Annual Report

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		¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		or
	For the fiscal year ended December 31, 2010			For the transition period from to .

Commission File Number: 000-28369

Geeknet, Inc.

(Exact name of Registrant as specified in its charter)

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

11216 Waples Mill Rd., Suite 100, Fairfax, VA 22030

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

(877) 433-5638

(Registrant’s telephone number, including area code)

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

Common Stock, $0.001 par value	The Nasdaq Stock Market LLC (Nasdaq Global Market)
(Title of Class)	(Name of each exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨

No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨

No x

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

Yes x

No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨

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 the 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨

No x

As of February 14, 2011, there were 6,273,023 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 June 30, 2010 (based on the closing price for the Common Stock on the NASDAQ Global Market for such date) was approximately $52.3 million. 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 2011 Annual Meeting of Stockholders which will be held on May 9, 2011, and which will be filed pursuant to Regulation 14A within 120 days after the registrant’s year ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K.

Table of Contents

		Page

PART I

Item 1	Business
	Overview		1
	Sales and Marketing		2
	Research and Development		2
	Competition		2
	Intellectual Property Rights		3
	Seasonality		3
	Employees		3
Item 1A	Risk Factors		4
Item 1B	Unresolved Staff Comments		11
Item 2	Properties		11
Item 3	Legal Proceedings		12
Item 4	(Removed and Reserved)		12

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		13
Item 6	Selected Financial Data		14
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		15
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		27
Item 8	Financial Statements and Supplementary Data		28
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		49
Item 9A	Controls and Procedures		49
Item 9B	Other Information		50

PART III

Item 10	Directors, Executive Officers and Corporate Governance		51
Item 11	Executive Compensation		51
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		51
Item 13	Certain Relationships and Related Transactions, and Director Independence		51
Item 14	Principal Accounting Fees and Services.		51

PART IV

Item 15	Exhibits and Financial Statement Schedule		52
	Signatures		53

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 “may,” “could,” “anticipate,” “potential,” “intend,” “expect,” “believe,” “in our view,” and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; and sources of revenue; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising and lead generation products; management's strategy, plans and objectives for future operations; employee relations and our ability to attract and retain highly qualified personnel; our intent to continue to invest in establishing our brand identity and developing of our web properties; competition, competitors and our ability to compete; liquidity and capital resources; changes in foreign currency exchange rates; the outcome of any litigation to which we are a party; our accounting policies; and sufficiency of our cash resources and investments to meet our operating and working capital requirements and to make any share repurchases. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in this Business section under “Competition” and in the Risk Factors contained in Item 1.A of this Form 10-K. We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

Introduction

Geeknet, Inc. (“Geeknet”, the “Company”, “we”, “our” or “us”) is an online network for the global geek community that is comprised of technology professionals, technology enthusiasts and general consumers of technology-oriented goods, services and media. Our web sites include: SourceForge, Slashdot, ThinkGeek and freshmeat. We provide our audiences with content, culture, connections and commerce.

Our E-commerce segment sells geek-themed retail products to technology enthusiasts and general consumers through our ThinkGeek web site. Our audience of technology professionals and technology enthusiasts relies on our web sites: SourceForge and freshmeat to create, improve, compare and distribute Open Source software and on Slashdot to peer-produce and peer-moderate technology news and discussion.

We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. In December 2001, we changed our name to VA Software Corporation to reflect our decision to pursue Media, E-commerce, Software and Online Images businesses. On May 24, 2007, we changed our name to SourceForge, Inc., and in November 2009 we changed our name to Geeknet, Inc. to project a more accurate reflection of our business, primarily to the advertising community. On August 5, 2010, we changed our ticker symbol to “GKNT”.

On November 10, 2010 we effected a 1-for-10 reverse stock split of all outstanding shares of common stock, reduced the total number of shares of common stock that the Company is authorized to issue to 25,000,000 and reduced the total number of shares of preferred stock that the Company is authorized to issue to 1,000,000. We have adjusted all share and per share amounts in this report to give effect to the reverse stock split.

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (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 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

You can access other information at our Investor Relations web site at investors.geek.net. The content of this web site is not intended to be incorporated by reference into this report or any other report we file with the SEC. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC, and have made our annual reports on Form 10-K available on our web site since November 2002.

Business Overview

Our business consists of two operating segments: E-commerce and Media. Our E-commerce segment sells geek-themed retail products to technology enthusiasts and general consumers through our ThinkGeek web site. Our Media segment is comprised of a network of web sites targeted at the global geek community. Our audience of technology professionals and technology enthusiasts relies on our web sites — SourceForge, Slashdot and freshmeat — to create, improve, compare and distribute Open Source software, and to debate and discuss current issues relating to technology.

E-commerce

Our E-commerce business sells a variety of retail products of interest to technology enthusiasts and general consumers through our ThinkGeek.com web site. We offer a broader range of unique products in a single web property than are typically available in traditional brick-and-mortar stores, introduce a range of new products to our audience on a regular basis and develop, manufacture and sell our own “Invented at ThinkGeek” custom products. Our customers are able to buy gadgets, apparel, caffeinated products, electronics, toys and other specialty items with a single check-out. Consumers can access the information directly through our web site or contact our customer care representatives and experts by e-mail at orders@thinkgeek.com or by telephone at 1-888-GEEKSTUFF. A third-party contract warehouse provider located in Lockbourne, Ohio receives purchased inventory and customer returns and fulfills our customers’ orders.

Our E-commerce segment represented 81%, 75%, 74% and 67% of net revenue from continuing operations for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.

Media

Our Media business connects millions of influential technology professionals and technology enthusiasts. These web sites serve more than 48 million unique visitors per month worldwide. (Source: Google Analytics, December 2010). Technology professionals and technology enthusiasts turn to our Media sites to create, improve, compare and distribute Open Source software and to debate and discuss current issues facing the technology community. Our Media business is supported by advertisers who want to reach our unique audience of visitors to our web sites. Our web sites are described below:

•

SourceForge provides the Open Source community with a peer production platform to develop, host and distribute Open Source software worldwide. As of December 31, 2010, SourceForge hosted more than 381,000 Open Source projects and had 3.0 million registered users. The majority of our traffic originates from countries outside the United States. SourceForge served 40.6 million unique visitors in December 2010.

•

Slashdot serves technology professionals and technology enthusiasts with timely, peer-produced and peer-moderated technology news and discussion. Slashdot’s lively and robust on-line conversations and interactions leverage its innovative comment and moderation system. Slashdot served 7.6 million unique visitors in December 2010.

•

Freshmeat indexes downloadable Linux, Unix and cross-platform software for a worldwide IT audience. Freshmeat served 0.6 million unique visitors in December 2010.

During 2010, we sold the Ohloh and Geek.com web sites. The results of Geek.com and the loss on disposal are reported as discontinued operations.

Our Media segment represented 19%, 25%, 26% and 33% of net revenue from continuing operations for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.

Sales and Marketing

E-commerce

Our E-commerce marketing and promotion strategy is focused on acquiring new customers and building brand loyalty with existing customers. This strategy is designed to increase customer traffic to our online store, add new customers while improving customer loyalty and increase incremental revenue opportunities through repeat purchases. We intend to continue to use the unique capabilities of the Internet, including social networking sites such as Facebook, Twitter and YouTube, as a means to increase awareness of our brand while encouraging new and repeat customers to visit our web sites. We participate in traditional online marketing activities such as email, search, affiliates and social media. We also create printed catalogs which we mail to customers and include in orders shipped to customers. Our Geek Points customer retention program is designed to build customer loyalty. Through this program, customers are rewarded for shopping with us. When the customers sign up for Geek Points they earn points on all of their purchases from our ThinkGeek.com web site. Rewards for Geek Points participants include special promotions and discounts.

Media

We sell display advertising and lead generation programs on our Media web sites through our United States-based direct sales organization, ad networks (primarily Google Inc.’s AdSense for Content) and international representatives in Europe, Australia and Asia. Our direct sales force is geographically distributed across the United States. We believe that targeting business-to-business technology companies and their advertising agencies will enable us to increase our revenue per page.

Since 2009, we have offered limited lead generation programs to customers. We provide these programs though third-parties and the revenue we derive from these programs has not been significant. In the third quarter of 2010, we hired individuals with the experience and capability of providing a greater variety of lead generation programs directly to our customers. We believe that customers value lead generation programs and that these programs will have the potential to constitute a growing source of future revenue.

In 2010, we established a presence in London, United Kingdom to develop strategies to increase the monetization of our international traffic, and have agreements with representatives in Europe, Australia and Asia to market and sell our advertising products.

Our marketing team is responsible for brand marketing and sales development, managing and optimizing our utilization of ad networks, metrics and analysis, public relations and corporate communication. In 2009 we developed a new corporate identity and continue our efforts to create awareness of that identity among advertising agencies and clients who buy advertising on our web sites.

Research and Development

E-commerce

We have implemented a broad array of services and systems for customer service, product searching, customer communication, order processing and order fulfillment functions. These services and systems use a combination of our own proprietary technologies and commercially-available, licensed technologies. We focus our internal development efforts on creating and enhancing the specialized, proprietary software to improve our customers’ experience and ease of use and to increase the functionality of our ThinkGeek.com web site.

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

Media

We believe that the success of our Media business will depend 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 have strengthened and modernized the infrastructure and architecture underlying our web sites. For example, we are in the midst of deploying improvements to SourceForge.net that are designed to facilitate global distribution of software and to improve the development experience of our users.

Competition

E-commerce

The market for retail products similar to those offered by ThinkGeek is highly competitive. We compete with online or mail-order retailers (e.g., X-tremegeek, Firebox (UK), iwantoneofthose.com, jinx.com and Computergear) and with Internet portals and online service providers that feature shopping services (e.g., Amazon.com and Yahoo!). More recently, some online retailers have developed sites targeted to the computer enthusiast and computer gaming markets. We believe that there are a number of competitive factors in our market, including company credibility, product selection and availability, convenience, price, web site features, functionality and performance, ease of purchasing, customer service and reliability and speed of order shipment.

Many of the competitors in our E-commerce business have substantial competitive advantages, including greater resources that can be devoted to the development, promotion and sale of their online products, more established sales channels, greater software and web site development experience, and greater name recognition.

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

Media

The market for Internet media services provided by the Media business is highly competitive. Advertisers have many alternatives available to reach their target audience, including print (e.g., Ziff Davis Media’s eWeek and International Data Group’s Computerworld ), general portal sites (e.g., aol.com, yahoo.com and msn.com) and other web sites focused on vertical markets (e.g., Federated Media; CBS Interactive’s cnet.com and techrepublic.com ; QuinStreet, Inc.’s internet.com , EarthWeb.com and DevX.com ; and TechTarget’s network of web sites) and general business sites (e.g., BusinessWeek.com, Forbes.com and Fortune.com). In July 2006, Google Inc. (“Google”) began offering Open Source code hosting capabilities that may be viewed as competitive to SourceForge.net’s offering; other companies and organizations also offer Open Source code hosting, Open Source code search, and Open Source software development-related services. This competition may impact traffic to our SourceForge web site. We also compete with an increasing number of sites that host and support Open Source development activities, such as Github.com and Berlios.de, and compete with online technology news and information community sites such as news.google.com, Digg.com and Reddit.com.

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

Intellectual Property Rights

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

Geeknet, SourceForge, Slashdot, ThinkGeek, freshmeat, and their associated logos are some of our trademarks that we use in the United States and in other countries.

Because the media publishing industry is characterized by rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new feature development, name recognition and reliable web sites are more important to establishing and maintaining a technology leadership position than the various legal protections of our technology.

Seasonality

Our E-commerce business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the holiday shopping season. As a result, a substantial portion of our E-commerce revenue occurred in our fourth quarter, which began on October 1, 2010 and ended on December 31, 2010 for our 2010 calendar year. As is typical in the retail industry, we generally experience lower E-commerce revenue 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 year.

Our Media business experiences lower web traffic — often accompanied by reduced advertising spending — during the summer due to various holidays in the United States and Europe.

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 December 31, 2010, our employee base totaled 122, including 43 in operations, 35 in sales and marketing, 24 in research and development and 20 in finance and administration. We will relocate our corporate headquarters from Mountain View, California to Fairfax, Virginia in March 2011 and have begun to hire a new corporate team in Fairfax, Virginia.

Item 1A. Risk Factors

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

Risks Related To Our E-commerce Business

If our E-commerce business fails to launch new and innovative products, the demand for our products may be limited, and our revenue will be adversely affected.

In order to attract customers to our site, we must continually release new and innovative products, including products developed by us. In addition to the direct revenue we derive from sales of these products, the release of new and innovative products garners media coverage and drives customers to our site. The successful development, sourcing, manufacturing and merchandising of products is subject to numerous risks and uncertainties, including our ability to:

accurately predict our customers’ demand for a product;

deliver our merchandise in sufficient quantities and in a timely manner to meet our customers’ demands;

maintain sufficient inventory levels, particularly during the peak holiday selling seasons;

anticipate and successfully respond to new preferences by our customers;

expand into new markets;

compete with other E-commerce service providers and traditional brick and mortar retailers;

procure adequate volumes of these products at price points acceptable to our customers; and

attract and retain qualified merchandising and product development personnel.

There can be no assurance that our new products will appeal to customers or that customer demand for these products will be sufficient to generate revenue consistent with our estimates. In addition, there can be no assurance that new products will be developed in a timely or cost-effective manner, or that we will be able to procure adequate quantities of such products. If we are unable to deliver new and innovative products that allow us to increase demand, we may not be able to generate sufficient revenue to grow our E-commerce business. See also additional risks related to competition set forth elsewhere in these Risk Factors.

Our E-commerce business is highly seasonal. In addition, 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.

Our E-Commerce business is highly seasonal, with a disproportionate amount of our sales occurring in the fourth quarter, which begins on October 1 and ends on December 31. In order to be successful, we must accurately predict our customers’ tastes and demands so that we can avoid purchasing too much or too little inventory. If we purchase too much inventory, we may be required discount those products or write-off products which we are unable to sell, which will reduce our gross margins. If we purchase too little inventory, we may fail to meet our customers’ demand and lose potential orders, which will adversely affect our financial results.

In addition, when we launch a new product, it is particularly difficult to accurately forecast customer demand. Certain products, especially custom manufactured products, or products purchased from outside the United States, may require significant lead-time, may require payment prior to shipment of the product, and may not be returnable. We carry a broad selection of products and significant inventory levels of certain products and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Failure to properly assess such inventory needs could adversely affect our financial results.

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

Our E-commerce business’ ability to receive inbound inventory and ship completed orders efficiently and in a timely manner to our customers is substantially dependent on a single third-party contract-fulfillment and warehouse provider. In August 2010, we began shipping products to customers worldwide using the services of Exel, Inc. (“Exel”), located in Lockbourne, Ohio. Prior to August 2010, we utilized another third-party fulfillment and warehouse provider. This change of providers required significant efforts by our E-commerce management's engineering and operations teams, and although we are currently fully transitioned to Exel, the transition still requires further effort in order to ensure that we are able to efficiently receive products from vendors and ship orders to customers. If we are not able to effectively complete the transition, our revenue and financial results will be adversely affected and our reputation will be adversely affected.

In addition, if Exel fails to meet our future distribution and fulfillment needs, our relationship with and reputation among our E-commerce customers will suffer and this will adversely affect our E-commerce revenue. Additionally, if Exel is unable to meet our distribution and fulfillment needs, particularly during the holiday season, or our contract with Exel is terminated, we may be required to secure a second-source or replacement fulfillment and warehouse provider. If we fail to secure such a fulfillment and warehouse provider or are unable to secure a fulfillment and warehouse provider on comparable terms our reputation and our E-commerce financial results would be adversely affected.

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

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

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

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

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

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

Our ability to obtain goods on a cost effective basis is also subject to our ability to maintain relationships with our suppliers and our ability to negotiate and maintain supply arrangements on favorable terms. The Chinese Yuan (“CNY”) exchange rate to the U.S. Dollar (“USD”) has not historically been volatile. In the event that the CNY/USD exchange rate changes substantially, our suppliers could attempt to renegotiate our purchase orders with them and increase our costs. In addition, because our purchases are usually on a case by case basis, we are subject to the risk of unexpected changes in pricing or supply from these suppliers. We may also be unable to develop beneficial relationships with new vendors in the future.

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

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

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

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

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

Risks Related To Our Media Business

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

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

creation of user-generated content,

participation in discussion surrounding such user-generated content,

evaluation of user-generated content, and

distribution of user-generated content.

If our development efforts fail to facilitate such activities on our web properties, the level of user engagement and interaction will not increase and may decline. Even if we succeed in facilitating such activities on our sites, there can be no assurance that such improvements will be deployed in a timely or cost-effective manner.

If we fail to increase user engagement and interaction on our web properties, we will not attract and retain a loyal user base that is desirable to advertisers. Our inability to maintain such a loyal user base and the advertisers which desire to reach them which will adversely affect our Media business and our ability to maintain or grow our revenue.

We rely on a limited number of Open Source projects for a significant portion of our traffic, if we fail to retain such Open Source projects, our Media revenue will be adversely affected.

We generate revenue from advertisements which are displayed when a visitor engages with SourceForge.net to obtain information and or to download software from an Open Source project. A significant portion of the page views on SourceForge.net is generated from a limited number of Open Source projects which are hosted on SourceForge.net. The loss of the hosting of an Open Source project may result in a significant loss of page views and the resulting loss of revenue. There can be no assurance that such Open Source projects will continue to be hosted on our websites or that users will continue to be attracted to, view and download such Open Source projects. To the extent that we are unable to retain these Open Source projects on our websites for any reason, then our advertising revenue will decline, and our Media revenue may be adversely affected.

We intend to expand our offerings in international markets in which we have limited experience and are subject to international business risks.

We continue to expand the international operations of our Media business. During 2010, we hired salespeople in London, United Kingdom to manage our sales efforts outside the United States. We also have agreements with business partners to sell our international inventory in Europe, Australia and Asia and may enter into agreements with additional or different firms to sell our international advertising impressions. We rely on the efforts and abilities of our employees and representatives to market our products and services in such markets. We cannot assure you that we will be able to hire, train, retain, and manage the personnel necessary to successfully market our products and service and expand our operations into international markets, which may limit the growth of our Media business.

In certain international markets, we have little or no operating experience and we may not be successful. Certain international markets may be slower than domestic markets in the development and adoption of the online advertising programs we offer and, as a result, our revenue in those markets may not develop at a rate that supports our level of investment. In addition, we face competition in these international markets from established companies that may have a substantial competitive advantage over us because of their more established local brand names and knowledge of consumer preferences.

Moreover, as we expand into international markets, our Media business will be subject to foreign business and financial risks, including:

Currency exchange rate fluctuations;

Compliance with a variety of international laws and regulations, such as data privacy, employment regulations, trade barriers and restrictions on the import and export of technologies;

Absence in some jurisdictions of effective laws to protect our intellectual property rights;

New regulatory requirements or changes in policies and local laws that materially affect the demand for our services or directly affect our foreign operations;

Local economic and political conditions, including recessions in foreign economies and inflation risk; and

Civil disturbance, terrorism or other catastrophic events that reduce business activity in other parts of the world.

Any of these risks may adversely impact our Media business and also have an adverse affect on our revenue and operating results.

If our Media business fails to deliver innovative programs and products, including our lead generation program, we may not be able to attract and retain advertisers, which will adversely affect our financial results.

Our advertisers continually seek new and innovative advertising products on which to spend their advertising budgets. In order to grow our direct sales revenue, we will need to introduce new and innovative advertising products and programs that appeal to these advertisers. We have recently hired individuals with experience in lead generation programs to develop our capability to deliver these programs to our advertisers and expect that an increasing portion of our Media revenue will be derived from these lead generation programs. If we are unable to successfully execute our lead generation strategy, our Media business revenue will not meet our expectations and our operations will be adversely impacted. The successful development and production of new and innovative advertising products or programs is subject to numerous uncertainties, including our ability to:

enable advertisers to showcase products, services and/or brands to their intended audience and to generate revenue from such audiences;

develop the capability to satisfy advertiser requirements for lead generation programs;

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

attract and retain qualified marketing and technical personnel.

There can be no assurance that our programs and products will appeal to our advertisers or enable us to attract and retain advertisers and generate revenue consistent with our estimates or sufficient to sustain operations. In addition, there can be no assurance that any new marketing programs and products will be developed in a timely or cost-effective manner. If we are unable to deliver innovative marketing programs and products that allow us to expand our advertiser base, we may not be able to generate sufficient revenue to grow our Media business.

The market in which our SourceForge platform operates is becoming more competitive, and if we do not compete effectively our Media business could be harmed.

Our SourceForge.net platform hosts Open Source software projects, and we derive the majority of our Media revenue by selling advertising campaigns on this site. Because the cost to develop and host websites has declined over time, an increasing number of companies, organizations and individuals have begun hosting Open Source code and offering Open Source software development-related services. In addition, Google offers Open Source code hosting capabilities that may be viewed as competitive to SourceForge.net’s offering. Because Google enjoys substantial competitive advantages in the online space generally, including powerful brand identity, established marketing relationships, larger visitor base, and greater financial, technical, and other resources, we may be unable to compete effectively with Google’s offering. Our competitors, such as Github, may be able to respond more quickly and effectively than we can to new or changing Open Source software opportunities, technologies, standards, or user requirements. Because of our competitors’ advantages, even if our services are more effective than those of our competitors, users might accept the services of our competitors in lieu of ours. If we fail to compete effectively, our Media business could be materially adversely affected.

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

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

If we fail to execute our direct sales strategy, our revenue will be adversely affected.

Our direct sales force is increasingly focused on selling our lead generation and advertising products to a select group of advertisers. If we fail to achieve increased spending levels from these advertisers, we may not meet our revenue goals. Additionally, we refer and will continue to refer other advertisers to our ad network partners. If such advertisers do not utilize our ad network partners to advertise on our sites our revenue will be adversely impacted.

We face competition from traditional media companies, and we may not be included in the advertising budgets of advertisers, which could harm our operating results.

We face competition from companies that have better brand awareness and long-term relationships with current and potential advertisers. Advertisers with fixed budgets may allocate only a portion of their budgets to Internet advertising. If we fail to convince these advertisers and their advertising agencies to spend their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.

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

We have made and will continue to make significant investments in research, development and marketing for our web properties and services offered thereon. Investments in new technology are inherently speculative. We continue to focus on initiatives to accelerate the pace of improvements to our web properties. These efforts require substantial investments of our time and resources and may be hindered by unforeseen delays and expenses. Our efforts may not be successful in achieving our desired objective and, even if we achieve the desired objective, our audience or our advertisers may not respond positively to these improvements. Failure to grow revenue sufficiently to offset the significant investments will materially and adversely affect our business and operating results.

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

The success of our Media business largely depends on the efficient and uninterrupted operation of the computer and communications hardware and network systems that power our web properties. We do not currently have a formal disaster recovery plan and substantially all of our computer and communications systems are located in a single data center near Chicago, Illinois. Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events.

We experience unplanned service interruptions with all our online sites. Service interruptions may be caused by a variety of factors, including capacity constraints, single points of hardware failure, software design flaws and bugs, and third party denial of service attacks. Although we continue to work to improve the performance and uptime of our web properties, and have taken steps to mitigate these risks, we expect that service interruptions will continue to occur from time to time. If our web properties experience frequent or lengthy service interruptions, our business and reputation will be seriously harmed.

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

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

Risks Related To Our Financial Results

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

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

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

the discretionary nature of our Media customers’ purchase and budget cycles;

our ability to deliver advertisements which meet our customers’ requirements;

the spending habits of our E-commerce customers;

the size and timing of Media customer orders;

long media sales cycles;

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

our ability to demonstrate and maintain attractive online user demographics;

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

our ability to keep our web properties operational at a reasonable cost.

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

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

From time to time, the Financial Accounting Standards Board (“FASB”) may issue updates to the FASB Accounting Standards Codification. A change in an accounting policy can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting our business, including rules relating to fair value accounting, revenue recognition, share-based payments and financial instruments have recently been revised or are under review. The SEC has announced that they will issue a proposed a roadmap regarding the potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS“). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, we could be required in 2014 to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. Required changes in our application of accounting pronouncements could cause changes in our reported results of operations and our financial condition.

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

We used $2.9 million and $5.7 million of cash from operating activities during the years ended December 31, 2010 and December 31, 2009, respectively. Unless we monitor and minimize the level of use of our existing cash, cash equivalents and marketable securities, we may require additional capital to fund continued operations beyond the next 12 months. In addition, our existing marketable securities may not provide us with adequate liquidity when needed. While we believe we will not require additional capital to fund continued operations for the next 12 months, we may require additional funding within this time frame, and this additional funding, if needed, may not be available on terms acceptable to us, or at all. A slowdown in E-commerce spending or online advertising, increased working capital requirements for our E-commerce inventory, as well as other factors that may arise, could affect our future capital requirements and the adequacy of our available funds. As a result, we may be required to raise additional funds through private or public financing facilities, strategic relationships or other arrangements. Any additional equity financing would likely be dilutive to our stockholders. Debt financing, if available, may involve restrictive covenants on our operations and financial condition. Our inability to raise capital when needed could seriously harm our business.

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

We generated a net loss of $4.4 million for the year ended December 31, 2010, and we have an accumulated deficit of $754.7 million as of December 31, 2010. Additionally, we may continue to incur net losses in the future. Failure to attain profitability on a sustained basis may materially and adversely affect the market price of our common stock and our ability to raise capital and continue operations beyond the next 12 months.

Risks Related To Competition

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

The market for Internet content and services is intensely competitive and rapidly evolving. It is not difficult to enter this market and current and new competitors can launch new Internet sites at relatively low cost. We compete with various media businesses for advertising revenue, including newspaper, radio, magazine and Internet media companies.

In addition, our E-Commerce business is rapidly evolving and intensely competitive. We have many competitors, including other e-commerce businesses as well as traditional brick and mortar retailers. Increases in shipping costs or the taxation of Internet commerce may make our products uncompetitive when compared with traditional brick and mortar retailers. Additionally, our current and future competitors may have greater resources, more customers and greater brand recognition than we do. These competitors may secure better terms from vendors, adopt more competitive pricing for their products, and devote more resources to their technology infrastructure, product development, order fulfillment and distribution facilities and marketing and advertising campaigns. In addition, as we expand into new markets and broaden our product offering, our competition may intensify as our current and future competitors enter into similar markets and offer similar products. Moreover, local competitors in these new markets may have a substantial competitive advantage over us because of their greater focus on and knowledge of local customers and their preferences, as well as their greater brand recognition.

Increased competition in our Media and E-Commerce businesses 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, advertisers and customers, our financial results may be materially and adversely affected.

Risks Related To Intellectual Property

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

We expect that our web properties will increasingly be subject to infringement claims as the number of competitors in our industry segment grows and the functionality of web properties in different Internet industry segments overlap. The scope of United States patent protection for software is not well defined and will evolve as the United States Patent and Trademark Office grants additional patents. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed that would relate to our products. In addition, we may receive patent infringement claims as companies increasingly seek to patent their software. Our developers may fail to perform patent searches and may therefore unknowingly infringe on third-party patent rights. We cannot prevent current or future patent holders or other owners of intellectual property from suing us and others seeking monetary damages or an injunction against our web offerings. A patent holder may deny us a license or force us to pay royalties. In either event, our operating results could be seriously harmed. In addition, employees hired from competitors might utilize proprietary and trade secret information from their former employers without our knowledge, even though our employment agreements and policies clearly prohibit such practices.

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

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

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

In addition, the laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States. To the extent that we increase our international activities, our exposure to unauthorized copying and use of our web properties 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 and registered some of our trademarks in the United States and internationally. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to protect our trademark rights adequately could damage our brand identity and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

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

In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent offerings will not be marketed in competition with our offerings, thereby substantially reducing the value of our proprietary rights. Currently, we do not have any software, utility, or design patents and we cannot assure that we will develop proprietary offerings or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business.

Other Risks Related To Our Overall Business

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

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

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

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

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

We may be subject to claims of defamation, negligence, copyright or trademark infringement (including contributory infringement) or other claims relating to the information contained on our Internet sites, whether written by third parties or us.

Claims of defamation have been brought against online services in the past and can be costly to defend regardless of the merit of the lawsuit. Although federal legislation protects online services from some claims when third parties write the material, this protection is limited. Furthermore, the law in this area remains in flux and varies from state to state. We receive notification from time to time of potential claims, but have not been named as a party to litigation involving such claims. While no formal defamation complaints have been filed against us to date, our business could be seriously harmed if one were asserted.

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

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

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), we are required to evaluate the effectiveness of our internal control over financial reporting as well as our disclosure controls and procedures each fiscal year. As of December 31, 2010 management has concluded that our internal control over financial reporting and our disclosure controls and procedures were effective. We will need to continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required or new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we may not be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls and we may not be able to meet our reporting obligations.

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

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

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

Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other key personnel are employees-at-will, and we cannot assure that we will be able to retain them. Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, and the results of our operations. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel. Competition for qualified personnel in our industry, as well as other geographic markets, in which we recruit, is intense. In the Internet and high technology industries, qualified candidates often consider equity awards in compensation arrangements and fluctuations in our stock price may make it difficult to recruit, retain, and motivate employees. In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.

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 our year ended December 31, 2010, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $11.60 to $26.88 per share and the closing sale price on December 31, 2010, the last trading day of our year ended December 31, 2010, was $25.03 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 a significant stockholder may cause the price of our common stock to decrease.

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

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

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

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

Internet commerce is rapidly evolving. While this is an evolving area of the law in the United States and overseas, currently there are relatively few laws or regulations that directly apply to commerce on the Internet. Changes in laws or regulations governing the Internet and E-commerce, including, without limitation, those governing an individual’s privacy rights, pricing, content, encryption, security, acceptable payment methods and quality of products or services could have a material adverse effect on our business, operating results and financial condition. Taxation of Internet commerce, or other charges imposed by government agencies or by private organizations, may also be imposed. Recently New York State has adopted legislation which attempts to impose sales tax collection and reporting obligation on Internet companies. Any of these regulations could have an adverse effect on our future sales and revenue growth.

System disruptions could adversely affect our future operating results.

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal locations are as follows:

Location	Purpose	Approximate Size (in square feet)		Expiration of Lease

Fairfax, Virginia	E-commerce segment operations		15,316	2014
Mountain View, California	Corporate headquarters; Media sales and marketing, finance and administration, research and development		14,583	2012
Dexter, Michigan	Research and development center for Media segment		4,300	2012
San Francisco, California	Media sales, marketing, operations and finance		3,150	2012
New York, New York	Media sales and marketing		3,282	2012
Seattle, Washington	Sub-leased for remaining lease term		2,498	2011

We will relocate our corporate headquarters from Mountain View, California to Fairfax, Virginia effective March 1, 2011. In conjunction with this move, we have sub-leased our Mountain View, California location for the remaining lease term. We believe that our existing properties are in good condition and are adequate and suitable for the conduct of our businesses.

Item 3. Legal Proceedings

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

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

In 2008, the parties reached a global settlement of the litigation. On October 5, 2009, the Court entered an order certifying a settlement class and granting final approval of the settlement. Under the settlement, the insurers will pay the full amount of settlement share allocated to the Company, and the Company will bear no financial liability. The Company, as well as the officer and director defendants, who were previously dismissed from the action pursuant to a stipulation, will receive complete dismissals from the case. A group of objectors appealed the Court's October 5, 2009 order to the Second Circuit Court of Appeals. The Plaintiffs have filed motions to dismiss the appeals and those motions are still pending. If for any reason the settlement does not become effective and litigation resumes, the Company believes that it has meritorious defenses to plaintiffs' claims and intends to defend the action vigorously.

On October 3, 2007, a purported Geeknet shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company's IPO underwriters. The complaint, Vanessa Simmonds v. Credit Suisse Group, et al., Case No. C07-1583, in District Court for the Western District of Washington, seeks the recovery of short-swing profits. The Company is named as a nominal defendant and no recovery is sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar lawsuits in the District Court for the Western District of Washington alleging short-swing trading in the stock of 54 other companies. On July 25, 2008, a majority of the named issuer companies, including Geeknet, jointly filed a motion to dismiss plaintiff's claims. On March 12, 2009, the Court issued an order granting the motion to dismiss and a judgment in the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the order and judgment dismissing her claims to the United States Court of Appeal for the Ninth Circuit. On January 18, 2011, the Ninth Circuit Court of Appeals voted unanimously to deny Simmonds’s petition for a rehearing en banc . The matter is pending a petition for a writ of certiorari to the U.S. Supreme Court.

On November 17, 2010, the Company filed a lawsuit against Tightrope Interactive claiming among other things trademark infringement, cyber piracy and violation of the California Consumer Protection against Computer Spyware Act regarding Tightrope Interactive’s use of certain software provided by VLC, a French non-profit whose software project is hosted on SourceForge.net. On December 14, 2010, Tightrope Interactive answered the complaint and filed counterclaims alleging the Company sent a wrongful Digital Millennium Copyright Act request to take down Tightrope Interactive material and seeking unspecified damages. The Company intends to vigorously defend itself. Due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of these claims at this time or the range of a possible loss, and therefore has not accrued for any potential loss

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

Item 4. (Removed and Reserved)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Market under the symbol GKNT. As of February 14, 2011, there were 147 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:

	Year Ended				Year Ended
	December 31, 2010				December 31, 2009
Quarter	High		Low		High		Low

Fourth Quarter	$	26.88	$	16.50	$	13.30	$	11.00
Third Quarter	$	19.80	$	11.60	$	14.60	$	10.70
Second Quarter	$	16.10	$	12.40	$	15.50	$	8.00
First Quarter	$	15.70	$	12.00	$	12.50	$	8.10

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

On October 14, 2010, our shareholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a 1-for-10 reverse stock split of all outstanding shares of our common stock, reduce the total number of shares of common stock that we are authorized to issue to 25,000,000 and reduce the total number of shares of preferred stock that we are authorized to issue to 1,000,000. The reverse stock split became effective on November 10, 2010.

Stock Performance Graph

Set forth below is a line graph comparing the percentage change in the cumulative return to the stockholders of our Common Stock with the cumulative return of the NASDAQ Stock Market (U.S.) Index, the S&P 600 SmallCap Internet Retail Index and the RDG Internet Composite (“RDG”) Index for the period commencing July 31, 2005 and ending on December 31, 2010. Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.

Item 6. Selected Financial Data

You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this Form 10-K.

The statement of operations data for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 and the balance sheet data as of December 31, 2010 and December 31, 2009 are derived from the audited financial statements and related notes appearing elsewhere in this Form 10-K. The statement of operations data for the years ended July 31, 2007 and July 31, 2006 and the balance sheet data as of December 31, 2008, July 31, 2007 and July 31, 2006 are derived from audited financial statements not appearing in this Form 10-K. Net revenue, cost of revenue and operating expenses data excludes the results of Geek.com, which was sold in December 2010, our Software business, which was sold in April 2007 and our Online Images business, which was sold in December 2005. The 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)

	Year Ended						Five Months Ended		Year Ended
	December 31,						December 31,		July 31,			July 31,		July 31,
	2010			2009			2008		2008			2007		2006

Selected Consolidated Statements of Operations Data:
Net revenue from continuing operations	$	94,619		$	65,577		$	32,475	$	55,326		$	45,599	$	33,658
Cost of revenue from continuing operations		69,240			45,104			21,941		35,128			25,933		19,337
Gross margin from continuing operations		25,379			20,473			10,534		20,198			19,666		14,321

Income (loss) from continuing operations		(4,200	)		(14,021	)		1,080		(4,326	)		5,955		3,923
Income (loss) from discontinued operations, net of income taxes		(248	)		-			-		-			2,773		7,039
Net income (loss)	$	(4,448	)	$	(14,021	)	$	1,080	$	(4,326	)	$	8,728	$	10,962

Income (loss) per share from continuing operations:
Basic	$	(0.69	)	$	(2.31	)	$	0.16	$	(0.64	)	$	0.90	$	0.63
Diluted	$	(0.69	)	$	(2.31	)	$	0.16	$	(0.64	)	$	0.87	$	0.61
Income (loss) per share from discontinued operations:
Basic	$	(0.04	)	$	-		$	-	$	-		$	0.42	$	1.13
Diluted	$	(0.04	)	$	-		$	-	$	-		$	0.40	$	1.09
Net income (loss) per share:
Basic	$	(0.73	)	$	(2.31	)	$	0.16	$	(0.64	)	$	1.32	$	1.76
Diluted	$	(0.73	)	$	(2.31	)	$	0.16	$	(0.64	)	$	1.27	$	1.69
Shares used in per share calculation:
Basic		6,073			6,080			6,653		6,747			6,625		6,233
Diluted		6,073			6,080			6,665		6,747			6,849		6,470

Selected Balance Sheet data at period-end:
Cash, cash equivalents and investments	$	35,341		$	38,351		$	50,021	$	52,702		$	56,640	$	53,043
Working capital	$	37,852		$	40,711		$	40,421	$	42,933		$	44,103	$	51,265
Total assets	$	66,757		$	60,151		$	74,166	$	74,533		$	76,863	$	63,212
Liabilities, net of current portion	$	77		$	103		$	1,423	$	2,610		$	4,121	$	5,693
Total stockholders’ equity	$	47,872		$	48,265		$	62,567	$	63,652		$	65,094	$	49,378

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

The following discussion and analysis should be read in conjunction with “Selected Consolidated 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 “Item 1A. Risk Factors” and elsewhere in this Form 10-K. See Part I — Item 1 — “Special Note Regarding Forward-Looking Statements.”

Overview

We are an online network for the global geek community, which is comprised of technology professionals, technology enthusiasts and general consumers of technology-oriented goods, services and media. Our sites include: SourceForge, Slashdot, ThinkGeek and freshmeat. We provide our audiences with content, culture, connections and commerce.

In 2009, we changed our fiscal year-end from July 31 to December 31 retroactive to December 31, 2008. Our discussion and analysis of results of operations compares the years ended December 31, 2010 to the year ended December 31, 2009 as well as the year ended December 31, 2009 to the fiscal year ended July 31, 2008. We have also presented the five month transition period ended December 31, 2008 and unaudited information for the comparable five month period ended December 31, 2007.

We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. On May 24, 2007 we changed our name to SourceForge, Inc., and in November 2009 we changed our name to Geeknet, Inc. to project a more accurate reflection of our business, primarily to the advertising community. On August 5, 2010, we changed our ticker symbol to “GKNT”. On November 10, 2010 we effected a 1-for-10 reverse stock split. We have adjusted all share and per share amounts in this report to give effect to the reverse stock split.

Our business consists of two operating segments: E-commerce and Media. Our E-commerce segment sells technology themed retail products for technology enthusiasts through our ThinkGeek.com web site. We offer a broader range of unique products in a single web property than are available in traditional brick-and-mortar stores, introduce a range of new products to our audience on a regular basis and develop, manufacture and sell our own “Invented at ThinkGeek” custom products. Our Media segment provides web properties that serve as platforms for the creation, review and distribution of online peer produced content. Our audience of technology professionals and technology enthusiasts relies on our web properties, SourceForge, Slashdot, and freshmeat, to create, improve, compare and distribute Open Source software and to research, debate and discuss current issues relating to the technology marketplace.

Our E-commerce business strategy is to increase revenue by expanding the range of new and innovative products we sell, including products developed by us, and by attracting increased traffic to our site. We attract traffic to our sites using a variety of traditional online and direct retail marketing channels, direct mail and email to our customers and followers. We also communicate with our customers through social networks such as Facebook and Twitter. In August 2010, we changed our third-party contract-fulfillment and warehouse provider and invested in modern automated distribution equipment.

We currently use the following key metrics to measure our E-Commerce business:

	Year Ended									Five Months Ended
	December 31,						July 31,			December 31,
	2010			2009			2008			2008			2007

Daily Unique Visitors (in thousands) (1)		53,111			36,414			29,483			13,905			12,495
Orders Received (in thousands)		1,239			766			510			360			291
Conversion Rate		2.33	%		2.10	%		1.73	%		2.59	%		2.33	%
Average Order Value (2)	$	63.74		$	66.19		$	74.05		$	67.97		$	74.47

(1)

Daily Unique Visitors is the aggregate visitors to our E-Commerce site during the period presented. This metric includes visitors who visit our E-Commerce site on more than one day during the period.

(2)

Average Order Value is based on orders received.

Our Media business strategy is targeted to business-to-business technology companies and their advertising agencies with the goal of increasing revenue per page. For the past year we have offered limited lead generation programs to customers. We provide these programs though third-parties and the revenue we derive from these programs has not been significant. During the third quarter of 2010, we hired individuals with the experience and capability of providing a greater variety of lead generation programs directly to our customers. We believe that customers value lead generation programs and that these programs will have the potential to constitute a growing source of future revenue. We are also focused on increasing the monetization of our International traffic and currently have two salespeople in London, United Kingdom, who are developing and implementing strategies to increase international revenue, and have agreements with representatives in Europe, Australia and Asia to market and sell our advertising products.

We continue to invest in our web properties, primarily SourceForge. In April 2010, we launched our new Download service on SourceForge. The downloading of open source projects has always been a part of SourceForge. Downloads generate a significant amount of traffic and allow us to target highly relevant advertisements to those visitors who visit SourceForge to download software. The new Download service was intended to be more appealing to a broader group of leaders of free, open source projects. We also improved our project statistics system, to provide additional information to the engineers who write open source software and use these statistics to develop enhancements to projects. In July 2010, we launched a series of improvements to our platform for developers of Open Source projects. These improvements provide a completely redesigned set of tools, including an issue tracker, wiki, source code management, and discussion system. This updated platform also offers flexibility by allowing developers to integrate and use third party tools directly on the platform. We have also enhanced the SourceForge usability and improved site performance.

We currently use the following key metrics which are derived from data provided by Google Analytics to measure our Media business:

	Year Ended						Five Months Ended
	December 31,				July 31,		December 31,
	2010 (4)		2009		2008		2008		2007

Unique Visitors per Month (in thousands) (1)(2)		43,960		35,422		33,542		36,141		33,053
Visits per Unique Visitor per Month		1.7		1.8		1.9		1.8		1.9
Visits per Month (in thousands) (2)		73,650		62,076		63,416		63,933		62,554
Pages per Visit		2.0		2.2		2.4		2.4		2.5
Page Views per Month (in thousands) (2)		149,678		136,332		151,346		153,915		153,683

Revenue per Thousand Pages (RPM)	$	10.18	$	10.08	$	10.19	$	11.02	$	9.38
Revenue per User (RPU) (3)	$	0.42	$	0.47	$	0.55	$	0.56	$	0.52

(1)

Unique Visitors per Month is the aggregate average unique visitors for all our Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month.

(2)

Per month amounts are the average calculated as the total amount for the period divided by the months in the period.

(3)

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

(4)

Excludes the Geek.com discontinued operations

A key element of our growth plans is to increase our user engagement. Our metrics around engagement are an important measure, and we are focused on both growing the number of unique visitors and deepening the average levels of engagement.

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 because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition policies, the assessment of impairment of goodwill and long-lived assets, restructuring reserves for excess facilities for non-cancelable leases, income taxes, stock-based compensation and contingencies and litigation.

Revenue Recognition

E-commerce Revenue

E-commerce revenue is derived from the online sale of consumer goods. We recognize E-commerce revenue from the sale of consumer goods 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 when products are shipped and title transfers to the customer. We generally grant customers a 30-day right to return products and based on historical experience, we have recorded reserve for estimated returns of $0.4 million and $0.3 million at December 31, 2010 and December 31, 2009, respectively.

Media Revenue

Media revenue is derived primarily from advertising on our various web sites or from lead generation information provided to our customers. Advertisements include various forms of rich media and banner advertising, text links and sponsorships, while lead generation information utilizes advertising and other methods to deliver leads to a customer. We recognize Media advertising revenue as advertisements are displayed over the contractual campaign period, and recognize lead generation revenue as leads are delivered to our customer, 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 may include guarantees of a minimum number of impressions (the number of times that an advertisement is viewed by visitors to our web sites). To the extent that minimum guaranteed impressions are not delivered in the specified time frame, we do not recognize the corresponding revenue until the guaranteed impressions are delivered.

Inventories

Inventories related to our E-commerce segment consist solely of finished goods that are valued at the lower of cost, using the weighted average cost method, or market. We reduce estimated excess and obsolete inventories to their net realizable values.

Long-Lived Assets

We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. 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 carrying value of the asset exceeds the estimated undiscounted future cash flows, 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.

Goodwill

We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicates that the carrying value may not be recoverable. Our annual testing date is December 31. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying net assets, including goodwill, to the fair value of the reporting unit. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered to be impaired and a second step is performed to measure the amount of the impairment loss. The preparation of the goodwill impairment analysis requires us to make significant estimates and assumptions with respect to the determination of fair values of reporting units and tangible and intangible assets. These estimates and assumptions, which include future values, are often subjective and may differ significantly from period to period based on changes in the overall economic environment, changes in our business and changes in our strategy or our internal forecasts. We utilize third-party valuation experts to assess the reasonableness of our assumptions and to perform certain portions of our goodwill impairment analysis.

Stock-Based Compensation

We measure compensation cost for stock awards at grant date fair value and recognize the expense net of estimated forfeitures for those shares expected to vest over the service period of the award.

Calculating compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns. We estimate stock price volatility based on historical volatility in our stock. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, or cancelled.

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 any loss contingency required is assessed and recorded, if probable, after careful analysis of each individual matter. The required loss contingencies may change in the future as the facts and circumstances of each matter change.

Results of Operations

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

	Year Ended									Five Months Ended
	December 31,						July 31,			December 31,
	2010			2009			2008			2008			2007
													(unaudited)
Consolidated Statements of Operations Data:
E-commerce revenue		80.7	%		74.9	%		66.6	%		73.9	%		74.6	%
Media revenue		19.3			25.1			33.4			26.1			25.4
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
E-commerce cost of revenue		66.2			58.2			50.4			56.6			53.5
Media cost of revenue		7.0			10.6			13.1			11.0			9.2
Cost of revenue		73.2			68.8			63.5			67.6			62.7
Gross margin		26.8			31.2			36.5			32.4			37.3
Operating expenses:
Sales and marketing		16.1			18.0			15.1			13.3			11.6
Research and development		6.5			12.4			7.9			7.8			5.2
General and administrative		10.1			13.4			20.1			11.6			13.3
Amortization of intangible assets		0.3			0.3			-			-			-
(Gain) loss on sale of assets		(1.5	)		1.6			-			-			-
Restructuring costs		(0.1	)		(0.1	)		3.9			-			5.0
Total operating expenses		31.4			45.6			47.0			32.7			35.1
Income (loss) from operations		(4.6	)		(14.4	)		(10.5	)		(0.3	)		2.2
Interest and other income (expense), net		-			(6.8	)		2.9			4.1			4.0
Income (loss) from continuing operations before income taxes		(4.6	)		(21.2	)		(7.6	)		3.8			6.2
Provision (benefit) for income taxes		(0.2	)		0.2			0.2			0.5			0.8
Income (loss) from continuing operations		(4.4	)%		(21.4	)%		(7.8	)%		3.3	%		5.4	%

Net Revenue

	Year Ended						Five Months Ended				% Change			% Change			% Change
	December 31,				July 31,		December 31,				Year 2010 to			Year 2009 to			Five Months
	2010		2009		2008		2008		2007		2009			Fiscal 2008			2008 to 2007
($ in thousands)									(unaudited)
E-commerce revenue	$	76,335	$	49,091	$	36,820	$	23,994	$	21,148		55	%		33	%		13	%
Media revenue		18,284		16,486		18,506		8,481		7,205		11	%		(11	)%		18	%
Net revenue	$	94,619	$	65,577	$	55,326	$	32,475	$	28,353		44	%		19	%		15	%

Revenue for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 was primarily from customers located in the United States of America.

For the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 no one customer represented 10% or greater of net revenue. We do not anticipate that any one customer will represent more than 10% of future annual net revenue.

E-commerce Revenue

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
													(unaudited)
Revenue (in thousands)	$	76,335		$	49,091		$	36,820		$	23,994		$	21,148			55	%		33	%		13	%
Percentage of total net revenue		81	%		75	%		67	%		74	%		75	%
Number of orders shipped		1,302,966			788,531			518,429			368,393			296,723			65	%		52	%		24	%
Average order size (in dollars)	$	58.59		$	62.26		$	71.02		$	68.00		$	74.00			(6	)%		(12	)%		(8	)%

E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances. International revenue from our E-Commerce business comprised approximately 18%, 17%, 15% and 19% of total E-commerce revenue for the year ended December 31, 2010, the year ended December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.

The growth in E-commerce revenue for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increase in the number of custom developed products such as the Electronic Rock Guitar shirt, iPhone case with flip out keyboard and the Star Trek Enterprise Pizza cutter. Online marketing, catalog marketing and media coverage of our web site contributed to a larger customer base. This larger customer base as well as web site enhancements, including improved search capability and customer communication features, drove a 45% increase in the number of unique visitors to our web site. This increase in unique visitors resulted in a 62% increase in the number of orders received during the year ended December 31, 2010. The average order size decreased by 4% in the fiscal year ended December 31, 2010 when compared to the prior year.

The growth in E-commerce revenue for the year ended December 31, 2009 as compared to the year ended July 31, 2008 was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increased number of custom developed products such as the Electronic Rock Guitar Shirt and the Tauntaun Sleeping Bag, online marketing, print catalogs and media coverage of our web site. This increased awareness of our site attracted a larger customer base, which drove a 24% increase in the number of unique visitors to our web site, resulting in a 50% increase in the number of orders received. The increase in orders received was partially offset by a 11% decrease in the average order size during the year ended December 31, 2009 as compared to the prior fiscal year ended July 31, 2008 due to the mix of products with lower selling prices.

The growth in E-commerce revenue during the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily due to a 24% increase in the number of shipments year-over-year, offset in part by an 8% decrease in the average value of those shipments. The increase in the number of shipments was primarily driven by demand for new products, including newly released products such as the Electronic Drum Kit and the Personal Soundtrack Shirt. The decrease in average shipment value was due to a combination of lower price points of the mix of products purchased, lower shipping revenue per order as customers took advantage of our free shipping promotions and a general decrease in shipping fees charged to customers.

We expect E-commerce revenue to continue to grow as we increase the number of orders received by visitors to our site.

Media Revenue

	Year Ended						Five Months Ended				% Change			% Change			% Change
	December 31,				July 31,		December 31,				Year 2010 to			Year 2009 to			Five Months
	2010		2009		2008		2008		2007		2009			Fiscal 2008			2008 to 2007
($ in thousands)									(unaudited)
Direct sales	$	13,334	$	11,531	$	14,325	$	5,418	$	5,698		16	%		(20	)%		(5	)%
Ad Networks		3,973		4,200		3,341		2,576		1,209		(5	)%		26	%		113	%
Other		977		755		840		487		298		29	%		(10	)%		63	%
Media revenue	$	18,284	$	16,486	$	18,506	$	8,481	$	7,205		11	%		(11	)%		18	%

Media revenue is derived primarily from advertising products delivered on our web properties and more recently from the delivery of leads resulting from lead generation programs.

Direct sales revenue is generated from orders received by our United States based sales team, which may also include advertisements to be delivered globally,

Ad Networks revenue represents revenue from our Ad Network partners, primarily Google Inc., who sell our inventory globally to customers through automated systems and includes revenue from international resellers who use automated systems, and

Other represents orders received from our international resellers and to a lesser extent sales of data and referral fees.

Direct sales revenue for the year ended December 31, 2010 increased $1.8 million as compared with the year ended December 31, 2009. The increase was primarily due to $1.0 million in revenue from customers who did not advertise in the year ended December 31, 2009 and $4.2 million from customers who increased their advertising levels during the year ended December 31, 2010 as compared with the year ended December 31, 2009, offset in part by a $3.4 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the year ended December 31, 2010. The decrease in Ad Networks revenue for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to decreased revenue from our from Really Simple Syndication ("RSS") partner. Other revenue increased by $0.2 million during the year ended December 31, 2010 as compared to the year ended December 31, 2009 due to increased revenue from our reseller partners as a result of increased customer account penetration as well as increased rates due to more active management of our resellers.

Direct sales revenue for the year ended December 31, 2009 decreased $2.8 million as compared with the year ended July 31, 2008. The decrease was primarily due to a $7.0 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the year ended December 31, 2009, offset in part by increases in revenue of $1.7 million from customers who did not advertise in the year ended July 31, 2008 and $2.5 million from customers who increased their advertising levels during the year ended December 31, 2009 as compared with the year ended July 31, 2008. The increase in Ad Networks revenue for the year ended December 31, 2009 as compared to the year ended July 31, 2008 was due to increased revenue from Google primarily due to optimization of our web sites to increase yields from Google. Since we obtain higher prices for direct sales revenue, we allocate our available ad units first to direct sales campaigns and then to ad networks. To the extent that direct sales campaigns decline, we would allocate additional ad units to ad networks, which would increase revenue from ad networks. The decrease in other revenue during the year ended December 31, 2009 as compared to the year ended July 31, 2008 was primarily due to a decrease in revenue from our international resellers.

Direct sales revenue for the five months ended December 31, 2008 decreased $0.3 million as compared with the five months ended December 31, 2007. The decrease was primarily due to decreases of $2.5 million in revenue from advertisers whose campaigns were not renewed or who chose not to advertise during the five months ended December 31, 2008, offset in part by an increase of $2.2 million from advertisers who advertised more or who did not participate in campaigns during the five months ended December 31, 2007. The increase in Ad Networks revenue for the five months ended December 31, 2008 as compared to the five months ended December 31, 2007 was due to increased revenue from Google as a result of optimization of our web sites to increase yields from our Google programs. The increase in Other for the five months ended December 31, 2008 as compared to the five months ended December 31, 2007 was primarily due to an increase in revenue generated by our United Kingdom’s reseller and to a lesser extent to revenue from other resellers.

We expect our Media revenue to increase in the future as we expand our international presence, increase our monetization of international traffic and expand our lead generation and other new programs.

Cost of Revenue/Gross Margin

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
Cost of revenue	$	69,240		$	45,104		$	35,128		$	21,941		$	17,789			54	%		28	%		23	%
Gross margin		25,379			20,473			20,198			10,534			10,564			24	%		1	%		0	%
Gross margin %		27	%		31	%		37	%		32	%		37	%
Headcount		43			40			39			38			34

Gross margin percentage decreased in the year ended December 31, 2010 as compared to the year ended December 31, 2009 and in the year ended December 31, 2009 as compared to the year ended July 31, 2008. The decrease in gross margin percentages was primarily due to our business unit mix as well as declining gross margins in our E-Commerce business. Our E-commerce business has significantly lower gross margins than our Media business. Our E-commerce revenue increased to 81% of total net revenue for the year ended December 31, 2010 from 75% of total net revenue for the year ended December 31, 2009 and 67% of net revenue for the year ended July 31, 2008. The decrease in gross margin percentage in the year ended July 31, 2008 as compared to the year ended July 31, 2007 was primarily due to our business unit mix as well as to a decrease in our Media gross margin percentage, resulting from the significant increase in Media cost of revenue.

Gross margin percentage decreased for the five months ended December 31, 2008 as compared with the five months ended December 31, 2007, due to the decrease in our E-commerce and Media gross margin percentages, which are discussed further in the next section.

Cost of Revenue/Gross Margin by Segment

E-commerce Cost of Revenue/Gross Margin

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
E-commerce cost of revenue	$	62,630		$	38,151		$	27,860		$	18,374		$	15,179			64	%		37	%		21	%
E-commerce gross margin		13,705			10,940			8,960			5,620			5,969			25	%		22	%		(6	)%
E-commerce gross margin %		18	%		22	%		24	%		23	%		28	%
Headcount		30			25			19			17			14

E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and personnel and related overhead associated with the operations and merchandising functions.

E-commerce gross margin percentage for the year ended December 31, 2010 decreased from the year ended December 31, 2009 due to higher customer discounts as well as increased inbound shipping costs, fulfillment costs and merchandising and customer support costs. The higher customer discounts were due to increased availability of promotion codes to repeat customers and catalog recipients. The increase in E-commerce cost of revenue in absolute dollars in year ended December 31, 2010 as compared to year ended December 31, 2009 was primarily due to increased product costs of $13.5 million, shipping costs of $5.3 million, fulfillment and packing costs of $2.9 million, and merchandising and customer support costs of $2.4 million. Increases in product costs were the result of increased E-commerce revenue levels, shipping costs were related to the increased volume of orders shipped as well as inefficiencies in the shipping process following our change of third-party contract-fulfillment and warehouse provider, and the increase in fulfillment costs were related to increased number of orders processed and start-up costs related to the new third-party contract-fulfillment and warehouse provider. The increase in merchandising and customer support costs was due primarily to increased personnel required to support our broader product offering and increased volumes as well as costs incurred in moving our inventory to new third-party warehouse provider.

E-commerce gross margin percentage decreased in the year ended December 31, 2009 as compared to the year ended July 31, 2008 primarily due to our investment in our merchandising and operations teams. E-commerce cost of revenue in the year ended December 31, 2009 increased as compared to the year ended July 31, 2008 consistent with increased E-commerce revenue levels; however, our operating costs increased as we added additional headcount to enhance our merchandising team and to support our expected revenue growth.

The increase in E-commerce cost of revenue during the five months ended December 31, 2008, as compared to five months ended December 31, 2007 was primarily due to increased product costs, shipping and fulfillment costs and operating costs. These increases were primarily the result of an increase in the number of orders. The decrease in the gross margin percentage was primarily due to lower product gross margins resulting from sales of slower moving inventory at discounted margins and other incentives offered and increased operating expenses, primarily due to additional headcount and related costs to provide customer service and to identify and source new products and to a lesser extent to increases in shipping and fulfillment costs as a percentage of the reduced average order size.

We expect E-commerce cost of revenue in absolute dollars to increase proportionately with E-commerce revenue.

Media Cost of Revenue/Gross Margin

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
Media cost of revenue	$	6,610		$	6,953		$	7,268		$	3,567		$	2,610			(5	)%		(4	)%		37	%
Media gross margin		11,674			9,533			11,238			4,914			4,595			22	%		(15	)%		7	%
Media gross margin %		64	%		58	%		61	%		58	%		64	%
Headcount		13			15			20			21			20

Media cost of revenue consists of personnel and related overhead, equipment and bandwidth associated with the operation of our data center, personnel costs and related overhead associated with developing the editorial content of our sites and personnel and related overhead and third-party costs associated with delivering revenue producing products. Media cost of revenue includes both costs which do not vary directly with revenue (fixed costs), such as equipment, personnel and editorial costs, as well as costs which are more directly affected by revenue (variable costs), such as bandwidth for delivering content and ad-serving costs. While our fixed costs will generally not vary directly with revenue, they may increase to the extent that we expand or upgrade the equipment necessary to operate our network or if we add additional sites to our network of web sites. Our variable costs generally vary based on the delivery of web pages, content, the number of advertisements delivered and the size of the advertisement. To the extent that we are able to increase our revenue without increasing our fixed costs, our gross margins will increase; however, to the extent that we purchase equipment in anticipation of increased activity, we may experience decreased gross margins.

The increase in Media gross margin percentage for the fiscal year ended December 31, 2010 as compared to the fiscal year ended December 31, 2009 was primarily due to increased revenue of $2.0 million as well as a decrease in cost of revenue of $0.1 million. The decrease in cost of revenue was primarily due to decreases in software amortization of $0.3 million and reduced facilities related costs of $0.1 million offset in part by an increase in data center co-location costs of $0.3 million. Our software amortization costs decreased due to amortization of our SourceForge.net Marketplace Platform ending in June 2009 as we deprecated the functionality from SourceForge.net. Our facilities related costs decreased due to lower average headcount during the year. Our data center costs increased due to additional services requested from the service provider.

The decrease in Media gross margin percentage for the year ended December 31, 2009 as compared to the fiscal year ended July 31, 2008 was primarily due to a decrease in Media revenue of $2.0 million, offset slightly by lower cost of revenue of $0.3 million. The decrease in cost of revenue was primarily due to decreases in co-location costs of $0.3 million, headcount and related costs of $0.2 million, and ad serving costs of $0.2 million, offset in part by an increase in depreciation and amortization of equipment and software of $0.4 million. Our co-location costs decreased primarily due to savings resulting from the closure of our data center in Santa Clara, California, upon completion of our relocation to the new data center near Chicago, Illinois. Our headcount and related costs decreased primarily due a reduction in our ad operations group in the early part of 2009 and our ad serving costs decrease is primarily due to our site redesign, which eliminated a significant number of advertising impressions from our pages. Our depreciation and amortization costs increased due to equipment and related software purchased for our data center and amortization of internally developed software.

The decrease in Media gross margin percentages for the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily driven by increases in depreciation and amortization expense of $0.6 million, personnel related expenses of $0.2 million and co-location expenses of $0.1 million. Depreciation and amortization expense increased due to depreciation of the equipment we purchased for our data center and amortization of internally developed software. Our personnel expenses increased as we added headcount to develop and serve our premium products, which require more effort to produce.

We expect Media cost of revenue to decrease in absolute dollars primarily due to a reduction in depreciation expense related to our data center equipment and consequently, to the extent that revenues remain constant or increase, we expect our Media gross margins will increase.

Operating Expenses

Sales and Marketing Expenses

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

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
E-commerce S&M	$	6,910		$	3,347		$	1,685		$	1,307		$	827			106	%		99	%		58	%
Media S&M		8,367			8,428			6,661			3,019			2,446			(1	)%		27	%		23	%
Total Sales and Marketing	$	15,277		$	11,775		$	8,346		$	4,326		$	3,273			30	%		41	%		32	%
Percentage of total net revenue		16	%		18	%		15	%		13	%		12	%
Headcount		35			28			28			32			21

The increase in absolute dollars spent on sales and marketing in the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to increases in headcount and related expenses of $1.5 million, marketing expenses of $1.4 million and credit card fees of $0.6 million. The increase in headcount was due to additional personnel in our Media sales and E-Commerce marketing organizations. The increase in discretionary marketing expenses was primarily due to increased E-commerce marketing expenses of $1.8 million, resulting from a $0.9 million increase in on-line search engine marketing, the printing and mailing of our E-commerce catalogs which are now full page catalogs, fees paid to affiliates and consultants, which were offset in part by lower discretionary Media marketing expenses of $0.4 million, primarily due to fewer trade shows attended in the year ended December 31, 2010. The increase in credit card fees was due to an increase in our E-commerce revenue.

The increase in absolute dollars spent on sales and marketing in year ended December 31, 2009 as compared to year ended July 31, 2008 was primarily due to increases in headcount and related expenses of $1.2 million, marketing expenses of $1.6 million and credit card fees of $0.5 million. The increase in headcount and related expense was due to additional personnel in our E-commerce and Media marketing organizations, offset in part by headcount reductions in our Media sales organization, including severance costs of $0.3 million related to the reduction of 7 Media sales and marketing personnel during the fourth quarter of 2009. The increase in discretionary marketing expenses was primarily due to increased E-commerce marketing expenses of $0.7 million, resulting from discretionary online and direct mail marketing, approximately $0.5 million related to our name branding and the promotion of our Geeknet brand and increased discretionary Media marketing expenses of $0.4 million, including events and trade show attendance. The increase in credit card fees was due to an increase in our E-commerce revenue.

The increase in S&M expenses in the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily due to increases in headcount and related expenses of $0.5 million, marketing expenses of $0.2 million and credit card fees of $0.2 million. The increase in headcount was primarily due to an increase in sales personnel. The increase in marketing expenses was due to printing and mailing of our E-commerce catalog and other discretionary marketing programs and the increase in credit card fees was due to an increase in our E-commerce revenue.

We believe that our sales and marketing expenses in absolute dollars will increase in the future as we increase our revenue, expand our marketing organization and marketing programs and expand our international Media sales force. We do not expect that sales and marketing expenses will change significantly as a percentage of revenue.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel and related overhead expenses for software engineers involved in developing our E-commerce and Media web sites. We expense all of our R&D costs as they are incurred; however, costs related to internally developed software, including personnel related expenses, are capitalized.

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
E-commerce R&D	$	1,514		$	869		$	387		$	255		$	147			74	%		125	%		73	%
Media R&D		4,634			7,234			3,995			2,273			1,337			(36	)%		81	%		70	%
Total Research & Development	$	6,148		$	8,103		$	4,382		$	2,528		$	1,484			(24	)%		85	%		70	%
Percentage of total net revenue		6	%		12	%		8	%		8	%		5	%
Headcount		24			39			32			35			25

Costs related to the planning and post implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue. No internal use software costs were capitalized for the years ended December 31, 2010 and December 31, 2009 and the five month period ended December 31, 2008 as the costs incurred in development have not been significant. During the year ended July 31, 2008, we capitalized $0.7 million of software development costs relating to the development of our SourceForge.net Marketplace platform.

R&D expense decreased in absolute dollars in the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to a decrease in our Media R&D expenses, offset in part by an increase in our E-Commerce R&D expenses. The decrease in Media expense was primarily due to a decrease of 16 heads and their related overhead expenses of $2.2 million as well as a decrease in contractors‘ expenses of $0.3 million due to expenses incurred during 2009 in the redesign of our SourceForge.net platform, which was released in July 2009. The increase in E-commerce expense was due to increased personnel who were hired to update and add additional functionality to our ThinkGeek.com web site.

The increase in R&D expense in absolute dollars in the year ended December 31, 2009 compared to the year ended July 31, 2008 was due to increases in both our E-commerce and Media R&D expenses. The increase in Media expense was primarily due to increased investment in personnel and related overhead expenses incurred to modernize our web sites and services, and the increase in E-commerce expense was due to increased personnel who were hired to update and add additional functionality for our ThinkGeek.com web site. In 2009 we began modernizing our SourceForge.net and ThinkGeek.com web sites.

R&D expense increased by $1.0 million in absolute dollars in the five months ended December 31, 2008, as compared to the five months ended December 31, 2007. Media accounted for the majority of the increase including $0.3 million due to increased headcount related costs. Additionally, during the five months ended December 31, 2007, certain development efforts of $0.6 million qualified for capitalization as development phase costs related to internally-developed software. Our E-commerce R&D expense increased due to increases in headcount to further develop the web sites and their capabilities.

We expect that R&D expenses may decline slightly in absolute dollars and may also decline as a percentage of revenue in the future.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of salaries and related expenses for finance and accounting, human resources and legal personnel, professional fees for accounting and legal services as well as insurance and other public company related costs.

	Year Ended									Five Months Ended						% Change			% Change			% Change
	December 31,						July 31,			December 31,						Year 2010 to			Year 2009 to			Five Months
	2010			2009			2008			2008			2007			2009			Fiscal 2008			2008 to 2007
($ in thousands)													(unaudited)
General & Administrative	$	9,551		$	8,843		$	11,126		$	3,780		$	3,773			8	%		(21	)%		0	%
Percentage of total net revenue		10	%		13	%		20	%		12	%		13	%
Headcount		20			20			21			19			19

The increase in G&A expenses in absolute dollars in the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily related to severance costs of $1.0 million and legal fees of $0.3 million, partially offset by decreases in employee related expenses of $0.3 million, accounting and tax fees of $0.1 million, consulting expenses of $0.1 million and bad debt expenses of $0.1 million. The increase in severance costs was due to the resignation of our former Chief Executive Officer and severance expense recorded for our corporate team in Mountain View, California as a result of the planned relocation of our corporate headquarters to Fairfax, Virginia. The decrease in employee related expenses was due to lower compensation expense resulting from our reduction in August 2010 and lower stock compensation expense. The decrease in G&A expense as a percentage of net revenue was primarily due to the significant increase in revenues.

The decrease in G&A expenses in absolute dollars in year ended December 31, 2009 as compared to year ended July 31, 2008 was primarily related to decreases in personnel related expenses of $1.9 million, legal related expenses of $0.3 million, insurance of $0.1 million and annual meeting expenses of $0.1 million, offset in part by increases in accounting and tax expenses of $0.2 million. Our decrease in personnel related expenses was primarily due to decreases in stock-based compensation expense of $1.2 million and severance costs of $0.7 million, related to the resignation of our former Chief Executive Officer in the prior year. The decrease in G&A expense as a percentage of net revenue was also due to the decrease in G&A expenses. Our decrease in legal related expenses was primarily due to the resolution of the Okerman legal matter in the prior year. Our decrease in annual meeting expenses and increase in accounting and tax expenses resulted primarily from the change in our fiscal year to December 31.

General and administrative expenses did not change significantly during the five months ended December 31, 2008 as compared to the five months ended December 31, 2007. During the five months ended December 31, 2008, increases in recruiting expenses of $0.2 million were offset by reductions in bad debt expenses of $0.1 million and facilities related expenses of $0.1 million. The increase in recruiting expenses was due to recruiting fees for our new chief executive officer and the decrease in facilities fees is due to expenses related to the relocation of our corporate headquarters incurred during the five months ended December 31, 2007.

We do not expect G&A expenses to change significantly from 2009 levels in absolute dollars, and we also expect G&A expenses to decrease as a percentage of revenue in the future.

Restructuring Costs

In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal year 2008, which ended on July 31, 2008 under our prior fiscal calendar, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of our Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of our Software business, which was included in the gain on disposal of discontinued operations. In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. At December 31, 2010 all restructuring liabilities have been settled and no restructuring liabilities remain.

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

	Year Ended								Five Months Ended
	December 31,						July 31,		December 31,
	2010			2009			2008		2008		2007
Cash provision:											(unaudited)
Facilities charges	$	(27	)	$	(62	)	$	2,057	$	-	$	1,414
Cash proceeds from sales of furniture		(74	)		-			-		-		-
Non-cash:
Write-off of equipment and leasehold improvements		-			-			122		-		-
	$	(101	)	$	(62	)	$	2,179	$	-	$	1,414

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

	Balance at Beginning of Period		Restructuring Charges			Cash payments			Other		Balance at End of Period

For the year ended July 31, 2008	$	5,048	$	2,179		$	(2,585	)	$	590	$	5,232
For the five months ended December 31, 2008	$	5,232	$	-		$	(1,163	)	$	47	$	4,116
For the year ended December 31, 2009	$	4,116	$	(62	)	$	(2,881	)	$	65	$	1,238
For the year ended December 31, 2010	$	1,238	$	(101