  July 31,  2003 that  would  indicate a possible
impairment in the carrying value of intangible assets at July 31, 2003.

  Interest and Other Income, Net

    Interest and other income,  net,  includes income from our cash investments,
net of other expenses.  Net interest and other income  decreased to $0.8 million
for fiscal year 2003 from $2.2  million for fiscal year 2002.  The  decrease was
primarily due to our decreased investment in VA Linux Japan, which accounted for
$0.9 million of the decrease and a lower cash balance and  decreased  returns on
our  cash as a result  of  declining  interest  rates  from  prior  year,  which
accounted for $0.6 million of the decrease. We expect interest and other income,
net to decline as our cash balance decreases to support our operations.

    Net interest and other income decreased to $2.2 million for fiscal year 2002
from $6.5  million for fiscal year 2001.  The decrease  was  primarily  due to a
lower cash  balance and  decreased  returns on our cash as a result of declining
interest rates from prior year.

  Income Taxes

    As of July 31, 2003,  we had $233 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 2021 and fiscal year 2012,  respectively,  to
the extent that they are not utilized.  The amount of net

                                       18
<PAGE>


operating losses that we can utilize is limited under tax regulations because we
have  experienced a cumulative  stock ownership change of more than 50% over the
last three years.

Liquidity and Capital Resources

    As of July 31, 2003, our available  capital resources totaled $38.8 million,
comprised  of  marketable   securities  of  $32.5  million  and  cash  and  cash
equivalents  of $6.3  million.  As of  July  27,  2002,  our  available  capital
resources  totaled  $53.0  million,  comprised  of $17.9  million in  marketable
securities and $35.1 million in cash and cash  equivalents.  During fiscal 2003,
in an effort to maximize  our rate of return,  we invested a greater  portion of
our  capital  resources  in short-  and  long-term  marketable  securities.  The
resulting $14.6 million increase in our marketable securities investments during
fiscal  2003,  accounts for 50.7% of the $28.8  million  decline in our cash and
cash equivalents to $6.3 million at July 31, 2003 from $35.1 million at July 27,
2002. The remaining decline of approximately  $14.2 million was primarily due to
cash utilized in our  operations of $15.8  million,  offset by cash generated by
our financing activities of $1.4 million. The remaining variance was due to cash
generated  through the release of  restricted  cash of $0.5  million,  offset by
capital purchases of $0.3 million.

    For the fiscal year ended July 31, 2003,  we used $15.8  million in cash for
operating  activities,  compared to $35.1 million for the fiscal year ended July
27,  2002.  This  represents  a decrease  of 55.0% and is  primarily  due to our
reduction in expenses as a result of exiting the systems and services businesses
and changing our focus to our software and online businesses.

    For the fiscal year ended July 31, 2003, our operating loss of $8.6 million,
net of non-cash charges,  accounted for 54.4% of our operating cash utilization.
Non-cash  charges  include   depreciation  and  amortization  of  $5.4  million,
provision  for bad debts,  provision  for  excess  obsolete  inventory,  loss on
disposal of assets, amortization of deferred stock compensation of $0.1 million,
non-cash  restructuring charges of a negative $0.6 million, and an impairment of
long-lived  assets of $0.2 million.  In total,  these net non-cash items reduced
the net loss of $13.8  million  by $5.2  million.  Other  significant  operating
activities  resulting  in the  utilization  of cash  were  accounts  receivable,
inventories,  accounts payable, accrued restructuring  liabilities,  and accrued
liabilities and other. The growth in accounts  receivable  utilized $1.2 million
in cash.  The decline in accounts  payable  utilized  $1.2 million in cash.  The
decrease in  accounts  payable was due to a decrease in expenses as well as more
rapid  payment  under  terms.  Finally,  $5.2  million  was  utilized in accrued
liabilities  primarily as a result of payments made on excess facilities of $2.6
million,  $0.5 million in payments made to former employees related to severance
agreements  and $2.1  million in  payments  made for other  accrued  liabilities
during the normal course of business.  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.

    For the fiscal year ended July 27, 2002 the  utilization  of cash was due to
our operating loss of $38.7  million,  net of non-cash  charges,  offset by cash
generated  from other  operating  activities of $3.6 million.  Non-cash  charges
include depreciation and amortization of $16.2 million,  provision for bad debts
of a negative  $1.1 million,  provision  for excess and obsolete  inventory of a
negative $4.4 million, loss on disposal of assets of $1.4 million, proportionate
share of Japan losses in VA Linux Japan  investment  of $2.0  million,  minority
interest of VA Linux Japan loss of a negative $0.5  million,  gain on sale of VA
Linux Japan investment of a negative $12.8 million, release of contingent shares
in relation to OSDN acquisition of $1.3 million,  amortization of deferred stock
compensation  of $1.6 million,  non cash  compensation  expense of $0.1 million,
non-cash  restructuring charges of $36.4 million and an impairment on long-lived
assets of $12.2 million. In total, these net non-cash items reduced the net loss
of $91.0  million  by $52.3  million.  Other  significant  operating  activities
resulting in the utilization of cash were accounts payable,  accrued liabilities
and other long-term liabilities.  The decline in accounts payable utilized $12.2
million in cash.  The  decrease  in  accounts  payable  was due to a decrease in
expenses as a result of exiting the  hardware  business.  The decline in accrued
liabilities  and other  long-term  liabilities  utilized  $8.5  million  in cash
primarily as a net result of payments made associated with accrued  compensation
of $2.4 million,  payments made  associated with accrued  restructuring  of $3.1
million and $4.2 million in payments made for other accrued  liabilities  during
the normal  course of business,  offset by cash  generated  from  deferred  rent
associated  with a  sublease  termination  of $1.2  million.  Other  significant
operating   activities  resulting  in  the  generation  of  cash  were  accounts
receivable,   inventories,   prepaid  expenses  and  other  assets  and  accrued
restructuring  liabilities.  The decrease in accounts receivable generated $10.4
million in cash, and reflects a lower level of revenues as the hardware business
declined  and we exited  certain  portions  of that  business.  The  decrease in
inventory  generated  $2.0 million and was due to exiting the hardware  business
and selling  inventory that was originally  reserved for in  restructuring.  The
decline in prepaid  expenses and other assets generated $3.4 million of cash and
was the  result of  selling a portion  of our VA Linux  Japan  investment  which
represented $0.8 million of the decline.  The remaining  decline of $2.6 million
was the result of cash received from various  miscellaneous  receivables  during
the  fiscal  year  ended  July  27,  2002.   Finally,  an  increase  in  accrued
restructuring  liabilities  generated  $8.5  million  in  cash  as a  result  of
additional  restructuring  reserves  established  for $11.6  million,  offset by
payments made on previously established accruals of $3.1 million.

                                       19
<PAGE>


    For  fiscal  year  2001,  we  used  $81.6  million  in  cash  for  operating
activities.  Working  capital  decreased  to $62.4  million  at July  28,  2001,
primarily  due to using  our cash  and  investments  to  support  our  operating
activities.  Non-cash items consisted primarily of depreciation and amortization
of  goodwill,  bad debt and  inventory  provisions,  loss on disposal of assets,
amortization of deferred compensation,  non-cash restructuring and impairment of
long-lived  assets of $453.7 for fiscal year 2001.  Other  operating  activities
during  fiscal  year 2001  consisted  of an  increase  in  inventories,  prepaid
expenses, accrued restructuring liabilities, other accrued liabilities and other
long-term  liabilities  offset by decreases in accounts  receivable and accounts
payable.

    For the fiscal year ended July 31, 2003,  we used $14.4  million in cash for
investing activities, compared to generating $11.3 million and $17.3 million for
the fiscal  years  ended July 27,  2002 and July 28,  2001,  respectively.  This
change is  primarily  due to our  strategic  decision to increase our short- and
long-term investments and decrease our cash equivalent  investments in an effort
to maximize our rate of return.  During the fiscal year ended July 31, 2003,  we
utilized a net $14.6 million of cash and cash equivalents to purchase short- and
long-term investments, compared to an increase of $4.9 million and $29.8 million
in cash and cash  equivalents  during the fiscal  years  ended July 27, 2002 and
July 28, 2001,  respectively,  which  resulted from our  liquidation  of certain
investments.  In addition,  during the fiscal year ended July 27, 2002 we sold a
portion of our VA Linux Japan  investment that generated $5.1 million.  Further,
we generated  $0.5 million as a result of the release of restricted  cash during
the fiscal year ended July 31, 2003,  compared to $1.5 million during the fiscal
year ended July 27, 2002 and the  utilization  of $0.6 million during the fiscal
year  ended  July 28,  2001.  We expect  that  cash  utilization  for  investing
activities  will  decline  as we  sell  longer  term  investments  to  fund  our
operations  and our  restricted  cash is released  under terms of our  corporate
lease agreement.

    For the fiscal year ended July 31, 2003,  we generated  $1.4 million in cash
from  financing  activities,  compared to $0.1  million and $1.6 million for the
fiscal years ended July 27, 2002 and July 28, 2001, respectively.  This increase
in cash generation  during fiscal 2003 is primarily the result of cash generated
from the issuance of common stock to our  employees and  decreasing  payments on
notes payable.  During the fiscal year ended July 31, 2003, $1.4 million in cash
was generated  from the issuance of common stock to our  employees,  compared to
$0.4  million and $4.4  million  during the fiscal years ended July 27, 2002 and
July 28, 2001, respectively. During the fiscal year ended July 31, 2003, $42,000
in cash was utilized to make payments on our notes payable, compared to payments
of $0.3 million and $2.5 million  during the fiscal year ended July 27, 2002. We
are uncertain of the level of cash that will be generated in the future from the
issuance  of common  stock to our  employees  as the  exercising  of  options is
dependant  upon  several  factors  such as the price of our common stock and the
number of employees participating in our stock option plans.

    For the fiscal  year ended  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.  For the fiscal year ended July 28, 2001,  exchange
rate changes had a negative effect on cash and cash equivalents of $1.5 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, 2003 and July 27, 2002, we had outstanding  letters of credit
issued under a line of credit of  approximately  $0.9 million and $1.4  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 each fiscal year through 2005
under the terms of our existing lease agreement.

    Future payments due under debt and lease obligations as of July 31, 2003 are
as follows (in thousands):

                                              Gross                       Net
                                            Operating      Sublease    Operating
                                             Leases         Income      Leases
                                             ------         ------      ------
2004...................................     $ 5,370        $   615     $ 4,755
2005...................................       4,916            309       4,607
2006...................................       3,709             77       3,632
2007...................................       3,511             --       3,511
2008...................................       3,616             --       3,616
Thereafter.............................       6,905             --       6,905
                                             ------         ------      ------
        Total minimum lease payments...     $28,027        $ 1,001     $27,026
                                             ======         ======      ======

                                       20
<PAGE>


    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 2004 under our current business strategy.

    Financial Risk Management

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

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

   Critical Accounting Policies

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

    Revenue Recognition

    As  discussed  in  Note  2  of  the  notes  to  the  consolidated  financial
statements, we account for the licensing of software in accordance with American
Institute of Certified Public  Accountants  (AICPA)  Statement of Position (SOP)
97-2,  Software  Revenue  Recognition.  The  application  of SOP  97-2  requires
judgment,  including whether a software  arrangement includes multiple elements,
and if so,  whether  vendor-specific  objective  evidence  (VSOE) of fair  value
exists for those elements.  End users receive  certain  elements of our products
over a period of time. These elements include  post-delivery  telephone  support
and   the   right   to   receive   unspecified    upgrades/enhancements   on   a
when-and-if-available  basis,  the fair  value of which is  recognized  over the
product's  estimated  life  cycle.   Changes  to  the  elements  in  a  software
arrangement,  the ability to identify VSOE for those elements, the fair value of
the respective  elements,  and changes to a product's estimated life cycle could
materially  impact the amount of earned and unearned  revenue.  Judgment is also
required to assess whether  future  releases of certain  software  represent new
products or upgrades and enhancements to existing products.

     Amortization of Goodwill and Intangibles

    As  discussed  in  Note  2  of  the  notes  to  the  consolidated  financial
statements,  effective  July 29, 2001,  we adopted SFAS No. 142,  "Goodwill  and
Other  Intangible  assets."  SFAS 142,  Goodwill  and Other  Intangible  Assets,
requires  that goodwill be tested for  impairment  at the  reporting  unit level
(operating  segment or one level below an operating  segment) on an annual basis
and between annual tests in certain  circumstances.  Application of the goodwill
impairment test requires  judgment,  including the  identification  of reporting
units,  assigning assets and liabilities to reporting units,  assigning goodwill
to reporting  units,  and  determining  the fair value of each  reporting  unit.
Significant  judgments  required to estimate the fair value of  reporting  units
include estimating future cash flows, determining appropriate discount rates and
other  assumptions.  Changes in these estimates and assumptions could materially
affect the  determination  of fair value  and/or  goodwill  impairment  for each
reporting unit.

     Restructuring Costs and Other Special Charges

                                       21
<PAGE>


    As  discussed  in  Note  4  of  the  notes  to  the  consolidated  financial
statements,  we have recorded  significant  restructuring  charges in connection
with exiting our managed services,  systems, and professional services and Linux
software  engineering  services  businesses  during  fiscal years ended 2002 and
2001.  A  significant  portion of these  charges  related  to excess  facilities
primarily  from   non-cancelable   leases  (payments  which,  unless  we  sublet
completely,  will continue until fiscal 2010) or other costs for the abandonment
or disposal of property and equipment.  Restructuring  charges  associated  with
these  non-cancelable  leases  include  estimates  related to sublease costs and
income which are based on  assumptions  regarding the period  required to locate
and contract with suitable  sub-lessees and sublease rates which can be achieved
using market trend  information  analyses  provided by a commercial  real estate
brokerage firm retained by us. We review these  estimates each reporting  period
and to the extent  that these  assumptions  change due to changes in the market,
the ultimate  restructuring  expenses for these excess  facilities could vary by
material amounts.  Savings related to fiscal year 2003 as a result of idle space
charges  taken in fiscal year 2002 and 2001  totaled  $3.0  million.  Should the
Company be unable to sublet the idle facilities  under the current  assumptions,
additional idle space charges may be recorded in future periods for a maximum of
up to $6.5 million.

    Income Taxes

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

    Contingencies and Litigation

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

    Recent Accounting Pronouncements

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

    In November 2002, the FASB issued FASB  Interpretation No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of  Indebtedness  of Others." FIN No. 45 requires that a liability be
recorded in the  guarantor's  balance  sheet upon  issuance  of a  guarantee  or
indemnification.  In  addition,  FIN  No.  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 No. 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 No. 45 are
effective for financial  statements  of interim or annual  periods  ending after
December 15, 2002.  The adoption of FIN No. 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

                                       22
<PAGE>


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.  All of  these  indemnification
agreements were grandfathered under the provisions of FIN No. 45 as they were in
effect prior to December 31, 2002. Accordingly,  we have no liabilities recorded
for these agreements as of July 31, 2003.

    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, 2003.

    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, 2003.

    We warrant  that our  hardware  products  related to our  previous  hardware
business  will  perform in all  material  respects  in  accordance  with the our
standard  published  specifications  in  effect at the time of  delivery  of the
products to the customer for the life of the product,  typically 36 months.  The
remaining  estimated  fair value of these  agreements  related  to our  previous
hardware business is minimal at July 31, 2003. Accordingly,  we have a liability
of approximately $12,000 recorded for these agreements as of July 31, 2003.

    In  November  2002,  the  Emerging  Issues  Task  Force  ("EITF")  reached a
consensus regarding EITF Issue 00-21,  Accounting for Revenue  Arrangements with
Multiple  Deliverables.  The  consensus  addresses  not  only  when  and  how an
arrangement  involving  multiple  deliverables  should be divided into  separate
units of  accounting  but also how the  arrangement's  consideration  should  be
allocated among separate units.  The  pronouncement is effective for VA Software
commencing  with its  fiscal  year 2004 and is not  expected  to have a material
impact  on  VA  Software's  consolidated  results  of  operations  or  financial
position.

    In December 2002, the FASB issued SFAS No. 148,  "Accounting for Stock-Based
Compensation  -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This  Statement  amends FASB SFAS No.  123,  "Accounting  for  Stock-Based
Compensation,",  to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee  compensation.  SFAS No. 148 also requires that  disclosures of the pro
forma  effect  of using the fair  value  method of  accounting  for  stock-based
employee  compensation  be displayed more  prominently  and in a tabular format.
Additionally,  SFAS No.  148  requires  disclosures  of the pro forma  effect in
interim financial statements.  The transition and annual disclosure requirements
of SFAS No. 148 are  effective  for fiscal years ended after  December 15, 2002.
The interim disclosure  requirements are effective for interim periods beginning
after  December 15, 2002. We have chosen to continue to account for  stock-based
compensation  using the intrinsic value method  prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock options
is measured as the excess,  if any, of the  estimate of the market  value of our
stock at the date of the grant over the amount an  employee  must pay to acquire
its stock.  We adopted  the  interim  disclosure  provisions  for our  financial
reports  during the quarter  ended  April 26,  2003 and have  adopted the annual
disclosure  provisions of SFAS No. 148 in our  financial  reports for the fiscal
year ended July 31,  2003.  Refer to Note 2 of Notes to  Condensed  Consolidated
Financial  Statements.  As the adoption of this  standard  involves  disclosures
only, it has not had a material impact on our consolidated financial statements.

    In January  2003,  the FASB  issued FIN No. 46,  "Consolidation  of Variable
Interest  Entities,  an  Interpretation  of ARB No. 51."  Generally,  a variable
interest entity ("VIE") is a corporation,  partnership, trust or any other legal
structure used for business  purposes that either does not have equity investors
with  substantive  voting  rights or has equity  investors  that do not  provide
sufficient  financial resources for the entity to support its activities.  A VIE
often  holds  financial  assets  and may be  passive  or it may  engage  in such
activities as research and development or other  activities on behalf of another
company.  FIN No. 46 requires  that a VIE be  consolidated  by a company if that
company  is  subject to a  majority  of the VIE's  risk of loss or  entitled  to
receive a  majority  of the  VIE's  residual  returns  or both.  A company  that
consolidates a VIE is referred to as the primary beneficiary of that entity. The

                                       23
<PAGE>


consolidation requirements of FIN No. 46 apply immediately to VIEs created after
January 31, 2003.  The  consolidation  requirements  apply to entities  existing
prior to January 31, 2003 in the first fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued after January 31, 2003  regardless of when the VIE
was  established.  We have adopted the disclosure  provisions and will adopt the
consolidation   requirements   as  of  August  1,  2003.  The  adoption  of  the
consolidation  requirements  of FIN No. 46 did not have a significant  impact on
our 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 is not expected to have a material effect on our
consolidated financial statements.

Risk Factors

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

Risks Related To Our Software Business

    BECAUSE  THE  MARKET FOR OUR  SOURCEFORGE  APPLICATION  SOFTWARE  IS NEW AND
RAPIDLY EVOLVING,  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 broadly implement our
software by  licensing  additional  copies from us. 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 CONCENTRATING  OUR SALES EFFORTS ON SOURCEFORGE,  SO IF THIS SOFTWARE
DOES NOT  ACHIEVE  MARKET  ACCEPTANCE  WE ARE  LIKELY  TO  EXPERIENCE  CONTINUED
OPERATING  LOSSES.  We are  directing  the majority of our product  research and
development efforts to SourceForge.  The failure to achieve market acceptance of
SourceForge  would  adversely  affect our business and  operating  results.  The
success of SourceForge is difficult to predict because SourceForge  represents a
relatively  new area of business for us. There can be no assurance  that we will
be successful in marketing, licensing, upgrading and supporting SourceForge. Our
failure to do so could 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  internal  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  DO  NOT  DEVELOP  AND   ENHANCE   SOURCEFORGE   TO  KEEP  PACE  WITH
TECHNOLOGICAL,  MARKET, AND INDUSTRY CHANGES, OUR SOFTWARE REVENUE WILL NOT GROW
AND MAY DECLINE. Rapid technological

                                       24
<PAGE>


advances,   changes  in  customer   requirements,   and   frequent  new  product
introductions and enhancements  characterize the software industry generally. We
must respond rapidly to developments  related to hardware  platforms,  operating
systems,  and software  development tools. These developments will require us to
make substantial  product development  investments.  If we fail to anticipate or
respond adequately to technology developments,  industry standards, or practices
and customer requirements, or if we experience any significant delays in product
development,  introduction,  or integration,  SourceForge may become obsolete or
unmarketable,  our ability to compete may be impaired, and our software revenues
may not grow or may  decline.  We believe the success of our  software  business
will become increasingly dependent on our ability to:

     o    support  multiple   platforms,   including  Linux,   commercial  UNIX,
          Microsoft Windows and Apple Mac OS X;

     o    use  the  latest   technologies  to  continue  to  support   Web-based
          collaborative software development; and

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


    Our 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 our software varies and can range from
three to more than  twelve  months.  Additionally,  our sales  cycle is  complex
because  customers  consider a number of factors  before  committing  to license
SourceForge.  Factors  that  may be  considered  by  customers  when  evaluating
SourceForge include product benefits,  cost and time of implementation,  and the
ability to operate with existing and future computer  systems and  applications.
Customer evaluation,  purchasing and budgeting processes vary significantly from
company  to  company.  As a  result,  we spend  significant  time and  resources
informing  prospective  customers  about our  software  products,  which may not
result in a  completed  transaction  and may  negatively  impact  our  operating
margins.  Even if SourceForge  has been chosen by 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:

     o    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;

     o    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

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

    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.  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.

    Many enterprise  customers  negotiate software licenses near the end of each
quarter. In part, this is because enterprise customers are able, or believe that
they are able, to negotiate  lower prices and more favorable terms at that time.
Our reliance on a large portion of software revenue  occurring at the end of the
quarter and the increase in the dollar value of  transactions  that occur at the
end of a quarter  can result in  increased  uncertainty  relating  to  quarterly
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.

    IF WE DO NOT CONTINUE TO RECEIVE  REPEAT  BUSINESS FROM EXISTING  CUSTOMERS,
OUR REVENUE WILL NOT GROW AND MAY DECLINE.  We generate a significant  amount of
our software  license  revenues  from  existing  customers.

                                       25
<PAGE>


Most of our current customers  initially  purchased a limited number of licenses
as they implemented and adopted 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.

    OUR  RESEARCH  AND  DEVELOPMENT  EFFORTS  MAY BE COSTLY AND MAY NOT  PRODUCE
SUCCESSFUL  NEW PRODUCTS AND PRODUCT  UPGRADES.  Our future  success will depend
upon our ability to enhance our current  products and develop and  introduce new
products on a timely  basis,  particularly  if new  technology  or new  industry
standards render any existing products obsolete. We believe that we will need to
incur significant  research and development  expenditures to remain competitive,
particularly  because  many  of  our  competitors  have  substantially   greater
resources.  The products that we are currently  developing or may develop in the
future  may not be  technologically  successful  or may not be  accepted  in our
market. In addition,  the length of our product development cycle may be greater
than we expect. If the resulting products are not introduced in a timely manner,
or do not compete  effectively  with products of our  competitors,  our business
will be harmed.

    DELAYS  IN  INTRODUCING  UPGRADES  TO OUR  PRODUCTS  MAY  CAUSE  US TO  LOSE
CUSTOMERS TO OUR  COMPETITORS OR HARM OUR  REPUTATION.  We attempt to maintain a
consistent  release  schedule  for  upgrades  of  existing   products.   Due  to
uncertainties  inherent in software  development,  it is likely that delays will
materialize from time to time in the future. We could lose customers as a result
of substantial delays in the shipment of product upgrades.

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

    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.

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

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

Risks Related To Our Online Business

                                       26
<PAGE>


    OUR ONLINE CONTENT AND SERVICES MAY NOT ACHIEVE CONTINUED ACCEPTANCE,  WHICH
COULD ADVERSELY  AFFECT OUR FINANCIAL  RESULTS.  Our future success depends upon
our ability to deliver original and compelling content and services that attract
and retain  users.  The  successful  development  and  production of content and
services  is subject to  numerous  uncertainties,  including  our  ability to:

          o    anticipate and successfully  respond to rapidly changing consumer
               tastes and preferences;

          o    fund new program development; and

          o    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
and sellers of  technology  products,  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.  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 softness of demand and minimal  growth of marketing and  advertising
budgets and delays in spending of budgeted resources.  Because we derive a large
part of our  revenues  from  advertising  fees,  the  decrease  in or  delay  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.

    WE CANNOT PREDICT OUR E-COMMERCE  CUSTOMERS'  PREFERENCES WITH CERTAINTY AND
SUCH   PREFERENCES  MAY  CHANGE  RAPIDLY.   Our  e-commerce   offerings  on  our
ThinkGeek.com  Web site are  designed  to appeal to IT  professionals,  software
developers and others in technical  fields. If we misjudge either the market for
our products or our customers'  purchasing  habits,  our sales may decline,  our
inventories  may  increase or we may be  required to sell our  products at lower
prices. This 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. In order to be  successful,  we must  accurately  predict these trends 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. Our ability to receive inbound inventory  efficiently or ship completed
orders to customers may be negatively affected by a number of factors, including
our  dependence  on a single  third party  contract  fulfillment  and  warehouse
facility  in  Baltimore,  Maryland  to  handle  the  majority  of our  ThinkGeek
e-commerce distribution and fulfillment operations and reliance upon third party
carriers for all of our product shipments.

    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 ONLINE 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 future results will be adversely
affected.

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
2004. Since becoming a public

                                       27
<PAGE>


company,  we have  experienced  negative cash flow from operations and expect to
experience  negative cash flow from  operations for fiscal year 2004.  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 2004.  While we believe we will not  require
additional capital to fund continued  operations during fiscal year 2004, we may
require additional funding within this time frame, and this additional  funding,
if  needed,  may not be  available  on  terms  acceptable  to us,  or at all.  A
continued  slowdown in  technology  or  advertising  spending as compared to the
general  economy,  as well as other  factors  that may arise,  could  affect our
future  capital  requirements  and the  adequacy of our  available  funds.  As a
result,  we may be required to raise  additional funds through private or public
financing  facilities,   strategic  relationships  or  other  arrangements.  Any
additional equity financing would likely be dilutive to our  stockholders.  Debt
financing, if available, may involve restrictive covenants on our operations and
financial condition.  Our inability to raise capital when needed could seriously
harm our business.

    IT IS DIFFICULT TO EVALUATE OUR BUSINESS  BECAUSE WE HAVE A LIMITED  HISTORY
OPERATING  AS A PROVIDER  OF  APPLICATION  SOFTWARE.  We have a brief  operating
history as a provider of SourceForge, our proprietary software application. As a
result, our historical  financial  information is of limited value in projecting
future  operating  results.  On June 27, 2001, we announced our plan to exit our
hardware  business.  In the first  quarter of our fiscal year 2002,  we made the
strategic   decision  to  exit,  and  exited,  the   hardware-related   software
engineering and  professional  services  fields to focus on  SourceForge.  These
changes  required  us to  adjust  our  business  processes  and make a number of
significant   personnel   changes,   including  changes  and  additions  to  our
engineering and management teams. Therefore, in evaluating our business you must
consider  the risks  and  difficulties  frequently  encountered  by early  stage
companies in new and rapidly evolving markets.

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

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

          o    macroeconomic  factors such as the general  condition of the U.S.
               economy;

          o    specific economic conditions relating to IT spending;

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

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

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

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

          o    difficulty predicting the size and timing of customer orders;

          o    long sales cycles;

          o    our ability to develop and retain a skilled software sales force;

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

          o    an increase in our operating costs;

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

          o    changes in accounting pronouncements applicable to us;

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<PAGE>


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

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

          o    the possibility that software development delays will result from
               our outsourcing of certain  SourceForge  research and development
               efforts  to  Cybernet  Software  Systems,  Inc.,  an  independent
               contractor located primarily in India;

          o    weak  economic  conditions  relating  to online  advertising  and
               sponsorship, and e-commerce;

          o    the pricing of  advertising  on our network of Internet sites and
               our competitors' Internet sites;

          o    the amount of traffic on our network of Internet sites;

          o    our  ability to  achieve,  demonstrate  and  maintain  attractive
               online user demographics;

          o    our  ability to  develop  and  retain a skilled  advertising  and
               sponsorship sales force;

          o    the demand for advertising or sponsorships;

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

          o    our ability to manage effectively our development of new business
               opportunities and markets;

          o    our   ability  to   upgrade   and   develop   our   systems   and
               infrastructure;

          o    our  ability to keep our Web sites  operational  at a  reasonable
               cost;

          o    technical  difficulties,  system downtime,  Internet brownouts or
               denial of service or other similar attacks;

          o    consumer confidence in the safety and security of transactions on
               our e-commerce Web sites; and

          o    disruption to our operations,  employees,  affiliates,  customers
               and  facilities  caused by  international  or domestic  terrorist
               attacks or armed conflict.

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

    WE HAVE A HISTORY OF LOSSES AND EXPECT TO  CONTINUE  TO INCUR NET LOSSES FOR
THE FORESEEABLE FUTURE. We incurred a loss of $2.4 million for our fiscal fourth
quarter ended July 31, 2003, and we had an accumulated deficit of $739.7 million
as of July  31,  2003.  We  expect  to  continue  to incur  significant  product
development,  sales and  marketing  and  administrative  expenses.  We expect to
continue  to incur net  losses  for at least the  foreseeable  future.  If we do
achieve  profitability,

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<PAGE>


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.

    DESPITE  REDUCTIONS IN THE SIZE OF OUR  WORKFORCE,  OUR BUSINESS MAY FAIL TO
GROW RAPIDLY ENOUGH TO OFFSET OUR ONGOING OPERATING EXPENSES. During fiscal year
2001, we  substantially  reduced our workforce  such that as of July 28, 2001 we
had 286 employees,  down from 551 employees in January 2001. During fiscal years
2002 and 2003, we further reduced our workforce such that as of July 31, 2003 we
had 115 employees.  Nevertheless, despite these reductions in our workforce, our
business  may fail to grow  rapidly  enough  to  offset  our  ongoing  operating
expenses. As a result, our quarterly operating results could fluctuate, and such
fluctuation could adversely affect the market price of our common stock.

Risks Related To Competition

    IF WE DO NOT  EFFECTIVELY  COMPETE  WITH NEW AND EXISTING  COMPETITORS,  OUR
REVENUES AND  OPERATING  MARGINS WILL NOT GROW AND MAY DECLINE.  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  entrenched  companies 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

                                       30
<PAGE>


seriously  harmed.  In addition,  employees hired from competitors might utilize
proprietary and trade secret information from their former employers without our
knowledge,  even though our employment  agreements and policies clearly prohibit
such practices.

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

    IF  WE  FAIL  TO  ADEQUATELY  PROTECT  OUR  INTELLECTUAL   PROPERTY  RIGHTS,
COMPETITORS  MAY USE OUR  TECHNOLOGY  AND  TRADEMARKS,  WHICH  COULD  WEAKEN OUR
COMPETITIVE POSITION,  REDUCE OUR REVENUES, AND INCREASE OUR COSTS. We rely on a
combination  of  copyright,   trademark  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 Business

    WE MAY BE SUBJECT TO CLAIMS AS A RESULT OF INFORMATION  PUBLISHED ON, POSTED
ON OR  ACCESSIBLE  FROM OUR  INTERNET  SITES.  We may be  subject  to  claims of
defamation,   negligence,   copyright  or  trademark   infringement   (including
contributory infringement) or other claims relating to the information contained
on our Internet  sites,  whether  written by third parties or us. These types of
claims have been brought  against online  services in the past and can be costly
to defend regardless of the merit of the lawsuit.  Although 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.

                                       31
<PAGE>


    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. 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  SOFTWARE
BUSINESS.  Our ability to successfully  offer our services and grow our software
business requires an effective  planning and management  process.  Over the past
year, we have  implemented  or updated our  operations  and  financial  systems,
procedures  and  controls as we focused on our  application  software and online
businesses.  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  software  and  online  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 2003, the
closing sale prices of our common stock on the Nasdaq ranged from $0.88 to $2.49
per share and the closing sale price on September  30, 2003 was $4.12 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.

    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

                                       32
<PAGE>


condition  could be materially  and  adversely  affected in the event of a major
earthquake,  fire or other  catastrophic  event,  such as the  recent  terrorist
attacks upon the United States. 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  and  short-term
investments in a variety of securities, including commercial paper, money market
funds and government  and  non-government  debt  securities.  In general,  money
market funds are not subject to market risk  because the  interest  paid on such
funds fluctuates with the prevailing interest rate.

    The  following  table  presents  the  amounts  of our cash  equivalents  and
short-term  investments  (in  thousands)  that are  subject  to market  risk and
weighted-average  interest rates,  categorized by expected maturity dates, as of
July 31, 2003.  This table does not include  money market  funds  because  those
funds are not subject to market risk.

<TABLE>
<CAPTION>
                                                 Maturing              Maturing within              Maturing
                                            Within three months    three months to one year   Greater than one year
(in thousands)                              -------------------    ------------------------   ---------------------
 As of July 31, 2003
<S>                                               <C>                    <C>                       <C>
Cash equivalents                                  $3,401
    Weighted-average interest rate                1.09%
Short-term investments                                                    $27,864
    Weighted-average interest rate                                        2.40%
Long-term investments                                                                               $4,680
    Weighted-average interest rate                                                                  2.14%
</TABLE>

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

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

                                       33
<PAGE>


Item 8. Consolidated Financial Statements and Supplementary Data

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
Reports of Independent Public Accountants...............................     35
Consolidated Balance Sheets.............................................     37
Consolidated Statements of Operations and Other Comprehensive Loss......     38
Consolidated Statements of Stockholders' Equity.........................     39
Consolidated Statements of Cash Flows...................................     40
Notes to Consolidated Financial Statements..............................     41


    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.

                                       34
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

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

    In our opinion, the accompanying consolidated financial statements listed in
the index  appearing  under  Item  14(a)(1)  on page 61 present  fairly,  in all
material  respects,  the financial  position of VA Software  Corporation and its
subsidiaries  at July  31,  2003 and July 27,  2002,  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  appearing  under Item  14(a)(2)  on page 61 presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  These financial statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
Management;  our  responsibility  is to express  an  opinion on these  financial
statements and financial statement schedule based on our audit. We conducted our
audit of these  statements  in  accordance  with  auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audit provides a reasonable basis for our opinion.

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

    As discussed in Note 1 to the consolidated  financial statements,  effective
July 29,  2001,  the company  changed its method of  accounting  for goodwill in
accordance with Statement of Financial Accounting Standards No.142, Goodwill and
Other Intangible Assets.

PricewaterhouseCoopers LLP

San Jose, California
August 20, 2003

                                       35
<PAGE>


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

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

                                                           ARTHUR ANDERSEN LLP

San Jose, California
August 22, 2001

                                       36
<PAGE>


                             VA SOFTWARE CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                  (In thousands, except per share information)
<TABLE>
<CAPTION>
                                                                                                        July 31,      July 27,
                                                                                                          2003         2002
                                                                                                     ------------  ------------
<S>                                                                                                  <C>           <C>
                                     ASSETS
  Current assets:
    Cash and cash equivalents....................................................................    $      6,303  $     35,148
    Short-term investments.......................................................................          27,864         7,952
    Restricted cash, current.....................................................................             450           450
    Accounts receivable, net of allowances of $144 and $1,166, respectively......................           1,928           764
    Inventories..................................................................................             388           300
    Prepaid expenses and other assets............................................................           1,232           877
                                                                                                     ------------  ------------
            Total current assets.................................................................          38,165        45,491
  Property and equipment, net....................................................................           4,267         7,223
  Goodwill and intangibles, net..................................................................              21         2,169
  Long-term investments..........................................................................           4,680         9,946
  Restricted cash, non current...................................................................             450           900
  Other assets...................................................................................             912         1,239
                                                                                                     ------------  ------------
            Total assets.........................................................................    $     48,495  $     66,968
                                                                                                     ============  ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Current portion of notes payable.............................................................    $         --  $         42
    Accounts payable.............................................................................             863         2,075
    Accrued restructuring liabilities, current portion...........................................           4,117         3,397
    Accrued compensation.........................................................................           1,346         1,517
    Deferred revenue.............................................................................             751           774
    Accrued liabilities and other................................................................           2,263         4,200
                                                                                                     ------------  ------------
            Total current liabilities............................................................           9,340        12,005
  Accrued restructuring liabilities, net of current portion......................................          10,772        14,597
  Other long-term liabilities....................................................................           1,181           978
                                                                                                     ------------  ------------
            Total liabilities....................................................................          21,293        27,580
  Commitments and contingencies (Notes 5,6 and 7)
  Stockholders' equity:
    Common stock, $0.001 par value; authorized-- 250,000,000; issued and
       outstanding-- 55,470,064 shares in 2003 and 54,165,411 shares in 2002.....................              56            54
    Treasury stock...............................................................................              (4)           (4)
    Additional paid-in capital...................................................................         766,765       765,422
    Deferred stock compensation..................................................................             (20)         (245)
    Accumulated other comprehensive gain.........................................................             128            86
    Accumulated deficit..........................................................................        (739,723)     (725,925)
                                                                                                     ------------- -------------
            Total stockholders' equity...........................................................          27,202        39,388
                                                                                                     ------------  ------------
            Total liabilities and stockholders' equity...........................................    $     48,495  $     66,968
                                                                                                     ============  ============
</TABLE>

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

                                       37
<PAGE>


                             VA SOFTWARE CORPORATION

   CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME/(LOSS)
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                                     Year Ended
                                                                                         July 31,      July 27,    July 28,
     Net revenues:                                                                         2003          2002        2001
                                                                                      ------------  ------------  ----------
<S>                                                                                   <C>           <C>           <C>
      Software revenues...........................................................    $      2,917  $      1,086  $       --
      Online revenues.............................................................          20,551        15,967      14,678
      Other revenues..............................................................             760         3,332     120,212
                                                                                      ------------  ------------  ----------
         Net revenues.............................................................          24,228        20,385     134,890
    Cost of revenues:
      Software cost of revenues...................................................           1,997         2,387          --
      Online cost of revenues.....................................................          11,166        10,393      10,497
      Other cost of revenues......................................................            (383)       (3,119)    143,606
                                                                                      ------------- ------------  ----------
     Cost of revenues.............................................................          12,780         9,661     154,103
                                                                                      ------------  ------------  ----------
         Gross margin.............................................................          11,448        10,724     (19,213)
                                                                                      ------------  ------------  ----------
    Operating expenses:
      Sales and marketing.........................................................           9,791        12,513      39,981
      Research and development....................................................           7,815         8,122      17,959
      General and administrative..................................................           6,455        10,850      22,012
      Restructuring costs and other special charges...............................            (263)       46,936     113,478
      Amortization of deferred stock compensation.................................             144         1,671      61,268
      Amortization of goodwill and intangible assets..............................           1,910        11,730      97,887
      Impairment of goodwill, intangible assets and other long-lived assets.......             239        12,150     160,000
              Total operating expenses............................................          26,091       103,972     512,585
                                                                                      ------------  ------------  ----------
    Loss from operations..........................................................         (14,643)      (93,248)   (531,798)
    Interest income...............................................................           1,132         1,714       6,803
    Interest expense..............................................................              (8)          (32)       (165)
    Other income (expense), net...................................................            (279)          528        (108)
                                                                                      ------------  ------------  ----------
    Net loss......................................................................    $    (13,798) $    (91,038) $ (525,268)
    Other comprehensive loss:
          Unrealized gain on marketable securities and investments................              30           209          13
                   Foreign currency translation gain (loss).......................              12         1,367      (1,456)
                                                                                      ------------  ------------  ==========
    Comprehensive loss............................................................    $    (13,756) $    (89,462) $ (526,711)
                                                                                      ============  ============  ==========

    Net loss......................................................................    $    (13,798) $    (91,038) $ (525,268)
                                                                                      ============  ============  ==========
    Basic and diluted net loss per share..........................................    $      (0.25) $      (1.72) $   (10.78)
                                                                                      ============  ============  ==========
    Shares used in computing basic and diluted net loss per share.................          54,110        53,064      48,741
                                                                                      ============  ============  ==========
</TABLE>

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

                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                                                   Additional    Deferred        Other
                                                        Common Stock    Treasury    Paid-in       Stock      Comprehensive
                                                       Shares   Amount    Stock     Capital    Compensation      Loss
                                                       ------   ------    -----     -------    ------------      ----
<S>                                                    <C>      <C>      <C>       <C>          <C>           <C>
BALANCE AT JULY 28, 2000 ...........................   51,904   $   52   $   --    $ 763,175    $ (109,686)   $    (47)
Issuance of common stock for cash related to options    2,522        3       --        4,437            --          --
Repurchase of common stock for cash related to
options ............................................   (1,028)      (1)      (4)        (268)           --          --
Issuance of common stock to acquire businesses
Or assets ..........................................      721       --       --       14,397        (6,757)         --
Amortization of deferred stock compensation ........       --       --       --           --        61,268          --
Acceleration and forfeiture of deferred stock
compensation related to terminations ...............       --       --       --      (12,944)       49,067          --
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...       --       --       --           --            --      (1,443)

Net loss ...........................................       --       --       --           --            --          --
                                                       ------   ------    ------     -------        ------      ------
BALANCE AT JULY 28, 2001 ...........................   54,119       54       (4)     768,797        (6,108)     (1,490)
Issuance of common stock for cash related to options      581        1        --         402            --          --
Repurchase of common stock for cash related to
options ............................................     (535)      (1)       --         (16)           --          --
Issuance of common stock to acquire businesses
Or assets ..........................................       --       --       --        1,313        (1,308)         --
Acceleration of stock options.......................       --       --       --           74            --          --
Amortization of deferred stock compensation ........       --       --       --       (1,926)        3,597          --
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................       --       --       --       (3,222)        3,574          --

Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...       --       --       --           --            --       1,576

Net loss ...........................................       --       --       --           --            --          --
                                                       ------   ------    ------     -------        ------      ------
BALANCE AT JULY 28, 2002 ...........................   54,165       54       (4)     765,422          (245)         86
Issuance of common stock for cash related to options    1,578        2       --        1,442            --          --
Repurchase of common stock for cash related to
options ............................................     (273)      --       --           (2)           --          --
Amortization of deferred stock compensation ........       --       --       --          (76)          220          --
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................       --       --       --          (21)            5          --
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...       --       --       --           --            --          42

Net loss ...........................................       --       --       --           --            --          --
BALANCE AT JULY 31, 2003 ...........................   55,470  $    56   $   (4)   $ 766,765       $   (20)    $   128
                                                       ======   ======    ======    ========       =======      ======
</TABLE>

                                                                       Total
                                                       Accumulated  Stockholders
                                                         Deficit      Equity
                                                         -------      ------
BALANCE AT JULY 28, 2000 ...........................  $ (109,619)  $ 543,875
Issuance of common stock for cash related to options          --       4,440
Repurchase of common stock for cash related to
options ............................................          --        (273)
Issuance of common stock to acquire businesses
Or assets ..........................................          --       7,640
Amortization of deferred stock compensation ........          --      61,268
Acceleration and forfeiture of deferred stock
compensation related to terminations ...............          --      36,123
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...          --      (1,443)

Net loss ...........................................    (525,268)   (525,268)
                                                         -------     -------
BALANCE AT JULY 28, 2001 ...........................    (634,887)    126,362
Issuance of common stock for cash related to options          --         403
Repurchase of common stock for cash related to
options ............................................          --         (17)
Issuance of common stock to acquire businesses
Or assets ..........................................          --           5
Acceleration of stock options.......................          --          74
Amortization of deferred stock compensation ........          --       1,671
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................          --         352

Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...          --       1,576

Net loss ...........................................     (91,038)    (91,038)
                                                         -------     -------
BALANCE AT JULY 28, 2002 ...........................    (725,925)     39,388

Issuance of common stock for cash related to options          --       1,444
Repurchase of common stock for cash related to
options ............................................          --          (2)
Amortization of deferred stock compensation ........          --         144
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................          --         (16)
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ...          --          42

Net loss ...........................................     (13,798)    (13,798)
                                                         -------     -------
BALANCE AT JULY 31, 2003 ...........................  $ (739,723)   $ 27,202


                                       39
<PAGE>

                             VA SOFTWARE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                        Year Ended
                                                                                            July 31,      July 27,     July 28,
                                                                                              2003          2002         2001
                                                                                           ---------    ------------   --------
   Cash flows from operating activities:
<S>                                                                                     <C>           <C>            <C>
     Net loss.......................................................................    $    (13,798) $    (91,038)  $  (525,268)
     Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization................................................           5,351        16,153       102,786
       Provision for bad debts......................................................             (19)       (1,096)        3,968
       Provision for excess and obsolete inventory..................................              (6)       (4,378)       24,441
       Loss on disposal of assets...................................................              35         1,422             9
       Proportionate share of net losses in Japan investment........................              --         2,012            --
       Minority interest in Japan loss..............................................              --          (496)           --
       Gain on sale of Japan investment.............................................              --       (12,872)           --
       Release of contingent shares in relation to OSDN acquisition ................              --         1,313            --
       Amortization of deferred stock compensation..................................             144         1,671        61,268
       Non-cash compensation expense................................................              --            75            --
       Non-cash restructuring expense...............................................            (569)       36,426       101,237
       Impairment of long-lived assets..............................................             239        12,150       160,000
       Changes in assets and liabilities:
         Accounts receivable........................................................          (1,178)       10,439        17,635
         Inventories................................................................             (82)        2,046       (23,783)
         Prepaid expenses and other assets..........................................             286         3,391        (3,195)
         Accounts payable...........................................................          (1,212)      (12,244)      (12,446)
         Accrued restructuring liabilities..........................................          (3,105)        8,481         9,513
         Accrued liabilities and other..............................................          (2,098)       (8,159)        1,388
         Other long-term liabilities................................................             203          (388)          814
                                                                                        ------------  -------------  -----------
            Net cash used in operating activities...................................         (15,809)      (35,092)      (81,633)
                                                                                        ------------- -------------  -----------
   Cash flows from investing activities:
     Change in restricted cash......................................................             450         1,509          (609)
     Purchase of property and equipment.............................................            (289)         (417)      (14,750)
     Sale of property and equipment.................................................               8            --            --
     Purchase of marketable securities..............................................         (34,335)      (32,917)      (80,329)
     Sale of marketable securities..................................................          19,688        37,829       110,167
     Businesses acquired, net of cash acquired......................................              --            --         4,627
     Cash proceeds on sale of Japan investment......................................              --         5,059            --
     Purchase of other long-lived assets............................................              --            --        (1,929)

     Other, net.....................................................................              30           209           161
                                                                                        ------------  ------------   -----------
            Net cash provided by (used in) investing activities.....................         (14,448)       11,272        17,338
                                                                                        ------------- ------------   -----------
   Cash flows from financing activities:
     Payments on notes payable......................................................             (42)         (273)       (2,527)
     Proceeds from issuance of common stock.........................................           1,444           403         4,440
     Repurchase of common stock.....................................................              (2)          (17)         (273)
                                                                                        ------------- -------------  -----------
            Net cash provided by financing activities...............................           1,400           113         1,640
                                                                                        ------------  ------------   -----------
    Effect of exchange rate changes on cash and cash equivalents....................              12         1,367        (1,456)
                                                                                        ------------  ------------   -----------
    Net decrease in cash and cash equivalents.......................................         (28,845)      (22,340)      (64,111)
                                                                                        ------------- -------------  -----------
    Cash and cash equivalents, beginning of year....................................          35,148        57,488       121,599
                                                                                        ------------  ------------   -----------
    Cash and cash equivalents, end of year..........................................    $      6,303  $     35,148   $    57,488
                                                                                        ============  ============   ===========
   Supplemental cash flow information:
    Cash paid for state taxes.......................................................    $         16  $         18   $       335

    Cash paid for interest..........................................................    $          8  $         32   $       165

   Supplemental non-cash flow information:
   Issuance of common stock to acquire businesses...................................    $         --  $         --   $    14,397
</TABLE>

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

                                       40
<PAGE>


                             VA SOFTWARE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Operations of the Company:

Overview

    We were  incorporated  in California in January 1995 and  reincorporated  in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development  Network,  Inc. ("OSDN"),  a network of Internet Web
sites.

     SourceForge   is   proprietary   software   designed  for   corporate   and
public-sector   information   technology   ("IT")   professionals  and  software
engineering  organizations.  SourceForge is a Web-based application that enables
IT and software engineering organizations to manage application development more
effectively.  SourceForge  combines software development and collaboration tools
with the ability to track,  measure,  and report on software project activity in
real-time. With SourceForge,  developers and project managers gain access to the
information they need to reduce risk and become more productive.  SourceForge is
a  relatively  new product  and  additional  development  and  enhancements  are
expected in the future.

    OSDN is a network of media and  e-commerce  Internet  sites serving the Open
Source, developer and IT communities,  and media sites serving Web designers and
consumers.  OSDN  sites,  including  SourceForge.net,  Slashdot.org,  Linux.com,
NewsForge.com,  DevChannel.org, and Freshmeat.com collectively receive more than
180 million page views, and more than 10 million unique visitors, every month

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  and  majority-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.  On March 29, 2002, VA Linux Japan repurchased  10,000 shares of its
outstanding stock from a third party other than the Company,  thereby decreasing
the number of shares  outstanding  and  increasing  the Company's  investment to
approximately  19%. As the Company holds less than 20% of the voting stock of VA
Linux Japan and does not  otherwise  exercise  significant  influence,  VA Linux
Japan has been  accounted for under the cost method as of January 11, 2002.  The
minority  interest  included in the results of operations for VA Linux Japan has
not been material for any period presented and has been recorded in other income
in the accompanying  statements of operations.  The operations of VA Linux Japan
primarily relate to our former systems and services business.

  Foreign Currency Translation

                                       41
<PAGE>


    The functional  currency of all the Company's  foreign  subsidiaries  is the
country's  local  currency.  Balance  sheet  accounts are  translated  into U.S.
dollars at  exchange  rates  prevailing  at balance  sheet  dates.  Revenue  and
expenses are translated into U.S. dollars at average rates for the period. Gains
and losses  resulting from  translation are charged or credited in comprehensive
income as a component of stockholders'  equity.  As of July 31, 2003 the Company
did not hold any foreign currency derivative instruments.

Segment and Geographic Information

    Statement of Financial Accounting  Standards ("SFAS") No. 131,  "Disclosures
about Segments of an Enterprise and Related Information",  establishes standards
for  reporting  information  regarding  operating  segments in annual  financial
statements and requires selected  information for those segments to be presented
in  interim  financial  reports  issued  to  stockholders.  SFAS  No.  131  also
establishes  standards for related  disclosures  about products and services and
geographic  areas.  Operating  segments  are  identified  as  components  of  an
enterprise about which separate discrete financial  information is available for
evaluation by the chief operating  decision-maker,  or decision-making group, in
making decisions how to allocate resources and assess performance. The Company's
chief  decision-making  group,  as  defined  under SFAS No.  131,  are the Chief
Executive  Officer and the executive  team.  During fiscal 2001, the Company had
two reportable business segments for revenue: systems and services and OSDN. The
Company  allocated  its  resources  and  evaluated  performance  of its separate
segments  based on revenue.  As a result of the  Company's  decision to exit the
systems  business in the fourth quarter of fiscal 2001 and focus on its software
application  business,  during fiscal 2002 the Company  operated as one business
segment,  providing  application software products and related OSDN products and
services.  During the fourth  quarter of fiscal 2003,  two  separate  businesses
emerged and as of July 31, 2003, we operate as two reportable business segments:
software and online. Due to the significant amount of shared operating resources
that are  utilized by both of the  business  segments,  the Company only reports
segment information for revenues and cost of sales.

    The Company  marketed its products in the United  States  through its direct
sales force.  Revenues for each of the years ended July 31, 2003,  July 27, 2002
and July 28, 2001 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 equivalents and investments  consist of the following (in thousands) at
market value:

                                                        July 31,        July 27,
                                                          2003            2002
                                                          ----            ----
    Government obligations...........................  $ 10,001         $ 22,319
    Corporate obligations............................    21,148            6,431
    Commercial paper.................................     4,796              598
                                                       --------         --------
              Total..................................  $ 35,945         $ 29,348
                                                       ========         ========

    Included in cash, cash equivalents..............   $  3,401         $ 11,450
    Included in short-term investments..............     27,864            7,952
    Included in Long-term investments...............      4,680            9,946
                                                       --------         --------
              Total.................................   $ 35,945         $ 29,348
                                                       ========         ========

  Restricted Cash

                                       42
<PAGE>


    During  fiscal  year  2000,  the  Company  established  letters of credit of
approximately  $2.3 million that are used to  collateralize  payments related to
the Fremont  building  lease. As of July 31, 2003 and July 27, 2002, the Company
had  approximately  $0.9 million and $1.4 million,  respectively,  of restricted
cash related to this building lease.

  Inventories

    Inventories  related to our online operations  consist 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):
<TABLE>
<CAPTION>
                                                                                                 July 31,    July 27,
                                                                                                   2003        2002
                                                                                                   ----        ----
<S>                                                                                            <C>          <C>
            Computer and office equipment (useful lives of 2 to 3 years)...................    $   6,238    $   6,295
            Furniture and fixtures (useful lives of 2 to 4 years)..........................        2,209        2,464
            Leasehold improvements (useful lives of lesser of estimated life or lease term)        3,762        3,748
            Software (useful lives of  2 to 5 years) ......................................        2,090        2,016
                                                                                               ---------    ---------
                      Total property and equipment.........................................       14,299       14,523
            Less: Accumulated depreciation and amortization................................      (10,032)      (7,300)
                                                                                               ----------   ---------
                      Property and equipment, net..........................................    $   4,267    $   7,223
                                                                                               =========    =========
</TABLE>

    Depreciation  expense for the years ended July 31, 2003,  July 27, 2002, and
July 28, 2001 was $3.2 million, $4.4 million, and $4.9 million, respectively.

  Goodwill and Intangibles and Impairment of Long-Lived Assets

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

    The Company  continually  evaluates  whether events and  circumstances  have
occurred that indicate the remaining  estimated useful life of long-lived assets
may warrant revision or that the remaining  balance of long-lived assets may not
be recoverable in accordance  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.  See  Note 4 for  details  on  impairment  charges
recognized during fiscal years 2002 and 2001.

    The Company  performed an assessment of the carrying value of its long-lived
assets to be held and used including  significant  amounts of goodwill and other
intangible  assets recorded in connection with the Company's OSDN acquisition at
July 28, 2001. The Company performed the assessment pursuant to SFAS No. 144 due
to the  significant  slowdown in the economy  affecting  current  operations and
expected future sales, as well as the general decline of technology  valuations.
The  conclusion  of that  assessment  was that the decline in market  conditions
within the industry was significant and other than temporary.  As a result,  the
Company  recorded  during  the fourth  quarter  of fiscal  year 2001 a charge of
$160.0 million to reduce goodwill and other  intangible  assets  associated with
the  acquisition  of OSDN,  based on the amount by which the  carrying  value of
these assets  exceeded  their fair value.  The charge is

                                       43
<PAGE>


included in the caption  "Impairment of long-lived  assets" in the  consolidated
statements of operations.  Fair value was determined based on discounted  future
cash flows.

    Effective  July 29, 2001,  the Company  adopted SFAS No. 142,  "Goodwill and
Other  Intangible  assets." Upon adoption of SFAS No. 142, the Company no longer
amortized  goodwill.  Pursuant to SFAS No. 142, the Company  tests  goodwill for
impairment.  SFAS 142 requires  that  goodwill be tested for  impairment  at the
"reporting unit level"  ("Reporting Unit") at least annually and more frequently
upon the occurrence of certain  events,  as defined by SFAS No. 142.  During the
quarter ended July 27, 2002 goodwill was tested for  impairment  and the Company
determined that it had only one Reporting Unit,  providing  application software
products and related OSDN products and services.  First, the Company  determined
whether its carrying amount exceeded its "fair value", which would indicate that
goodwill  may be  impaired.  Based on this test,  the  Company  determined  that
goodwill could be impaired.  Therefore,  the Company  compared the "implied fair
value" of  goodwill,  as  defined by SFAS No.  142,  to its  carrying  amount to
determine  whether there was an impairment  loss. As a result of the  impairment
test,  the  Company  determined  that the  carrying  value was  impaired  and it
recorded  an  impairment  loss of $3.6  million.  The charge is  included in the
caption "Impairment of long-lived assets" in the statements of operations. There
was no carrying value associated with goodwill at July 31, 2003 to be tested for
impairment.

    Intangible assets are amortized on a straight-line  basis over three to five
years. The Company  continually  evaluates whether events or circumstances  have
occurred that indicate the remaining  estimated useful lives of these intangible
assets may not be recoverable.  When factors indicate that the intangible assets
should be evaluated for possible impairment, the Company uses an estimate of the
related  business  segment's  undiscounted  net income over the remaining useful
life of the  intangible  assets in measuring  whether they are  recoverable.  An
evaluation was performed on the intangible  assets during the quarter ended July
27,  2002.  As a result of this  evaluation,  the  Company  determined  that the
carrying  value  was  impaired  and an  impairment  loss was  recorded  for $8.6
million.  The  charge  is  included  in the  caption  "Impairment  of  goodwill,
intangible assets and other long-lived  assets" in the statements of operations.
No events or  circumstances  occurred during the fiscal year ended July 31, 2003
that would  indicate a possible  impairment in the carrying  value of intangible
assets at July 31, 2003.

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

<TABLE>
<CAPTION>
                                                                        As of July 31, 2003             As of July 27, 2002
                                                                  ------------------------------   -----------------------------
                                                                  Gross Carrying   Accumulated    Gross Carrying    Accumulated
                                                                      Amount       Amortization       Amount        Amortization
                                                                  ------------     ------------    ------------      -----------
<S>                                                               <C>              <C>             <C>               <C>
       Domain and trade ...................................       $      5,922     $     (5,901)   $      5,922      $    (4,457)
       names...............................................
       Purchased technology................................              2,534           (2,534)          2,534           (1,830)
                                                                  ------------     ------------    ------------      -----------
             Total intangible assets.......................              8,456           (8,435)          8,456           (6,287)
       Goodwill............................................             60,362          (60,362)         60,362          (60,362)
                                                                  ------------     ------------    ------------      -----------
       Total changes in Goodwill and intangible assets.........   $     68,818     $    (68,797)   $     68,818      $   (66,649)
                                                                  ============     ============    ============      ===========
</TABLE>

     The  aggregate   amortization   expense  of  intangible   assets,   net  of
restructuring  charges was $2.1  million and $11.7  million for the fiscal years
ending  July 31,  2003 and July 27,  2002,  respectively.  The  estimated  total
amortization expense of acquired intangible assets is $12,700 and $8,500 for the
fiscal  years  ending 2004 and 2005,  respectively,  at which  point  intangible
assets will be fully amortized.

     The changes in the net carrying amount of goodwill for the years ended July
31, 2003, and July 27, 2002 are as follows (in thousands):


                                           July 31,      July 27,
                                             2003          2002
                                         ----------   -----------
Balance as of July.................      $       --   $    49,114
Amortization in the period.........              --            --
Goodwill additions.................              --            45
Write-off of goodwill..............              --       (49,159)
                                         ----------   -----------
Balance as of July.................      $       --   $        --
                                         ==========   ===========

                                       44
<PAGE>

Revenue Recognition

Software Revenues

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

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

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

     If the fee due from the customer is not fixed or determinable,  the Company
recognizes revenues at the earlier of the due date or when cash is received from
the customer,  assuming all other revenue recognition criteria have been met. If
a significant  portion of the fee is due after 120 days,  the Company  considers
the fee not to be fixed or determinable.

     Online Revenues

     Advertising  revenues are derived from the sale of advertising space on our
various Web sites.  Advertising revenues are recognized over the period in which
the  advertisements  are  displayed,  provided that no  significant  obligations
remain and collection of the receivable is reasonable  assured.  Our obligations
typically include guarantees of a minimum number of "impressions" (times that an
advertisement  is viewed by users of our online services over a specified period
of time).  To the extent that minimum  guaranteed  impressions  are not met, the
Company does not  recognize  the  corresponding  revenues  until the  guaranteed
impressions are achieved.  Barter revenue transactions which totaled $2,000,000,
2,000,000 and 2,400,000 for the fiscal years ended July 31, 2003,  July 27, 2002
and July 28,2001, respectively, are recorded at their estimated fair value based
on the Company's  historical  experience of selling similar advertising for cash
in accordance with Emerging Issues Task Force ("EITF") Issue 99-17,  "Accounting
for Advertising Barter  Transactions." The Company broadcasts banner advertising
in exchange for similar banner advertising on third party Web sites.

     E-commerce  revenues are derived from the online sale of consumer goods and
digital  animations.  E-commerce  revenues  from the sale of consumer  goods are
recognized in accordance  with SEC Staff  Accounting  Bulletin  ("SAB") No. 101,
"Revenue  Recognition in Financial  Statements." Under SAB 101, product revenues
are recognized when persuasive evidence of an arrangement  exists,  delivery has
occurred,  the  sale  price  is  fixed or  determinable  and  collectibility  is
reasonably assured. In general,  the Company recognizes  e-commerce revenue upon
the  shipment  of goods.  The  Company  does grant  customers  a right to return
e-commerce  products.  Such  returns  are  recorded  as  incurred  and have been
immaterial for the periods presented.  The majority of the revenues derived from
digital animation sales are related to membership arrangements.  As a result, we
recognize  the value  ratably  over the term of the  contract,  normally 3 or 12
months

     Other Revenues

     The Company's  revenue  recognition  policy related to its former  hardware
systems  business  follows SEC SAB No. 101,  "Revenue  Recognition  in Financial
Statements." Under SAB No. 101, the Company recognized product revenues from the
sale of Linux-based


                                       45
<PAGE>

servers,  components,  and  desktop  computers  when  persuasive  evidence of an
arrangement existed, delivery occurred, the sales price is fixed or determinable
and  collectibility is reasonably  assured.  In general,  the Company recognizes
product revenue upon shipment of the goods. The Company does not grant customers
any rights to return these products.

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

   Advertising Expenses

     The Company  expenses  advertising  costs as  incurred.  Total  advertising
expenses  were $2.5  million,  $2.7  million and $8.3  million for fiscal  years
ending July 31, 2003, July 27, 2002 and July 28, 2001, respectively.

   Stock-Based Compensation

     The Company  accounts 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  ("FIN") No. 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.

     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, 2003,  July 27, 2003 and July 28, 2003 the
Company's  pro forma net loss and net loss per share  would have been as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                                                    -----------------------------------
                                                                     July 31,    July 27,     July 28,
                                                                      2003         2002         2001
                                                                    --------    ---------    ---------
<S>                                                                 <C>         <C>          <C>
Net loss as reported .............................................  ($13,798)   ($ 91,038)   ($525,268)
Add back employee stock-based compensation expense related to
    stock options included in reported net loss ..................       144        1,671       61,268
Less employee stock-based compensation expense determined under ..
   fair value based method for all employee stock option awards,
                                                                    --------    ---------    ---------
 net  of related tax effects .....................................    (8,774)     (10,590)     (20,332)
                                                                    --------    ---------    ---------
   Pro forma net loss ............................................  ($22,428)   ($ 99,957)   ($484,332)
   Basic and diluted net loss per share ..........................  ($  0.25)   ($   1.72)   ($  10.78)
                                                                    --------    ---------    ---------
Pro forma basic and diluted net loss per share ...................  ($  0.41)   ($   1.88)   ($   9.94)
                                                                    --------    ---------    ---------
</TABLE>


                                       46
<PAGE>

     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:

<TABLE>
<CAPTION>
                               Stock option Plans                 ESPP Plans
                           For the fiscal year ended       For the fiscal year ended
                          ---------------------------   ---------------------------------
                          July 31,  July 27,  July 28,  July 31,     July 27,     July 28,
                            2003      2002      2001      2003         2002         2001
                            ----      ----      ----      ----         ----         ----
<S>                          <C>         <C>       <C>     <C>          <C>          <C>
Expected life (years) .      4.8         4         4       0.5          0.5          0.6
Risk-free interest rate        3%      3.7%      5.1%      1.1%         2.4%         5.2%
Volatility ............      108%      100%      100%       95%         100%         100%
Dividend yield ........      None      None      None      None         None         None
</TABLE>

  Software Development Costs

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

    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.

  Computation of Per Share Amounts

    In  accordance  with SFAS No. 128,  basic net loss per common share has been
calculated  using  the  weighted-average   number  of  shares  of  common  stock
outstanding during the period, less shares subject to repurchase.  For the years
ended July 31, 2003,  July 27, 2002 and July 28, 2001,  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):

<TABLE>
<CAPTION>
                                                                                 Year Ended
                                                                   -----------------------------------------
                                                                    July 31,       July 27,       July 28,
                                                                     2003            2002             2001
                                                                   ---------       ---------       ---------
<S>                                                                <C>             <C>             <C>
Net loss ......................................................    $ (13,798)      $ (91,038)      $(525,268)
                                                                   =========       =========       =========
Basic and diluted:
  Weighted average shares of common stock outstanding .........       54,117          53,290          51,410
  Less: Weighted average shares subject to repurchase .........           (7)           (226)         (2,669)
                                                                   ---------       ---------       ---------
  Shares used in computing basic and diluted net loss per share       54,110          53,064          48,741
                                                                   =========       =========       =========
  Basic and diluted net loss per share ........................    $   (0.25)      $   (1.72)      $  (10.78)
                                                                   =========       =========       =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                 Year Ended
                                                                 -------------------------------------
                                                                   July 31,       July 27,     July 28,
                                                                     2003           2002         2001
                                                                 ------------   ------------  --------
<S>                                                                   <C>           <C>         <C>
        Anti-dilutive securities:
             Options to purchase common stock...................      9,433         12,308      10,834
             Common stock subject to repurchase.................         --             29         923
                                                                  -----------   ------------  --------
        Total Anti-dilutive securities..........................      9,433         12,337      11,757
                                                                  ===========    ===========   =======
</TABLE>


  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.


                                       47
<PAGE>

   Income Taxes

    The  Company  accounts  for  income  taxes  using  the  liability  method in
accordance  with  SFAS  No.  109,  "Accounting  for  Income  Taxes".  Due to the
Company's  loss  position  in fiscal  years  2003,  2002 and 2001,  there was no
provision for income taxes for the years ended July 31, 2003,  July 27, 2002 and
July 28, 2001.  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
believe 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 June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities,"  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supercedes  previous  accounting
guidance, principally EITF issue No. 94-3. The Company is required to adopt SFAS
No. 146 for restructuring activities initiated after December 31, 2002. SFAS No.
146 requires that the liability  for costs  associated  with an exit or disposal
activity be  recognized  when the  liability  is  incurred.  Under EITF 94-3,  a
liability  for an  exit  cost  was  recognized  at  the  date  of the  company's
commitment  to an exit plan.  SFAS No. 146 also  established  that the liability
should initially be measured and recorded at fair value.  Accordingly,  SFAS No.
146 may affect the timing of  recognizing  future  restructuring  plans.  If the
Company continues to record significant restructuring charges in the future, the
adoption  of SFAS No.  146 could  have a  significant  impact on its  results of
operations.

    In November 2002, the FASB issued FASB  Interpretation No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of  Indebtedness  of Others." FIN No. 45 requires that a liability be
recorded in the  guarantor's  balance  sheet upon  issuance  of a  guarantee  or
indemnification.  In  addition,  FIN  No.  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 No. 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 No. 45 are
effective for financial  statements  of interim or annual  periods  ending after
December 15, 2002.  The adoption of FIN No. 45 has not had a material  effect on
these consolidated financial statements.


    In  November  2002,  the  Emerging  Issues  Task  Force  ("EITF")  reached a
consensus regarding EITF Issue 00-21,  Accounting for Revenue  Arrangements with
Multiple  Deliverables.  The  consensus  addresses  not  only  when  and  how an
arrangement  involving  multiple  deliverables  should be divided into  separate
units of  accounting  but also how the  arrangement's  consideration  should  be
allocated among separate units.  The  pronouncement is effective for VA Software
commencing  with its  fiscal  year 2004 and is not  expected  to have a material
impact  on  VA  Software's  consolidated  results  of  operations  or  financial
position.

    In December 2002, the FASB issued SFAS No. 148,  "Accounting for Stock-Based
Compensation  -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This  Statement  amends FASB SFAS No.  123,  "Accounting  for  Stock-Based
Compensation,",  to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee  compensation.  SFAS No. 148 also requires that  disclosures of the pro
forma  effect  of using the fair  value  method of  accounting  for  stock-based
employee  compensation  be displayed more  prominently  and in a tabular format.
Additionally,  SFAS No.  148  requires  disclosures  of the pro forma  effect in
interim financial statements.  The transition and annual disclosure requirements
of SFAS No. 148 are  effective  for fiscal years ended after  December 15, 2002.
The interim disclosure  requirements are effective for interim periods beginning
after  December  15,  2002.  The  Company  has chosen to continue to account for
stock-based  compensation  using the  intrinsic  value method  prescribed in APB
Opinion No. 25 and related  interpretations.  Accordingly,  compensation expense
for stock  options is  measured as the  excess,  if any, of the  estimate of the
market value of the Company's  stock at the date of the grant over the amount an
employee  must pay to  acquire  its  stock.  The  Company  adopted  the  interim
disclosure  provisions for our financial  reports during the quarter ended April
26, 2003 and has adopted the annual disclosure provisions of SFAS No. 148 in our
financial  reports for the fiscal year ended July 31,  2003.  As the adoption of
this standard involves disclosures only, it has not had a material impact on our
consolidated financial statements.

    In January  2003,  the FASB  issued FIN No. 46,  "Consolidation  of Variable
Interest  Entities,  an  Interpretation  of ARB No. 51."  Generally,  a variable
interest entity ("VIE") is a corporation,  partnership, trust or any other legal
structure used for business  purposes that either does not have equity investors
with  substantive  voting  rights or has equity  investors  that do not  provide
sufficient  financial


                                       48
<PAGE>

resources for the entity to support its activities.  A VIE often holds financial
assets and may be passive or it may engage in such  activities  as research  and
development  or other  activities  on  behalf  of  another  company.  FIN No. 46
requires that a VIE be consolidated by a company if that company is subject to a
majority  of the VIE's risk of loss or  entitled  to  receive a majority  of the
VIE's residual returns or both. A company that consolidates a VIE is referred to
as the primary beneficiary of that entity. The consolidation requirements of FIN
No.  46  apply   immediately  to  VIEs  created  after  January  31,  2003.  The
consolidation  requirements apply to entities existing prior to January 31, 2003
in the first  fiscal  year or interim  period  beginning  after  June 15,  2003.
Certain of the disclosure  requirements apply in all financial statements issued
after January 31, 2003 regardless of when the VIE was  established.  The Company
has  adopted  the  disclosure   provisions  and  will  adopt  the  consolidation
requirements   as  of  August  1,  2003.  The  adoption  of  the   consolidation
requirements of FIN No. 46 did not have a significant impact on our 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 is not expected to have a material effect on the
Company's consolidated financial statements.

  Supplier Concentration

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

  Concentrations of Credit Risk and Significant Customers

     The  Company's   investments   are  held  with  two   reputable   financial
institutions,   both  institutions  are  headquartered  in  the  United  States.
Financial  instruments that potentially subject the Company to concentrations of
credit risk consist  primarily of cash trade  receivables.  The Company provides
credit, in the normal course of business,  to a number of companies and performs
ongoing  credit  evaluations  of its  customers.  As of July 31, 2003,  no gross
accounts  receivables were concentrated  with one customer.  As of July 27, 2002
approximately  40% of gross  accounts  receivables  were  concentrated  with one
customer, Lavaca Systems, Inc. A reserve representing 100% of the gross accounts
receivable related to this customer has been established.

     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.  For the fiscal year ended July 28, 2001,  one  customer,  Akamai
Technologies,  Inc.,  accounted for  approximately  25% of net  revenues.  Going
forward,  the company does not  anticipate  that anyone  customer will represent
more than 10% of net revenues.

3.  Acquisitions and Divestitures

    There were no  acquisitions  or  divestitures  during the fiscal years ended
2003 and 2002. During the fiscal year ended July 28, 2001, the Company completed
a number of  acquisitions  accounted for using the purchase  method and as such,
the  purchase  price was  allocated to the assets  acquired and the  liabilities
assumed  based  on  estimated  fair  values  on the  date  of  acquisition.  The
consolidated financial statements include the operating results of each business
from the date of  acquisition.  Amounts  allocated  to  goodwill  and  purchased
intangible  assets have been  amortized on a  straight-line  basis over three to
five years through July 28, 2001.  As of July 29, 2001, in accordance  with SFAS
No. 142, "Goodwill and Other Intangible assets," the Company no longer amortizes
goodwill.  Other  intangible  assets continue to be amortized on a straight-line
basis over three to five years.


  Brave New Worlds, Inc.

    On September  26, 2000, in an  acquisition  accounted for under the purchase
method of  accounting,  the Company  acquired all of the  outstanding  shares of
Brave New Worlds, Inc. ("BNW") for approximately $2.5 million. The consideration
included  approximately  35,000 shares of the Company's common stock with a fair
market value of $1.7 million  based on the average  closing price for three days
prior to the acquisition  closing date and cash of approximately  $750,000.  The
purchase agreement contained additional


                                       49
<PAGE>

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

   Life BVBA

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

   Help Desk Facility

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

  Software Technology

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


                                       50
<PAGE>

4.  Restructuring Costs and Other Special Charges

     In fiscal 2001 and 2002, the Company  adopted plans to exit the 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 software and
online  businesses  and reduce its  operating  losses to improve cash flow.  The
Company  recorded  restructuring  charges of $180.2  million  related to exiting
these activities,  $160.4 million of which was included in restructuring charges
and other special  charges in operating  expenses and $19.8 million of which was
included in cost of sales. Included in the restructuring were charges related to
excess  facilities from  non-cancelable  leases (with payments  continuing until
fiscal 2010, unless sublet completely).  The accrual from  non-cancelable  lease
payments includes management's estimates of sublease income. These estimates are
subject to change based on actual events. The Company evaluates and updates,  if
applicable,  these estimates quarterly.  As of July 31, 2003, the Company had an
accrual  of   approximately   $14.5   million   outstanding   related  to  these
non-cancelable  leases,  all of  which  was  originally  included  in  operating
expenses.

     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 credit adjustments to previously recorded  restructuring  reserves.
As of July 31, 2003, the Company had an accrual of $0.4 million related to these
charges.

     In addition to the above, the Company recorded a $0.4 million net credit in
cost of revenues in the consolidated statement of operations for the fiscal year
ended July 31, 2003.  The $0.4  million  consisted  of $23,000  associated  with
severance and other related costs  attributable to the fiscal 2002 plan to align
the  Company's  infrastructure  with  its  operations,  net  of  adjustments  to
previously  recorded  restructuring  reserves  of $0.4  million  related  to the
systems warranty  reserve and excess facility  reserves  originally  established
during  fiscal  2001.  As of July 31, 2003,  no  outstanding  accruals  remained
related to these restructuring charges.


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

<TABLE>
<CAPTION>
                                                                      Total                                        Total
                                                   Total Charged   Charged To    Total Charged     Cash        Restructuring
                                                    To Operations  Operations   To Operations    Receipts\     Liabilities at
                                                     Fiscal 2001   Fiscal 2002    Fiscal 2003    (Payments)     July 31, 2003
                                                   --------------  -----------    -----------    ----------    --------------
<S>                                                 <C>            <C>           <C>             <C>            <C>
Cash Provisions:
  Other special charges relating to
    restructuring activities ...................    $  2,159       $   (888)     $     78        $ (1,349)      $    --
  Facilities charges ...........................       6,584          9,401           191          (1,287)        14,889
  Employee severance and other related charges .       3,498          1,997            37          (5,532)           --
                                                    --------       --------      --------        --------       --------
      Total cash provisions ....................      12,241         10,510           306        $ (8,168)      $ 14,889
                                                    --------       --------      --------        ========       ========
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)
  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)
                                                    --------        --------      --------
      Total provisions .........................    $113,478       $ 46,936      $   (263)
                                                    ========        ========      ========
</TABLE>


                                       51
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Balance at      Charged to                   Balance
                                                                    Beginning       Costs and                     at End
   Changes in the total accrued restructuring  liability            of Period       Expenses    Deductions      of Period
   -----------------------------------------------------           ----------      ----------   ----------      ----------
<S>                                                                <C>            <C>           <C>             <C>
        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

                                                                    Short          Long         Total
     Components of the total accrued restructuring liability        Term           Term        Liability
   -----------------------------------------------------           --------      ----------   ----------
        For the year ended July 28, 2001.........................  $  3,135      $   6,378    $   9,513
        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
</TABLE>

5.  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, 2003 are
as follows (in thousands):

                                                Gross                     Net
                                              Operating    Sublease    Operating
                                               Leases       Income      Leases
                                              ---------    ---------   ---------
  2004.....................................    $5,370         $615      $4,755
  2005.....................................     4,916          309       4,607
  2006.....................................     3,709           77       3,632
  2007....................................      3,511            -       3,511
  2008.....................................     3,616            -       3,616
  Thereafter...............................     6,905            -       6,905
                                              ---------    ---------   ---------
            Total minimum lease payments...    $28,027       $1,001     $27,026
                                              =========    =========   =========

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

     Gross rent  expense  for the years ended July 31,  2003,  July 28, 2002 and
July  28,  2001  was  approximately  $3,889,401,  $18,866,000  and  $13,601,000,
respectively.  Rent  expense was offset by  sublease  income of  $2,436,655  and
$5,966,578  for the years ended July 31, 2003 and July 27,  2002,  respectively.
$93,428 and  $11,029,000  of the rent  expense for the years ended July 31, 2003
and July 27, 2002,  respectively,  were  attributable to an estimate of the loss
related to idle facilities,  which has been recorded as restructuring  costs and
other special charges in the statements of operations.

6.  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.  In October  2002,  the court,  pursuant  to a  stipulation,
dismissed all claims against the Company's Former Officers without prejudice. On
February  19,  2003,  the court denied in part and granted in part the motion to
dismiss filed on behalf of the  defendants,  including the Company.  The court's
order did not dismiss any claims against the Company. As a result, discovery may
now proceed.  A proposal has been made for the  settlement and release of claims
against the issuer defendants,  including VA Software. 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.


                                       52
<PAGE>

     On February 28, 2003, a related case,  captioned Liu v. Credit Suisse First
Boston, et al., Case No. 03-20459, was filed in the United States District Court
for the Southern District of Florida.  The Liu plaintiff was not alleged to have
bought or sold VA  Software  stock.  The  Company  was not  served  with the Liu
complaint. The Complaint related generally to the ongoing IPO-related litigation
currently  pending in the United States District Court for the Southern District
of New York,  described  above.  On June 19, 2003,  the Liu  plaintiff  filed an
amended complaint that dropped the VA Software defendants from the litigation.

     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.

7.  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 term of the  indemnification  period is for the
officer's or director's term 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.  All of  these
indemnification agreements were grandfathered under the provisions of FIN No. 45
as they were in effect prior to December 31, 2002. Accordingly,  the Company has
no liabilities recorded for these agreements as of July 31, 2003.

     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 U.S.  patent  or any
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, 2003.

     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, 2003.

     The Company  warrants  that its hardware  products  related to its previous
hardware  business will perform in all material  respects in accordance with the
Company's standard published specifications in effect at the time of delivery of
the products to the  customer for the life of the product,  typically 36 months.
The remaining  estimated fair value of these agreements related to the Company's
previous hardware business is minimal at July 31, 2003. Accordingly, the Company
has a liability of  approximately  $12,000  recorded for these  agreements as of
July 31, 2003.

8.  Retirement Savings Plan

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


                                       53
<PAGE>

9.  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 2003, the Company cancelled 270,407 shares of
its common stock, which has been recorded as treasury stock in the balance sheet
and statement of  stockholders'  equity.  In fiscal 2002, the Company  cancelled
10,934 shares of its common stock which has been  recorded as treasury  stock in
the balance sheet and statement of stockholders' equity.

    As of July 31, 2003 there were 55,470,064  shares of common stock issued and
outstanding.  VA Software is  authorized to issue  250,000,000  shares of common
stock,  $0.001 par value.  Each share of common stock has the right to one vote.
The  holders of common  stock are also  entitled to receive  dividends  whenever
funds  are  available  and when  declared  by the  Board of  Directors.  No cash
dividends have been declared or paid through July 31, 2003.

    As of July 31, 2003, the Company had reserved shares of its common stock for
future issuance as follows:

   1998 Stock Option Plan and Assumed Plans.................    21,039,118
   1999 Director Option Plan................................     1,250,000
   1999 Employee Stock Purchase Plan........................     2,225,391
                                                               -----------
                                                                24,514,509

  Stock Repurchase Agreements

    In connection  with the exercise of options  pursuant to the Company's Stock
Option Plan,  employees  entered into restricted stock purchase  agreements with
the  Company.  Under the terms of these  agreements,  the Company has a right to
repurchase any unvested shares at the original exercise price of the shares upon
termination  of the  employee.  The  repurchase  right  lapses  ratably over the
vesting term of the original  option grant.  As of July 31, 2003,  there were no
shares of the Company's common stock subject to repurchase by the Company.

  Stock Option Plan

    In fiscal year 1999, the Company adopted and the board of directors approved
the 1998 Plan. A total of  35,106,353  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, 2003, 38,404,566 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.  A total of
1,250,000  shares of common  stock have been  reserved  for  issuance  under the
Directors' Plan,  subject to an annual increase of the lesser of 250,000 shares,
0.5% of the then outstanding  common stock or an amount  determined by the board
of directors. Through July 31, 2003, 550,000 options have been granted under the
Directors'  Plan.  Under  the  Directors'  Plan,  options  are  granted  when  a
non-employee director joins the board of directors following the IPO and at each
annual meeting where the director  continues to serve on the board of directors.
The Directors'  Plan  establishes an automatic  grant of 80,000 shares of common
stock to each  non-employee  director who is elected after the completion of the
IPO.  The  Directors'  Plan  also  provides  that  upon the date of each  annual
stockholders'  meeting,  each non-employee director who has been a member of the
board  of  directors  for  at  least  six  months  prior  to  the  date  of  the
stockholders' meeting will receive automatic annual grants of options to acquire
20,000 shares of common stock.  Each automatic grant will have an exercise price
per share  equal to the fair  market  value of the  common  stock at the date of
grant, will vest 25% immediately upon the grant date and monthly  thereafter and
become fully vested three years after the date of grant.  Each  automatic  grant
will have a term of ten years. In the event of a merger with another corporation
or the sale of substantially  all of its assets,  each  non-employee  director's
outstanding  option will become fully vested and  exercisable.  Options  granted
under the  Directors'  Plan must be exercised  within 3 months of the end of the
non-employee  director's tenure as a member of


                                       54
<PAGE>

the board of  directors,  or within 12 months  after a  non-employee  director's
termination by death or disability,  provided that the option does not terminate
by its terms earlier.  Unless terminated  sooner, the Directors' Plan terminates
automatically in 2009.

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

    The  following  is a summary of the option  activity  under all of the stock
option plans for the years ended July 31, 2003, July 27, 2002 and July 28, 2001.


                                                       Options Outstanding
                                                  -----------------------------
                                      Options                       Weighted
                                     Available       Number of       Average
                                     for Grant        Shares     Exercise Price
                                  -------------   -------------  --------------
 Balance at July 28, 2000.......      7,509,685       9,533,518        11.77
   Authorized...................      3,293,288              --           --
   Granted......................     (8,683,574)      8,683,574         9.10
   Exercised....................             --      (2,395,276)        1.25
   Cancelled....................      4,272,107      (4,987,636)       16.62
   Repurchases..................        923,844              --           --
                                  -------------   -------------
 Balance at July 28, 2001.......      7,315,350      10,834,180         9.72
                                  =============   =============
   Authorized...................      2,901,816              --           --
   Granted......................     (8,082,800)      8,082,800         1.15
   Exercised....................             --        (511,674)        0.63
   Cancelled....................      5,970,320      (6,097,405)        8.79
   Repurchases..................        523,751              --           --
                                  -------------   -------------
 Balance at July 27, 2002.......      8,628,437      12,307,901         4.94
                                  =============   =============
   Authorized...................      2,904,105              --           --
   Granted......................     (1,584,600)      1,584,600         1.25
   Exercised....................             --      (1,499,274)        0.92
   Cancelled....................      2,906,164      (2,960,715)        9.24
   Repurchases..................          2,500              --           --
                                  -------------   -------------
 Balance at July 31, 2003.......     12,856,606       9,432,512         3.61
                                  =============   =============

<TABLE>
<CAPTION>

     Outstanding Options                                          Options Exercisable
                                           Weighted               -------------------
                                            Average    Weighted                Weighted
                                           Remaining    Average                 Average
         Range of              Number      Life (in    Exercise                Exercise
      Exercise Prices        Outstanding    years)       Price      Shares       Price
      ---------------       ------------- ----------  ---------  -----------  --------
<S>                          <C>             <C>       <C>         <C>         <C>
     $  0.02 -   0.96          770,610       6.01      $  0.22       629,109   $  0.06
     $  0.99 -   0.99        3,158,168       8.20      $  0.99     1,024,589   $  0.99
     $  1.00 -   2.32        2,248,877       8.92      $  1.52       497,484   $  1.75
     $  2.49 -   8.13        2,256,099       7.76      $  4.18     1,535,526   $  4.61
     $  8.50 - 112.06          998,758       7.17      $ 17.93       721,968   $ 19.26
                             ---------                             ---------
     $  0.02 - 112.06        9,432,512       7.98      $  3.61     4,408,676   $  5.20
                             =========                             =========
</TABLE>

    During  fiscal  years  2003,  2002 and 2001,  there were no options or stock
purchase  rights  granted  outside of the 1998 Plan  outstanding.  Total options
exercisable  at July 31, 2003 and July 27, 2002 were  4,408,676  and  4,116,898,
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


                                       55
<PAGE>

equal to the lesser of (a) one percent  (1%) of the then issued and  outstanding
shares of common stock, (b) an amount  determined by the Board of Directors,  or
(c) 500,000  shares of common  stock.  During each  six-month  offering  period,
employees can choose to have up to 10% of their annual base earnings withheld to
purchase the Company's  common stock.  The purchase price of the common stock is
85% of the  lesser  of the  fair  value as of the  beginning  or  ending  of the
offering period. A total of 274,609 shares of common stock were issued under the
ESPP through July 31, 2003. At July 31, 2003,  2,225,391  shares were  available
for issuance.

Employee Stock Option and Stock Purchase Plan

     The Company  elected to follow APB No. 25,  Accounting  for Stock Issued to
Employees,  in accounting for our employee stock options because the alternative
fair  value  accounting   provided  for  under  SFAS  No.  123,  Accounting  for
Stock-Based Compensation,  requires the use of option valuation models that were
not  developed  for use in valuing  employee  stock  options.  Under APB No. 25,
because the exercise price of the Company's  employee's stock options  generally
equals  the  market  price of the  underlying  stock on the  date of  grant,  no
compensation  expense is  recognized  in the  Company's  consolidated  financial
statements.

    Pro forma information  regarding net loss and net loss per share is required
by SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options,  including shares issued under the
Employee Stock  Purchase Plan,  collectively  called  "options,"  under the fair
value method of that statement.  The fair value of options granted during fiscal
2003, 2002 and 2001 reported below has been estimated at the date of grant using
the Black-Scholes  option-pricing  model assuming no expected  dividends and the
following weighted average assumptions:

    The weighted average fair value of options granted during fiscal years 2003,
2002  and  2001 was $ 0.97,  $0.81  and  $6.52,  respectively.  Pursuant  to the
provisions  of SFAS No. 123,  the  compensation  cost  associated  with  options
granted in fiscal  years 2003,  2002 and 2001 were  estimated  on the grant date
using the Black-Scholes model and the following assumptions:

<TABLE>
<CAPTION>
                                           Stock option Plans                   ESPP Plans
                                       For the fiscal year ended        For the fiscal year ended
                                       -------------------------        -------------------------
                                   July 31,   July 27,   July 28,    July 31,     July 27,     July 28,
                                     2003       2002       2001        2003         2002         2001
                                     ----       ----       ----        ----         ----         ----
<S>                                  <C>         <C>       <C>         <C>         <C>          <C>
   Expected life (years)..........   4.8         4         4           0.5         0.5          0.6
   Risk-free interest rate........     3%        3.7%      5.1%        1.1%        2.4%         5.2%
   Volatility.....................   108%       100%       100%         95%        100%         100%
   Dividend yield.................   None       None       None        None        None         None
</TABLE>


    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 in
the Summary of Significant Accounting Policies under Stock-Based Compensation.

  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
Financial  Accounting  Standards Board  Interpretation  No. 28. The amortization
expense  relates  to options  awarded  to  employees  in all  operating  expense
categories.  The  amortization  of  deferred  stock  compensation  has not  been
separately  allocated  to  these  categories.   The  amount  of  deferred  stock
compensation  from year to year has  decreased as options for which  accrued but
unvested  compensation  has been  recorded  have  been  forfeited.  The  Company
recorded amortization of deferred stock compensation related to these options of
$0.1 million, $1.2 million and $10.6 million for the fiscal years ended July 31,
2003, July 27, 2002 and July 28, 2001, respectively.  In addition, in connection
with  acquisitions,  the Company  recorded  $0.5  million  and $50.7  million of
amortization of deferred stock  compensation  during the fiscal years ended July
27, 2002 and July 28,  2001.  No  amortization  of deferred  stock  compensation
related


                                       56
<PAGE>

to  acquisitions  was  recorded  during  the fiscal  year  ended July 31,  2003.
Further,  in connection  with the  restructuring  discussed  above,  the Company
recorded an expense of  approximately  $35.7 million related to the acceleration
of deferred stock compensation for the fiscal year ended July 28, 2001. Finally,
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.  All  adjustments  have been
included in  restructuring  costs and other special charges in the statements of
operations.

10.  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 2003, 2002 and 2001, there was no provision for income taxes for the years
ended July 31, 2003, July 27, 2002 and July 28, 2001. 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,    July 27,     July 28,
                                      2003         2002         2001
                                    --------     --------     --------
Net operating loss carryforwards    $ 83,577     $ 80,446     $ 68,965
Other reserves and accruals ....      13,081       11,494       19,726
                                    --------     --------     --------
                                      96,658       91,940       88,691
Valuation allowance ............     (96,658)     (91,940)     (88,691)
                                    --------     --------     --------
Net deferred income tax asset ..    $     --     $     --     $     --
                                    ========     ========     ========

    As of July 31, 2003,  the Company has net operating  loss  carryforwards  of
approximately  $233  million to offset  future  federal  taxable  income,  which
expires  at  various  dates  through  fiscal  year 2023.  This  amount  includes
approximately  $12.5  million  of net  operating  loss  carryforwards  from  the
acquisition of OSDN. The deferred tax assets related to the  acquisition of OSDN
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  $73 million to offset future  California
taxable income,  which expire at various dates through fiscal year 2013. The net
operating loss carryforwards also include  approximately $21.3 million resulting
from  employee  exercises  of  non-qualified   stock  options  or  disqualifying
dispositions,  the tax benefits of which, when realized,  will be recorded as an
addition to additional  paid-in capital rather than a reduction of the provision
for income taxes. The operating loss carryforwards to be used in future years is
limited in accordance  with the  provisions of the Tax Reform Act of 1986 as the
Company has  experienced a cumulative  stock  ownership  change of more than 50%
over the last three years. The net operating loss carryforwards stated above are
reflective of various federal and state tax limitations


11.      Segment and Geographic Information

    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.  During fiscal 2001,  the Company had two  reportable  business
segments for revenue:  systems and services and OSDN. The Company  allocated its
resources and evaluated  performance of its separate  segments based on revenue.
As a result of the Company's decision to exit the systems business in the fourth
quarter of fiscal 2001 and focus on its software  application  business,  during
fiscal 2002 the Company operated as one business segment,  providing application
software  products and related OSDN  products  and  services.  During the fourth
quarter of fiscal 2003, two separate businesses emerged and as of July 31, 2003,
we operate as two reportable business segments:  software and online. Due to the
significant  amount of shared  operating  resources that are utilized by both of
the business segments, the Company only reports segment information for revenues
and cost of sales.


    The accounting  policies of the segments are the same as those  described in
the summary of significant  accounting polices. There are no intersegment sales.
Our chief operating decision maker evaluates performance based on each segment's
revenue and gross margin  rather than profit or similar  measure.  The Company's
assets and liabilities are not discretely allocated or reviewed by segment.


                                       57
<PAGE>

<TABLE>
<CAPTION>
                                                                                 Total
 (in thousands)                       Software        Online        Other       Company
 --------------------------------     --------        ------        -----       -------
<S>                                  <C>           <C>          <C>           <C>
Year Ended July 31, 2003
  Revenue from external customers    $   2,917     $  20,551    $     760     $  24,228
  Cost of revenues ..............    $   1,997     $  11,166    $    (383)    $  12,780
  Gross margin ..................    $     920     $   9,385    $   1,143     $  11,448
Year Ended July 27, 2002
  Revenue from external customers    $   1,086     $  15,967    $   3,332     $  20,385
  Cost of revenues ..............    $   2,387     $  10,393    $  (3,119)    $   9,661
  Gross margin ..................    $  (1,301)    $   5,574    $   6,451     $  10,724
Year Ended July 28, 2001
  Revenue from external customers    $      --     $  14,678    $ 120,212     $ 134,890
  Cost of revenues ..............    $      --     $  10,497    $ 143,606     $ 154,103
  Gross margin ..................    $      --     $   4,181    $ (23,394)    $ (19,213)
</TABLE>

    The Company  marketed its products in the United  States  through its direct
sales force. Revenues for each of the fiscal years ended July 31, 2003, July 27,
2002 and July 28, 2001 were  primarily  generated from sales to end users in the
United States of America.


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

None

Item 9A. Controls and Procedures

    a)   Evaluation  of  disclosure  controls  and  procedures.  Our  management
         evaluated,  with the  participation of our Chief Executive  Officer and
         our  Chief  Financial  Officer,  the  effectiveness  of our  disclosure
         controls  and  procedures  as of the end of the period  covered by this
         report.  Based on this evaluation,  our Chief Executive Officer and our
         Chief Financial Officer have concluded that our disclosure controls and
         procedures are effective to ensure that  information we are required to
         disclose  in  reports  that we  file or  submit  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 our 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, 2003 that has materially affected, or
         is reasonably  likely to materially  affect,  our 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  Proxy  Statement  for  the  annual
stockholders' meeting to be held on December 3, 2003.

Code of Ethics

     The Company has adopted a Code of Ethics for Principal Executive and Senior
Financial  Officers.  The  Company has posted the text of this Code of Ethics on
our Internet Web site at   http://www.vasoftware.com/company/investor_relations/
code_of_conduct/.

Item 11. Executive Compensation

     The information called for by this item is incorporated by reference to the
section entitled "Compensation of Directors and Executive Officers" in the Proxy
Statement for the annual stockholders' meeting to be held on December 3, 2003. .


                                       58
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information called for by this item is incorporated by reference to the
sections  entitled  "Certain  Beneficial  Owners"  and  "Security  Ownership  of
Directors  and  Executive  Officers"  in the  Proxy  Statement  for  the  annual
stockholders' meeting to be held on December 3, 2003.

Item 13. Certain Relationships and Related Transactions

     The information called for by this item is incorporated by reference to the
sections entitled "Certain  Relationships and Related Transactions" in the Proxy
Statement for the annual stockholders' meeting to be held on December 3, 2003.

Item 14.  Principal Accountant Fees and Services.

     Not applicable.


                                     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 May 27,  2003,  the Company  furnished a Current  Report on Form 8-K
under Items 9  (Regulation  FD  Disclosure)  and 12 (Results of  Operations  and
Financial  Condition)  disclosing the issuance of a press release announcing its
financial results for the third quarter ended April 26, 2003 .

         On August 27, 2003, the Company  furnished a Current Report on Form 8-K
under Items 9  (Regulation  FD  Disclosure)  and 12 (Results of  Operations  and
Financial  Condition)  disclosing the issuance of a press release announcing its
financial results for the fourth quarter and fiscal year ended July 31, 2003.


                                   SIGNATURES

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

                                       VA SOFTWARE CORPORATION

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

Date: October 14, 2003


                                       59
<PAGE>

                                POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
                Signature                                      Title                                   Date
                ---------                                      -----                                   ----

<S>                                            <C>                                               <C>
             /s/  ALI JENAB                       Chief Executive Officer, President             October 14, 2003
---------------------------------------        (principle executive officer) and Director
                  Ali Jenab

        /s/  KATHLEEN R. MCELWEE                     Chief Financial Officer                     October 14, 2003
---------------------------------------            (principle accounting officer)
             Kathleen R. McElwee

         /s/  LARRY M. AUGUSTIN                  Chairman of the Board of Directors              October 14, 2003
---------------------------------------
              Larry M. Augustin

         /S/  ANDRE M. BOISVERT                            Director                              October 14, 2003
---------------------------------------
              Andre M. Boisvert

             /s/  RAM GUPTA                                Director                              October 14, 2003
---------------------------------------
                  Ram Gupta

           /s/  DOUGLAS LEONE                              Director                              October 14, 2003
---------------------------------------
                Douglas Leone

     /s/  ROBERT M. NEUMEISTER, JR.                        Director                              October 14, 2003
---------------------------------------
          Robert M. Neumeister, Jr.

          /s/  CARL REDFIELD                               Director                              October 14, 2003
---------------------------------------
               Carl Redfield

          /s/ DAVID B. WRIGHT                              Director                              October 14, 2003
---------------------------------------
              David B. Wright
</TABLE>


                                       60
<PAGE>

                             VA SOFTWARE CORPORATION

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                            Balance at   Charged to              Balance at
                                                             Beginning    Costs and                  End
    Description                                              of Period    Expenses   Deductions   of Period
    -----------                                              ---------    --------   ----------   ---------
<S>                                                          <C>         <C>          <C>         <C>
    Year Ended July 28, 2001
      Allowance for doubtful accounts......................  $  1,475    $   3,968    $  1,196    $   4,247
      Allowance for excess and obsolete inventory..........  $  1,171    $  24,441    $  7,265    $  18,347
    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
</TABLE>


                                       61
<PAGE>

                                  EXHIBIT INDEX

      Exhibit
      Number

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

3.2**       -- Bylaws of the Registrant

4.1**       -- Specimen Common Stock Certificate

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

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

10.3**++    -- 1999 Employee Stock Purchase Plan

10.4**++    -- 1999 Director Option Plan

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

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

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

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

10.9****    -- Consent of Linus Torvalds

23.1        -- Consent  of   PricewaterhouseCoopers   LLP,   Independent  Public
               Accountants

23.2        -- Notice regarding Consent of Arthur Andersen LLP

24.1        -- Power of Attorney (see signature page)

31.01       -- Certification Of Chief Executive  Officer Pursuant To Section 302
               Of The Sarbanes-Oxley Act Of 2002

31.02       -- Certification Of Chief Financial  Officer Pursuant To Section 302
               Of The Sarbanes-Oxley Act Of 2002

32.01       -- Certification Of Chief Executive  Officer Pursuant To Section 906
               Of The Sarbanes-Oxley Act Of 2002

32.02       -- Certification Of Chief Financial  Officer Pursuant To Section 906
               Of The Sarbanes-Oxley Act Of 2002

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

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

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

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

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

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


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


                                       62
<PAGE>

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

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

++          Denotes a management contract or compensatory plan or arrangement.


                                       63