-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IjmTGQQxelwAnT6rdAlJ7bVzze5lzGUI+vtiJD1CUXdXnEvOQE5PG8SbgN7XheH4 v0spApTfIaT6bH1vpnyG0Q== 0000950134-08-016612.txt : 20080915 0000950134-08-016612.hdr.sgml : 20080915 20080915172334 ACCESSION NUMBER: 0000950134-08-016612 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080731 FILED AS OF DATE: 20080915 DATE AS OF CHANGE: 20080915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCO GROUP INC CENTRAL INDEX KEY: 0001102542 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870662823 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29911 FILM NUMBER: 081072423 BUSINESS ADDRESS: STREET 1: 355 S 520 W, SUITE 100 CITY: LINDON STATE: UT ZIP: 84042 BUSINESS PHONE: 8017654999 MAIL ADDRESS: STREET 1: 355 S 520 W CITY: LINDON STATE: UT ZIP: 84042 FORMER COMPANY: FORMER CONFORMED NAME: CALDERA INTERNATIONAL INC/UT DATE OF NAME CHANGE: 20001101 FORMER COMPANY: FORMER CONFORMED NAME: CALDERA SYSTEMS INC DATE OF NAME CHANGE: 20000104 10-Q 1 v43726e10vq.htm FORM 10-Q e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-29911
THE SCO GROUP, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   87-0662823
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
355 South 520 West
Suite 100
Lindon, Utah 84042
(Address of principal executive offices and zip code)
(801) 765-4999
(Registrant’s telephone number, including area code)
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 þ NO o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one): YES o NO þ
As of September 9, 2008, there were 21,886,288 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.
 
 

 


 

The SCO Group, Inc.
Table of Contents
         
    Page  
    Number  
PART I. FINANCIAL INFORMATION
       
Item 1. Unaudited Financial Statements
       
    3  
    4  
    5  
    6  
    18  
    35  
    35  
       
    35  
    37  
    45  
    46  
    47  
 EXHIBIT 10.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

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THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
                 
    July 31,     October 31,  
    2008     2007  
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 2,117     $ 5,554  
Restricted cash
    2,680       3,099  
Accounts receivable, net of allowance for doubtful accounts of $124 and $85, respectively
    2,592       3,365  
Prepaid reorganization expenses
    441       137  
Other
    1,135       1,298  
 
           
Total current assets
    8,965       13,453  
 
           
PROPERTY AND EQUIPMENT:
               
Computer and office equipment
    1,694       2,006  
Leasehold improvements
    233       268  
Furniture and fixtures
    59       66  
 
           
 
    1,986       2,340  
Less accumulated depreciation and amortization
    (1,802 )     (1,981 )
 
           
Net property and equipment
    184       359  
 
           
OTHER ASSETS
    373       497  
 
           
Total assets
  $ 9,522     $ 14,309  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 377     $ 252  
Payable to Novell, Inc.
    918       1,148  
Accrued payroll and benefits
    1,010       1,370  
Accrued liabilities
    629       1,110  
Accrued reorganization expenses
    375       253  
Deferred revenues
    1,653       2,044  
Royalties payable
    137       123  
Income taxes payable
    751       708  
 
           
Total current liabilities
    5,850       7,008  
LONG-TERM LIABILITIES
    182       182  
LIABILITIES SUBJECT TO COMPROMISE
    6,708       3,365  
 
           
Total liabilities
    12,740       10,555  
 
           
 
               
COMMITMENTS AND CONTINGENCIES (Notes 1,3 and 6)
               
 
               
STOCKHOLDERS’ EQUITY (DEFICIT):
               
Common stock, $0.001 par value: 45,000 shares authorized, 21,886 and 21,782 shares outstanding, respectively
    22       22  
Additional paid-in capital
    263,921       262,659  
Common stock held in treasury; 297 shares outstanding
    (2,446 )     (2,446 )
Warrants outstanding
    206       856  
Accumulated other comprehensive income
    1,068       1,029  
Accumulated deficit
    (265,989 )     (258,366 )
 
           
Total stockholders’ equity (deficit)
    (3,218 )     3,754  
 
           
Total liabilities and stockholders’ equity (deficit)
  $ 9,522     $ 14,309  
 
           
See accompanying notes to condensed consolidated financial statements.

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THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)
                                 
    Three Months Ended July 31,     Nine Months Ended July 31,  
    2008     2007     2008     2007  
REVENUES:
                               
Products
  $ 3,170     $ 3,690     $ 10,257     $ 13,451  
SCOsource
                      23  
Services
    569       996       2,015       3,241  
 
                       
Total revenues
    3,739       4,686       12,272       16,715  
 
                       
COST OF REVENUES:
                               
Products
    228       329       702       1,041  
SCOsource
    2,876       1,156       3,476       2,876  
Services
    245       448       959       1,553  
 
                       
Total cost of revenues
    3,349       1,933       5,137       5,470  
 
                       
GROSS MARGIN
    390       2,753       7,135       11,245  
 
                       
OPERATING EXPENSES:
                               
Sales and marketing
    1,765       2,463       6,630       7,296  
General and administrative
    889       1,377       3,086       4,051  
Research and development
    708       1,424       2,912       4,737  
 
                       
Total operating expenses
    3,362       5,264       12,628       16,084  
 
                       
LOSS FROM OPERATIONS
    (2,972 )     (2,511 )     (5,493 )     (4,839 )
 
                       
EQUITY IN INCOME (LOSS) OF AFFILIATE
    1       9       (10 )     115  
 
                       
OTHER INCOME (EXPENSE):
                               
Reorganization expense
    (183 )           (1,662 )      
Interest expense
    (925 )           (925 )      
Interest income
    14       112       115       351  
Other income (expense), net
    (6 )     20       503       29  
 
                       
Total other income (expense), net
    (1,100 )     132       (1,969 )     380  
 
                       
LOSS BEFORE PROVISION FOR INCOME TAXES
    (4,071 )     (2,370 )     (7,472 )     (4,344 )
BENEFIT (PROVISION) FOR INCOME TAXES
    6       (28 )     (151 )     (221 )
 
                       
NET LOSS
  $ (4,065 )   $ (2,398 )   $ (7,623 )   $ (4,565 )
 
                       
BASIC AND DILUTED NET LOSS PER COMMON SHARE
  $ (0.19 )   $ (0.11 )   $ (0.35 )   $ (0.21 )
 
                       
WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING
    21,589       21,372       21,574       21,264  
 
                       
OTHER COMPREHENSIVE LOSS:
                               
Net loss
  $ (4,065 )   $ (2,398 )   $ (7,623 )   $ (4,565 )
Foreign currency translation adjustment
    (13 )     21       39       54  
 
                       
COMPREHENSIVE LOSS
  $ (4,078 )   $ (2,377 )   $ (7,584 )   $ (4,511 )
 
                       
See accompanying notes to condensed consolidated financial statements.

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THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
                 
    Nine Months Ended July 31,  
    2008     2007  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (7,623 )   $ (4,565 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock-based compensation
    590       1,407  
Depreciation and amortization
    164       239  
Loss on disposition and write-downs of long-lived assets
    21       35  
Equity in income (loss) of affiliate
    10       (115 )
Reorganization expense
    1,662        
Changes in operating assets and liabilities:
               
Restricted cash
    189       2,457  
Accounts receivable, net
    773       1,990  
Other current assets
    163       319  
Accounts payable
    125       (394 )
Accrued payroll and benefits
    (360 )     (1,127 )
Accrued liabilities
    (481 )     (254 )
Deferred revenue
    (391 )     (433 )
Royalties payable
    14       (190 )
Income taxes payable
    43       (53 )
Long-term liabilities
          (6 )
Liabilities subject to compromise
    3,343        
Payments for reorganization expense
    (1,844 )      
 
           
Net cash used in operating activities
    (3,602 )     (690 )
 
           
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (10 )     (81 )
Dividends received
    114        
Proceeds from sale of available-for-sale marketable securities
          2,249  
 
           
Net cash provided by investing activities
    104       2,168  
 
           
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of common stock through employee stock purchase program
    22       436  
Proceeds from exercise of common stock options
          57  
 
           
Net cash provided by financing activities
    22       493  
 
           
NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS
    (3,476 )     1,971  
EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    39       53  
CASH AND CASH EQUIVALENTS, beginning of period
    5,554       5,369  
 
           
CASH AND CASH EQUIVALENTS, end of period
  $ 2,117     $ 7,393  
 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
  $ 48     $ 150  
Non cash financing activity — expiration of warrants
  $ 650     $  
See accompanying notes to condensed consolidated financial statements.

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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
     The SCO Group, Inc. (the “Company”) markets reliable, cost-effective UNIX software products and related services for the small-to-medium sized business market, including replicated site franchises of Fortune 1000 companies. In 2003, the Company established its SCOsource business to market, protect and defend its intellectual property surrounding the UNIX operating system which it acquired in 2001 from The Santa Cruz Operation (“Santa Cruz”), which changed its name to Tarantella, Inc., and was subsequently acquired by Sun Microsystems.
     The Company incurred a net loss of $7,623,000 for the nine months ended July 31, 2008, and during that same period used cash of $3,602,000 in its operating activities. As of July 31, 2008, the Company had a total of $2,117,000 in cash and $2,680,000 in restricted cash, of which $1,639,000 is designated to pay for experts, consultants and other expenses in connection with the litigation between the Company and IBM, Novell and Red Hat (the “SCO Litigation”), and the remaining $1,041,000 of restricted cash is payable to Novell for post bankruptcy petition retained binary royalty stream.
     On August 10, 2007, the federal judge overseeing the Company’s lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or to eliminate certain of the Company’s claims in both the Novell case (“Novell Litigation”) and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and Santa Cruz (the “APA”), and that Novell retained broad rights to waive the Company’s contract claims against IBM. The Court ruled that the Company owns the copyrights to post-APA UnixWare derivatives and that the Company has certain other ownership rights in the UNIX technology. The Company was directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that the Company executed in fiscal year 2003 and thereafter included older SVRx licenses and that the Company was possibly required to remit some portion of the proceeds to Novell. Over the Company’s objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether SCO had authority to enter into such SVRx licenses. Based on Novell’s allegations, the potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.
     The trial of these issues, however, was automatically stayed as a result of the Company’s filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of SCO’s alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the automatic stay applies to the SuSE arbritation proceeding pending in Europe. Upon the partial lifting of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court lifted the stay, which started on April 29, 2008 and concluded on May 2, 2008, .
     On December 21, 2007, Novell filed a motion for summary judgment on the issue of whether the Company had the authority to enter into the SCOsource licenses. The parties have fully briefed the motion, and the Court set oral argument on this and any other pending motions for summary judgment for April 30, 2008. On March 7, 2008, the Company filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which the Company argues, based on Novell’s version of the facts, that either its claims for money from SCOsource agreements or its claim seeking a declaration that SCO lacked the authority to enter into those agreements must fail. The Court heard oral arguments on this motion, as well as Novell’s pending motion for summary judgment, on the second day of trial, April 30, 2008.
     From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees SCO received from the SCOsource agreements and on whether SCO had the authority to enter into those agreements. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to SCO by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561.

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After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.
     On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx License that was incidental to the UnixWare license in the agreement, and therefore SCO was authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.
     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because certain SCO claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, SCO sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on SCO’s tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of SCO’s current assets were traceable as trust funds. SCO also proposed dismissing its stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copy rights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, SCO filed papers arguing for the entry of final judgment.
     As a result of this order from the Court, the Company has accrued $3,473,000 for this contingent liability and related interest. However, the Company, continues to contest this liability. The Company believes that this order is in error, and that the Company has strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.
     The Company intends to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order as soon as Final Judgment is entered upon those orders. However, in the event that the Company’s assets are further depleted or frozen, the Company may not be in a financial position to appeal those rulings.
     The Company’s management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and the Company’s entry into Chapter 11, among other factors, there is substantial doubt about the Company’s ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.
     Absent a significant cash payment to Novell being required by the final resolution for the aforementioned court order, management believes that the undiscounted future cash flows generated by the Company will be sufficient to recover the carrying values of the Company’s long-lived assets over their expected remaining useful lives. However, if a significant cash payment is required the carrying amount of the Company’s long-lived assets may not be recovered.
Bankruptcy Filing
     On September 14, 2007, the Company and its wholly owned subsidiary, SCO Operations, Inc. (collectively the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware. The Debtors’ Chapter 11 cases are being jointly administered under Case No. 07-11337(KG). The Debtors continue to exercise control over their assets and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company’s foreign subsidiaries were not included in the filings. The Company’s foreign subsidiaries, as non-debtors, are not subject to the requirements of the Bankruptcy Code and are not subject to Bankruptcy Court supervision.

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     On September 18, 2007, the Bankruptcy Court granted the Debtors’ motions to maintain their existing bank accounts and cash management systems, to pay pre-bankruptcy wage-related items, to establish procedures relating to utility providers and to employ temporary employees.
     As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements, in the ordinary course of business, or, if outside the ordinary course of business, subject to Bankruptcy Court approval.
     On February 13, 2008, the Company entered into a Memorandum of Understanding (the “MOU”) with Stephen Norris Capital Partners, LLC, a Delaware limited liability company (“SNCP”), whereby SNCP agreed to provide financing to fund the Company’s plan of reorganization filed on February 29, 2008. On the same day, the Company filed its disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.
     On February 29, 2008, the Debtors filed their joint Chapter 11 Plan of Reorganization (the “Plan”) and Disclosure Statement in Connection with the Plan (the “Disclosure Statement”). A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding the Debtors’ progress towards a new Memorandum of Understanding (“MOU”) with Stephen Norris Capital Partners, LLC. Therefore, the Debtors indicated that they were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU.
     On May 12, 2008, the Debtors filed a motion seeking an extension of their exclusive periods to submit and solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, 2008, respectively. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of their exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following an entry of a final judgment in the Novell Litigation. The hearing on that motion will be heard September 16, 2008.
     Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive, or as to the timing of such distributions, if any. A plan of reorganization could result in holders of the Company’s stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of the Company’s equity security holders.
     Under the supervision of the Bankruptcy Court, the Company may decide to pursue various strategic alternatives as deemed appropriate by the Company’s Board of Directors to serve the best interests of the Company and its stakeholders, including asset sales or strategic partnerships.
Going Concern
     The Debtors are operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) achieve profitability; (iv) achieve sufficient cash flows from operating activities; and (v) obtain financing sources to meet the Company’s future obligations. These matters as well as the aforementioned ruling in favor of Novell create substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and the classification of liabilities that might result from the outcome of these uncertainties. In addition, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

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(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) on a basis consistent with the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s most recent annual report on Form 10-K, are adequate to make the information presented not misleading.
     American Institute of Certified Public Accountants Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization under Bankruptcy Code, which is applicable to companies under Chapter 11 of the Bankruptcy Code, generally does not change the manner in which financial statements are prepared. It does, however, require among other disclosures that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations. The balance sheets must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, reorganization items must be disclosed separately in the statements of cash flows.
     Operating results for the nine months ended July 31, 2008 are not necessarily indicative of the operating results that may be expected for the year ending October 31, 2008.
Use of Estimates in the Preparation of Financial Statements
     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s critical accounting policies and estimates include: revenue recognition, allowances for doubtful accounts receivable, useful lives and impairment of long-lived assets, litigation reserves, and valuation allowances against net deferred income tax assets.
Revenue Recognition
     The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, as modified by SOP 98-9. The Company’s revenue has historically been from three sources: (i) product license revenue, primarily from product sales to resellers, end users and original equipment manufacturers (“OEMs”); (ii) technical support service revenue, primarily from providing technical support and consulting services to end users; and (iii) revenue from SCOsource licensing.
     The Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is probable and product returns are reasonably estimable.
     The majority of the Company’s revenue transactions relate to product-only sales. On occasion, the Company has revenue transactions that have multiple elements (such as software products, maintenance, technical support services, and other services). For software agreements that have multiple elements, the Company allocates revenue to each component of the contract based on the relative fair value of the elements. The fair value of each element is based on vendor specific objective evidence (“VSOE”). VSOE is established when such elements are sold separately. The Company recognizes revenue when the criteria for product revenue recognition set forth above have been met. If VSOE of all undelivered elements exists, but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue in the period when persuasive evidence of an arrangement is obtained assuming all other revenue recognition criteria are met.

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     The Company recognizes product revenue from OEMs when the software is sold by the OEM to an end-user customer. Revenue from technical support services and consulting services is recognized as the related services are performed. Revenue for maintenance is recognized ratably over the maintenance period.
     The Company considers an arrangement with payment terms longer than the Company’s normal business practice not to be fixed or determinable and revenue is recognized when the fee becomes due. The Company typically provides stock rotation rights for sales made through its distribution channel and sales to distributors are recognized upon shipment by the distributor to end users. For direct sales not through the Company’s distribution channel, sales are typically non-refundable and non-cancelable and revenue is recognized upon shipment. The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
     The Company’s SCOsource revenue to date has been primarily generated from agreements to utilize the Company’s UNIX source code as well as from intellectual property agreements. The Company recognizes revenue from SCOsource agreements when a signed contract exists, the fee is fixed or determinable, collection of the receivable is probable and delivery has occurred. If the payment terms extend beyond the Company’s normal payment terms, revenue is recognized as the payments become due.
Cash and Cash Equivalents
     The Company considers all investments purchased with original maturities of three or fewer months to be cash equivalents. Cash equivalents were $0 and $1,926,000 as of July 31, 2008 and October 31, 2007, respectively. Cash was $2,117,000 and $3,628,000 as of July 31, 2008 and October 31, 2007, respectively. The Company has $100,000 of cash that is federally insured through the financial institutions in which it is deposited. All remaining amounts of cash and restricted cash as of July 31, 2008 exceed federally insured limits.
Net Loss Per Common Share
     Basic net income or loss per common share (“Basic EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (“Diluted EPS”) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock. If dilutive, the Company computes Diluted EPS using the treasury stock method.
     Due to the fact that for all periods presented the Company has incurred net losses, common share equivalents of 4,322,000 and 5,646,000 for the three and nine months ended July 31, 2008 and 2007, respectively, are not included in the calculation of diluted net loss per common share because they are anti-dilutive.
(3) COMMITMENTS AND CONTINGENCIES
IBM
     On March 6, 2003, the Company filed a civil complaint against IBM. The case is pending in the United States District Court for the District of Utah, styled The SCO Group, Inc. v. International Business Machines Corporation, Civil No. 2:03CV0294. In this action, the Company claims that IBM breached its UNIX source code licenses (both the IBM and Sequent Computer Systems, Inc. (“Sequent”) licenses) by disclosing restricted information concerning the UNIX source code and derivative works and related information in connection with IBM’s efforts to promote the Linux operating system. The Company’s complaint includes, among other things, claims for breach of contract, unfair competition, tortious interference and copyright infringement. The Company is seeking damages in an amount to be proved at trial and injunctive relief.
     On March 6, 2003, the Company notified IBM that IBM was not in compliance with the Company’s UNIX source code license agreement and on or about June 13, 2003, the Company delivered to IBM a notice of termination of that agreement, which underlies IBM’s AIX software. On August 11, 2003, the Company sent a similar notice terminating the Sequent source code license. IBM disputes the Company’s right to terminate those licenses. In the event the Company’s termination of those licenses is valid and not ultimately defeated by Novell’s claims, the Company believes IBM is exposed to substantial damages and injunctive relief claims based on its continued use and distribution of the AIX operating system. On June 9, 2003, Novell sent the Company a notice purporting to waive the Company’s claims against IBM regarding its license breaches.

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     On February 27, 2004, the Company filed a second amended complaint which alleges nine causes of action that are similar to those set forth above, added a new claim for copyright infringement, and removed the claim for misappropriation of trade secrets. IBM filed an answer and 14 counterclaims. Among other things, IBM asserted that the Company does not have the right to terminate IBM’s UNIX licenses and claimed that the Company breached the GNU General Public License and infringed certain patents held by IBM. IBM’s counterclaims include claims for breach of contract, violation of the Lanham Act, unfair competition, intentional interference with prospective economic relations, unfair and deceptive trade practices, promissory estoppel, patent infringement and a declaratory judgment claim for non-infringement of copyrights. On October 6, 2005, IBM voluntarily dismissed with prejudice its claims for patent infringement.
     On December 22, 2005, the Company filed a voluminous report detailing IBM’s misuse of the Company’s proprietary material (the “December 2005 Submission”). The Company’s December 2005 Submission included 293 total disclosures, which the Company claims violate its contractual rights and copyrights. The December 2005 Submission and the disclosures identified therein are the result of analysis by experienced outside technical consultants.
     On February 13, 2006, IBM filed a motion with the Court seeking to limit the Company’s claims as set forth in the December 2005 Submission. IBM argued that, of the 293 items the Company had identified, 201 did not meet the level of specificity required by the Court. IBM requested that the Company be limited to 93 items set forth in the December 2005 Submission, which IBM claimed meet the required level of specificity. On June 28, 2006, the Magistrate Judge issued a ruling striking over 180 of the technology disclosures identified in the December 2005 Submission. This ruling is a limitation on the number of technology disclosures the Company made in its December 2005 Submission, but means that over 100 of the challenged items remain in the case. On July 13, 2006, the Company filed objections to the Magistrate Judge’s order with the Court; those objections challenged the process and the result embodied in the Magistrate Judge’s order. On November 29, 2006, the Court affirmed the Magistrate Judge’s order of June 28, 2006. The Company filed a motion to reconsider the Court’s ruling and a motion to amend the December 2005 Submission. The District Judge has not ruled on these motions.
     On June 8, 2006, IBM filed a motion to confine the Company’s claims to, and strike allegations in excess of, the December 2005 Submission. In this motion, IBM claims that the Company’s technology expert reports go beyond the disclosures contained in the Company’s December 2005 Submission and that those expert reports should be restricted to that extent. On December 21, 2006, the Magistrate Judge granted IBM’s motion. The Company filed objections to that ruling with the Court. The District Judge has not ruled on these objections.
     Both parties have filed expert reports and substantially finished expert discovery. IBM filed six motions for summary judgment that, if granted in whole or in substantial part, could resolve the Company’s claims in IBM’s favor or substantially reduce the Company’s claims. The Company filed three motions for summary judgment.
     As a result of the Court’s order of August 10, 2007, in the SCO v. Novell case, several of the Company’s claims against IBM may be dismissed. These claims include its claims that IBM breached its UNIX license agreements and the claims arising from its termination of IBM’s UNIX licenses. The Company believes that the Court’s August 10, 2007 ruling does not resolve certain claims in the case, or aspects of those claims, including the Company’s claim for unfair competition arising out of the Project Monterey initiative in the late 1990’s. IBM has taken the position that the Court’s order of August 10, 2007 in the Novell case resolves all of the Company’s claims against IBM in IBM’s favor. The Company disputes this position. IBM’s counterclaims against the Company remain in the case subject to pending motions for summary judgment.
     Proceedings in the SCO v. IBM matter were automatically stayed as a result of the Company’s filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007.
Novell, Inc.
     On January 20, 2004, the Company filed suit in Court against Novell, Inc. for slander of title seeking relief for its alleged bad faith effort to interfere with the Company’s ownership of copyrights related to the Company’s UNIX source code and derivative works and the Company’s UnixWare product. The case is pending in the Court under the caption, The SCO Group, Inc. v. Novell, Inc., Civil No. 2:04CV00139. In the lawsuit, the Company requested preliminary and permanent injunctive relief as well as damages.

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Through these claims, the Company seeks to require Novell to assign to the Company all copyrights that the Company believes Novell has wrongfully registered, to prevent Novell from claiming any ownership interest in those copyrights, and to require Novell to retract or withdraw all representations it has made regarding its purported ownership of those copyrights and UNIX itself.
     Novell filed two motions to dismiss claiming, among other things, that Novell’s false statements were not issued with malice and are privileged under the law. The Court denied both motions. On July 29, 2005, Novell filed its answer and counterclaims against the Company, asserting counterclaims for the Company’s alleged breaches of the 1995 Asset Purchase Agreement between Novell and the Company’s predecessor-in-interest, The Santa Cruz Operation (the “APA”), for slander of title, restitution/unjust enrichment, an accounting related to Novell’s retained interest in SRVx royalties, and for declaratory relief regarding Novell’s alleged rights under the APA. On or about December 30, 2005, the Company filed a motion for leave to amend its complaint to assert additional claims against Novell including copyright infringement, unfair competition and a breach of Novell’s limited license to use the Company’s UNIX code. Novell consented to the Company’s filing of these additional claims.
     On or about April 10, 2006, Novell filed a motion to stay the case in Utah pending a request for arbitration that Novell and its subsidiary SuSE Linux, GmbH (“SuSE”) filed on the same date in the International Court of Arbitration. Through these proceedings, Novell claims that the Company granted SuSE the right to use UNIX intellectual property through the Company’s participation in the UnitedLinux initiative in 2002 and that, through its acquisition of SuSE, Novell acquired SuSE’s rights as a member of UnitedLinux. On August 21, 2006, the District Court ordered that portions of claims related to SuSE should be stayed pending the arbitration but that the other portions of claims in the case should proceed.
     The three-person arbitration panel has been selected for the SuSE arbitration but that process has been stayed by the Bankruptcy Court in Delaware, as explained below.
     In September 2006, Novell filed an Amended Counterclaim asserting nine claims for relief including, among other things, claims for slander of title, breach of contract, declaratory relief and claims for an accounting and for a constructive trust over certain revenue the Company collected from Sun and Microsoft in 2003. In September 2006, Novell also filed a motion for summary judgment or a preliminary injunction, asking the Court to rule that Novell was entitled to that revenue under the APA. The Company opposed the motion and filed a cross-motion for summary judgment or partial summary judgment. Those motions were argued before the Court on January 23, 2007.
     On December 1, 2006, Novell also filed a motion for summary judgment on its Fourth Counterclaim, asking the Court to rule that Novell had retained broad waiver rights and other rights over SVRx Licenses it transferred under the 1995 Asset Purchase Agreement. With its opposition to this motion, the Company filed its own cross-motion for summary judgment, asking the Court to rule that the rights Novell retained under the APA are much narrower than Novell claims.
     On April 9, 2007, the Company filed a Motion for Partial Summary Judgment on its First, Second, and Fifth Causes of Action and for Summary Judgment on Novell’s First Counterclaim, arguing that Novell transferred the UNIX and UnixWare copyrights under the plain language of the amended Asset Purchase Agreement, as confirmed by testimony of at least nine witnesses, including Novell’s own CEO at the time of the Agreement. On April 20, 2007, Novell filed motions for summary judgment asking the Court to rule that Novell retained the UNIX and UnixWare copyrights under the APA, that the Company did not meet its burden of establishing special damages on its slander of title claim, and that the portion of the Company’s contract and unfair-competition claims based on non-compete provisions in the APA and a related agreement should not proceed to a jury trial. On May 31 and June 4, 2007, the Court heard oral argument on these motions and the pending motion and cross-motion for summary judgment on Novell’s Fourth Counterclaim, taking the motions under advisement.
     On August 10, 2007, the Court ruled in favor of Novell on several of the summary judgment motions that were pending. The effect of these rulings was to significantly reduce or to eliminate certain of the Company’s claims in both the Novell and IBM cases, and possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the APA and that Novell retained broad rights to waive the Company’s contract claims against IBM. The Court also ruled that the Company owns the copyrights to post-APA UnixWare derivatives and that the Company has certain other ownership rights in the UNIX technology. The Company was directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that the Company executed in fiscal year 2003 and thereafter included older SVRx licenses and that the Company was possibly required to remit some portion of the proceeds to Novell. Over the Company’s objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether SCO had authority to enter into such SVRx licenses. Based on Novell’s allegations, the potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

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     The trial of these issues, however, was automatically stayed as a result of the Company’s filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of SCO’s alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the automatic stay applies to the SuSE arbitration proceeding pending in Europe. As described above and below, upon the partial lifting of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court lifted the stay, which started on April 29, 2008 and concluded on May 2, 2008.
     On December 21, 2007, Novell filed a motion for summary judgment on the issue of whether the Company had the authority to enter into the SCOsource licenses. The parties have fully briefed the motion, and the Court set oral argument on this and any other pending motions for summary judgment for April 30, 2008. On March 7, 2008, the Company filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which the Company argues, based on Novell’s version of the facts, that either its claims for money from SCOsource agreements or its claim seeking a declaration that SCO lacked the authority to enter into those agreements must fail. The Court heard oral arguments on this motion, as well as Novell’s pending motion for summary judgment, on the second day of trial, April 30, 2008.
     From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees SCO received from the SCOsource agreements and on whether SCO had the authority to enter into those agreements, as explained above. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to SCO by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.
     On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore SCO was authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.
     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because certain SCO claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, SCO sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on SCO’s tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of SCO’s current assets were traceable as trust funds. SCO also proposed dismissing its stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgement order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, SCO filed papers arguing for the entry of final judgment.
     As a result of this order from the Court, the Company has accrued $3,473,000 for this contingent liability and related interest. However, the Board of Directors and management of the Company, continue to contest this liability. They believe that this order is in error, and that the Company has strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.
     The Company intends to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order as soon as Final Judgment is entered upon those orders.

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IPO Class Action Matter
     In July 2001, the Company and several of its former officers and directors (the “Individual Defendants”) were named as defendants in class action complaints alleging violations of the federal securities laws in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed a Consolidated Amended Complaint, which is now the operative complaint. The complaint seeks unspecified damages and alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Registration Statement for the Company’s initial public offering was false and misleading because it did not disclose these arrangements.
     The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss with respect to the Company.
     On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six “focus” cases, which are intended to serve as test cases. Plaintiffs selected these six cases, which do not include the Company. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.
     Prior to the Second Circuit’s December 5, 2006 ruling, a majority of the issuers, including the Company, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed by the plaintiffs and the issuers terminating the proposed settlement. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The amended complaints include a number of changes, such as changes to the definition of the purported class of investors, and the elimination of the individual defendants as defendants. On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them. On March 26, 2008, the district court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. The Company is awaiting a decision from the Court on the class certification motion.
     Due to the inherent uncertainties of litigation, the Company cannot predict the ultimate outcome of this matter. The Company has notified its underwriters and insurance companies of the existence of the claims. Management presently believes, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on the Company’s results of operations, liquidity or financial position, and will not exceed the $200,000 self-insured retention already paid or accrued by the Company.
Red Hat, Inc.
     On August 4, 2003, Red Hat, Inc. filed a complaint against the Company. The action is pending in the United States District Court for the District of Delaware (the “District Court of Delaware”) under the case caption, Red Hat, Inc. v. The SCO Group, Inc., Civil No. 03-772. Red Hat asserts that the Linux operating system does not infringe on the Company’s UNIX intellectual property rights and seeks a declaratory judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat claims the Company has engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, trade libel and disparagement. On April 6, 2004, the District Court of Delaware denied the Company’s motion to dismiss this case; however, the District Court of Delaware stayed the case and requested status reports every 90 days regarding the case against IBM. Red Hat filed a motion for reconsideration, which the District Court of Delaware denied on March 31, 2005. This matter was also automatically stayed upon the Company’s filing its Chapter 11 petitions. In the event that the stay is lifted, including the automatic stay, and Red Hat is allowed to pursue its claims, the Company will likely assert counterclaims against Red Hat. The Company intends to vigorously defend this action.

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Other Matters
     In April 2003, the Company’s former Indian distributor filed a claim in India, requesting summary judgment for payment of approximately $1,428,000, and an order that the Company trade in India only through the distributor and/or give a security deposit until the claim is paid. The distributor claims that the Company is responsible to repurchase certain software products and to reimburse the distributor for certain other operating costs. Management does not believe that the Company is responsible to reimburse the distributor for any operating costs and also believes that the return rights related to any remaining inventory have lapsed. The distributor also requested that the Indian Courts grant interim relief in the form of attachment of local assets. These requests for interim relief have failed in the Court, discovery has commenced, and hearings on the main claims have been held and are ongoing. The Company intends to vigorously defend this action.
     Pursuit and defense of the above-mentioned matters will be costly, and management expects legal fees and related expenses will be substantial. A material, negative impact on the Company’s results of operations, liquidity or financial position from the Red Hat, IPO Class Action, or Indian Distributor matters, or the IBM or Novell counterclaims is not estimable.
     The Company is a party to certain other legal proceedings arising in the ordinary course of business, and management believes, after consultation with legal counsel, that the ultimate outcome of these legal proceedings will not have a material adverse effect on the Company’s results of operations, liquidity or financial position.
(4) STOCKHOLDERS’ EQUITY
Equity Plans
     During the year ended October 31, 1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”) that provided for the granting of nonqualified stock options to purchase shares of common stock. On December 1, 1999, the Company’s board of directors approved the 1999 Omnibus Stock Incentive Plan (the “1999 Plan”), which was intended to serve as the successor equity incentive program to the 1998 Plan. The 1999 Plan allows for the grant of awards in the form of incentive and non-qualified stock options, stock appreciation rights, restricted shares, phantom stock and stock bonuses. Awards may be granted to individuals in the Company’s employ or service.
     On May 16, 2003, the Company’s stockholders approved the 2002 Omnibus Stock Incentive Plan (the “2002 Plan”) upon the recommendation of the board of directors. The 2002 Plan permits the award of stock options, stock appreciation rights, restricted stock, phantom stock rights, and stock bonuses. Stock options may have an exercise price equal to, less than, or greater than the fair market value of the common stock on the date of grant, except that the exercise price of incentive stock options must be equal to or greater than the fair market value of the common stock as of the date of grant.
     On April 20, 2004, the Company’s stockholders approved the 2004 Omnibus Stock Incentive Plan (the “2004 Plan”) upon the recommendation of the board of directors. The 2004 Plan allows for the award of up to 1,500,000 shares of the Company’s common stock and permits the award of stock options, stock appreciation rights, restricted stock, phantom stock rights, and stock bonuses. The 2004 Plan incorporates an evergreen formula pursuant to which on each November 1, the aggregate number of shares reserved for issuance under the 2004 Plan will increase by a number of shares equal to 3% of the outstanding shares on the day preceding (October 31). The 2004 Plan is administered by the compensation committee of the Company’s board of directors. The compensation committee has the ability to determine the terms of the option, the exercise price, the number of shares subject to each option, and the exercisability of the options. Stock options may have an exercise price equal to, less than, or greater than the fair market value of the common stock on the date of grant, except that the exercise price of incentive stock options must be equal to or greater than the fair market value of the common stock as of the date of grant. Shares issued pursuant to the 2004 Plan may be authorized and unissued shares, treasury shares or shares acquired by the Company for purposes of the 2004 Plan.
     Under the terms of the 1998, 1999, 2002 and 2004 Plans, options generally expire 10 years from the date of grant or within 90 days of termination. Options granted under these plans generally vest at 25% after the completion of 1 year of service and then 1/36 per month for the remaining 3 years and would be fully vested at the end of 4 years.

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     The board of directors may suspend, revise, terminate or amend any of the option plans at any time; provided, however, that stockholder approval must be obtained if and to the extent that the board of directors deems it appropriate to satisfy Section 162(m) of the Code, Section 422 of the Code or the rules of any stock exchange on which the common stock is listed. No action under the option plans may, without the consent of the participant, reduce the participant’s rights under any outstanding award.
     The effect of accounting for stock-based awards for the three months ended July 31, 2008 and 2007 was to record $237,000 and $396,000, respectively, of stock-based compensation expense. For the nine months ended July 31, 2008 and 2007, $590,000 and $1,407,000, respectively, of stock-based compensation expense was recorded. For the three and nine months ended July 31, 2008 and 2007, the Company has allocated stock-based compensation expense to the following statement of operations captions:
                                 
    Three Months Ended July 31,     Nine months Ended July 31,  
    2008     2007     2008     2007  
    (In thousands)  
Cost of products
  $ 1     $ 2     $ 3     $ 5  
Cost of SCOsource
    68       66       168       211  
Cost of services
    7       12       20       29  
Sales and marketing
    50       68       135       286  
General and administrative
    98       197       226       729  
Research and development
    13       51       38       147  
 
                       
Total stock-based compensation
  $ 237     $ 396     $ 590     $ 1,407  
 
                       
     With respect to stock options granted during the three and nine months ended July 31, 2008 and 2007, the assumptions used in the Black-Scholes option-pricing model are as follows:
                                 
    Three Months Ended July 31,   Nine months Ended July 31,
    2008   2007   2008   2007
Risk-free interest rate
    3.3 %     4.7 %     3.0 %     4.7 %
Expected dividend yield
    0.0 %     0.0 %     0.0 %     0.0 %
Volatility
    369.7 %     96.9 %     350.1 %     90.0 %
Expected exercise life (in years)
    5.6       5.0       5.5       5.0  
     The estimated fair value of stock options is amortized over the vesting period of the award.
     During the nine months ended July 31, 2008, the Company granted options to purchase approximately 60,000 shares of common stock with an average exercise price of $0.08 per share. None of these stock options were granted with an exercise price below the quoted market price on the date of grant. During the nine months ended July 31, 2008, no options to purchase common stock were exercised. As of July 31, 2008, there were approximately 4,309,000 stock options outstanding with a weighted average exercise price of $3.37per share.
(5) SEGMENT INFORMATION
     The Company’s resources are allocated and operating results managed to the operating income (loss) level for each of the Company’s segments: UNIX and SCOsource. Both segments are based on the Company’s UNIX intellectual property. The UNIX business sells and distributes UNIX products and services through an extensive distribution channel and to corporate end-users and the SCOsource business enforces and protects the Company’s UNIX intellectual property. Segment disclosures for the Company are as follows:
                         
    Three Months Ended July 31, 2008  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 3,739     $     $ 3,739  
Cost of revenues
    473       2,876       3,349  
 
                 
Gross margin (deficit)
    3,266       (2,876 )     390  
 
                 
Sales and marketing
    1,765             1,765  
General and administrative
    889             889  
Research and development
    708             708  
 
                 
Total operating expenses
    3,362             3,362  
 
                 
Loss from operations
  $ (96 )   $ (2,876 )   $ (2,972 )
 
                 
                         
    Three Months Ended July 31, 2007  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 4,686     $     $ 4,686  
Cost of revenues
    777       1,156       1,933  
 
                 
Gross margin (deficit)
    3,909       (1,156 )     2,753  
 
                 
Sales and marketing
    2,463             2,463  
General and administrative
    1,377             1,377  
Research and development
    1,424             1,424  
 
                 
Total operating expenses
    5,264             5,264  
 
                 
Loss from operations
  $ (1,355 )   $ (1,156 )   $ (2,511 )
 
                 
                         
    Nine months Ended July 31, 2008  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 12,272     $     $ 12,272  
Cost of revenues
    1,661       3,476       5,137  
 
                 
Gross margin (deficit)
    10,611       (3,476 )     7,135  
 
                 
Sales and marketing
    6,630             6,630  
General and administrative
    3,086             3,086  
Research and development
    2,912             2,912  
 
                 
Total operating expenses
    12,628             12,628  
 
                 
Loss from operations
  $ (2,017 )   $ (3,476 )   $ (5,493 )
 
                 
                         
    Nine months Ended July 31, 2007  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 16,692     $ 23     $ 16,715  
Cost of revenues
    2,594       2,876       5,470  
 
                 
Gross margin (deficit)
    14,098       (2,853 )     11,245  
 
                 
Sales and marketing
    7,296             7,296  
General and administrative
    4,051             4,051  
Research and development
    4,737             4,737  
 
                 
Total operating expenses
    16,084             16,084  
 
                 
Loss from operations
  $ (1,986 )   $ (2,853 )   $ (4,839 )
 
                 

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(6) PLAN OF REORGANIZATION STATUS
     On February 13, 2008, the Company entered into a Memorandum of Understanding (the “MOU”) with Stephen Norris Capital Partners, LLC, a Delaware limited liability company (“SNCP”), whereby, SNCP agreed to provide financing to fund the Company’s plan of reorganization filed on February 29, 2008 in the Company’s Chapter 11 bankruptcy case presently pending in the United States Bankruptcy Court for the District of Delaware, In re: The SCO Group, Inc, Case No. 07-11337(KG). The Company on the same day filed its disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.
     The MOU is not a definitive agreement. It is a non-binding summary of the intentions of the parties and is subject to change. As such, the MOU, the plan of reorganization and the transactions they contemplate are subject to various changes and conditions precedent, including: (1) SNCP’s due diligence and (2) the Bankruptcy Court’s approval. A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding the Company’s progress towards a new MOU with SNCP. Therefore, the Company indicated that it was not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU. On May 12, 2008, the Company filed a motion seeking an extension of its exclusive periods to submit and solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, 2008, respectively. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of their exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion will be heard on September 16, 2008.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “intends,” “anticipates,” “expects,” “believes,” “plans,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those set forth below under “Forward-Looking Statements and Factors that May Affect Future Results and Financial Condition” and “Part II, Item 1A — Risk Factors” and elsewhere in this Form 10-Q. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended October 31, 2007 filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. All information presented herein is based on the three and nine months ended July 31, 2008 and 2007. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Recent Developments
     Novell, Inc. Ruling. On August 10, 2007, the federal judge overseeing our lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or eliminate certain of our claims in both the Novell case (the “Novell Litigation” and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and the Santa Cruz Operations (the “APA”), and that Novell retained broad rights to waive our contract claims against IBM. The Court also ruled that we own the copyrights to post APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.
     The trial of these issues, however, was automatically stayed as a result of our filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of our alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the bankruptcy stay applies to the SuSE arbitration proceeding pending in Europe. Upon the partial lifting of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court lifted the stay, which started on April 29, 2008 and concluded on May 2, 2008.
     On December 21, 2007, Novell filed a motion for summary judgment on the issue of whether the Company had the authority to enter into the SCOsource licenses. The parties have fully briefed the motion, and the Court set oral argument on this and any other pending motions for summary judgment for April 30, 2008. On March 7, 2008, the Company filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which the Company argues, based on Novell’s version of the facts, that either its claims for money from SCOsource agreements or its claim seeking a declaration that SCO lacked the authority to enter into those agreements must fail. The Court heard oral arguments on this motion, as well as Novell’s pending motion for summary judgment, on the second day of trial, April 30, 2008.

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     From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements, as explained above.
Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.
     On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.
     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because certain of our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.
     As a result of this order from the Court, we have accrued $3,473,000 for this contingent liability and related interest. However, we continue to contest this liability. We believe that this order is in error, and that we have strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.
     We intend to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order as soon as Final Judgment is entered upon those orders. However, in the event that our assets are further depleted or frozen, we may not be in a financial position to appeal those rulings.
     Our management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and our entry into Chapter 11, among other factors, there is substantial doubt about our ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.
     Absent a significant cash payment to Novell being required by the final resolution for this matter, we believe that the undiscounted future cash flows generated by us will be sufficient to recover the carrying values of our long-lived assets over their expected remaining useful lives. However, if a significant cash payment is required the carrying amount of our long-lived assets may not be recovered (which totaled $184,000 as of July 31, 2008).
     We intend to maintain business operations throughout the reorganization process. Subject to the Bankruptcy Court’s approval, we intend to use our cash, restricted cash and subsequent cash inflows to meet our working capital needs throughout the reorganization process.
     Bankruptcy Filing. On September 14, 2007, The SCO Group, Inc. (the “Company”) and its wholly owned subsidiary, SCO Operations, Inc. (collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Debtors’ Chapter 11 cases are being jointly administered under Case Nos. 07-11337 and 07-11338(KG). As the Debtors, we continue to exercise control over our assets and operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Our foreign subsidiaries were not included in the filings. Our foreign subsidiaries, as non-debtors, are not subject to the requirements of the Bankruptcy Code and are not subject to Bankruptcy Court supervision.

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     On September 18, 2007, the Bankruptcy Court granted our motions to maintain our existing bank accounts and cash management systems, to pay pre-bankruptcy wage-related items, to establish procedures relating to utility providers and to employ temporary employees.
     On February 13, 2008, we entered into a Memorandum of Understanding (the “MOU”) with Stephen Norris Capital Partners, LLC, a Delaware limited liability company (“SNCP”), whereby SNCP agreed to provide financing to fund our plan of reorganization filed on February 29, 2008. On the same day, we filed our disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.
     The MOU is not a definitive agreement. It is a non-binding summary of the intentions of the parties and is subject to change. As such, the MOU, our plan of reorganization and the transactions they contemplate are subject to various changes and conditions precedent, including: (1) SNCP’s due diligence and (2) the Bankruptcy Court’s approval. On February 29, 2008, we filed the Plan and the Disclosure Statement. A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding our progress towards a new MOU with SNCP. Therefore, we indicated that we were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU.
     On May 12, 2008, we filed a motion seeking an extension of our exclusive periods to submit and solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, 2008, respectively. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. We filed another motion for an extension of our exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion will be heard on September 16, 2008.
     As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements, in the ordinary course of business, or, if outside the ordinary course of business, subject to Bankruptcy Court approval.
     In addition, under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery by creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive, or as to the timing of any such distributions. A plan of reorganization could result in holders of our stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of our equity security holders. Accordingly, we urge that the appropriate caution be exercised with respect to existing and future investments in any of these securities as the value and prospects are highly speculative.
     Under the supervision of the Bankruptcy Court, we may decide to pursue various strategic alternatives as deemed appropriate by our board of directors to serve the best interests of the Company and our stockholders, including asset sales or strategic partnerships.
Business Focus
     UNIX Business. Our UNIX business serves the needs of small-to-medium sized businesses as well as replicated site franchisees of Fortune 1000 companies, by providing reliable, cost effective UNIX software technology for distributed, embedded and network-based systems. Our UNIX business includes our mobility product and services offerings. Our largest source of UNIX business revenue is derived from existing customers through our worldwide, indirect, leveraged channel of partners, which includes distributors and independent solution providers. We have a presence in a number of countries that provide support and services to customers and resellers. The other principal channel for selling and marketing our UNIX products is through existing customers that have a large number of replicated sites or franchisees.

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     We access these corporations through their information technology or purchasing departments with our Area Sales Managers (“ASMs”) in the United States and through our reseller channel in countries outside the United States. In addition, we also sell our operating system products to original equipment manufacturers (“OEMs”). Our sales of UNIX products and services during the last several years have been primarily to existing UNIX customers and not newly acquired customers. Our UNIX business revenue depends significantly on our ability to market and sell our products to existing customers and to generate upgrades from existing customers.
     The following table shows the operating results of the UNIX business for the three and nine months ended July 31, 2008 and 2007:
                                 
    Three Months Ended July 31,     Nine months Ended July 31,  
    2008     2007     2008     2007  
    (In thousands)  
Revenue
  $ 3,739     $ 4,686     $ 12,272     $ 16,692  
Cost of revenue
    473       777       1,661       2,594  
 
                       
Gross margin
    3,266       3,909       10,611       14,098  
 
                       
Sales and marketing
    1,765       2,463       6,630       7,296  
General and administrative
    889       1,377       3,086       4,051  
Research and development
    708       1,424       2,912       4,737  
 
                       
Total operating expenses
    3,362       5,264       12,628       16,084  
 
                       
Loss from operations
  $ (96 )   $ (1,355 )   $ (2,017 )   $ (1,986 )
 
                       
     Revenue from the UNIX business decreased by $947,000, or 20%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and revenue from the UNIX business decreased by $4,420,000, or 26%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007. The revenue from this business has been declining over the last several years primarily as a result of increased competition from alternative operating systems, particularly Linux. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. The Linux operating system competes directly with our OpenServer and UnixWare products and has taken significant market share from these products.
     Operating costs for the UNIX business decreased from $5,264,000 for the three months ended July 31, 2007 to $3,362,000 for the three months ended July 31, 2008 and operating costs for the UNIX business decreased from $16,084,000 for the nine months ended July 31, 2007 to $12,628,000 for the nine months ended July 31, 2008. These decreases were primarily attributable to reduced headcount and related costs.
     The decline in our UNIX business revenue will continue if the factors that have contributed to the decline described above continue or industry partners continue to withdraw their support for our products. The decline in our UNIX business and our SCOsource business may cause industry partners, developers and hardware and software vendors to choose not to support or certify to our UNIX operating system products. This would lead to an accelerated decline in revenue and an increase in negative cash flows from our UNIX business.
     SCOsource Business. During the year ended October 31, 2003, we became aware that our UNIX code and derivative works had been inappropriately included by others in the Linux operating system. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. The Linux operating system competes directly with our OpenServer and UnixWare products and has taken significant market share from these products.
     In an effort to establish, protect and defend our UNIX intellectual property rights, we initiated our SCOsource business. We have incurred significant legal costs in an effort to defend and protect our UNIX intellectual property rights. We expect that costs and expenses for this business for the year ending October 31, 2008 will continue to be significant.

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     The following table shows the operating results of the SCOsource business for the three and nine months ended July 31, 2008 and 2007:
                                 
    Three Months Ended April 30,     Nine months Ended April 30,  
    2008     2007     2008     2007  
    (In thousands)  
Revenue
  $     $     $     $ 23  
Cost of revenue
    2,876       1,156       3,476       2,876  
 
                       
Gross deficit
    (2,876 )     (1,156 )     (3,476 )     (2,853 )
 
                       
Sales and marketing
                       
General and administrative
                       
Research and development
                       
 
                       
Total operating expenses
                       
 
                       
Loss from operations
  $ (2,876 )   $ (1,156 )   $ (3,476 )   $ (2,853 )
 
                       
     Revenue from our SCOsource business was $0 for the three months ended July 31, 2007 and July 31, 2008. Revenue decreased from $23,000 for the nine months ended July 31, 2007 to $0 for the nine months ended July 31, 2008. Revenue in the nine month period ended July 31, 2007 was primarily attributable to sales of our SCOsource IP agreements.
     Cost of revenue, which primarily includes legal and professional fees incurred in connection with defending our UNIX intellectual property rights in the SCO Litigation, increased from $1,156,000 for the three months ended July 31, 2007 to $2,876,000 for the three months ended July 31, 2008 and increased from $2,876,000 for the nine months ended July 31, 2007 to $3,476,000 for the nine months ended July 31, 2008. These increases were due to the $2,548,000 judgment in the Novell litigation for an unauthorized amendment to a prior UNIX agreement with Sun as previously mentioned under Recent Developments partially offset by decreases in legal expenses provided by technical, industry, damage and other experts in connection with the SCO Litigation. In addition to the expenses incurred above, we may pay one or more contingency fees upon certain amounts we or our stockholders may receive as a result of a settlement, judgment, or a sale of our company.
     Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses such as damage, industry and technical review and other consultants is difficult to predict; it is therefore difficult to predict the total cost of SCOsource revenue in the future.
     Because of the uncertainties related to our SCOsource business, the success of the SCOsource business depends on the strength of our intellectual property rights and claims regarding UNIX, including our claims against Novell and the strength of our claim that unauthorized UNIX source code and derivative works are contained in Linux.
Critical Accounting Policies
     Our critical accounting policies and estimates include the following:
    Revenue recognition;
 
    Valuation allowances against net deferred income tax assets;
 
    Litigation reserves;
 
    Useful lives and impairment of property and equipment; and
 
    Allowances for doubtful accounts receivable.
     Revenue Recognition. We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, as modified by SOP 98-9. Our revenue has historically been from three sources: (i) product license revenue, primarily from product sales to resellers, end users and OEMs; (ii) technical support service revenue, primarily from providing technical support and consulting services to end users; and (iii) revenue from SCOsource.
     We recognize product revenues upon shipment if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is probable and product returns are reasonably estimable.

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     The majority of our revenue transactions relate to product-only sales. On occasion, we have revenue transactions that have multiple elements (such as software products, maintenance, technical support services, and other services). For software agreements that have multiple elements, we allocate revenue to each component of the contract based on the relative fair value of the elements. The fair value of each element is based on vendor specific objective evidence (“VSOE”). VSOE is established when such elements are sold separately. We recognize revenue when the criteria for product revenue recognition set forth above have been met. If VSOE of all undelivered elements exists, but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue in the period when persuasive evidence of an arrangement is obtained assuming all other revenue recognition criteria are met.
     We recognize product revenues from OEMs when the software is sold by the OEM to an end-user customer. Revenues from technical support services and consulting services are recognized as the related services are performed. Revenues for maintenance are recognized ratably over the maintenance period.
     We consider an arrangement with payment terms longer than our normal business practice not to be fixed or determinable and revenue is recognized when the fee becomes due. We typically provide stock rotation rights for sales made through our distribution channel and sales to distributors are recognized upon shipment by the distributor to end users. For direct sales not through our distribution channel, sales are typically non-refundable and non-cancelable and revenue is recognized upon shipment. We estimate our product returns based on historical experience and maintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
     Our SCOsource revenues to date have been primarily generated from agreements to utilize our UNIX source code as well as from intellectual property compliance agreements. We recognize revenue from SCOsource agreements when a signed contract exists, the fee is fixed or determinable, collection of the receivable is probable and delivery has occurred. If the payment terms extend beyond our normal payment terms, revenue is recognized as the payments become due.
     Valuation Allowances Against Net Deferred Income Tax Assets. The amount, and ultimate realization, of our net deferred income tax assets depends, in part, upon the tax laws in effect, our future earnings, if any, and other future events, the effects of which cannot be determined. We provided a valuation allowance against our entire net deferred income tax assets as of July 31, 2008 and October 31, 2007. The valuation allowance was recorded because of our history of net operating losses and the uncertainties regarding our future operating profitability and taxable income.
     Litigation Reserves. We are party to a number of legal matters described in more detail elsewhere in this Form 10-Q, including under Part II, Item I — Legal Proceedings. Pursuit and defense of these matters will be costly, and management expects the costs for legal fees and related expenses will be substantial. We have accrued $3,473,000 for the Novell claim as a result of the court order of July 16, 2008. This contingent liability is included in the caption Liabilities Subject to Compromise. However, we continue to contest this liability. We believe that this order is in error, and that we have strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.
     A material, negative impact on our results of operations or financial position from the Red Hat, Inc., IPO Class Action, or Indian Distributor matters, or the IBM counterclaims may be probable but not estimable. Because these matters are not estimable, we have not recorded any reserves or contingencies related to these legal matters. In the event that our assumptions used to evaluate these matters change in future periods, we may be required to record a liability for an adverse outcome, which could have a material adverse effect on our results of operations, financial position and liquidity.
     Useful Lives and Impairment of Property and Equipment. We review our long-lived assets for impairment at each balance sheet date and when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.
     Write-downs of long-lived assets may be necessary if, in the future, the fair value of these assets is less than the carrying value. If the operating trends for our UNIX or SCOsource businesses licensing continue to decline, we may be required to record an impairment charge in a future period related to the carrying value of our long-lived assets.

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     Allowance for Doubtful Accounts Receivable. We offer credit terms on the sale of our products to a majority of our customers and require no collateral from these customers. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts based upon our historical collection experience and a specific review of customer balances to determine expected collectability. Our policies for determining allowances for doubtful accounts receivable have been applied consistently. Our allowance for doubtful accounts receivable was $124,000 as of July 31, 2008. We have not experienced material differences from the actual amounts provided for bad debts and our recorded estimates. However, our actual bad debts in future periods may differ from our current estimates and the differences may be material, which may have an adverse impact on our future accounts receivable and cash position.
Results of Operations
     The following table presents our results of operations for the three and nine months ended July 31, 2008 and 2007:
                                 
    Three Months Ended July 31,     Nine months Ended July 31,  
    2008     2007     2008     2007  
    (In thousands)  
Revenue:
                               
Products
  $ 3,170     $ 3,690     $ 10,257     $ 13,451  
SCOsource licensing
                      23  
Services
    569       996       2,015       3,241  
 
                       
Total revenue
    3,739       4,686       12,272       16,715  
 
                       
Cost of revenue:
                               
Products
    228       329       702       1,041  
SCOsource licensing
    2,876       1,156       3,476       2,876  
Services
    245       448       959       1,553  
 
                       
Total cost of revenue
    3,359       1,933       5,137       5,470  
 
                       
Gross margin
    390       2,753       7,135       11,245  
 
                       
Operating expenses:
                               
Sales and marketing
    1,765       2,463       6,630       7,296  
General and administrative
    889       1,377       3,086       4,051  
Research and development
    708       1,424       2,912       4,737  
 
                       
Total operating expenses
    3,362       5,264       12,628       16,084  
 
                       
Loss from operations
    (2,972 )     (2,511 )     (5,493 )     (4,839 )
Equity in income (loss) of affiliate
    1       9       (10 )     115  
Other income (expense), net
    (1,100 )     132       (1,969 )     380  
Benefit (Provision) for income taxes
    6       (28 )     (151 )     (221 )
 
                       
Net loss
  $ (4,065 )   $ (2,398 )   $ (7,623 )   $ (4,565 )
 
                       
THREE AND NINE MONTHS ENDED JULY 31, 2008 AND 2007
Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Revenue
  $ 3,739       (20 )%   $ 4,686  
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Revenue
  $ 12,272       (27 )%   $ 16,715  
     Revenue for the three months ended July 31, 2008 decreased by $947,000, or 20%, from the three months ended July 31, 2007 and revenue for the nine months ended July 31, 2008 decreased by $4,443,000, or 27%, from the nine months ended July 31, 2007. These decreases were primarily attributable to a continued decline in our UNIX business as a result of the factors described below.

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     Revenue generated from our UNIX business and SCOsource business is as follows:
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
UNIX revenue
  $ 3,739       (20 )%   $ 4,686  
Percentage of total revenue
    100 %             100 %
SCOsource revenue
  $       n/a     $  
Percentage of total revenue
    0 %             0 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
UNIX revenue
  $ 12,272       (26 )%   $ 16,692  
Percentage of total revenue
    100 %             100 %
SCOsource revenue
  $       n/a     $ 23  
Percentage of total revenue
    0 %             0 %
     The decrease in revenue in the UNIX business of $947,000, or 20%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and the decrease in revenue in the UNIX business of $4,420,000, or 26%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007 was primarily attributable to continued competition from other operating systems, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing Chapter 11 bankruptcy. We believe that the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX revenues because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. We anticipate that for the year ending October 31, 2008 our UNIX revenues will decline from UNIX revenues generated in the year ended October 31, 2007 as a result of this continued competition and negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy.
     Sales of our UNIX products and services during the three and nine months ended July 31, 2008 and 2007 were primarily to existing customers. Our UNIX business revenue depends significantly on our ability to market our products to existing customers and to generate upgrades from existing customers. Our UNIX revenue may be lower than currently anticipated if (i) we are not successful with our existing customers, (ii) we lose the support of any of our existing hardware and software vendors, or (iii) our key industry partners withdraw their marketing and certification support or direct their support to our competitors.
Products Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Products revenue
  $ 3,170       (14 )%   $ 3,690  
Percentage of total revenue
    85 %             79 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Products revenue
  $ 10,257       (24 )%   $ 13,451  
Percentage of total revenue
    84 %             80 %
     Our products revenue consists of software licenses for UNIX products such as OpenServer and UnixWare, as well as sales of UNIX-related products. Products revenue also includes revenue derived from OEMs, distribution partners and large accounts. We rely heavily on our two-tier distribution channel and any disruption in our distribution channel could have an adverse impact on future revenue.
     The decrease in products revenue of $520,000, or 14%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and the decrease in products revenue of $3,194,000, or 24%, for the nine months ended July 31, 2008 compared

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to the nine months ended July 31, 2007 was primarily attributable to decreased sales of OpenServer and UnixWare products. These decreases primarily resulted from continued competition in the operating system market, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy, which have adversely impacted and delayed our customers’ buying decisions. We believe that this competition from Linux will continue for the year ending October 31, 2008 and future periods.
     Our products revenue was derived primarily from sales of our OpenServer and UnixWare products. Other products revenue consists mainly of products maintenance and other UNIX-related products. Revenue for these products was as follows:
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
OpenServer revenue
  $ 2,150       1 %   $ 2,135  
Percentage of products revenue
    68 %             58 %
UnixWare revenue
  $ 670       (43 )%   $ 1,172  
Percentage of products revenue
    21 %             32 %
Other products revenue
  $ 350       (8 )%   $ 383  
Percentage of products revenue
    11 %             10 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
OpenServer revenue
  $ 6,931       (15 )%   $ 8,202  
Percentage of products revenue
    68 %             61 %
UnixWare revenue
  $ 2,438       (36 )%   $ 3,820  
Percentage of products revenue
    24 %             28 %
Other products revenue
  $ 888       (38 )%   $ 1,429  
Percentage of products revenue
    8 %             11 %
     The decrease in revenue for OpenServer and UnixWare for the three and nine months ended July 31, 2008 compared to the three and nine months ended July 31, 2007 is primarily the result of continued competition, particularly from Linux operating system providers, and from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy. The decrease in other products revenues is primarily attributed to decreased sales of UNIX-related products and decreased sales of products maintenance, which is sold separately from the product.
SCOsource Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
SCOsource revenue
        n/a      
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
SCOsource revenue
        n/a     $ 23  
     We initiated our SCOsource business for the purpose of protecting and defending our intellectual property rights in our UNIX source code and derivative works. SCOsource revenue was $0 for the three months ended July 31, 2008 and July 31, 2007 and was $0 for the nine months ended July 31, 2008 compared to $23,000 for the nine months ended July 31, 2007. Revenues for the nine months ended July 31, 2007 were primarily attributable to sales of our SCOsource agreements.
     We are unable to predict the amount and timing of future SCOsource revenue, and if generated, the revenue will be sporadic and may be dependent on the outcome of the SCO Litigation.

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Services Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Services revenue
  $ 569       (43 )%   $ 996  
Percentage of total revenue
    15 %             21 %
                         
    Nine Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Services revenue
  $ 2,015       (38 )%   $ 3,241  
Percentage of total revenue
    16 %             19 %
     Services revenue consists primarily of technical support fees, engineering services fees, professional services fees and consulting fees. These fees are typically charged and invoiced separately from UNIX products sales. The decrease in services revenue of $427,000, or 43%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and the decrease in services revenue of $1,226,000, or 38%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007 was primarily attributable to the renewal of fewer support and engineering services contracts.
     The majority of our support and professional services revenue continues to be derived from services for UNIX-based operating system products. Our future level of services revenue depends in part on our ability to generate UNIX products revenue from new customers as well as to renew annual support and services agreements with existing UNIX customers.
Cost of Products Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of products revenue
  $ 228       (31 )%   $ 329  
Percentage of products revenue
    7 %             9 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of products revenue
  $ 702       (33 )%   $ 1,041  
Percentage of products revenue
    7 %             8 %
     Cost of products revenue consists of manufacturing costs, royalties to third-party vendors, technology costs and overhead costs. Cost of products revenue decreased by $101,000 for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and decreased by $339,000 for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. These decrease in the dollar amount of cost of products revenue was primarily attributable to lower products revenue as margins did not vary considerably.

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Cost of SCOsource Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of SCOsource revenue
  $ 2,876       149 %   $ 1,156  
                         
    Nine Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of SCOsource revenue
  $ 3,476       21 %   $ 2,876  
     Cost of SCOsource revenue includes legal and professional fees incurred in connection with our SCO Litigation, the salaries and related personnel costs of SCOsource employees, and an allocation of corporate costs.
     Cost of SCOsource revenue increased by $1,720,000, or 149%, during the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and increased by $600,000, or 21%, for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. These increases were due to the $2,548,000 judgment in the Novell litigation for an unauthorized amendment to a prior UNIX agreement with Sun as previously mentioned under Recent Developments, which is partially offset by decreases in legal services provided by technical, industry, damage and other experts in connection with the SCO Litigation.
     Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses is difficult to predict, and will be difficult to predict in the future. We will continue to make payments for technical, damage and industry experts, consultants and for other fees. Future legal fees may include contingency payments made to the law firms as a result of a settlement, judgment, or sale of our Company, which could cause the cost of SCOsource revenue for the three months ending October 31, 2008 or for future periods to be higher than the costs incurred for the three months ended July 31, 2008.
Cost of Services Revenue
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of services revenue
  $ 245       (45 )%   $ 448  
Percentage of services revenue
    43 %             45 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Cost of services revenue
  $ 959       (38 )%   $ 1,553  
Percentage of services revenue
    48 %             48 %
     Cost of services revenue includes the salaries and related personnel costs of employees delivering services revenue as well as third-party service agreements. Cost of services revenue decreased by $203,000, or 45%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and decreased by $594,000, or 38%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007. These decreases were primarily attributable to a reduction of employee and employee-related costs.

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Sales and Marketing
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Sales and marketing expenses
  $ 1,765       (28 )%   $ 2,463  
Percentage of total revenue
    47 %             53 %
                         
    Nine Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Sales and marketing expenses
  $ 6,630       (9 )%   $ 7,296  
Percentage of total revenue
    54 %             44 %
     Sales and marketing expenses consist of the salaries, commissions and other personnel costs of employees involved in the revenue generation process, as well as advertising and corporate allocations. The decrease in sales and marketing expenses of $698,000, or 28%, for the three months ended July 31, 2008 compared with the three months ended July 31, 2007 and the decrease of $666,000, or 9%, for the nine months ended July 31, 2008 compared with the nine months ended July 31, 2007 was primarily attributable to lower commissions, lower travel expenses, reduced discretionary marketing spending and lower co-operative advertising as a result of lower revenue, partially offset by an increase in severance and termination costs. Included in sales and marketing expenses for the three months ended July 31, 2008 and 2007 was $50,000 and $68,000, respectively, for stock-based compensation. Included in sales and marketing expenses for the nine months ended July 31, 2008 and 2007 was $135,000 and $286,000, respectively, for stock-based compensation.
     For the three months ending October 31, 2008, we anticipate that the dollar amount of sales and marketing expenses will be generally consistent with that incurred during the three months ended July 31, 2008.
Research and Development
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Research and development expenses
  $ 708       (50 )%   $ 1,424  
Percentage of total revenue
    19 %             30 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Research and development expenses
  $ 2,912       (39 )%   $ 4,737  
Percentage of total revenue
    24 %             28 %
     Research and development expenses consist of the salaries and benefits of software engineers, consulting expenses and corporate allocations. Research and development expenses decreased by $716,000, or 50%, for the three months ended July 31, 2008 compared with the three months ended July 31, 2007 and decreased by $1,825,000, or 39%, for the nine months ended July 31, 2008 compared with the nine months ended July 31, 2007. The decrease in research and development expenses was primarily attributable to reduced employee and employee-related costs. Included in research and development expenses for the three months ended July 31, 2008 and 2007 was $13,000 and $51,000, respectively, of stock-based compensation. Included in research and development expenses for the nine months ended July 31, 2008 and 2007 was $38,000 and $147,000, respectively, for stock-based compensation.
     For the three months ending October 31, 2008, we anticipate that the dollar amount of research and development expenses will be generally consistent with that incurred during the three months ended July 31, 2008.

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General and Administrative
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
General and administrative expenses
  $ 889       (35 )%   $ 1,377  
Percentage of total revenue
    24 %             29 %
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
General and administrative expenses
  $ 3,086       (24 )%   $ 4,051  
Percentage of total revenue
    25 %             24 %
     General and administrative expenses consist of the salaries and benefits of finance, human resources, and executive management and expenses for professional services and corporate allocations. General and administrative expenses decreased by $488,000, or 35%, during the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and decreased by $965,000, or 24%, during the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. The decrease in general and administrative expenses was primarily attributable to decreased professional services costs and reduced stock-based compensation expenses. Included in general and administrative expenses for the three months ended July 31, 2008 and 2007 was $98,000 and $197,000, respectively, of stock-based compensation. Included in general and administrative expenses for the nine months ended July 31, 2008 and 2007 was $226,000 and $729,000, respectively, for stock-based compensation.
     For the three months ending October 31, 2008, we anticipate that the dollar amount of general and administrative expenses will be generally consistent with that incurred during the three months ended July 31, 2008.
Equity in Income (Loss) of Affiliate
     We account for our ownership interests in companies in which we own at least 20% and less than 50% using the equity method of accounting. Under the equity method, we record our portion of the entities’ net income or net loss in our consolidated statements of operations. As of July 31, 2008, the carrying value of our investment of $373,000 was for our 30% ownership in a Chinese company.
Reorganization items
                         
    Three Months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Reorganization items
  $ 183       n/a     $  —  
                         
    Nine months Ended July 31,
    2008   Change   2007
    (Dollars in thousands)
Reorganization items
  $ 1,662       n/a     $  —  
     Reorganization expense consists of legal and professional fees associated with our Chapter 11 bankruptcy and development of a reorganization plan.

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Other Income (Expense), net
     Other income (expense) included the following components for the three and nine months ended July 31, 2008 and 2007:
                         
    Three Months Ended July 31,  
    2008     Change     2007  
    (Dollars in thousands)  
Interest expense
  $ (925 )     n/a     $  
Interest income
    14       (88 )%     112  
 
                       
Other income (expense), net
    (6 )     n/a       20  
 
                   
Total
  $ (917 )           $ 132  
 
                   
                         
    Nine Months Ended July 31,  
    2008     Change     2007  
    (Dollars in thousands)  
Interest expense
  $ (925 )     n/a     $  
Interest income
    115       (67 )%     351  
 
                       
Other income (expense), net
     503       n/a       29  
 
                   
Total
  $ (307 )           $ 380  
 
                   
     Interest expense for the three months and nine months ended July 31, 2008 is due to the interest assessed in the July 16, 2008 court order in the Novell litigation as mentioned in Recent Developments.
     Interest income decreased by $98,000 for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and decreased by $236,000 for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007 and was primarily attributable to lower cash and available-for-sale marketable securities balances.
     Other income (expense), net, decreased $26,000 for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and increased $474,000 for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. The nine month increase was primarily attributable to a realized gain as a result of a sale of intellectual property.
Benefit (Provision) for Income Taxes
     The benefit (provision) for income taxes was a $6,000 tax benefit for the three months ended July 31, 2008 and a $28,000 tax provision for the three months ended July 31, 2007, and was a $151,000 tax provision for the nine months ended July 31, 2008 and a $221,000 tax provision for the nine months ended July 31, 2007. Our benefit (provision) for income taxes is primarily related to earnings in foreign subsidiaries as well as from withholding taxes on revenue generated in certain foreign locations.
Liquidity and Capital Resources
     Our cash and cash equivalents balance decreased from $5,554,000 as of October 31, 2007 to $2,117,000 as of July 31, 2008. As of July 31, 2008, we also had $2,680,000 of restricted cash, of which $1,639,000 is set aside to cover expert and other costs related to the SCO Litigation and $1,041,000 payable to Novell for royalties earned by Novell post bankruptcy petition.
     We intend to use the cash as of July 31, 2008 to run our UNIX business and pursue the SCO Litigation, and believe that we have sufficient liquidity resources to fund our operations through at least April 30, 2009. However, as a result of both the Court’s August 10, 2007 order and our entry into Chapter 11, among other matters, there is substantial doubt about our ability to continue as a going concern.
     We are operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of our business as a going concern is contingent upon, among other things, our ability to (i) construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) achieve profitability; (iv) achieve sufficient cash flows from operating activities; and (v) obtain financing sources to meet our future obligations. These matters as well as the aforementioned ruling in favor of Novell create substantial doubt about our ability to continue as a going concern.

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     Our net cash used in operating activities during the nine months ended July 31, 2008 was $3,602,000 and was attributable to a net loss of $7,623,000, and a net decrease in operating assets and liabilities of $107,000, partially offset by increase in liabilities subject to compromise of $3,343,000 for Novell under the court order as full discussed in Recent Developments and by non-cash items of $785,000.
     Our net cash used in operating activities during the nine months ended July 31, 2007 was $690,000 and was attributable to a net loss of $4,565,000, partially offset by a net increase in operating assets and liabilities of $2,309,000 and non-cash items of $1,566,000.
     Our investing activities have historically consisted of equipment purchases and the purchase and sale of available-for-sale marketable securities. During the nine months ended July 31, 2008, cash provided by investing activities was $104,000, which was from distributions from our 30% ownership in a Chinese company of $114,000, partially offset by the purchases of equipment of $10,000.
     During the nine months ended July 31, 2007, cash provided by investing activities was $2,168,000, which was primarily a result of proceeds from the sale of available-for-sale marketable securities of $2,249,000, offset by purchases of equipment of $81,000.
     Our financing activities provided $22,000 of cash during the nine months ended July 31, 2008, which were generated from proceeds received from the sale of common stock through our employee stock purchase plan.
     Our financing activities provided $493,000 of cash during the nine months ended July 31, 2007. The primary sources of cash were from the exercise of options to acquire common stock of $57,000 and proceeds of $436,000 received from the sale of common stock through our employee stock purchase plan.
     Our net accounts receivable balance decreased from $3,365,000 as of October 31, 2007 to $2,592,000 as of July 31, 2008, primarily as a result of lower sales (and related invoicing) generated during the three months ended July 31, 2008 as compared to the three months ended October 31, 2007. The majority of our accounts receivable are current and our allowance for doubtful accounts was $124,000 as of July 31, 2008, which represented approximately 5 percent of our gross accounts receivable balance. Our write-offs of uncollectible accounts during the three and nine months ended July 31, 2008 and 2007 were not significant.
     We are continuing to pay for expert, consulting and other expenses relating to the SCO Litigation. These expenses have been material in the past and even though we expect these expenses to be lower for the year ending October 31, 2008 as compared to the year ended October 31, 2007, we expect them to continue to be material to our financial statements.
     In addition to the cash expenditures mentioned above, we may pay one or more contingency fees upon certain amounts we or our stockholders may receive as a result of a settlement, judgment, or a sale of our company. On October 31, 2004, we entered into an engagement agreement (the “Engagement Agreement”) with Boies, Schiller & Flexner LLP, Kevin McBride and Berger Singerman P.A. (the “Law Firms”). This Engagement Agreement superseded and replaced the original engagement agreement that was entered into in February 2003. The Engagement Agreement governs the relationship between the Law Firms and us in connection with the Law Firms’ representation of us in the SCO Litigation. Berger Singerman P.A. was a member of this group of Law Firms. With our consent, the engagement of this firm was mutually terminated. The last payment received by Berger Singerman P.A. was on November 24, 2004. Further, Berger Singerman P.A. waived its rights under the Engagement Agreement upon the parties’ agreement for Berger Singerman P.A. to represent the Debtors in their bankruptcy cases.
     We may pay one or more contingency fees upon certain amounts that we or our stockholders may receive as a result of a settlement, judgment or a sale of the company. The contingency fee amounts payable to the Law Firms (which no longer includes Berger Singerman P.A.) will be, subject to certain credits and adjustments, as follows:
    33 percent of any aggregate recovery amounts received up to $350,000,000, reduced by all professional fees previously paid relating to these proceedings;
 
    plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or equal to $700,000,000;
 
    plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.

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     The Engagement Agreement provides that, except for the compensation obligations specifically described above, we will not be obligated to pay any legal fees, whether hourly, contingent or otherwise, to the Law Firms, or any other law firms that may be engaged by the Law Firms, in connection with the SCO Litigation through the end of the current litigation between us and IBM, including any appeals.
Contractual Obligations
     We have entered into operating leases for our corporate offices located in the United States and our international sales offices. We have commitments under these leases that extend through the year ending August 31, 2013.
     The following table summarizes our contractual operating lease obligations as of July 31, 2008:
                                         
            Less than                   More than
    Total   1 year   1 — 3 years   3 — 5 years   5 years
    (In thousands)
Operating lease obligations
  $ 1,414     $ 216     $ 768     $ 430     $  —  
     As of July 31, 2008, we did not have any long-term debt obligations, purchase obligations or material capital lease obligations.
     Our ability to reduce costs to offset revenue declines in our UNIX business is limited because of contractual commitments to maintain and support our existing UNIX customers. The decline in our UNIX business may be accelerated if industry partners withdraw their support as a result of the SCO Litigation. In addition, the SCO Litigation may cause industry partners, developers and hardware and software vendors to choose not to support or certify to our UNIX operating system products. This would lead to an accelerated decline in our UNIX products and services revenue. If our UNIX products and services revenue is less than expected, our liquidity will be adversely impacted.
     In the event that cash required to fund operations and strategic initiatives exceeds our current cash resources, we will be required to reduce costs and perhaps raise additional capital. We may not be able to reduce costs in a manner that does not impair our ability to maintain our UNIX business and pursue the SCO Litigation. We may not be able to raise capital for any number of reasons, including those listed under the section “Risk Factors” under Part II, Item 1A of this Form 10-Q. If additional equity financing is available, it may not be available to us on favorable terms or at all and may be dilutive to our existing stockholders. In addition, if our stock price declines, we may not be able to access the public equity markets on acceptable terms, if at all. Our ability to effect acquisitions for our common stock would also be impaired. The restructuring imposed by the Bankruptcy Court may also adversely affect our ability to raise debt or equity capital. Our delisting from NASDAQ will also impair our ability to raise capital.
Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition
     With the exception of historical facts, the statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current expectations and beliefs regarding our future results of operations, performance and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These forward-looking statements include, but are not limited to, statements concerning:
    Our intention to shortly file papers arguing for the entry of final judgement;
 
    Our intention to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order, and our belief concerning the strength of our potential appeal;
 
    Our belief that the undiscounted future cash flows generated by us will be sufficient to recover the carrying amounts of our long-lived assets over their expected remaining useful lives;
 
    Our intention to maintain business operations throughout the reorganization process;

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    Our intention to use our cash, restricted cash and subsequent cash inflows to meet our working capital needs throughout the reorganization process;
 
    Our intention to continue operating and to file a plan of reorganization with the Bankruptcy Court;
 
    Our intention to vigorously defend legal claims and counterclaims brought against us by others;
 
    Our intention to continue to pursue the SCO Litigation;
 
    Our belief that our allowance for doubtful accounts receivable is adequate and that write-offs of uncollectible accounts will not materially exceed that allowance;
 
    The strength of our intellectual property rights and contractual claims regarding UNIX generally and specifically the strength of our claim that unauthorized UNIX source code and derivatives of UNIX source code are prevalent in Linux;
 
    Our belief that competition from Linux will continue during the year ending October 31, 2008 and future periods;
 
    Our expectation that for the three months ending October 31, 2008, the dollar amount of sales and marketing expense will be generally consistent with that incurred during the three months ended July 31, 2008;
 
    Our expectation that for the three months ending October 31, 2008, the dollar amount of research and development expenses will be generally consistent with that incurred during the three months ended July 31, 2008;
 
    Our expectation that for the three months ending October 31, 2008, the dollar amount of general and administrative expenses will be generally consistent with that incurred during the three months ended July 31, 2008;
 
    Our expectation that we will continue to be unable to predict the amount and timing of SCOsource revenue, and when generated, the revenue will be sporadic and dependent on the outcome of the SCO Litigation;
 
    Our expectation that future services revenue will depend in part on our ability to generate UNIX products revenue from new customers as well as the renewal of annual support and services agreements from existing UNIX customers;
 
    Our expectation that for the year ending October 31, 2008 our total UNIX revenue will decline from UNIX revenue generated in the year ended October 31, 2007 as a result of continued competition and negative publicity;
 
    Our intention to use cash to run our UNIX business and pursue the SCO Litigation;
 
    Our belief that we have sufficient liquidity resources to fund our operations through at least April 30, 2009;
 
    Our intention to continue to pay for expert, consulting and other expenses through the conclusion of our litigation with IBM, and our expectation that although these expenses are expected to decrease for the year ending October 31, 2008 as compared to the year ended October 31, 2007, that they will continue to be material to our financial statements;
 
    Our expectation for the three months ending October 31, 2008 that because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses is difficult to predict, and will be difficult to predict for the upcoming quarters; and
 
    Our belief that certain legal actions to which we are a party will not have a material adverse effect on us.
     We wish to caution readers that our operating results are subject to various risks and uncertainties that could cause our actual results and outcomes to differ materially from those discussed or anticipated, including confirmation of a plan of reorganization, the outcomes and developments in our Chapter 11 bankruptcy case, court rulings in the bankruptcy proceedings, the impact of the bankruptcy proceedings or other pending litigation, developments in our litigation, our cash balances and available cash, continued competitive pressure on the Company’s operating system products, which could impact the Company’s results of operations, adverse developments in and increased or unforeseen legal costs related to the Company’s litigation, the inability to devote sufficient resources to the development and marketing of the Company’s products, including the Me Inc. mobile services and development platform, and the possibility that customers and companies with whom the Company has formed partnerships will decide to terminate or reduce their relationships with the Company, and the factors set forth below in Part II, Item 1A-Risk Factors. We also wish to advise readers not to place any undue reliance on the forward-looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Foreign Currency Risk. We have foreign offices and operations in Europe and Asia. As a result, a portion of our revenues are derived from sales to customers outside the United States. Our international revenues are primarily denominated in U.S. dollars, Euros and United Kingdom Pounds. Most of the operating expenses related to our foreign-based operations are denominated in foreign currencies and therefore operating results are affected by changes in the U.S. dollar exchange rate in relation to foreign currencies such as the Euro, among others. If the U.S. dollar weakens compared to the Euro and other currencies, our operating expenses for foreign operations will be higher when translated back into U.S. dollars. Our revenues can also be affected by general economic conditions in the United States, Europe and other international markets. Our results of operations may be affected in the short term by fluctuations in foreign currency exchange rates.
     Interest Rate Risk. The primary objective of our cash management strategy is to invest available funds in a manner that assures safety and liquidity and maximizes yield within such constraints. We believe that a hypothetical movement in interest rates, either up or down of up to 2%, would not have a material adverse impact on our cash. We do not borrow money for short-term investment purposes.
     Investment Risk. We have historically invested in equity instruments of privately held and public companies in the technology industry for business and strategic purposes. Investments are accounted for under the cost method if our ownership is less than 20 percent and we are not able to exercise influence over operations. We account for our ownership interests in companies in which we own at least 20% and less than 50% using the equity method of accounting. Under the equity method, we record our portion of the entities’ net income or net loss in our consolidated statements of operations. Our investment policy is to regularly review the assumptions and operating performance of these companies and to record impairment losses when events and circumstances indicate that these investments may be impaired. As of July 31, 2008, we did not hold any cost method investments. As of July 31, 2008, the carrying value of our equity method investment of $373,000 was for our 30% ownership in a Chinese company.
ITEM 4. CONTROLS AND PROCEDURES
     Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
     Changes in internal control over financial reporting. During the most recent fiscal quarter covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     Certain legal proceedings in which we are involved are discussed in Part I, Item 3, of our Annual Report on Form 10-K for the year ended October 31, 2007. In addition, for more information regarding our legal proceedings, please see Note 3 included in Part 1, Item 1. Unaudited Financial Statements — Notes to Condensed Consolidated Financial Statements, which information is incorporated herein by reference. We have included disclosure updating legal proceedings below:
     Novell, Inc. Ruling. On August 10, 2007, the federal judge overseeing our lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or eliminate certain of our claims in both the Novell case (the “Novell Litigation” and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and the Santa Cruz Operations (the “APA”), and that Novell retained broad rights to waive our contract claims against IBM. The Court also ruled that we

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own the copyrights to post APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.
     The trial of these issues, however, was automatically stayed as a result of our filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of our alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the bankruptcy stay applies to the SuSE arbitration proceeding pending in Europe. Upon the partial lifting of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court lifted the stay, which started on April 29, 2008 and concluded on May 2, 2008.
     From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements, as explained above. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.
     On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.
     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.
IPO Class Action Matter
     In July 2001, we and several of its former officers and directors (the “Individual Defendants”) were named as defendants in class action complaints alleging violations of the federal securities laws in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed a Consolidated Amended Complaint, which is now the operative complaint. The complaint seeks unspecified damages and alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs allege that the underwriter defendants agreed to

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allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Registration Statement for the Company’s initial public offering was false and misleading because it did not disclose these arrangements.
     The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss with respect to us.
     On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six “focus” cases, which are intended to serve as test cases. Plaintiffs selected these six cases, which do not include us. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.
     Prior to the Second Circuit’s December 5, 2006 ruling, a majority of the issuers, including us, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed by the plaintiffs and the issuers terminating the proposed settlement. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The amended complaints include a number of changes, such as changes to the definition of the purported class of investors, and the elimination of the individual defendants as defendants. On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them. On March 26, 2008, the district court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. We are awaiting a decision from the Court on the class certification motion.
     Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of this matter. We have notified our underwriters and insurance companies of the existence of the claims. We presently believes, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on our results of operations, liquidity or financial position and will not exceed the $200,000 self-insured retention already paid or accrued by us.
ITEM 1A. RISK FACTORS
     Investing in our securities involves a high degree of risk. In addition to the other information contained in this Form 10-Q, you should consider the following risk factors before investing in our securities.
We do not have a history of profitable operations and our cash resources are limited.
     For the years ended October 31, 2007, 2006 and 2005, we incurred net losses applicable to common stockholders of $6,826,000, $16,598,000 and $10,726,000, respectively, and for the nine months ended July 31, 2008 we incurred a net loss of $7,623,000. As of July 31, 2008, our accumulated deficit was $265,989,000.
     If our revenues from the sale of our UNIX products and services continue to decline, or if we continue to devote significant cash resources to the SCO Litigation, we will need to further reduce operating expenses to generate positive cash flows. On January 31, 2008, in an effort to reduce ongoing operating expenses and to conform our business to our current objectives and opportunities, we began the implementation of a reduction in force. We reduced our workforce by 25 positions or a reduction of approximately 21% of our total workforce and this reduction was completed in April 2008. We may not be able to further reduce operating expenses without damaging our ability to support our existing UNIX business. Additionally, we may not be able to achieve profitability through additional cost-cutting actions.
     As of July 31, 2008, we had a total of $2,117,000 in cash and an additional $2,680,000 of restricted cash of which $1,639,000 is to be used to pursue the SCO Litigation. Since October 31, 2004, we have spent a total of $13,361,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with our legal counsel in the SCO Litigation. Our limited cash resources may not be sufficient to fund continuing losses from operations and the expenses of the SCO Litigation.

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A long period of operating under Chapter 11 may harm our business.
     A long period of operating under Chapter 11 could adversely affect our business and operations. So long as the Chapter 11 cases continue, our senior management will be required to spend a significant amount of time and effort dealing with the bankruptcy reorganization instead of focusing exclusively on business operations. A prolonged period of operating under Chapter 11 may also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to successfully reorganize our businesses and seek to establish alternative commercial relationships.
     Furthermore, so long as the Chapter 11 cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the cases. A prolonged continuation of the Chapter 11 cases may also require us to seek financing. If we require financing during the Chapter 11 cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our businesses may be seriously jeopardized.
We may not be able to obtain confirmation of our Chapter 11 plan; we may not be able to emerge from Bankruptcy and we may be liquidated.
     To successfully emerge from Chapter 11 bankruptcy protection as a viable entity, one must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization (the “Plan”), soliciting and obtaining the requisite acceptances of the Plan, and fulfilling other statutory conditions for confirmation. We may not receive the requisite acceptances to confirm the Plan. Even if the requisite acceptances of the Plan are received, the Bankruptcy Court may not confirm the Plan.
     On February 29, 2008, we filed the Plan and Disclosure Statement with the United States Bankruptcy Court. The Plan is subject to, among other conditions, Bankruptcy Court approval. A hearing for approval of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding our progress towards a new Memorandum of Understanding (“MOU”) with Stephen Norris Capital Partners, LLC. Therefore, we indicated that we were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU.
     On May 12, 2008, we filed a motion seeking an extension of our exclusive period to submit and solicit acceptance to an amended or new plan of reorganization. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of our exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion is scheduled for September 16, 2008. If our motion is denied, creditors may file their own proposed plans of reorganization. Plans filed by creditors may be less favorable to our stockholders.
     If we lose our motion to extend the exclusive period to file our Plan or if our Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if anything, holders of claims against us would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that our bankruptcy proceeding could be converted to a liquidation under Chapter 7 and we would have to liquidate our assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if we were to emerge as a viable, reorganized entity and stockholders would likely receive nothing from the liquidation.
A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock.
     Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. No assurance can be provided regarding the date any plan or plans of reorganization will be proposed, confirmed or consummated or regarding when any distributions could be made to parties in interest. A plan of reorganization could result in holders of our common stock receiving no distribution on account

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of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of our equity security holders. Therefore, an investment in our common stock is highly speculative.
Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.
     Under the Bankruptcy Code, all debtors must obtain Bankruptcy Court approval to, among other things:
    sell assets outside the ordinary course of business;
 
    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
 
    obtain financing secured by the Company’s assets.
     In addition, if a trustee is appointed to operate the Debtors in Chapter 11 (or the case is converted to a case under Chapter 7), the trustee would assume control of our assets, including the SCO Litigation.
     We have suffered a significant setback in our lawsuit with Novell that has significantly limited our claims and raises substantial doubt about our ability to continue as a going concern and we may not prevail in our lawsuits with IBM, Novell and others.
     On August 10, 2007, the Court ruled in favor of Novell on several of the summary judgment motions that were pending. The effect of these rulings was to significantly reduce or to eliminate certain of our claims in both the Novell and IBM cases, and possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the APA and that Novell retained broad rights to waive our contract claims against IBM. The Court ruled that we own the copyrights to post-APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.
     The trial of these issues, however, was automatically stayed as a result of our filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court in Utah on the allocation of proceeds from the SCOsource agreements and the question of SCO’s alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell.
     On April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and whether we had the authority to enter into those agreements. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell, therefore, reduced the principal amount of its claim to $19,979,561. The Court also held oral argument on the motions filed by us and Novell. After the trial and arguments the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.
     On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

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     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under the 2003 SCOsource agreement, Novell agreed that only $625,487 of SCO’s current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.
     As a result of this order from the Court, we have accrued $3,473,000 for this contingent liability and related interest. However, we continue to contest this liability. We believe that this order is in error, and that we have strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.
     We intend to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order as soon as Final Judgment is entered upon those orders. However, in the event that our assets are further depleted or frozen, we may not be in a financial position to appeal those rulings.
     Our management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and our entry into Chapter 11, among other factors, there is substantial doubt about our ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.
     Absent a significant cash payment to Novell being required by the final resolution for the aforementioned court order, we believe that the undiscounted future cash flows generated by us will be sufficient to recover the carrying values of our long-lived assets over their expected remaining useful lives. However, if a significant cash payment is required the carrying amount of our long-lived assets may not be recovered.
     The lawsuits with IBM and Novell will continue to be costly. In the event that we are not successful with the IBM or Novell motions, or the continuing litigation requires more cash than expected, our business and operations would be materially harmed.
     We must continue to pay for expert, consulting and other expenses through the conclusion of our litigation with IBM and Novell. As we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could further reduce our liquidity position.
If the Court imposes a constructive trust on proceeds of the fiscal year 2003 SCOsource agreements, we may not be able to continue in business.
     On July 16, 2008, the Court overseeing our lawsuit with Novell entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

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     In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2008. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.
     If the Bankruptcy Court imposes a constructive trust in an amount that exceeds our cash and restricted cash, or if the amounts subject to the constructive trust are otherwise significant, we may not be able to continue to operate our business absent confirmation of the Plan.
Our claims relating to our UNIX intellectual property may subject us to additional legal proceedings.
     In August 2003, Red Hat brought a lawsuit against us asserting that the Linux operating system does not infringe our UNIX intellectual property rights and seeking a declaratory judgment for non-infringement of copyrights and non-misappropriation of trade secrets. In addition, Red Hat claims we have engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, and trade libel and disparagement. This case is currently stayed pending the resolution of our suit against IBM and because of the bankruptcy proceedings. If Red Hat is successful in its claim against us, our business and results of operations could be materially harmed.
Our Engagement Agreement with the Law Firms representing us in the SCO Litigation requires us to pay for expert, consulting and other costs, which could harm our liquidity position.
     On October 31, 2004, we entered into an engagement agreement (the “Engagement Agreement”) with Boies, Schiller & Flexner LLP, Kevin McBride and Berger Singerman P.A. (the “Law Firms”). This Engagement Agreement supersedes and replaces the original engagement agreement that was entered into in February 2003. The Engagement Agreement governs the relationship between the Law Firms and us in connection with the Law Firms’ representation of us in the SCO Litigation. Berger Singerman P.A. was a member of this group of Law Firms. With our consent, the engagement of this firm was mutually terminated. The last payment received by Berger Singerman P.A. was on November 24, 2004. Further, Berger Singerman P.A. waived its rights under the Engagement Agreement upon the parties’ agreement for Berger Singerman P.A. to represent the Debtors in their bankruptcy cases.
     We must pay one or more contingency fees upon certain amounts that we or our stockholders may receive as a result of a settlement, judgment or a sale of the company. The contingency fee amounts payable to the Law Firms (which no longer includes Berger Singerman P.A.) will be, subject to certain credits and adjustments, as follows:
    33 percent of any aggregate recovery amounts received up to $350,000,000, reduced by all professional fees previously paid with respect to these proceedings;
 
    plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or equal to $700,000,000;
 
    plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.
     The Engagement Agreement specifically provides that, except for the compensation obligations specifically described above, we will not be obligated to pay any legal fees, whether hourly, contingent or otherwise, to the Law Firms, or any other law firms that may be engaged by the Law Firms, in connection with our SCO Litigation through the end of the current litigation between us and IBM, including any appeals.
     On June 5, 2006, we entered into an amendment to the Engagement Agreement and agreed with the Law Firms to deposit an additional $5,000,000 into the escrow account to cover additional expert, consulting and other expenses. During October 2006, we deposited an additional $5,000,000 into the escrow account. In the event that we exhaust these funds, we must continue to pay for

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expert, consulting and other expenses through the conclusion of our litigation with IBM. As we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could further reduce our liquidity position. As of July 31, 2008, we had a total of $2,117,000 in cash and an additional $2,680,000 of restricted cash of which $1,639,000 is to be used to pursue the SCO Litigation. From October 31, 2004 through July 31, 2008, we have spent a total of $13,361,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with the Law Firms in the SCO Litigation. In light of the Chapter 11 filings, the payment of fees under the Engagement Agreement to the Law Firms (other than Berger Singerman P.A.) is subject to Bankruptcy Court approval.
Developments in the SCO Litigation and fluctuations in our operating results or the failure of our operating results to meet the expectations of public market analysts and investors may negatively impact our stock price and our ability to continue in business.
     Developments in the SCO Litigation and fluctuations in our operating results or our failure to meet the expectations of analysts or investors, even in the short-term, could cause our stock price to decline significantly. Because of the potential for fluctuations in our expenses related to the SCO Litigation in any particular period, you should not rely on comparisons of our results of operations as an indication of future performance.
     Factors that may affect our results include:
    our ability to operate effectively under Chapter 11 protection and changes in business attitudes toward UNIX as a viable operating system compared to other competing operating systems, especially Linux, as well as the possibility that the automatic stay triggered by our Chapter 11 filing will be lifted or modified, and a constructive trust will be imposed upon our cash in a significant amount or the failure to confirm our reorganization plan;
 
    the outcome of pending litigation with Novell and pending motions for summary judgment in our lawsuit with IBM and Novell, adverse rulings relating to IBM’s and Novell’s counterclaims, and results of, developments in, or costs of the SCO Litigation as well as adverse publicity regarding our business and the SCO Litigation;
 
    changes in general economic conditions, such as recessions, that could affect capital expenditures in the software industry;
 
    the interest level of resellers in recommending our UNIX business solutions to end users and the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors;
 
    the contingency and other costs we may pay to the Law Firms representing us in our efforts to establish and defend our intellectual property rights;
 
    changes in attitudes of customers and partners due to the decline in our UNIX business and our position against the inclusion of our UNIX code and derivative works in Linux; and
 
    the activities of short sellers.
     We also experience fluctuations in operating results in interim periods in Europe and the Asia Pacific regions due to seasonal slowdowns and economic conditions in these areas. Seasonal slowdowns in these regions typically occur during the summer months.
     As a result of the factors listed above and elsewhere, it is possible that our results of operations may be below the expectations of public market analysts and investors in any particular period. This could cause our stock price to decline. If revenue falls below our expectations, and we are unable to quickly reduce our spending in response, our operating results will be lower than expected. Our stock price may fall in response to these events. Our common stock may be worthless unless our confirmed plan of reorganization results in full payment of all creditor claims, of which there can be no assurance.
     For a further description of recent developments in our litigation with Novell, see Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments, Novell, Inc. Ruling. For a further description of the risks we face as a result of filing for Chapter 11, see A long period of operating under Chapter 11 may harm our business, We may not be able to obtain confirmation of our Chapter 11 plan, A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock, and Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.

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If we are unable to retain key personnel in an intensely competitive environment, our operations could be adversely affected.
     We need to retain our key management, technical and support personnel. Competition for qualified professionals in the software industry is intense, and departures of existing personnel could be disruptive to our business and might result in the departure of other employees. During October 2006, and in January 2008, we were required to reduce our operating expenses and eliminated certain positions within our worldwide workforce in an effort to reduce operating costs. The loss or departure of any officers or key employees could harm our ability to implement our business plan and could adversely affect our operations. Our future success depends to a significant extent on the continued service and coordination of our management team. For a discussion of the risks we face in attracting and retaining employees due to our Chapter 11 filing, see A long period of operating under Chapter 11 may harm our business.
We operate in a highly competitive market and face significant competition from a variety of current and potential sources; many of our current and potential competitors have greater financial and technical resources than we do; thus, we may fail to compete effectively.
     In the operating system market, our competitors include IBM, Red Hat, Novell, Sun, Microsoft, and other UNIX and Linux distributors. These and other competitors are aggressively pursuing the current UNIX operating system market. Many of these competitors have access to substantially greater resources than we do. The major competitive alternative to our UNIX products is Linux. The expansion of our competitors’ offerings may restrict the overall market available for our UNIX products, including some markets where we have been successful in the past.
     Our future success may depend in part on our ability to continue to meet the increasing needs of our customers by supporting existing and emerging technologies. If we do not have the resources to enhance our products to meet these evolving needs, we may not remain competitive and be able to sustain our business. Additionally, because technological advancement in the UNIX operating system market and alternative operating system markets is progressing at an advanced pace, we will have to develop and introduce enhancements to our existing products and any new products on a timely basis to keep pace with these developments, evolving industry standards, changing customer requirements and keeping current on certifications. Our failure to meet any of these and other competitive pressures may render our existing products and services obsolete, which would have an adverse impact on our revenues and operations.
     The success of our UNIX business will depend on the level of commitment and certification we receive from industry partners and developers. In recent years, we have seen hardware and software vendors as well as software developers turn their certification and application development efforts toward Linux and elect not to continue to support or certify to our UNIX operating system products. If this trend continues, our competitive position will be adversely impacted and our future revenues from our UNIX business will decline. The decline in our UNIX business may be accelerated if industry partners withdraw their support from us for any reason, including our SCO Litigation.
If the market for UNIX continues to contract, our business will be harmed.
     Our revenues from the sale of UNIX products have declined over the last several years. This decrease in revenues has been attributable primarily to increased competition from other operating systems, particularly Linux, and from the negative publicity we have received from the SCO Litigation. Our sales of UNIX products and services are primarily to existing customers. If the demand for UNIX products continues to decline, and we are unable to develop UNIX products and services that successfully address a market demand, our UNIX revenues will continue to decline, industry participants may not certify to our operating system and products, we may not be able to attract new customers or retain existing customers and our business and results of operations will be adversely affected. Additionally, with the recent adverse summary judgment rulings in our lawsuit with Novell and our entry into Chapter 11, customers may likely determine to no longer buy our products and services. Because of the long adoption cycle for operating system purchases and the long sales cycle of our operating system products, we may not be able to reverse these revenue declines quickly.
We may lose the support of industry partners leading to an accelerated decline in our UNIX products and services revenues.
     The decline in our UNIX business, the recent rulings in our lawsuit with Novell and our filing for protection under Chapter 11 may cause industry partners, developers, customers and hardware and software vendors to choose not to support or certify to our

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UNIX operating system products. This would lead to an increased decline in our UNIX products and services revenues and would adversely impact our results of operations and liquidity.
We rely on our indirect sales channel for distribution of our products, and any disruption of our channel at any level could adversely affect the sales of our products.
     We have a two-tiered distribution channel. The relationships we have developed with resellers allow us to offer our products and services to a much larger customer base than we would otherwise be able to reach through our own direct sales and marketing efforts. Some solution providers also purchase solutions through our resellers, and we anticipate they will continue to do so. Because we usually sell indirectly through resellers, we cannot control the relationships through which resellers, solution providers or equipment integrators purchase our products. In turn, we do not control the presentation of our products to end users. Therefore, our sales could be affected by disruptions in the relationships between us and our resellers, between our resellers and solution providers, or between solution providers and end users. Also, resellers and solution providers may choose not to emphasize our products to their customers. Any of these occurrences could diminish the effectiveness of our distribution channel and lead to decreased sales.
     Our foreign-based operations and sales are subject to the imposition of governmental controls and taxes and fluctuations in currency exchange rates that could hurt our results.
     We have employees or contractors in certain locations in Europe, the Middle East, Latin America, and Asia. These foreign operations are subject to certain inherent risks, including:
    potential loss of developed technology through piracy, misappropriation, or more lenient laws regarding intellectual property protection;
 
    imposition of governmental controls, including trade restrictions and other tax requirements;
 
    fluctuations in currency exchange rates and economic instability;
 
    longer payment cycles for sales in foreign countries;
 
    seasonal reduction in business activity; and
 
    substantial wind down and severance expenses that local law may require be paid in connection with any termination of our overseas operations.
     In addition, certain of our operating expenses are denominated in local currencies, creating risk of foreign currency translation losses that could reduce our financial results and cash flows. When we generate profits in foreign countries, our effective income tax rate is increased.
     During the three months ended April 30, 2004, our India office was assessed withholding taxes by the Government of India Income Tax Department. The Tax Department assessed a 15% withholding tax on certain revenue transactions in India that the Tax Department deemed royalty revenues under the Income Tax Act. We have filed an appeal with the Tax Department and believe that revenue from our packaged software does not qualify for royalty treatment and therefore would not be subject to withholding tax. However, we may be unsuccessful in our appeal against the Tax Department and be obligated to pay the assessed taxable amounts. Because of our international operations, we may be subject to additional withholding or other taxes from other international jurisdictions.
We have lost our listing on the Nasdaq Capital Market as a result of our bankruptcy filing and the loss of our listing has made our stock significantly less liquid and has significantly reduced its value.
     As a result of our having filed for protection under Chapter 11 of the U.S. Bankruptcy Code, Nasdaq has used its authority under Marketplace Rules 4300, 4450(f) and IM-4300 to delist our securities from The Nasdaq Capital Market.
     Upon delisting from the Nasdaq Capital Market, our stock is traded on the Pink Sheets. In order to trade on the Pink Sheets, there must be market makers for our stock. Without a number of market makers in our stock, our stock would be less liquid than it would

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otherwise be, and the value of our stock could decrease. In addition, compliance with the rules and regulations of the Exchange Act relating to “penny stocks” may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them.
Our stock price is volatile.
     The trading price for our common stock has been volatile during the last several years and our share price has changed dramatically over short periods. We believe that changes in our stock price are affected by the factors mentioned above as well as from changing public perceptions concerning the strength of the SCO Litigation, developments in our Bankruptcy proceedings and other factors beyond our control. Public perception can change quickly and without any change or development in our underlying business or litigation position. An investment in our stock is subject to such volatility and, consequently, is subject to significant risk.
There are risks associated with the potential exercise of our outstanding options.
     As of August 31, 2008, we have issued outstanding options to purchase up to approximately 5,193,000 shares of common stock with an average exercise price of $2.82 per share. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock. Further, the holders of the outstanding stock options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.
Our stock price could decline further because of the activities of short sellers.
     Our stock has attracted significant interest from short sellers. The activities of short sellers could further reduce the price of our stock or inhibit increases in our stock price.
The right of our board of directors to authorize additional shares of preferred stock could adversely impact the rights of holders of our common stock.
     Our board of directors currently has the right, with respect to the 5,000,000 shares of our preferred stock, to authorize the issuance of one or more additional series of our preferred stock with such voting, dividend and other rights as our directors determine. The board of directors can designate new series of preferred stock without the approval of the holders of our common stock. The rights of holders of our common stock may be adversely affected by the rights of any holders of additional shares of preferred stock that may be issued in the future, including without limitation, further dilution of the equity ownership percentage of our holders of common stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock.
Our stockholder rights plan could make it more difficult for a hostile bid for our company or a change of control transaction to succeed at current market prices for our stock.
     We have adopted a stockholder rights plan. The power given to the board of directors by the stockholder rights plan may make it more difficult for a change of control of our Company to occur or for our Company to be acquired if the acquisition is opposed by our board of directors.
ITEM 5. OTHER INFORMATION
     The Company’s lease agreement for its Murray Hill, New Jersey facility with GRE Mountain Heights Property LLC was terminated by the landlord upon exercise of the early termination clause of the agreement. The termination is effective September 18, 2008. The Company is responsible to restore the facility to certain conditions as described in the lease. Management estimates those costs to be approximately $31,000.
     The Company has entered into lease agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for its New Jersey facility. This facility is located in Florham Park, New Jeresy and is for 9,416 square feet. The lease term is for sixty-one months with monthy base rents of $16,629 for months 1-12; $17,263 for month 13; $18,047 for months 14 -37, and $18,832 for months 38 -61.

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ITEM 6. EXHIBITS
     
(a)
  Exhibits
 
   
3.1
  Amended and Restated Certificate of Incorporation of Caldera International, Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.2
  Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding consolidation of outstanding shares (incorporated by reference to Exhibit 3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.3
  Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit 3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)).
 
   
3.4
  Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.5
  Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCO’s Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).
 
   
3.6
  Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
 
   
3.7
  Certificate of Correction correcting the Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
 
   
10.1
  Lease Agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for lease of Florham Park, New Jersey facility.
 
   
31.1
  Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
Date: September 15, 2008  THE SCO GROUP, INC.
 
 
  By:   /s/ Kenneth R. Nielsen    
    Kenneth R. Nielsen   
    Duly Authorized Officer and Chief Financial Officer (Principal Financial and Accounting Officer)   

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EXHIBIT INDEX
     
Exhibit    
Number   Exhibit Description
 
   
3.1
  Amended and Restated Certificate of Incorporation of Caldera International, Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.2
  Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding consolidation of outstanding shares (incorporated by reference to Exhibit 3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.3
  Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit 3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)).
 
   
3.4
  Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
 
   
3.5
  Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCO’s Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).
 
   
3.6
  Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
 
   
3.7
  Certificate of Correction correcting the Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
 
   
10.1
  Lease Agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for lease of Florham Park, New Jersey facility.
 
   
31.1
  Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

48

EX-10.1 2 v43726exv10w1.htm EXHIBIT 10.1 exv10w1
Exhibit 10.1
LEASE AGREEMENT
between
VREELAND SPVEF VENTURE, LLC
Landlord
and
SCO GROUP, INC.
Tenant
Dated: August 5, 2008
Premises: A portion of the Building located at
                                     25 A Vreeland Road, Florham Park, NJ 07932

i


 

TABLE OF CONTENTS
                 
LEASE AGREEMENT     1
 
               
ARTICLE I. BASIC LEASE INFORMATION     1
 
  Section 1.01.   Building:   1
 
  Section 1.02.   Demised Premises:   1
 
  Section 1.03.   Base Rent:   1
 
  Section 1.04.   Security Deposit:   2
 
  Section 1.05.   Term:   2
 
  Section 1.06.   Tenant’s Pro Rata Share:   2
 
  Section 1.07.   Tenant’s Electricity Charge:   2
 
               
ARTICLE II. DEFINITIONS     2
 
  Section 2.01.   Assessed Valuation:   2
 
  Section 2.02.   Base Year:   3
 
  Section 2.03.   Commencement Date:   3
 
  Section 2.04.   Common Area:   3
 
  Section 2.05.   Mortgage:   3
 
  Section 2.06.   Operating Cost Base:   3
 
  Section 2.07.   Operating Year:   3
 
  Section 2.08.   Parking Area:   3
 
  Section 2.09.   Real Estate Tax Base:   3
 
  Section 2.10.   Rent:   3
 
  Section 2.11.   Tax Year:   3
 
  Section 2.12.   Taxes:   4
 
  Section 2.13.   Tenant’s Agents:   4
 
               
ARTICLE III. PREPARATION OF THE DEMISED PREMISES     4
 
  Section 3.01.   Tenant Work:   4
 
  Section 3.02.   Tenant’s Early Access:   5
 
  Section 3.03.   Insurance Covering Work By Tenant:   5
 
  Section 3.04.   No Representation:   5
 
               
ARTICLE IV. TERM     5
 
  Section 4.01.   Term:   5
 
  Section 4.02.   Commencement Date:   5
 
  Section 4.03.   Expiration Date:   6
 
               
ARTICLE V. RENT     6
 
  Section 5.01.   Base Rent:   6
 
  Section 5.02.   Tax Increase Amount:   6
 
  Section 5.03.   Operating Cost Increase Amount:   7
 
  Section 5.04.   Payment of Rent or Additional Rent:   10
 
  Section 5.05.   Security Deposit:   11
 
               
ARTICLE VI. SIGNS     11
 
  Section 6.01.   Building Directory(s) Signage:   11
 
  Section 6.02.   Tenant Door Signage:   12
 
               
ARTICLE VII. REPAIRS, ALTERATIONS, COMPLIANCE, SURRENDER     12
 
  Section 7.01.   Repairs and Maintenance by Landlord:   12
 
  Section 7.02.   Repairs and Maintenance by Tenant:   12
 
  Section 7.03.   Approval by Landlord of Improvements:   12
 
  Section 7.04.   Emergency Repairs:   13
 
  Section 7.05.   Electrical Lines:   13
 
  Section 7.06.   Surrender of Premises:   13
 
               
ARTICLE VIII. SERVICE AND UTILITIES     13
 
  Section 8.01.   Landlord’s Services:   13
 
  Section 8.02.   Electricity:   14
 
               
ARTICLE IX. USE AND OPERATION     15
 
  Section 9.01.   Use:   15
 
  Section 9.02.   Rules and Regulations:   15
 
  Section 9.03.   Restriction on Tenant’s Activities:   15
 
  Section 9.04.   Compliance With Law:   16
 
               
ARTICLE X. TRANSFER OF INTEREST, PRIORITY OF LIEN     16
 
  Section 10.01.   Assignment, Subletting, etc.:   16
 
  Section 10.02.   Subordination:   18
 
  Section 10.03.   Attornment:   18
 
  Section 10.04.   Transfer of Landlord’s Interest:   18
 
  Section 10.05.   Mortgagee’s Rights:   19

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ARTICLE XI. COMMON AREA     19
 
  Section 11.01.   Use of Common Area:   19
 
  Section 11.02.   Landlord’s Rights:   19
 
  Section 11.03.   License Numbers:   20
 
  Section 11.04.   Parking Areas:   20
 
               
ARTICLE XII. DESTRUCTION OR DAMAGE     20
 
  Section 12.01.   Rent Abatement:   20
 
  Section 12.02.   Termination by Landlord:   20
 
  Section 12.03.   Landlord’s Obligation to Rebuild:   21
 
  Section 12.04.   Landlord’s Liability:   21
 
               
ARTICLE XIII. CONDEMNATION     21
 
  Section 13.01.   Definitions:   21
 
  Section 13.02.   Taking of Demised Premises:   21
 
  Section 13.03.   Taking for Temporary Use:   22
 
  Section 13.04.   Disposition of Awards:   22
 
  Section 14.01.   General Insurance:   22
 
  Section 14.02.   Liability Insurance:   22
 
  Section 14.03.   Fire Insurance:   23
 
  Section 14.04.   Worker’s Compensation Insurance:   23
 
  Section 14.05.   Other Insurance:   23
 
  Section 14.06.   Waiver of Subrogation:   23
 
  Section 14.07.   Insurance Rate:   23
 
               
ARTICLE XV. INDEMNIFICATION AND LIABILITY     24
 
  Section 15.01.   Indemnification:   24
 
  Section 15.02.   Waiver and Release:   24
 
  Section 15.03.   Liability of Landlord:   24
 
               
ARTICLE XVI. DEFAULT, REMEDIES     25
 
  Section 16.01.   Default:   25
 
  Section 16.02.   Landlord’s Remedy:   26
 
  Section 16.03.   Landlord’s Re-Entry:   26
 
  Section 16.04.   Landlord’s Additional Remedies:   26
 
  Section 16.05.   Waiver of Right of Redemption:   27
 
  Section 16.06.   Landlord’s Right to Perform for Account of Tenant:   27
 
  Section 16.07.   Additional Remedies, Waivers, etc.:   27
 
  Section 16.08.   Distraint:   27
 
               
ARTICLE XVII. TENANT’S ESTOPPEL CERTIFICATE     27
 
               
ARTICLE XVIII. RIGHT OF ACCESS     28
 
               
ARTICLE XIX. COVENANT OF QUIET ENJOYMENT     28
 
               
ARTICLE XX. ENVIRONMENTAL MATTERS     28
 
  Section 20.01.   Industrial Site Recovery Act:   28
 
               
ARTICLE XXI. MISCELLANEOUS     30
 
  Section 21.01.   Interpretation:   30
 
  Section 21.02.   Construction of Words and Phrases:   30
 
  Section 21.03.   Written Agreement Required:   31
 
  Section 21.04.   Notice:   31
 
  Section 21.05.   Method of Payment:   31
 
  Section 21.06.   Successors and Assigns:   31
 
  Section 21.07.   Guarantor of Tenant:   31
 
  Section 21.08.   Hold Over:   32
 
  Section 21.09.   Interest:   32
 
  Section 21.10.   Late Charge:   32
 
  Section 21.11.   Non-Waiver:   32
 
  Section 21.12.   Broker:   32
 
  Section 21.13.   Short Form Lease:   32
 
  Section 21.14.   Financial Statements:   33
 
  Section 21.15.   Mechanics’ Liens:   33
 
  Section 21.16.   Corporate Authority:   33
 
  Section 21.17.   Force Majeure:   33
 
  Section 21.18.   Governing Law:   33
 
  Section 21.19.   Substituted Premises:   33
 
  Section 21.20.   Renewal Option   34
 
  Section 21.21.   Right of First Offer:   35
EXHIBITS TO LEASE
         
Exhibit A
  Description of the Land   A-1
Exhibit B
  Outline of Demised Premises   B-1
Exhibit C
  Tenant Improvement Workletter   C-1
Exhibit D
  Rules and Regulations   D-1
Exhibit E
  Janitorial Services   E-1
Exhibit F
  Holiday Schedule   F-1
Exhibit G
  Commencement Date Memorandum   G-1

iii


 

LEASE AGREEMENT
     THIS AGREEMENT OF LEASE dated August 5, 2008, between VREELAND SPVEF VENTURE, LLC, a Delaware limited liability company having an office address c/o Bergman Realty Corporation, 555 Route One South, Iselin, New Jersey 08830 (hereinafter called “Landlord”) and SCO GROUP, INC., a                      corporation having an office address of 355 South 520 West, Lindon, Utah 84042 (hereinafter called “Tenant”).
     Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the Demised Premises (hereinafter defined) for the Term (hereinafter defined) and at the rent and on all of the terms and conditions set forth herein. Intending to be legally bound hereunder and in consideration of $1.00 and other good and valuable consideration, Landlord and Tenant hereby agree with each other as follows:
ARTICLE I. BASIC LEASE INFORMATION.
      Section 1.01. Building:
     The Building is located at 25 A Vreeland Road, Florham Park, New Jersey 07932 (‘the Building”) and is part of the two building complex known as FLORHAM PARK CORPORATE CENTER, located at 25 A and B Vreeland Road, Florham Park, New Jersey 07932 (the “Complex”). The Building, Complex and the “Land” (as described in Exhibit A attached hereto) are sometimes referred to collectively as the “Real Estate” or the “Property”.
     Section 1.02. Demised Premises:
     Effective as of the Commencement Date of this Lease (hereinafter defined), the “Demised Premises” shall initially be that portion of the Building leased to Tenant consisting of approximately 9,076 rentable square feet of area (inclusive of allocable Common Areas as defined in Section 2.04 hereof) consisting of (i) approximately 6,830 rentable square feet of area located on the first (1st) floor (the “Initial 1st Floor Premises”), and (ii) approximately 2,246 rentable square feet of area located on the third (3rd) floor (the “3rd Floor Premises”), all as shown outlined in red on the Floor Plan attached hereto as Exhibit B. Effective as of the Expansion Space Effective Date (as defined in Section 4.02 (c) below), the Demised Premises shall be increased by that portion of the Building leased to Tenant consisting of approximately 340 rentable square feet of area located on the first (1st) floor as shown crosshatched and outlined in red on the Floor Plan attached hereto as Exhibit B (the “Expansion Space”) for a total Demised Premises of 9,416 rentable square feet consisting of (i) approximately 7,170 rentable square feet of area located on the first (1st) floor, and (ii) approximately 2,246 rentable square feet of area located on the third (3rd) floor. The Demised Premises includes any alterations, additions or repairs made thereto. This computation of rentable square footage shall be binding and conclusive on the parties, and their successors and assigns.
     Section 1.03. Base Rent:
     Base Rent shall be payable in equal monthly installments as follows (subject to adjustment pursuant to Sections 5.02 and 5.03 hereof):
         
Period   Annual Base Rent   Monthly Base Rent
Months 1 — Expansion Space Effective Date:   $199,672.00   $16,639.33
Expansion Space Effective Date — Month 13:   $207,152.00   $17,262.67
Months 14 — 37:   $216,568.00   $18,047.33
Months 38 — 61:   $225,984.00   $18,832.00
Notwithstanding the foregoing, Tenant shall receive a rent abatement in the amount of $16,639.33 for the first full calendar month of the Term. In the event the Commencement Date (as defined below) shall occur on a day other than the first day of a calendar month, then the Base Rent for that month shall be pro-rated based on a thirty (30) day month.

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     Section 1.04. Security Deposit:
     Tenant has deposited with Landlord the sum of TWO HUNDRED TWENTY-FIVE THOUSAND AND 00/100 ($225,000.00) DOLLARS as the Security Deposit, to be governed by Section 5.05 hereof. Tenant shall have the right to substitute an irrevocable letter of credit (“Letter of Credit”) for the cash security deposit, subject to Landlord’s reasonable approval of (i) the institution or bank issuing said Letter of Credit, and (ii) the form of the Letter of Credit. Provided Tenant is not in default of the Lease, and Tenant has demonstrated a prompt payment record, then Landlord agrees to return a portion of the Security Deposit in the amount of $45,000.00 after each of the thirteenth (13th), twenty-fifth (25th), thirty-seventh (37th) and forty-ninth (49th) months anniversaries of the Commencement Date, which will leave remaining balances of $180,000.00, $135,000.00, $90,000.00 and $45,000.00, respectively, on each of said anniversaries (or in the event Tenant provided a Letter of Credit in lieu of the cash Security Deposit, Landlord shall return the original Letter of Credit to Tenant within thirty (30) days following receipt of a substitute Letter of Credit from Tenant).
     Section 1.05. Term:
     The Term of this Lease shall be sixty-one (61) months plus the remaining number of days in the month on which the Commencement Date (hereinafter defined) occurs if such date is other than the first day of the month. The last day of the Term shall be the Expiration Date (hereinafter defined). The Commencement Date shall be confirmed between Landlord and Tenant by means of a “Commencement Date Memorandum” (attached hereto as Exhibit G).
      Section 1.06. Tenant’s Pro Rata Share:
     Tenant’s Pro Rata Share shall be the ratio of the total rentable square footage of the Demised Premises to the total square footage of the Building. The Landlord and Tenant have determined that Tenant’s Pro Rata Share shall initially be 8.04% based upon the Building rentable area of 112,922 square feet. As of the Expansion Space Effective Date, Tenant’s Pro Rata Share shall be increased by 0.30% (to reflect the addition of the Expansion Space) for a total Tenant’s Pro Rata Share of 8.34%. This determination of Tenant’s Pro Rata Share shall be binding and conclusive on the parties, and their successors and assigns.
     Section 1.07. Tenant’s Electricity Charge:
     Upon the Commencement Date hereof, the Tenant Electricity Charge is based upon the rate of ONE and 75/100 ($1.75/sq.ft.) Dollars per rentable square foot per annum (subject to adjustment pursuant to Section 8.02). The Tenant Electricity Charge shall be payable in monthly installments as follows (subject to adjustment pursuant to Section 8.02):
         
    Annual Tenant’s   Monthly Tenant’s
Period   Electricity Charge   Electricity Charge
Commencement Date — Expansion
Space Effective Date:
  $15,883.00   $1,323.58
Expansion Space Effective Date —
Expiration Date:
  $16,478.00   $1,373.17
ARTICLE II. DEFINITIONS.
     As used herein, the terms below have the following meanings:
      Section 2.01. Assessed Valuation:
     The Assessed Valuation of the Real Estate, including any added and/or omitted assessments, when fully assessed, as such is determined by final administrative proceedings by an appropriate taxing authority.

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     Section 2.02. Base Year:
     The Base Year for determining Tax Increase Amounts and Operating Cost Increase Amounts shall be the calendar year 2008.
     Section 2.03. Commencement Date:
     The target Commencement Date of this Lease shall be September 15, 2008, subject to adjustment pursuant to Section 4.02 hereof.
     Section 2.04. Common Area:
     Without limitation, the hallways, entryways, stairs, vending area, elevators, driveways, sidewalks, parking areas, loading areas, trash facilities, and all other areas and facilities of the Building and the Land provided and designated from time to time by Landlord for the general nonexclusive use and convenience of Tenant with other tenants and their respective employees, invitees, licensees or other visitors.
     Section 2.05. Mortgage:
     Any mortgage, deed to secure debt, trust indenture, or deed of trust which may now or hereafter affect, encumber or be a lien upon the Demised Premises, the Building, the Land, and any spreading agreements, renewals, modifications, consolidations, replacements and extensions thereof. Landlord’s current mortgagee as of the date hereof is: JP Morgan Chase Bank N.A. (“Mortgagee”).
     Section 2.06. Operating Cost Base:
     The total dollar amount of Building Operating Costs incurred during the Base Year.
     Section 2.07. Operating Year:
     Operating Year shall mean any calendar year.
     Section 2.08. Parking Area:
     Those portions of the Real Estate designated for parking by Landlord, which Landlord may assign and re-assign from time to time. As of the Commencement Date, Tenant shall initially be permitted to use a total of thirty-two (32) parking spaces in common with other tenants of the Building to be governed by Section 11.04 hereof, which is based upon a parking ratio of three and a half (3.5) parking spaces for each 1,000 square feet of rentable area then being leased hereunder. As of the Expansion Space Effective Date, Tenant’s parking allocation shall be increased by one (1) parking space to reflect the addition of the Expansion Space, at which time Tenant shall be permitted to use a total of thirty-three (33) parking spaces in common with other tenants of the Building to be governed by Section 11.04 hereof, which is based upon a parking ratio of three and a half (3.5) parking spaces for each 1,000 square feet of rentable area then being leased hereunder.
     Section 2.09. Real Estate Tax Base:
     The dollar amount of real estate taxes payable during the Base Year, determined by multiplying the Assessed Valuation by the tax rate.
     Section 2.10. Rent:
     Base Rent, Tenant’s Electricity Charge, Tax Increase Amount, Extra Taxes, Operating Cost Increase Amount (each as defined herein) and any other charges payable to Landlord hereunder.
     Section 2.11. Tax Year:
     Tax Year shall mean any calendar year.

3


 

     Section 2.12. Taxes:
     All real estate taxes, charges and assessments imposed upon the Real Estate. If any franchise, capital stock, capital gains, rent, income, profit or any other tax or charge shall be substituted in whole or in part for the current ad valorem Taxes now or hereafter imposed upon the Real Estate due to a change in the method of taxation or assessment, such franchise, capital stock, capital gains, rent, income, profit or other tax or charge shall be deemed included as Taxes.
     Section 2.13. Tenant’s Agents:
     Includes Tenant’s employees, servants, licensees, subtenants, assignees, contractors, heirs, successors, legatees, and devisees.
ARTICLE III. PREPARATION OF THE DEMISED PREMISES.
     Section 3.01. Tenant Work:
     (a) Within ten days (10) after the date of this Lease (if applicable), Tenant shall submit to Landlord completed interior design drawings, layouts and interior finish specifications for the preparation of the Demised Premises. Landlord, at its sole cost and expense, shall cause to be prepared all working, detailed construction drawings and specifications for the Tenant Work (as hereinafter defined) which shall become a part of this Lease and referred to as the “Plans and Specifications”. The Tenant Work is described in the Tenant Improvement Workletter annexed hereto as Exhibit C, which sets forth in detail the parties’ understanding regarding the scope of work to be provided to Tenant by Landlord (“Tenant Work”) and consists of the Initial 1st Floor Tenant Improvement Work (as defined in Exhibit C), the 3rd Floor Tenant Improvement Work (as defined in Exhibit C) and the Expansion Space Tenant Improvement Work (as defined in Exhibit C).
     (b) Landlord shall complete the construction of the Tenant Work, in accordance with the Tenant Improvement Workletter, in the following manner:
          (i) Landlord shall arrange for the performance of the 3rd Floor Tenant Improvement Work on or prior to the Commencement Date and shall arrange for the performance of the Initial 1st Floor Tenant Improvement Work and the Expansion Space Tenant Improvement Work after the Commencement Date;
          (ii) Within a reasonable time consistent with the target Commencement Date, after completion of the Plans and Specifications (if required), which shall be approved and initialed by Tenant, Landlord shall apply to the appropriate governmental authorities for any construction permit(s) which may be required in connection with Landlord’s performance of Tenant Work.
          (iii) Within a reasonable time consistent with the target Commencement Date, after the issuance of such construction permit(s), or if no permit is required, within a reasonable time after the execution of this Lease, Landlord shall commence to perform Tenant Work and shall diligently prosecute such work to completion. Landlord shall perform all work provided for in the Plans and Specifications (or in accordance with Exhibit C if no Plans and Specifications are required) in compliance with the applicable Building Codes and in a good and workmanlike manner. Tenant shall advise Landlord immediately in writing of any objection to the performance of the Tenant Work.
          (iv) Landlord shall arrange for any inspections and shall apply for and obtain any Certificate of Occupancy required by any governmental authority.
          (v) If prior to or during construction, Tenant elects to change the scope of Tenant Work (“Work Changes”) and/or Tenant requests additional work (“Additional Work”) other than Tenant Work to be performed in the Demised Premises, then provided such Work Changes or Additional Work adds to Landlord’s estimated costs, Tenant shall pay for any additional costs in advance of the Additional Work or Work Changes and upon receipt of invoice from Landlord.
          (vi) In the event of a default by Tenant in any payment required on account of Tenant’s Work, Work Changes or Additional Work costs prior to Tenant’s occupancy of Demised Premises, Landlord shall, in addition to all other legally allowable remedies, have the same rights as in the case of an Event of Default in Rent under the Lease.

4


 

          (vii) To the extent necessary, Tenant shall be responsible for moving all business equipment, furniture and all personal property (files, wall hangings, valuables, etc.) as may be required in connection with Landlord commencing and performing any of the Tenant Work.
     Section 3.02. Tenant’s Early Access:
     (a) Landlord shall permit Tenant to enter the Demised Premises before the Commencement Date the sole purpose of inspection, and for the installation of Tenant’s telephone, computer or other data communication wiring, equipment and furniture.
     (b) If Tenant is permitted access to the Demised Premises prior to the Commencement Date, it shall be at Tenant’s sole risk. Landlord may, but need not, grant Tenant a license for access to the Demised Premises to Tenant or its workmen to perform Additional Work. If the Tenant’s Agents begin to perform Additional Work, the foregoing license is conditioned upon Tenant’s Agent not interfering with Landlord’s employees and/or agents or the workmen of any other tenant. This license may be withdrawn by Landlord at any time, upon written notice to Tenant if Tenant interferes with Landlord’s prosecution of Tenant’s Work. Such entry shall be subject to all of the terms, covenants, provisions and conditions of this Lease. Landlord shall not be liable in any way for any injury, loss or damage occurring as a result of Tenant’s early access to the Demised Premises. Landlord shall have the right to impose such additional conditions on Tenant’s early entry as Landlord, in its sole discretion, deems appropriate.
     Section 3.03. Insurance Covering Work By Tenant:
     Tenant shall not make or cause to be made any alterations, repairs or installations, or perform Additional Work or any other work to or on the Demised Premises unless Tenant or Tenant’s contractor, shall obtain and have in force during the performance of such work, General Liability and Worker’s Compensation insurance (for each and every contractor performing work in or about the Demised Premises). Such policies shall provide for the coverage amounts described in Section 14.02 hereof, and shall be non-cancelable without ten (10) days prior notice to Landlord by the insurance company. Tenant shall supply Landlord with copies of the Certificates of Insurance.
      Section 3.04. No Representation:
     Landlord has made and makes no representations, covenants or warranties with respect to the Demised Premises, the Building or the Real Estate except as expressly set forth in this Lease.
ARTICLE IV. TERM.
     Section 4.01. Term:
     The Term of this Lease shall commence on the Commencement Date and shall expire on the Expiration Date unless sooner terminated pursuant to the terms hereof.
     Section 4.02. Commencement Date:
     (a) The Commencement Date shall be targeted for the date set forth in Section 2.03 hereof, but shall be the earlier of: (i) the date on which the 3rd Floor Tenant Improvement Work (as defined in Exhibit C) is substantially completed and Tenant can take occupancy of the Demised Premises; or (ii) the day on which Landlord obtains a Certificate of Occupancy (temporary or final) or other form of governmental approval permitting Tenant’s occupancy of the 3rd Floor Premises; or (iii) the day on which Tenant takes occupancy of any portion of the Demised Premises; provided that Landlord is not unreasonably delayed in the completion of 3rd Floor Tenant Improvement Work due to Tenant’s Work Changes to the Plans and Specifications, Additional Work requests or Tenant’s delays in giving necessary approvals, in which case the Commencement Date will be accelerated by the

5


 

number of any such days of delay. Landlord shall inform Tenant of the anticipated date on which it expects to substantially complete the 3rd Floor Tenant Improvement Work and/or receive a Certificate of Occupancy (temporary or final).
     (b) After the commencement of the Term, Landlord and Tenant shall promptly execute, acknowledge and deliver to each other the Commencement Date Memorandum attached hereto as Exhibit G, which confirms the actual Commencement and Expiration Dates of the Lease.
     (c) The Expansion Space Effective Date shall be the earlier of: (i) the date on which the Expansion Space Tenant Improvement Work (as defined in Exhibit C) is substantially completed and Tenant can take occupancy of the Expansion Space; or (ii) the day on which Landlord obtains a Certificate of Occupancy (temporary or final if required) or other form of governmental approval permitting Tenant’s occupancy of the Expansion Space; or (iii) the day on which Tenant takes occupancy of any portion of the Expansion Space; provided that Landlord is not unreasonably delayed in the completion of Expansion Space Tenant Improvement Work due to Tenant’s Work Changes to the Plans and Specifications, Additional Work requests or Tenant’s delays in giving necessary approvals, in which case the Expansion Space Effective Date will be accelerated by the number of any such days of delay. Landlord shall inform Tenant of the anticipated date on which it expects to substantially complete the Expansion Space Tenant Improvement Work and/or receive a Certificate of Occupancy (temporary or final).
     Section 4.03. Expiration Date:
     The Expiration Date shall be the last day of the Term as set forth in Section 1.05 from the Commencement Date. If this Lease is canceled or terminated prior to the Expiration Date by reason of an Event of Default (as hereinafter defined), Tenant’s liability under the provisions of this Lease shall continue as set forth in Article XVI hereof.
ARTICLE V. RENT.
     Section 5.01. Base Rent:
     Tenant shall pay Base Rent to Landlord, in the amount set forth in Section 1.03, without notice or demand, in equal monthly installments beginning on the Commencement Date (except that the first monthly installment shall be due upon the execution of this Lease). If the Commencement Date is a day other than the first day of the month, the first installment shall be prorated for each day commencing with the Commencement Date up to and including the last day of that month. Each subsequent installment shall be due on the first day of each month during the Term. If the Expiration Date occurs on a day other than the last day of any month, Base Rent for the last month of the Term shall be pro-rated in the same manner.
     Section 5.02. Tax Increase Amount:
     (a) As used in this Section, Taxes shall be defined as set forth in Section 2.12.
     (b) In addition to Base Rent and all other charges Tenant is required to pay hereunder, Tenant shall pay the “Tax Increase Amount” (as hereinafter defined) to Landlord as follows:
          (i) If the Taxes for any Tax Year and/or the estimated Taxes for any ensuing Tax Year during the Term of this Lease (after the Assessed Valuation has been established), shall be greater than the Real Estate Tax Base, then Tenant shall pay to Landlord, as Additional Rent and as provided in paragraph (ii) below, the “Tax Increase Amount” determined by multiplying the difference between the Taxes for the applicable Tax Year and the Real Estate Tax Base by Tenant’s Pro Rata Share. Notwithstanding the foregoing, there shall be no Tax Increase Amount due during Tenant’s first twelve (12) months of occupancy.
          (ii) Within ninety (90) days (or as soon as practicable) after Landlord receives the final tax bill(s) for each Tax Year (after and including the year in which the Assessed Valuation has been established), Landlord shall submit to Tenant a statement (the “Tax Statement”), which shall indicate: (i) the total annual Taxes for such Tax Year, (ii) the Tax Increase Amount due for said Tax

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Year, if any, which Tenant shall pay to Landlord within thirty (30) days after the issuance of the Tax Statement (iii) the estimated annual increase (or decrease) in the Taxes for the ensuing Tax Year as reasonably determined by Landlord, (iv) the estimated Tax Increase Amount due from Tenant for the ensuing Tax Year to be paid monthly on a one-twelfth (1/12) basis, together with the Base Rent until the next Tax Statement is issued for the following Tax Year, (v) any overpayment made by Tenant of any estimated Tax Increase Amount for such Tax Year, in which case Landlord shall either refund the excess amount to Tenant, or credit the excess amount against the estimated Tax Increase Amount due for the ensuing Tax Year (to the extent there are any) as shown on the Tax Statement, and (vi) any Extra Taxes due as set forth below. Any Tax Increase Amount for a period of less than a full Tax Year shall be ratably apportioned.
     (c) Tenant shall be liable for any portion of the Taxes, charges and assessments imposed upon the Real Estate during the Term of this Lease which are attributable to extraordinary improvements in the Demised Premises or the Building constructed at Tenant’s expense and for which the taxing authority has assigned an increase in valuation in computing the Assessed Valuation (“Extra Taxes”). Tenant shall pay to Landlord such Extra Taxes within thirty (30) days after issuance of the Tax Statement as set forth above. Any Extra Taxes due for a period of less than a full year shall be ratably apportioned. Tenant shall not be liable for any Extra Taxes attributable to the extraordinary improvements constructed for any other tenant for which the taxing authority has assigned an increase in valuation in computing the Assessed Valuation.
     (d) Tenant’s obligations for payment of Tax Increase Amount or Extra Taxes during the Term shall survive the expiration or early termination of this Lease.
     Section 5.03. Operating Cost Increase Amount:
     (a) Tenant hereby agrees that for each Operating Year during the Term of this Lease for which the Operating Costs (as hereinafter defined) shall be budgeted to exceed the Operating Cost Base (excluding extraordinary and nonrecurring expenses incurred during any Operating Year), Tenant shall pay to Landlord, as Additional Rent and in the manner further provided in this Section 5.03, an amount (the “Operating Cost Increase Amount”) determined by multiplying the difference between the budgeted Operating Costs for the applicable Operating Year and the Operating Cost Base by Tenant’s Pro Rata Share. Within ninety (90) days after the commencement of each Operating Year or as soon as practicable thereafter, except for the Base Year, Landlord shall present to Tenant a statement (the “Operating Statement”) showing, inter alia, the Operating Cost Increase Amount, if any, due hereunder (the date upon which the Operating Statement is presented to Tenant being hereinafter referred to as the “Billing Date”). Within twenty (20) days of the Billing Date Tenant shall pay the ratable portion of the Operating Cost Increase amount for the portion of the Operating Year through and including the last day of calendar month in which such payment is made. Thereafter, Tenant shall pay the Operating Cost Increase Amount monthly on a one-twelfth (1/12) basis which shall be added to and paid simultaneously with the Base Rent. On the next Operating Statement, Landlord will provide the actual Operating Costs for the prior Operating Year. If the actual Operating Costs are greater than the budgeted Operating Costs for that Operating Year (“underpayment”), then Tenant shall pay its Pro Rata Share of the difference to Landlord within thirty (30) days after the Billing Date. If the actual Operating Costs are less than the budgeted Operating Costs for that Operating Year (“overpayment”), but in no event less than the Operating Cost Base, then Landlord shall have the option of either (1) refunding the excess amount to Tenant within thirty (30) days after the Billing Date or (2) crediting the excess amount against the next Operating Cost Increase Amount due, if any, as shown on the Operating Statement. Each Operating Statement shall indicate (i) the Operating Cost Increase Amount for the current year; (ii) the difference between the actual Operating Costs and the budgeted Operating Costs for the preceding Operating Year; (iii) the total Operating Cost Increase Amounts paid by Tenant hereunder for the account of the preceding Operating Year, if applicable; and (iv) the amount of any overpayment or underpayment by Tenant on account of the Operating Increase Amount for the preceding Operating Year. Notwithstanding the foregoing, there shall be no Operating Cost Increase Amount due during Tenant’s first twelve (12) months of occupancy.
     (b) Each Operating Statement furnished by Landlord to Tenant shall be certified by Landlord as true and correct. If Tenant disputes the amount or characterization of any item contained in the Operating Statement by giving written notice thereof to Landlord within ninety (90) days of Tenant’s

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receipt of the Operating Statement, Tenant shall have the right to review Landlord’s books or designate a firm of independent certified public accountants to audit Landlord’s records upon which the Operating Statement is based, provided Tenant pays all sums due as shown on the Operating Statement prior to any audit. Such audit shall be conducted promptly after Tenant’s notice of dispute is given to Landlord. The fee for any audit conducted on Tenant’s behalf shall be borne solely by Tenant, unless the audit discloses that Landlord’s Operating Statement overstated Operating Costs by more than five (5%) percent, in which event Landlord shall forthwith reimburse Tenant for the cost of Tenant’s audit. Landlord shall have the right, at its sole expense, to have Tenant’s audit reviewed by a mutually agreed upon reputable third party certified public accountant, whose determination shall be based upon generally accepted accounting principles and which shall be conclusive and binding on both Landlord and Tenant. If, as a result of Tenant’s inspection of Landlord’s books or the audit of Landlord’s records and review by an independent certified public accountant, an error is discovered in the Operating Statement, Landlord shall revise the Operating Statement accordingly and any overpayment by Tenant shall be refunded by Landlord to Tenant forthwith and any underpayment shall be paid by Tenant on demand. Any audit and subsequent adjustment in payment shall be deemed to be conclusive of settlement of the dispute. If Tenant does not notify Landlord of a dispute within ninety (90) days of receipt of any Operating Statement, Tenant shall be deemed to have accepted Landlord’s Operating Statement.
     (c) The “Operating Costs” shall include each and every expense incurred in connection with the ownership, administration, management, operation, maintenance and repair of the Real Estate, or reasonably charged by Landlord if Landlord performs management services in connection with the Real Estate, including management, consulting, legal and accounting fees, and further, including but not limited to, wages, salaries and fees paid to persons either employed by Landlord or engaged as independent contractors in the operation of the Real Estate, and such other typical items of expense as indicated in Subsection (d) below. If any person or independent contractor is employed with respect to more properties than the Real Estate, the wages, salaries or fees paid therefor shall be allocated based on time spent by such person or contractor on matters relating to the Real Estate or the degree of responsibility for the Real Estate compared to the other properties involved.
     (d) Some of the typical items of expense which comprise or may comprise, the Operating Costs, but not by way of limitation, are or may be the following, but only to the extent that they relate solely or are properly allocated to the Real Estate.
          (i) Repairs and maintenance including the cost of materials and supplies;
          (ii) Utility costs, including but not limited to gas, electricity (other than Tenant Electricity Charges) and water and sewer charges;
          (iii) Cleaning costs, including but not limited to, windows, the Demised Premises and Common Areas;
          (iv) Service contracts including but not limited to elevators, HVAC, janitorial and window cleaning, rubbish removal, exterminating, and towel service;
          (v) Costs of landscaping and snow removal;
          (vi) Cost of decorating and redecorating Common Areas;
          (vii) Wages, salaries and other compensation, including taxes, insurance, retirement, fringe benefits, uniforms payable to employees, but not above the level of Building Manager;
          (viii) Reasonable fees and other compensation payable to independent contractors or other agents of Landlord;
          (ix) Cost of Landlord’s insurance, including but not limited to, fire and extended coverage, public liability and property, rental value insurance (including Base Rent, estimated Tax Increase Amount and estimated Operating Cost Increase Amount), elevator, worker’s compensation, boiler and machinery insurance;

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          (x) Reasonable auditing, accounting, attorneys’ and consultants fees and disbursements incurred in connection with the maintenance and operation of the Real Estate;
          (xi) A reasonable industry standard management fee for providing property management services (3% to 5% of gross building receipts), whether or not performed by Landlord, its employees, agents or servants or performed by an independent management company;
          (xii) Any other expenses of any kind whatsoever reasonably incurred in managing, operating, maintaining and repairing the Real Estate;
          (xiii) The cost, if any, of non-tenant area capital improvements installed by Landlord after the completion of the Building. The cost of any such capital expenditure shall be amortized over the useful life of such improvements, with that portion of the cost attributable to any Operating Year to be included in the Operating Costs for that Operating Year in accordance with generally accepted accounting principles (GAAP); provided, however, that no capital improvements shall be included in the calculation of Operating Costs during the initial Lease Term unless they are (i) are required by reason of laws, codes or ordinances, or (ii) are made in order to reduce Operating Expenses, improve operating efficiencies or are otherwise intended as a cost saving measure; and
          (xiv) The cost of compliance by Landlord with all laws, rules, regulations, ordinances or requirements of the Federal, State or Municipal government, or of any department, subdivision, bureau or office thereof, or of any other governmental, public or quasi-public authorities now existing or hereafter created, provided that the cost thereof shall be amortized over the normal useful life of the improvement(s) made as determined by Landlord in accordance with generally accepted accounting principles.
     (e) The term “Operating Costs” shall not include or be deemed or construed to include:
          (i) Costs incurred in connection with, or to correct defects in, the construction of the Building, the Building’s systems or equipment or the initial development of the Real Estate;
          (ii) Costs for which Landlord is reimbursed by its insurer, any tenant’s insurer, any tenant or under any warranty;
          (iii) Costs attributable to improvements to the Demised Premises or the premises of other tenants in the Building;
          (iv) Costs, expenses or expenditures relating to the enforcement of duties, liabilities or obligations of other tenants in the Building;
          (v) Interest, principal or other payments on mortgages, ground leases or other debt costs;
          (vi) Depreciation on the Building;
          (vii) Taxes;
          (viii) Costs, which are paid directly by any tenant;
          (ix) Cost of Tenant Electricity Charges as defined in Section 8.02(a) for which Landlord is reimbursed by Tenant or any other tenants in the Building; and
          (x) Costs incurred by Landlord to lease space to new tenants or to retain existing tenants, including, without limitation, leasing commissions, space or planning costs, tenant improvement costs or allowances, advertising and promotional expenditures, and legal expenses in connection with lease negotiations.
          (xi) The costs of repairs or restoration necessitated by condemnation or casualty damage, other than a customary deductible;

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          (xii) Expenses incurred by Landlord to resolve disputes, enforce or negotiate lease terms with prospective or existing tenants, or in connection with any financing or sale of the Property;
          (xiii) Landlord’s general partnership or corporate overhead and general administrative expenses, except if it is solely for the Building;
          (xiv) Cost to correct any penalty or fine incurred by Landlord due to Landlord’s violation of any federal, state, or local law or regulation;
          (xv) any bad debt loss, rent loss or reserves for the same;
          (xvi) fees or compensation paid to Landlord, or to Landlord’s subsidiaries or affiliates, for services in or to the Real Estate to the extent that they exceed the competitive market charges for comparable services rendered by an unaffiliated third party of comparable skill, competence and reputation;
          (xvii) Costs arising from the presence of Hazardous Substances (as defined in Article 20 hereof) in, under, on or about the Demised Premises, Building or Real Estate, to the extent such Hazardous Substances were not first deposited thereon by Tenant or any Tenant Agent after the date of this Lease;
          (xviii) Costs incurred to make or install any capital improvements, other than the capital expenditures described in Section 5.03(d)(xiii) above (payable on an amortized basis);
          (xix) Rentals and other related costs incurred in leasing systems and equipment ordinarily considered to be capital investments or expenditures;
          (xx) Costs not accruing during the Term of this Lease;
          (xxi) Landlord’s home office accounting fees other than those specifically incurred in connection with the Building;
          (xxii) Costs incurred in performing any work or furnishing services for any tenant (including Landlord), whether or not at such tenant’s expense, and costs of performing work or furnishing services for tenants other than Tenant, to the extent that such work or service is in excess of any work or service that Landlord is obligated to furnish to Tenant at Landlord’s expense.
          (xxiii) Costs of works of art or decorations to the Building; and
          (xxiv) Costs or expenses allocable to any retail space.
     (f) Landlord and Tenant agree that with respect to all Building Operating Costs, the actual costs thereof for the Operating Cost Base, and for each Operating Year thereafter, shall be adjusted to reflect all Building Operating Costs for a full year and at one hundred (100%) percent occupancy.
     (g) Tenant’s obligations for payment of Building Operating Costs during the Term shall survive the expiration or early termination of this Lease.
     Section 5.04. Payment of Rent or Additional Rent:
     (a) Rent, including Tax Increase Amounts, Extra Taxes, Operating Cost Increase Amounts, Tenant’s Electricity Charge, or any other charges payable hereunder (“Additional Rent”) shall be paid on the first day of each calendar month in lawful currency of the United States without notice, demand, counterclaim, offset, deduction, defense, or abatement.
     (b) All Rent or Additional Rent payable under this Lease shall be payable to Landlord at its address as set forth in Section 21.04 or at such other address as Landlord shall designate by giving notice to Tenant.

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     (c) If Tenant shall fail to pay Base Rent, Additional Rent, Tax Increase Amounts, Operating Cost Increase Amounts, Extra Taxes, Tenant’s Electricity Charge or any other charges payable hereunder, whether or not the same are called Rent or Additional Rent, Landlord shall have all remedies provided for in the Lease or at law as in the case of nonpayment of Rent. Tenant’s obligations (accruing during the term) under Article V and Article XXI hereof shall survive the expiration of earlier termination of this Lease.
     Section 5.05. Security Deposit:
     (a) The sum which is set forth in Section 1.04 which Tenant has deposited with Landlord is security for the full and faithful performance by Tenant of all its obligations under this Lease or in connection with this Lease. If an Event of Default (as herein defined) has occurred, Landlord may use, apply or retain the whole or any part of the Security Deposit in such order and in such combination as Landlord elects, for the payment of (i) Rent or any other sums of money which Tenant may not have paid or which may become due after the occurrence of the Event of Default; (ii) any sum expended by Landlord on Tenant’s behalf in accordance with the provisions of this Lease; or (iii) any sum which the Landlord may expend or be required to expend by reason of such Event of Default, including any damages or deficiency in the reletting of the Demised Premises in connection with Article XVI hereof. In the case of every such application or retention during the Lease Term, Tenant shall, on demand, pay to Landlord a sum equal to that so applied or retained, which shall be added to the Security Deposit so that the same shall be restored to its original amount. Landlord may use, apply or retain the whole or any part of the Security Deposit for the repair of damage to the Demised Premises upon Tenant’s surrender of the Demised Premises on the Expiration Date. The use, application or retention of the Security Deposit or portion thereof by Landlord shall not prevent Landlord from exercising any other right or remedy provided for hereunder or at law and shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled.
     (b) The Security Deposit shall bear no interest; and if legally permissible, Landlord shall be entitled to commingle the Security Deposit with Landlord’s other funds.
     (c) If Tenant shall fully and faithfully comply with all of the provisions of this Lease, the Security Deposit or any balance thereof shall be returned to Tenant within thirty (30) days after the Expiration Date or upon any later date after which Tenant has vacated the Demised Premises. In the absence of evidence satisfactory to Landlord of any assignment of the right to receive the Security Deposit or the remaining balance thereof, Landlord may return the Security Deposit to the original Tenant regardless of one or more assignments of Tenant’s interest in such Security Deposit. In such event, upon the return of such Security Deposit or balance thereof to the original Tenant, Landlord shall be completely relieved of liability hereunder.
     (d) Tenant covenants and agrees that it shall not assign, pledge, hypothecate, mortgage or otherwise encumber the Security Deposit during the term of the Lease.
     (e) The Security Deposit may be transferred to any purchaser of Landlord’s interest in the Building or the Real Estate, and upon such transfer, Landlord shall be relieved of any obligation with respect thereto.
ARTICLE VI. SIGNS.
     Section 6.01. Building Directory(s) Signage:
     Landlord shall provide a directory of tenants in the entrance lobby area of the Building and a floor directory of tenants on each of the floors (if applicable), which shall include Tenant’s name.
     Section 6.02. Tenant Door Signage:
     (a) At Tenant’s request, Landlord shall order and install the Building standard door signage bearing Tenant’s name (to the extent a standard door signage system exists in the Building), which shall be the only signage permitted on the exterior of the Demised Premises; otherwise Tenant may install its own door signage graphics subject to Landlord’s prior review and approval, not to be unreasonably withheld, conditioned or delayed.

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     (b) Tenant shall reimburse Landlord for all costs associated with Tenant’s door signage, or any requested future changes, including any permits or licenses which may be required.
     (c) Tenant shall not have the right to install or maintain any signs in or about the Real Estate or visible from the outside window of the Demised Premises.
     (d) Landlord shall have the right to temporarily remove any sign in order to paint, or to make repairs, alterations or improvements in or upon the Building or Demised Premises, at its expense, and shall thereafter reaffix same, at its expense. At the expiration of the Term, the Tenant shall, at Tenant’s sole cost and expense, remove all signs and restore the area in which they were affixed to its prior condition.
ARTICLE VII. REPAIRS, ALTERATIONS, COMPLIANCE, SURRENDER.
     Section 7.01. Repairs and Maintenance by Landlord:
     Landlord shall make or cause to be made necessary repairs and maintenance to the Common Areas of the Building. Landlord shall make or cause to be made necessary repairs, replacements and maintenance to the Building or Real Estate including the roof, foundation, floors, exterior walls, windows, any load-bearing interior walls of the Demised Premises; and the electrical, plumbing, HVAC and mechanical systems, except for any damage to the Building or Real Estate caused by (i) any act, omission or negligence of Tenant, Tenant’s agents or invitees; (ii) the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease; or (iii) any alterations, installations, additions or improvements made or to be made by Tenant. Damage set forth in (i), (ii) and (iii) will be repaired by Landlord at Tenant’s expense.
     Section 7.02. Repairs and Maintenance by Tenant:
     (a) Tenant shall take good care of the Demised Premises. Except for the repairs and other work to be performed by Landlord as set forth in this Lease, Tenant, at its expense, shall promptly make all repairs in and about the Demised Premises as shall be required by reason of (i) the performance or existence of work performed or to be performed by Tenant, (ii) the installation, use or operation of Tenant’s property in the Demised Premises, (iii) the moving of Tenant’s property in or out of the Building or (iv) the misuse or neglect of Tenant or any of its employees, agents or contractors. Except for repairs Landlord is specifically obligated to make, Tenant, at its expense, shall be responsible for all repairs, maintenance and replacements within the Demised Premises, including the replacement of lights and fluorescent bulbs and ballasts which shall be performed by Landlord and reimbursed by Tenant. Tenant shall notify Landlord of all repairs made by Tenant exceeding ten thousand ($10,000) dollars in cost. Tenant shall not remove blinds from windows. In making repairs, Tenant shall observe and comply with all requirements, laws or regulations of any applicable public authority and the terms and conditions of all insurance policies required by Article XIV relating to or affecting the Real Estate.
     (b) Tenant shall be responsible and liable for all damages to the Demised Premises and the Building or any part thereof attributable to the fault, negligence or misuse of Tenant, its agents employees or servants.
     Section 7.03. Approval by Landlord of Improvements:
     After completion of Tenant’s Work, Tenant may not make alterations, additions or improvements to the Demised Premises (“Alterations”), or any part, (other than interior improvements or alterations of a decorative nature), without the prior written consent of Landlord, not to be unreasonably withheld or delayed, if the reasonable cost of such alterations, additions or improvements exceeds five thousand ($5,000) dollars or includes any HVAC work, plumbing work, mechanical work or electrical work or any structural alterations. Prior to starting any work, Tenant furnish Landlord with (i) copies of any plans and specifications, (ii) any permits that may be required by law for performing such work or improvements and (iii) copies of certificates of

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insurance, for the coverage amounts required herein, for each and every contractor and/or vendor performing work in or about the Demised Premises for Tenant. In all events, Landlord shall be permitted to approve, at its sole and absolute discretion, the contractors to be used by Tenant for HVAC work, plumbing work, mechanical work or electrical work, which approval shall not be unreasonably withheld or delayed. Any permitted Alterations shall be performed in a good and workmanlike manner and using Building standard or better quality materials in accordance with all requirements of any applicable governmental authority, the terms and conditions of all required insurance policies and any other provisions relating to Tenant’s work herein contained. In no event shall Tenant make any Alterations of the outside dimensions of the Building or the existing bearing walls and columns, exterior walls, roof, structural ceiling or foundations. As a condition of Landlord’s approval of any Alterations, Landlord shall have the right to require Tenant to restore the Demised Premises to the conditions prior to any Alterations. Landlord shall notify Tenant at the time Landlord grants its consent to the Alterations whether Tenant shall be required to restore the Demised Premises to the conditions prior to any Alterations.
     Section 7.04. Emergency Repairs:
     If, in an emergency, it shall become necessary to make any repairs or replacements otherwise required to be made by Tenant, Landlord may enter the Demised Premises, and proceed to make or cause such repairs or replacements to be made at its expense. Landlord shall give Tenant advance notice of such emergency. Within thirty (30) days after Landlord renders a bill for such repairs or replacements, Tenant shall reimburse Landlord for the cost of making such repairs.
     Section 7.05. Electrical Lines:
     Tenant may not install any electrical equipment that overloads the lines in the Demised Premises, the Building or the Real Estate or which will interfere with the use thereof by other tenants of the Building unless Landlord approves same in the Plans and Specifications or as provided for in Section 7.03 above. If Tenant makes such installation, Landlord may require Tenant, at Tenant’s sole cost and expense, to make whatever alterations and/or repairs are necessary and which are in compliance with the terms and conditions of all required insurance policies and all requirements of applicable governmental authorities. Tenant shall be responsible or liable for all damages anywhere in the Building caused by any electrical overload attributable to Tenant.
      Section 7.06. Surrender of Premises:
     On the Expiration Date, Tenant shall quit and surrender the Demised Premises together with all alterations, fixtures, (except trade fixtures), installations, additions and improvements which may have been made in or attached thereto, broom clean, and in good condition and repair, ordinary wear and tear excepted, unless Landlord provides otherwise in writing. Any personal property of Tenant, or any subtenant or occupant, which shall remain in or on the Demised Premises after the termination of this Lease may, at the option of Landlord and without notice, be deemed to have been abandoned by such Tenant, subtenant or occupant, and may either be retained by Landlord as its property or be disposed of, without accountability, in such manner as Landlord may see fit. Tenant shall reimburse Landlord for any cost or expense incurred by Landlord in carrying out the foregoing. Landlord shall not be responsible for any loss or damage occurring to any such property owned by Tenant or any subtenant or occupant. Tenant’s obligations under this Section shall survive the Expiration Date.
ARTICLE VIII. SERVICE AND UTILITIES
     Section 8.01. Landlord’s Services:
     (a) Landlord shall furnish: (i) heat and air conditioning required for the comfortable occupancy of the Demised Premises, between 8:00 A.M. and 6:00 P.M. Monday through Friday, and Saturday 8:00 A.M. to 1:00 P.M, excluding Holidays (see Exhibit F for “Holiday Schedule”) (ii) electricity for Tenant’s office use, including lighting and electrical outlets for equipment; (iii) access and elevator service including one weekend elevator; (iv) restroom supplies; (v) cleaning services as set forth in the Building Janitorial Specifications (annexed hereto as Exhibit E) on

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weekdays, excluding Holidays, (vi) removal of ice, snow and debris from the Common Areas, including, but not limited to, walkways, parking lots, and other paved surfaces; (vii) landscaping maintenance and services for all plants, shrubs, flower beds and grounds located in both the interior and exterior of the Building and the Common Areas; (viii) access to the Building twenty-four (24) hours per day, seven (7) days per week; (ix) hot and cold water, toilet facilities and sewerage services; and (x) such other services as Landlord may set forth from time to time. Landlord shall have the right to reasonably modify the terms and/or frequency of the services provided (but not to diminish the current services), provided Landlord gives at least five (5) business days notice of any changes.
     (b) Subject to the last sentence of this Section 8.01, (a) Tenant shall have the right to use the Demised Premises at all times. If Tenant shall require heating, venting or air conditioning (“HVAC”) beyond the Building hours and days of operation described above (“After Hours Use”), then Tenant shall provide reasonable notice to Landlord and Landlord shall furnish HVAC upon the express condition that Tenant shall be responsible for the costs of any and all HVAC and Building Services required and attributable to such After Hours Use. The cost for After Hours Use of HVAC is charged at the rate of $75.00 per hour, subject, however, to adjustment by the difference between the cost of delivery of electricity as of the date of this Lease and any increases in the costs thereof that may occur from time to time. Payment for After Hours Use of services shall be deemed Additional Rent and shall be paid to Landlord monthly, together with Base Rent. If Tenant desires to use the Demised Premises on a regularly scheduled basis for more than two (2) hours at a time, outside of the Building standard operating hours of 8:00 A.M. to 6:00 P.M. Monday through Friday and 8:00 AM to 1:00 PM on Saturdays, and Tenant’s after-hours use creates excess security concerns for the safety of the Building, then Landlord reserves the right, in Landlord’s reasonable discretion, to provide manned security during such hours and charge the cost thereof to Tenant as Additional Rent. Landlord shall not charge Tenant for the cost of any security services which are currently being provided or which are not attributable to Tenant’s after-hours use of the Premises.
     (c) Landlord shall maintain and provide services to the Land and Common Area, including lobbies, stairs, elevators, corridors, restrooms, and Parking Areas.
     (d) Landlord shall not be liable for any damages caused by interruption of services due to repair, inspection or causes beyond its reasonable control. Tenant shall continue to be responsible for payment of Rent during any period of such interruption. If the interruption of services does not allow Tenant to comfortably use or occupy the Demised Premises in the normal course for a period of seven (7) consecutive business days due to any act or omission of the Land1ord or any of Landlord’s agents, then the Base Rent hereunder shall be equitably abated from the eighth (8th) consecutive business day until such time as the services are restored. Such interruption of services shall be defined as (i) no electrical service to the Demised Premises, (ii) inability to provide access to the Demised Premises via at least one (1) elevator, (iii) inability to access lavatories on the floor of the Demised Premises or on an adjacent floor, or (iv) insufficient HVAC such that the Demised Premises cannot be occupied except under conditions of “extreme discomfort” for the occupants.
     Section 8.02. Electricity:
     (a) Landlord shall furnish the electricity Tenant shall require in the Demised Premises for heating and air conditioning on a rent inclusion basis. Tenant shall pay to Landlord, as Additional Rent, Tenant’s Electricity Charge which amount is defined in Section 1.07 hereof for Tenant’s electricity consumption within the Demised Premises for interior lighting and the use of Tenant’s business equipment. This sum shall be payable to Landlord in advance on a monthly basis together with Base Rent and shall represent the cost of all electricity furnished to Tenant at the Demised Premises other than for heating and air-conditioning based on 5.5 watts per useable square foot.
     (b) If the Plans and Specifications anticipate extra electric usage based on either substantially greater needs than 5.5 watts per useable square foot or regular usage beyond the Building business hours, the amount charged to Tenant as set forth in Section 1.07 and paragraph (b) above shall be adjusted to reflect such additional usage.
     (c) Tenant’s Electricity Charge as set forth in Section 1.07 hereof may be adjusted when the rate charged the Landlord by the local electric company is modified between the execution of this Lease and the Commencement Date and further adjusted from time to time to reflect changes in the rate charged the Landlord subsequent to the Commencement Date. Any resulting charges for electricity shall be no greater than the cost of the same service of the Tenant were individually connected to the local electric utility company.

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     (d) Subsequent to Tenant’s having taken occupancy and commenced use of the Demised Premises, Landlord may cause a survey to be made by an independent electrical engineer or other qualified person of the estimated use of electricity in the Demised Premises (other than for the heating and air conditioning provided by Landlord as required herein, but including any supplemental HVAC systems installed for Tenant’s sole use within the Demised Premises provided the consumption for said supplemental HVAC is not being measured and billed to Tenant pursuant to a direct meter or sub-meter). The Tenant Electricity Charge set forth in Section 1.07 hereof shall be adjusted not more frequently than annually to reflect the outcome of this survey. The cost of preparing the survey shall be included in Building Operating Costs.
     (e) If Landlord or Tenant requests, Landlord shall install an electric meter or sub-meter to measure the electricity actually consumed in all or a portion of the Demised Premises at any time, inclusive of any supplemental HVAC equipment installed for Tenant’s sole use (such as an air conditioning unit for Tenant’s computer equipment room). Landlord shall arrange for such installation, which shall be at the requesting party’s expense. Tenant shall pay for its electrical usage based on metering or sub-metering to Landlord, as Additional Rent, on a monthly basis together with Rent, at the tariff applicable to Landlord, either (i) in lieu of the Tenant’s Electricity Charges if said metering or sub-metering measures Tenant’s electric consumption for all interior lighting and receptacle use of Tenant’s business equipment throughout the entire Demised Premises (excluding the Building heating and air conditioning), or (ii) in addition to Tenant’s Electricity Charges if said metering is to measure Tenant’s use of any supplemental HVAC equipment and/or additional electrical circuits.
ARTICLE IX. USE AND OPERATION.
      Section 9.01. Use:
     Tenant shall use the Demised Premises for general offices and for no other purpose. Tenant shall comply with all applicable zoning regulations or requirements of any governmental entity having jurisdiction over the Real Estate, as well as all the requirements set forth in Article XX.
     Section 9.02. Rules and Regulations:
     The rules and regulations in effect as of this date are set forth in Exhibit D annexed hereto. Tenant shall observe all Rules and Regulations established by Landlord from time to time for the Building and the Real Estate, provided Tenant shall be given at least five (5) days’ notice of any changes therein.
     Section 9.03. Restriction on Tenant’s Activities:
     (a) Garbage: (i) Tenant shall handle and dispose of all rubbish and garbage in accordance with the Rules and Regulations established by Landlord.
                           (ii) Landlord shall provide rubbish and garbage removal in accordance with the cleaning specifications incorporated as part of Exhibit E.
                           (iii) Tenant shall arrange for any rubbish and garbage removal in excess of the quantity to be disposed of by Landlord pursuant to the cleaning specifications set forth in Exhibit E at Tenant’s sole expense.
     (b) Plumbing Facility Use: Tenant shall not use the plumbing facilities of the Demised Premises or the Building for any purposes other than those for which they are intended. Tenant may not dispose of any substances therein which may clog, erode or damage the pipelines and conduits of the Demised Premises, the Building or the Real Estate.

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     (c) Floor Load: Tenant shall not install, operate or maintain in the Demised Premises any heavy item of equipment which exceeds the floor load per square foot which such floor was designed to carry.
     (d) Exterior Walls or Roof: Tenant shall not use all or any portion of the roof or exterior walls of the Demised Premises or the Building for any purpose.
     Section 9.04. Compliance With Law:
     (a) Tenant shall comply with all statutes, ordinances, orders, rules, regulations and other governmental requirements relating to the use, condition or occupancy of the Demised Premises, and all rules, orders, regulations, recommendations and requirements of the board of fire underwriters or insurance service office, or any other similar body, having jurisdiction over the building in which the Demised Premises are located (collectively “Law”), including, without limitation, the making of any required capital improvement or repair at the Demised Premises. Tenant shall not use or occupy, or permit any portion of the Demised Premises to be used or occupied, (1) in violation of any law, ordinance, order, rule, regulation, certificate of occupancy or other governmental requirement, or (2) for any disreputable business or purpose, or (3) in any manner for any business or purpose that creates risks of fire or other hazards, or that would in any way violate, suspend, void or increase the rate of fire or liability or any other insurance of any kind at any time carried by Landlord upon all or any part of the building in which the Demised Premises are located or its contents.
     (b) Landlord shall comply with all present and future Laws (excluding those relating to Tenant’s specific manner of use of the Premises) or appurtenances or any part thereof.
ARTICLE X. TRANSFER OF INTEREST, PRIORITY OF LIEN.
     Section 10.01. Assignment, Subletting, etc.:
     (a) Tenant may, with prior written notice to Landlord, sublet the Demised Premises or assign this Lease only to an affiliated company of Tenant (such as a parent, division or wholly owned subsidiary of Tenant, or an entity controlled, controlling or under common control with Tenant) without Landlord’s consent provided, however, Tenant shall continue to be liable and responsible for the full performance of all obligations under this Lease.
     (b) Tenant shall not sublet the Demised Premises or any part thereof, nor assign, mortgage or hypothecate, or otherwise encumber this Lease or any interest therein, nor grant concessions or licenses for the occupancy of the Demised Premises or any part thereof to an unaffiliated company without Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that upon Tenant’s seeking such consent to assign the Lease or sublet fifty (50%) percent or more of the Demised Premises, Landlord shall have the right to a return of the Demised Premises (or, if the request is for a partial sublet of the Demised Premises, that portion of the Demised Premises that Tenant is seeking to sublet) and possession thereof. Upon the return of the Demised Premises, all terms and conditions of this Lease shall be null and void, except for those provisions of the Lease which shall survive the Expiration Date, as herein provided. Landlord shall approve or disapprove a proposed assignment or subletting as described in any Tenant’s notice within twenty (20) business days after Tenant gives to Landlord such notice accompanied by the information required pursuant to the provisions of Section 10.01(d) or (e) below.
     (c) Landlord may, in its sole reasonable determination, withhold approval to a transfer, assignment or subletting under paragraph (b) above, under the following conditions:
          (i) The financial condition of the subtenant or assignee is unsatisfactory;
          (ii) The proposed use of the Demised Premises by the subtenant or assignee would be prejudicial to the safety, character, reputation and interests of the Building and its tenants or inconsistent with Section 9.01 hereof;
          (iii) The subtenant’s or assignee’s occupancy of the Demised Premises will cause excessive demands on the Real Estate;

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          (iv) The subtenant is already a tenant in the Building, and Landlord has available space for lease within the Building to accommodate the existing tenant;
          (v) The rent that Tenant proposes to market and advertise the space for sublease is more than 10% less than Tenant’s Base Rent; provided, however, during the course of negotiations Tenant may ultimately sublease the space for more than 10% less than Tenant’s Base Rent.
               For the purposes of this Lease, a merger, reorganization or dissolution involving Tenant or any guarantors, or any transfer of this Lease by operation of law, shall be deemed to be an assignment of this Lease which triggers the provisions of this Section 10.01. Furthermore, the sale, issuance or transfer of any voting capital stock of Tenant or voting capital stock of any corporate entity which directly or indirectly controls Tenant or the sale, issuance or transfer of any interest in any non-corporate entity which directly or indirectly controls Tenant, which sale, issuance or transfer results in a change in the direct or indirect voting control of Tenant, shall be deemed to be an assignment of this Lease which triggers the provisions of this Section 10.01, except that the foregoing shall not be applicable to stock which is traded on the New York Stock Exchange, the American Stock Exchange, or any other nationally recognized stock exchange. If Tenant is a partnership, trust or unincorporated association, then the sale, issuance or transfer of a controlling interest therein or of an interest therein which would result in a change in the voting control of Tenant, or the sale, issuance or transfer of a majority interest in or a change in the voting control of any partnership, trust or unincorporated association or corporation which directly or indirectly controls Tenant, or the sale, issuance or transfer of any portion of any general partnership or managing interest in Tenant or in any such entity, shall be deemed to be an assignment of this Lease which triggers the provisions of this Section 10.01.
     (d) Any request by Tenant for Landlord’s consent to an assignment of this Lease shall state the proposed assignee’s address and be accompanied by a duplicate original of the instrument of assignment (wherein the assignee assumes, jointly and severally with Tenant, the performance of Tenant’s obligations hereunder).
     (e) Any request by Tenant for Landlord’s consent to a sublease shall state the proposed subtenant’s address and be accompanied by a duplicate original of the instrument of sublease, which sublease must provide that (i) such sublease is subject to this Lease and that such subtenant shall be bound by all of the terms and conditions of this Lease to the extent of the Demised Premises being sublet, (ii) if this Lease is terminated because of Tenant’s default, prior to the expiration date of such sublease, such subtenant shall, at Landlord’s option, fully and completely attorn to Landlord for the balance of the term of the sublease, and (iii) such subtenant waives provisions of any present or future law which may give such subtenant any right of election to terminate such sublease or to surrender possession of such subleased space in the event any proceeding is brought by Landlord to terminate this Lease.
     (f) In the event of any assignment or sublease to which Landlord has consented or is expressly permitted under this Section 10.01, Tenant will not thereby be released from the payment and performance of any of its obligations in this Lease; rather, Tenant and its assignee or subtenant, as the case may be, will be jointly and severally primarily liable for such payment and performance. Accordingly, Landlord may collect Annual Base Rent and Additional Rent from the assignee or subtenant, as the case may be, and in either such event, Landlord may apply any amounts so collected to the Annual Base Rent and Additional Rent hereunder without thereby waiving any provisions hereof or releasing Tenant from liability for the performance of its obligations hereunder.
     (g) Landlord’s consent to any assignment or sublease hereunder shall not be deemed a consent to any further proposed assignment or sublease, which shall be governed by this Section 10.01.
     (h) In the event of a permitted assignment hereunder (other than to an affiliated company of Tenant pursuant to Section 10.01 (a) above or successor company), all rights hereunder respecting further assignments or subletting shall automatically lapse; moreover, any options contained in this Lease respecting an additional term(s) if any, or otherwise, shall likewise lapse and be of no further force and effect.

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     (i) In the event of any assignment or sublease request hereunder, Tenant shall pay to landlord as Additional Rent, upon demand, any and all costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred by Landlord in connection with such assignment or sublease request.
     (j) Tenant hereby indemnifies, defends and holds Landlord and Landlord’s agents harmless from and against any and all losses, liability, damages, costs and expenses (including reasonable attorneys’ fees) resulting from any claims that may be made against Landlord and/or Landlord’s agents by (i) any assignee or subtenant or proposed assignee or subtenant, or (ii) any brokers or other persons claiming a commission or similar compensation in connection with the assignee or subtenant or the proposed assignment or sublease or termination of this Lease.
     (k) Tenant shall pay to Landlord, immediately upon receipt thereof, fifty (50%) percent of the excess profits, if any, of all compensation received by Tenant for a sublet or assignment over the total Rent allocable to the portion of the Demised Premises covered thereby, net of any reasonable related transaction expenses.
     Section 10.02. Subordination:
     (a) This Lease shall be subordinate to any present or future ground lease and mortgage. This clause shall be self-operative and no further instrument shall be required. Notwithstanding the self-operative nature of this clause, upon Landlord’s request, at any time and from time to time, Tenant shall (i) confirm in writing and in recordable form that this Lease is subordinate to any ground lease or mortgage and/or (ii) execute an instrument making this lease subordinate to any ground lease or mortgage, in such form as may be required by an applicable ground lessor mortgagee.
     (b) At Tenant’s request and expense, Landlord shall request in writing from any mortgagee a non-disturbance agreement in favor of the Tenant for so long as the Tenant is not in default under this Lease, and provided the Tenant agrees to attorn to the said mortgagee in the event it comes into possession of the premises. However, the failure to obtain same shall not in any way impair Section 10.02(a).
     (c) Landlord shall have the right to assign Tenant’s Rent payments to any mortgagee in which case Tenant, upon Landlord’s written notice, shall make payments directly to such assignee.
     Section 10.03. Attornment:
     If the Demised Premises, the Building or the Real Estate are encumbered by a mortgage and such mortgage is foreclosed, or if same are sold pursuant to such foreclosure or by reason of a default under said mortgage, (a) Tenant shall not disaffirm this Lease or any of its obligations hereunder, and (b) at the request of the applicable Mortgagee or purchaser at such foreclosure or sale, Tenant shall attorn to such Mortgagee or purchaser and execute a new lease for the Demised Premises setting forth all of the provisions of this Lease except that the term of such new lease shall be for the balance of the Term.
     Section 10.04. Transfer of Landlord’s Interest:
     The term “Landlord” as used in this Lease means only the owner or the Mortgagee in possession of the Demised Premises, the Building or the Real Estate for the time being. In the event of any sale of the Demised Premises, the Building or the Real Estate, or in the event the Building or Real Estate is leased to any person (subject to this Lease), Landlord shall be and hereby is entirely freed and relieved of all of its covenants, obligations and liability hereunder, provided prior written notice is given to Tenant and the security deposit has been transferred to new Landlord. This subsection shall be applicable to each owner from time to time, and shall not be limited to the first owner of the Demised Premises, the Building or the Real Estate.

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     Section 10.05. Mortgagee’s Rights:
     (a) If Landlord shall notify Tenant that the Demised Premises, the Building or the Real Estate are encumbered by a mortgage and in such notice set forth the name and address of the Mortgagee thereof, then, notwithstanding anything to the contrary, no notice intended for Landlord shall be deemed properly given unless a copy thereof is simultaneously sent to such Mortgagee by certified or registered mail, return receipt requested. Until further notice to Tenant, the Mortgagee named in Section 10.05(d) is a Mortgagee to which copies of notices shall be delivered. If any Mortgagee shall perform any obligation that Landlord is required to perform hereunder, such performance by Mortgagee, insofar as Tenant is concerned, shall be deemed performance on behalf of Landlord and shall be accepted by Tenant as if performed by Landlord.
     (b) Upon receipt from Mortgagee regarding notice that an event of default exists, Tenant is hereby authorized and instructed to pay directly to Mortgagee all rent thereafter accruing, and the receipt of rent by Mortgagee shall release Tenant’s obligation by the amount paid.
     (c) Tenant will give to Mortgagee written notice of each and every default by Landlord under this Lease. Tenant cannot exercise any remedies under the Lease unless Mortgagee fails to cure such default within a reasonable period of time after receipt of such notice, provided Mortgagee has an obligation or duty to cure such default.
     (d) Tenant acknowledges receipt of notice that the Building is encumbered by a mortgage held by Mortgagee to which copies shall be delivered pursuant to Paragraph 21.04.
ARTICLE XI. COMMON AREA.
     Section 11.01. Use of Common Area:
     During the Term, the following privileges to use certain portions of the Real Estate in common with Landlord and any designee of Landlord, subject to the terms of this Lease and Landlord’s Rules and Regulations, are hereby granted to Tenant and Tenant’s Agents:
          (i) the non-exclusive license to use the Common Area as defined under Section 2.04; and
          (ii) the non-exclusive privilege to use the entrance and exit ways designated by Landlord from time to time for access to the Demised Premises from a public street or highway adjacent to the Real Estate through the appropriate entrances and exits so designated.
     Section 11.02. Landlord’s Rights:
     Notwithstanding anything to the contrary, Landlord shall have the following rights:
          (i) to close all or any portion of the Common Area including the Parking Area to such extent as may, in the opinion of Landlord’s counsel, be necessary to prevent a dedication thereof or the accrual of any rights of any person or the public therein;
          (ii) to prohibit parking or passage of motor vehicles in areas previously designated for such and to change the location of exclusively marked parking spaces provided that Landlord shall use commercially reasonable efforts to provide alternate parking space;
          (iii) to temporarily close any of the Common Area for repair, maintenance, alteration or improvements;
          (iv) to build additions to the Building or erect additional buildings or improvements, permanent or temporary, on the Common Area provided such construction is done in a manner as not to materially interfere with ingress and egress to the Building and not to materially interfere with Tenant’s business operations; and
          (v) to create paths, walks or other means of cross access through the Real Estate to other properties of the Landlord.

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     Section 11.03. License Numbers:
     In order to restrict the use by Tenant’s employees of areas designated or which may be designated by Landlord as handicapped, reserved or restricted Parking Areas, Tenant agrees that it will, at any time requested by Landlord, furnish Landlord with the license numbers of any vehicle of Tenant and Tenant’s Agents.
     Section 11.04. Parking Areas:
     (a) Tenant and Tenant’s Agents shall be entitled to use the unreserved Parking Area adjoining the Building, in common with other tenants, subject to reasonable rules and regulations which may be in effect or which Landlord may impose from time to time. Tenant agrees that it shall not burden the parking available for the Building; accordingly, Tenant agrees that it shall not use more than the allocated number of parking spaces defined in Section 2.08 hereof.
     (b) Throughout the Term, Landlord shall keep the Parking Area properly striped and paved and in good order and repair, and properly drained. After the end of a snowfall, Landlord will commence to remove accumulated snow and ice from the Parking Area and diligently prosecute the same to completion so that, to the extent practicable, the Parking Area shall be reasonably free of snow and ice. Landlord may deposit accumulated snow on such portions of the Common Area as may be necessary under the circumstances. If any ice cannot be removed with reasonable effort on the part of Landlord, it will be sufficient for Landlord to spread sand and other abrasive substances over the ice.
ARTICLE XII. DESTRUCTION OR DAMAGE.
     Section 12.01. Rent Abatement:
     If the Demised Premises shall be partially or totally damaged or destroyed by fire or other casualty not attributable to the fault, negligence or misuse of Tenant or Tenant’s Agents, the Rent payable hereunder shall be abated to the extent that the Demised Premises shall have been rendered untenantable and for the period from the date of such damage or destruction to the date it is rendered tenantable. Should Tenant reoccupy a portion of the Demised Premises during the period any restoration work is taking place and prior to the date same is made completely tenantable, Rent allocable to such portion shall be payable by Tenant from the date of such occupancy.
     Section 12.02. Termination by Landlord:
     If the Building or the Demised Premises shall be damaged or destroyed by fire or other casualty (whether or not the Demised Premises are damaged or destroyed) so as to require an expenditure in Landlord’s reasonable opinion of more than 25% of the full insurable value of the Building or if the Demised Premises are completely destroyed or so badly damaged that, in Landlord’s reasonable opinion, repairs to the Demised Premises cannot be commenced within sixty (60) days or completed within one hundred twenty (120) days from the date of the damage or destruction, then in either such case, Landlord may terminate this Lease by giving Tenant written notice within thirty (30) days after the date of the casualty, specifying the date of termination of this Lease. In such event, Tenant shall forthwith quit, surrender and vacate the premises without prejudice, however, to Landlord’s rights and remedies against Tenant as of the date of termination or as to those rights which survive such termination. In the event of termination, the Rent payable hereunder shall be abated from the date of damage or destruction. In the event the Demised Premises are damaged by fire or other casualty, Landlord shall provide Tenant with a good faith estimate of the time needed to repair the damage within sixty (60) days of the date of the casualty. If the Demised Premises can not be reasonably repaired, with occupancy of the Demised Premises to Tenant within one hundred eighty (180) days from the date of the casualty, then Tenant shall have the right to terminate this Lease by giving Landlord written notice within thirty (30) days after receipt of the good faith estimate of the time needed to repair the damage from Landlord.

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     Section 12.03. Landlord’s Obligation to Rebuild:
     If all or any portion of the Demised Premises is damaged by fire or other casualty and if Landlord has not elected to terminate this Lease, Landlord shall, within a reasonable time after such occurrence, shall repair or rebuild the Demised Premises or such portion to its condition immediately prior to the Commencement Date. Tenant may terminate this Lease by giving written notice to Landlord, if Landlord has not commenced the required repairs within sixty (60) days or has not restored and/or rebuilt the Demised Premises as herein provided within one hundred twenty (120) days from the date of such damage or destruction and such delay is due to Landlord’s fault. Landlord shall not be obligated to expend in such repair or rebuilding any sums greater than the proceeds of any insurance policy carried by Landlord or for Landlord’s benefit.
     Section 12.04. Landlord’s Liability:
     Landlord shall not be obligated to pay any damages, compensation or claim for inconvenience, loss of business or annoyance arising from any casualty, or repair or restoration of any portion of the Demised Premises or of the Building pursuant to this Article.
ARTICLE XIII. CONDEMNATION
     Section 13.01. Definitions:
          As used herein, the following words have the following meanings:
          (i) Taking: The deprivation of or damage to the Demised Premises, the Building or the Real Estate or any portion thereof, as the result of the exercise by a governmental authority of any power of eminent domain, condemnation, or purchase under threat thereof.
          (ii) Taking Date: With respect to any Taking, the date on which the condemning authority shall have the right to possession of the Demised Premises, the Building or the Real Estate or any portion thereof.
          (iii) Award: The proceeds of any Taking, less all expenses in connection therewith, including reasonable attorney’s fees.
     Section 13.02. Taking of Demised Premises:
     (a) In the event of a Taking of the whole or a substantial part of the Building, other than a Taking for a temporary use, then as of the Taking Date, this Lease shall immediately cease and terminate, and the Rent Payable hereunder shall be adjusted as of the Taking Date and Tenant shall have no claim for the value of the unexpired term hereof or to any part of the Award or any claim against Landlord relating to the Taking.
     (b) In the event of a Taking of all or any part of the Demised Premises, Landlord shall have the right to terminate this Lease and shall be entitled to the Award and Tenant shall have no claim for the value of the unexpired term of this Lease and or to any part of the Award or have any claim against Landlord relating to the Taking, except as provide for in Section 13.04 hereof.
     (c) In the event of a Taking of all of the Demised Premises or such a portion thereof as shall substantially impede or impair Tenant’s use and occupancy of the Demised Premises, then Tenant shall have the right to terminate this Lease as of the Taking Date and Landlord shall be entitled to the Award and Tenant shall have no claim for the value of the unexpired term of this Lease and or to any part of the Award or have any claim against Landlord relating to the Taking, except as provide for in Section 13.04 hereof.
     (d) In the event of a Taking of less than all of the Demised Premises and neither party shall elect to terminate this Lease the Rent payable hereunder shall be reduced in proportion to the ratio that the rentable square footage of the Demised Premises so taken bears to the total rentable rentals square footage of the Demised Premises prior to the Taking.

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     Section 13.03. Taking for Temporary Use:
     If there is a Taking of the Demised Premises for temporary use, this Lease shall continue in full force and effect, and Tenant shall continue to comply with all the provisions thereof, except as such compliance shall be rendered impossible or impracticable by reason of such Taking. Rent shall be abated during the course of such Taking to the extent and for the period of time that the Demised Premises shall have been rendered untenantable.
     Section 13.04. Disposition of Awards:
     All Awards shall belong to Landlord without any participation by Tenant. Tenant hereby assigns to Landlord any share of any Award, which may be granted to Tenant, except Tenant shall be entitled to make a separate claim with regard to the unamortized cost of any leasehold improvements paid for by Tenant and Tenant’s moving and relocation expenses, provided same does not diminish Landlord’s Award
ARTICLE XIV. TENANT’S INSURANCE.
     Section 14.01. General Insurance:
     (a) At all times during the Term of this Lease, Tenant will carry and maintain, at Tenant’s expense, the insurance required hereunder, in the amounts specified below or such other amounts and in form and substance as Landlord may from time to time reasonably request and issued by an insurance company reasonably satisfactory to Landlord. Upon the execution of this Lease, Tenant shall deliver to Landlord duplicate originals or certificates of all insurance policies required to be carried hereunder with evidence of payment of applicable premium. All insurance policies shall be carried in favor of Landlord, Tenant, and all Mortgagees, as their respective interests may appear.
     (b) Each insurance policy so issued shall expressly provide: (i) that it may not be canceled for nonpayment, or for other reason without thirty (30) days’ advance notice to Landlord; (ii) that the insurance company shall not fail to renew the policy without thirty (30) days’ advance notice to Landlord; (iii) that no material change may be made in the policy; and (iv) that it is not subject to invalidation as to Landlord’s interest by reason of any act or omission of the Tenant.
     (c) The term “insurance policy” shall include any extensions or renewals of such insurance policy.
     (d) Tenant may carry insurance required hereunder under a blanket policy provided such blanket policy allocates to the Demised Premises coverage in amounts satisfactory to Landlord, and further provided all other requirements of insurance are met by such blanket policy.
     (e) Landlord shall maintain insurance coverage for the Building and Real Estate as it deems necessary full insurable value thereof under “All-Risk” policies, and Tenant shall not do or permit to be done any act or thing upon the Premises which would (i) jeopardize or be in conflict with fire insurance policies covering the Building and fixtures and property in the Real Estate, (ii) increase the rate of fire or other casualty insurance applicable to the Real Estate to a rate higher than it otherwise would be for general office use of the Building, or (iii) subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation Tenant carries on upon the Premises.
     Section 14.02. Liability Insurance:
     Tenant shall provide on or before it enters the Demised Premises for any reason and shall keep in force during the Term for the benefit of Landlord and Tenant, liability insurance naming Landlord and any designee of Landlord as additional insureds. The Policy shall protect Landlord, Tenant and any designee of Landlord against any liability occasioned by any occurrence on or about the Demised Premises or any appurtenance thereto or arising from any of the items indicated in

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Section 15.01 against which Tenant is required to indemnify Landlord. Such policy is to be written in a combined single limit of at least $2,000,000 for injury or death to one or more than one person arising from any one occurrence and in the amount of $1,000,000 with respect to property damages. In addition, Tenant shall maintain and provide a $2,000,000 umbrella policy on terms reasonably specified by Landlord.
     Section 14.03. Fire Insurance:
     Tenant shall insure and keep its equipment, personal property and all leasehold improvements benefiting the Demised Premises or elsewhere on the Real Estate insured against damage by fire, water damage and other casualties and risks covered by “All Risk” and extended coverage insurance. Landlord will not carry insurance of any kind on Tenant’s property, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same.
     Section 14.04. Worker’s Compensation Insurance:
     Tenant shall maintain Worker’s Compensation insurance insuring against and satisfying Tenant’s obligations and liabilities under the applicable Worker’s Compensation laws.
     Section 14.05. Other Insurance:
     Tenant shall carry insurance against such other hazards and in such amounts as may be customarily carried by Tenants, owners and operators of similar properties, as Landlord may reasonably require for its protection from time to time.
     Section 14.06. Waiver of Subrogation:
     Landlord and Tenant each hereby releases the other, its officers, directors, employees and agents, from liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage to property covered by insurance either carried by such party or required under this Lease to be carried by such party, even if such loss or damage shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. However, this release shall apply only if the releasor’s insurance policies contain a clause or endorsement providing that any such release shall not adversely affect or impair such policies or prejudice the right of the releasor to recover thereunder. Landlord and Tenant each agrees that any fire and extended coverage insurance policies carried by each of them respectively and covering the Demised Premises or their contents will include such a clause or endorsement as long as the same shall be obtainable without extra cost, or, if an extra cost shall be charged therefor, the other party shall pay for such extra cost upon notice of the extra cost.
     Section 14.07. Insurance Rate:
     If, as a result of (i) any act or omission by Tenant or breach of any terms of this Lease; (ii) the use to which Tenant has put Demised Premises; or (iii) Tenant’s failure to comply with Landlord’s insurance requirements, Landlord’s insurance rates applicable to the Real Estate are raised, Tenant shall reimburse Landlord, on demand, for the increased cost of Landlord’s insurance premiums. For the purposes of this Section, any finding or schedule of the fire insurance rating organization having jurisdiction over the Real Estate shall be deemed to be conclusive.

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ARTICLE XV. INDEMNIFICATION AND LIABILITY.
     Section 15.01. Indemnification:
     (a) Tenant hereby indemnifies and agrees to defend and hold Landlord, its employees or agents, and any Mortgagee harmless from and against any and all claims, suits, proceedings, actions, causes of action, responsibility, liabilities, payments, demands and expenses (including attorney’s fees) in connection with or arising from:
          (i) Tenant’s possession, use, occupation, management, repair, maintenance or control of the Demised Premises, the Building or the Real Estate, or any portion thereof;
          (ii) any act, omission or negligence of Tenant, Tenant’s agents, invitees or visitors;
          (iii) any default, breach, violation or nonperformance of this Lease or any provision herein by Tenant;
          (iv) injury or damages to person(s) or property or loss of life sustained in or about the Demised Premises.
     (b) Tenant shall defend any actions, suits and proceedings which may be brought against Landlord or any Mortgagee with respect to the foregoing or in which they may be impleaded. Tenant shall pay, satisfy and discharge any judgments, orders and decrees which may be recovered against Landlord or any Mortgagee in connection with the foregoing. Landlord shall promptly notify Tenant of any claims for which Landlord seeks indemnification pursuant to this Section 15.01 provided, however, the failure to so notify Tenant shall not in any way modify or impair Tenant’s obligations pursuant to this Section 15.01 or otherwise.
     (c) Landlord shall defend, indemnify, and hold Tenant and Tenant’s Agents harmless against and from any and all injuries, costs, expenses, liabilities, losses, damages, injunctions, suits, actions, fines, penalties, and demands of any kind or nature (including reasonable attorneys’ fees) by or on behalf of any person, entity, or governmental authority occasioned by or arising out of injuries occurring in the Common Areas or any other portion of the Building outside the Demised Premises arising from any intentional act, or gross negligence of Landlord or Landlord’s agents, employees, or independent contractors (except to the extent caused by or resulting from the acts, omissions, negligence or willful misconduct of Tenant or its Agents or other tenants or their Agents). This indemnity shall survive termination of this Lease only as to claims arising out of the events that occur prior to termination of the Lease. Tenant shall promptly notify Landlord of any claims for which Tenant seeks indemnification pursuant to this Section 15.01. Landlord shall have the right to settle, dispose, arbitrate, or otherwise control any such litigation.
     Section 15.02. Waiver and Release:
     (a) Tenant hereby waives and releases all claims against Landlord with respect to all matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease.
     (b) Tenant will not be entitled to make, nor will Tenant make, any claim, and Tenant waives any claim, for money damages (nor will Tenant claim any money damages by way of setoff, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord has unreasonably withheld or unreasonably delayed its consent or approval with respect to any provision of this Lease providing for such consent or approval. Tenant’s sole remedy will be an action or proceeding to enforce any such provision, or for specific performance, injunction or declaratory judgment.
     Section 15.03. Liability of Landlord:
     (a) Neither Landlord nor any agent or employee of Landlord shall be liable to Tenant for (i) any injury or damage to Tenant or to any other person or (ii) any damage to, or loss (by theft or otherwise) of, any property of Tenant or any other person, irrespective of the cause of such injury, damage, or loss, unless caused by or due to the willful misconduct or gross negligence of Landlord, its agents or employees without contributory negligence on the part of Tenant.

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     (b) Landlord, (and, in case Landlord shall be a joint venture, partnership, tenancy-in-common, association or other form of joint ownership) and the members of any joint venture, partnership, tenancy-in-common, association or other form of joint ownership shall have absolutely no personal liability with respect to any provision of this Lease, or any obligation or liability arising therefrom or in connection therewith. Tenant shall look solely to the equity of the owner in the Real Estate for the satisfaction of any remedies of Tenant in the event of a breach by the Landlord of any of its obligations. Such exculpation of liability shall be absolute and without any exception whatsoever.
     (c) All property (whether real, personal or mixed) at any time located in or upon the Demised Premises shall be at the risk of the Tenant only, and Landlord shall not become liable for any damage to said property or to Tenant, or to any other person or property, caused by water leakage, steam, sewerage, gas or odors or for any damage whatsoever done or occasioned by or from any boiler, plumbing, gas, water, steam or other pipes, or any fixtures or equipment or appurtenances whatsoever, or for any damage arising from any act or neglect or arising by reason of the use of, or any defect in, the Demised Premises or any of the fixtures, equipment or appurtenances therein contained, or by the act or neglect of any other person or caused in any other manner whatsoever or occasioned by theft, Act of God, riot, strike or other labor difficulty.
     (d) Except as otherwise expressly provided herein, this Lease and the obligations of Tenant hereunder shall be in no way affected, impaired or excused because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease.
ARTICLE XVI. DEFAULT, REMEDIES.
     Section 16.01. Default:
     Each of the following shall constitute an Event of Default:
          (i) the failure of Tenant to pay any Rent, Additional Rent or any other charge required to be paid by Tenant hereunder, when the same shall be due and payable payable beyond a grace period of five (5) days. Notwithstanding the above, Tenant shall be permitted one late payment in any twelve (12) month period, whereby Landlord will provide Tenant notice of said failure to pay and Tenant shall have three (3) days from such notice to submit payment;
          (ii) the failure by Tenant to perform or observe any requirement of this Lease not specifically referred to in this Section, and such failure continuing for thirty (30) days after notice from Landlord to Tenant specifying the items in default, provided however, that if such failure cannot be cured within said thirty (30) day period, such longer period (but in no event longer than two (2) months) as may reasonably be necessary to cure such failure provided Tenant is diligently proceeding in good faith to cure the default;
          (iii) the commencement by Tenant of a case in bankruptcy, or under the insolvency laws of any State naming Tenant as the debtor;
          (iv) the commencement by anyone other than the Tenant of a case in bankruptcy or under the insolvency laws of any State naming Tenant as the debtor, which case shall not have been discharged within sixty (60) days of the commencement thereof;
          (v) the making by Tenant of an assignment for the benefit of creditors or any other arrangement involving all or substantially all of its assets under any state statute;
          (vi) the appointment of a receiver or trustee for the Tenant or for all or any portion of the property of Tenant in any proceeding, which receivership shall not have been set aside within sixty (60) days of such appointment;
          (vii) the refusal by Tenant to take possession of the Demised Premises upon completion of Tenant Work or the vacation and abandonment of the Demised Premises by Tenant, permitting the same to remain unoccupied and unattended; or

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          (viii) if Tenant is a corporation, the transfer by sale, assignment, operation of law or other disposition of any part or all of its shares of stock so as to result in a change in the effective voting control of Tenant on the date of this Lease;
     Section 16.02. Landlord’s Remedy:
     At any time after the occurrence of an Event of Default, Landlord may give written notice to Tenant specifying such Event(s) of Default and stating that the Lease and the term shall terminate five (5) business days after the giving of such notice, unless Tenant cures the Event of Default. At the expiration of such five (5) business days, if Tenant has not cured the Event of Default, this Lease and the Term and all of the right, title and interest of the Tenant hereunder shall wholly cease and expire, and Tenant shall quit and surrender the Demised Premises to the Landlord. Notwithstanding such termination, surrender, and the expiration of Tenant’s right, title, and interest, Tenant’s liability and responsibility under all of the provisions of this Lease shall continue.
     Section 16.03. Landlord’s Re-Entry:
     If this Lease shall be terminated as provided in Section 16.02, above, Landlord, or its agents or employees, may re-enter the Demised Premises at any time and remove therefrom Tenant, Tenant’s agents, and any subtenants, licensees, concessionaires or invitees, together with any of its or their property, either by summary dispossess proceedings or by any suitable action or proceeding at law or otherwise. In the event of such termination, Landlord may repossess and enjoy the Demised Premises. Landlord shall be entitled to the benefits of all provisions of law respecting the speedy recovery of lands and tenements, or proceedings in forcible entry and detainer. Tenant waives any rights to the service of any notice of Landlord’s intention to re-enter provided for by any present or future law. Landlord shall not be liable in any way in connection with any action it takes pursuant to the foregoing. Notwithstanding any such re-entry, repossession, dispossession or removal, Tenant’s liability and responsibility under all of the provisions of this Lease shall continue.
     Section 16.04. Landlord’s Additional Remedies:
     (a) In case of re-entry, repossession or termination of this Lease, whether the same is the result of the institution of summary or other proceedings, Tenant shall remain liable (in addition to accrued liabilities) to the extent legally permissible for: (i) the Rent, and all other charges provided for herein until the date this Lease would have expired had such termination, re-entry or repossession not occurred; and all expenses which Landlord may have incurred in re-entering the Demised Premises, repossessing the same; making good any Default of Tenant; painting, altering or dividing the Demised Premises; combining or placing the same in proper repair; protecting and preserving the same by placing therein watchmen and caretakers; reletting the same (including reasonable attorney’s fees and disbursements, Marshall’s fees, brokerage fees, in so doing); and any expenses which Landlord may incur during the occupancy of any new tenant; less (ii) the net proceeds of any reletting. Tenant agrees to pay to Landlord the difference between items (i) and (ii) hereinabove with respect to each month, at the end of such month. Any suit brought by Landlord to enforce collection of such difference for any one month shall not prejudice Landlord’s right to enforce the collection of any difference for any subsequent month. In addition to the foregoing, Tenant shall pay to Landlord such sums as the court may adjudge reasonable as attorney’s fees with respect to any successful lawsuit or action instituted by Landlord to enforce the provisions hereof.
     (b) Landlord may relet the whole or any part of said Demised Premises for the whole of the unexpired period of this Lease, or longer, or from time to time for shorter periods, for any rental then obtainable, giving such concessions of rent and making such special repairs, alterations, decorations and paintings for any new tenant as it may in its sole and absolute discretion deem advisable (all of which, without limitation, Tenant shall be liable for pursuant to Section 16.04(a)(i)) and may collect and receive the rents therefor.

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     Section 16.05. Waiver of Right of Redemption:
     Tenant hereby expressly waives (to the extent legally permissible), for itself and all persons claiming by, through, or under it, any right of redemption or for the restoration of the operation of this Lease under any present or future law in case Tenant shall be dispossessed for any cause, or in case Landlord shall obtain possession of the Demised Premises as herein provided.
     Section 16.06. Landlord’s Right to Perform for Account of Tenant:
     If an Event of Default shall occur hereunder, Landlord may, at any time, cure said Event of Default for the account and at the expense of Tenant. Tenant shall pay, on demand, to Landlord, with interest at the maximum legal rate, if any, otherwise at 18% per year, the amount so paid, expended, or incurred by the Landlord and any expense of Landlord including reasonable attorney’s fees incurred in connection with such Default; and all of the same shall be deemed to be Additional Rent.
     Section 16.07. Additional Remedies, Waivers, etc.:
     With respect to the rights and remedies of and waivers by Landlord:
          (i) The rights and remedies of Landlord set forth herein shall be in addition to any other right and remedy now and hereafter provided by law or equity. All such rights and remedies shall be cumulative and not exclusive of each other. Landlord may exercise such rights and remedies at such times, in such order, to such extent, and as often as Landlord deems advisable without regard to whether the exercise of one right or remedy proceeds, concurs with or succeeds the exercise of another.
          (ii) A single or partial exercise of a right or remedy shall not preclude (1) a further exercise thereof, or (2) the exercise of another right or remedy, from time to time.
          (iii) No delay or omission by Landlord in exercising a right or remedy shall exhaust or impair the same or constitute a waiver of, or acquiescence to a Default.
          (iv) No waiver of a Default shall extend to or affect any other Default or impair any right or remedy with respect thereto.
          (v) No action or inaction by Landlord shall constitute a waiver of Default.
          (vi) No waiver of a Default shall be effective unless it is in writing and signed by Landlord.
     Section 16.08. Distraint:
     In addition to all other rights and remedies, if Tenant shall be in Default hereunder, Landlord shall, to the extent permitted by law, have a right of distress for Rent and a lien on all of Tenant’s fixtures, furniture, and equipment in the Demised Premises, as security for Rent and all other charges payable hereunder.
ARTICLE XVII. TENANT’S ESTOPPEL CERTIFICATE.
     At any time within ten (10) business days after written request by Landlord, Tenant shall certify to Landlord, any mortgagee, assignee of a mortgagee, any purchaser, or any other person, specified by Landlord, by written instrument, duly executed and acknowledged, (i) whether or not Tenant is in possession of the Demised Premises; (ii) whether or not this Lease is unmodified and in full force and effect (or if there has been modification, that the same is in full force and effect as modified and setting forth such modification); (iii) whether or not there are then existing set-offs or defenses against the enforcement of any right or remedy of Landlord, or any duty or obligation of Tenant (and if so, specifying the same); (iv) the dates, if any, to which any Rent of other charges have been paid in advance; and (v) such other matters relating to this Lease as may be reasonably requested by Landlord, any Mortgagee or any of their designees.

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ARTICLE XVIII. RIGHT OF ACCESS
     Landlord may enter upon the Demised Premises, or any portion thereof (with laborers and materials, as required), with notice to Tenant and at reasonable times, for the purpose of: (i) inspecting same; (ii) making such repairs, replacements or alterations which it may be required to perform as herein provided or which it may deem desirable for the Demised Premises; (iii) showing the Demised Premises to prospective purchasers or lenders; or (iv) showing the Demised Premises to prospective replacement tenants within nine (9) months of the Expiration Date of this Lease, unless Tenant has renewed or extended the Term of Lease. Should Tenant vacate or abandon the Demised Premises during the last three (3) months of the Term, Landlord may enter upon the Demised Premises without notice to Tenant, for the purpose of making improvements, repairs, replacements or alterations in order to prepare the Demised Premises for the next tenant.
ARTICLE XIX. COVENANT OF QUIET ENJOYMENT.
     Landlord covenants that if Tenant pays the Rent and all other charges provided for herein, performs all of its obligations provided for hereunder, and observes all of the other provisions hereof, Tenant shall, at all times during the Term, peaceably and quietly have, hold and enjoy the Demised Premises, without any interruption or disturbance from Landlord, subject to the terms hereof.
ARTICLE XX. ENVIRONMENTAL MATTERS.
     Section 20.01. Industrial Site Recovery Act:
     (a) “Hazardous Substances” shall include any chemical substance, material or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, material or waste or component thereof by any present or future Federal, State or local environmental law, statute, act, rule, requirement, order, direction, ordinance or regulation and all amendments thereto (“Environmental Laws”).
     (b) Tenant covenants, represents and warrants that (i) its operation of the Demised Premises shall not involve any Hazardous Substances, (ii) Tenant is not and shall not be an “industrial establishment” (as such term is defined in the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. (which Act and all present and future amendments thereto and regulations promulgated thereunder are hereinafter referred to as “ISRA”)), and (iii) Tenant’s Standard Industrial Classification number as designated in the Standard Industrial Classification manual prepared by the Office of Management and Budget in the Executive Office of the President of the United States is, and shall be during the term of this Lease,                     .
     (c) In amplification of Section 20.01 (b) above and any other applicable provision of this Lease and not by way of limitation, in the event Tenant, in violation of this Lease, becomes an “industrial establishment” (as such term is defined in ISRA), Tenant shall, at Tenant’s sole cost and expense, without same constituting a waiver by Landlord of such default by Tenant under this Lease, comply with ISRA. Should the New Jersey Department of Environmental Protection and Energy, or any agency or subdivision thereof or any agency or subdivision responsible for enforcing ISRA (collectively, the “DEP”) determine that a cleanup plan be prepared, then Tenant (or, at Landlord’s option, Landlord on behalf of Tenant) shall, at Tenant’s sole cost and expense, prepare and submit the required plans and financial assurances, and fully implement the approved cleanup plan prior to the expiration or earlier termination of this Lease; however, Tenant shall not be responsible for any releases, spills or discharges (hereinafter sometimes collectively referred to as “discharges”) of Hazardous Substances which occur prior to the commencement of the term of this Lease. Tenant shall further obtain, at Landlord’s request, an administrative consent order from the DEP permitting Tenant to vacate the Demised Premises prior to a cleanup or other remediation, all at Tenant’s sole cost and expense including, without limitation, paying all filing fees and providing any required financial assurances.

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     (d) If the closing, terminating or transferring of Tenant’s operations at the Demised Premises does not trigger ISRA, or if the closing, terminating or transferring of Tenant’s operations at the Demised Premises does trigger ISRA but no cleanup or other remediation of any Hazardous Substances is required by the DEP pursuant to ISRA, then at Landlord’s request, Tenant shall obtain, at Tenant’s sole cost and expense, within thirty (30) days prior to such closing, terminating or transferring of Tenant’s operations at the Demised Premises either a written statement by the DEP that the closing, terminating or transferring of Tenant’s operations at the Demised Premises does not trigger ISRA or a “negative declaration” (as defined in ISRA) stating in part, that there are no Hazardous Substances at the Demised Premises which require any cleanup or other remediation.
     (e) In the event ISRA compliance becomes necessary at the Demised Premises due to any action or inaction on the part of Tenant, then, at Landlord’s election (i) Landlord shall comply with the requirements of ISRA inasmuch as such compliance relates to any Hazardous Substances released, discharged, stored or disposed of at the Demised Premises during the term of this Lease, and Tenant shall be responsible for paying the costs of such compliance within five (5) days after Landlord’s demand therefor, or (ii) Tenant shall be responsible for promptly, and within the time frame established by Landlord, complying with ISRA inasmuch as such compliance relates to any Hazardous Substances released, discharged or disposed of at the Demised Premises during the term of this Lease, and Tenant shall be responsible for paying the costs of such ISRA compliance. Tenant shall also promptly after Landlord’s request (but in no event later than five (5) days after Landlord’s request) provide all information requested by Landlord, sign any affidavit prepared by Landlord concerning ISRA and Tenant’s use and occupancy of the Demised Premises and pay all costs of such ISRA compliance that are attributable to Tenant’s use and occupancy of the Demised Premises. Landlord and the DEP, and any employee, representative, agent or contractor of Landlord or the DEP, may enter the Demised Premises for the purpose of complying with ISRA.
     (f) In the event Tenant, in violation of this Lease, becomes an industrial establishment and fails to comply with paragraphs “(c)” or “(e)” above, as applicable, prior to the expiration or earlier termination of this Lease, Tenant, at Landlord’s option, shall be deemed to be a “holdover tenant” and the provisions of Section 21.08 of this Lease shall be applicable to Tenant’s occupancy of the Demised Premises from the expiration or earlier termination of the Term of this Lease. In addition, Tenant shall indemnify and hold Landlord and Managing Agent harmless from and against any loss, cost, liability or expense resulting from such violation and failure to comply with ISRA including, without limitation, any attorneys’ fees and any claims made by any succeeding tenant.
     (g) In the event that there shall be filed a lien against the Demised Premises because of any Hazardous Substances released, discharged, stored or disposed of at the Demised Premises during the term of this Lease, Tenant shall, within thirty (30) days from the date Tenant is given notice of the lien (or in such shorter period of time in the event that the holder of such lien, including without limitation, the United States, State of New Jersey, or any agency or subdivision thereof, has commenced steps to cause the Demised Premises and Building to be sold pursuant to the lien) shall pay the claim and remove the lien from the Demised Premises. If Tenant fails to do so by said period, Landlord shall be entitled to resort to such remedies as are provided in this Lease as in the case of any default of this Lease, in addition to any remedies as are permitted by law, in equity or otherwise.
     (h) Tenant shall indemnify, defend and save harmless Landlord and Managing Agent from and against all fines, suits, procedures, claims, actions, damages, liabilities, judgments, reasonable costs and expenses (including without limitation, reasonable attorneys’ fees) of any kind arising out of or in any way connected with the presence of Hazardous Substances at the Demised Premises during the term of this Lease (including, without limitation, Hazardous Substances originating on the Demised Premises or migrating to the Demised Premises from other property, but not including any Hazardous Substances existing prior to the term of this Lease); and from all fines, suits, procedures, claims, actions, damages, liabilities, judgments, reasonable costs and expenses (including without limitation, reasonable attorneys’ fees) of any kind arising out of Tenant’s failure to provide all information, make all submissions and take all actions required by any Environmental Law or Laws.
     (i) Tenant’s obligations and liabilities under this Article 20 shall continue after expiration or earlier termination of the term of this Lease for so long as Landlord remains responsible for any spills or discharges of Hazardous Substances released, discharged, stored or disposed of at the Demised Premises by Tenant (or any other occupant of the Demised Premises during the term of this Lease) or Tenant’s (or any such occupant’s) Agents.

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     (j) In addition to the foregoing environmental obligations on Tenant’s part to be performed, Tenant shall also promptly furnish to Landlord (i) true and complete copies of all documents, submissions, and correspondence provided to any environmental agency including, but not limited to, the DEP and the United States Environmental Protection Agency, and (ii) true and complete copies of all sampling and test results obtained from samples and tests taken at, around, in or upon the Demised Premises.
     (k) Landlord shall indemnify, defend and save harmless Tenant from and against all fines, suits, procedures, claims, actions, damages, liabilities, judgments, reasonable costs and expenses (including reasonable attorneys’ fees) of any kind arising out of any spills or discharges of Hazardous Substances at the Demised Premises occurring prior to the Commencement Date and which are in no way attributable, directly or indirectly, to Tenant or Tenant’s Agents.
ARTICLE XXI. MISCELLANEOUS.
     Section 21.01. Interpretation:
     (a) Every term, condition, agreement or provision contained in this Lease which imposes an obligation on Tenant shall be deemed to be also a covenant by Tenant.
     (b) Any reference herein to subtenants or licensees shall not be deemed to imply that any subtenants or licensees are permitted hereunder. Any reference herein to any extension or renewal of the Term or any period during which Tenant may be in possession after the Expiration Date shall not be deemed to imply that any extension or renewal of the Term is contemplated hereby or that Tenant shall be permitted to remain in possession after the expiration of the Term.
     (c) If any provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.
     (d) The captions and headings used throughout this Lease are for convenience of reference only and shall not affect the interpretation of this Lease.
     (e) This Lease has been executed in several counterparts; but the counterparts shall constitute but one and the same instrument.
     (f) Wherever a requirement is imposed on any party hereto, it shall be deemed that such party shall be required to perform such requirement at its own expense unless it is specifically otherwise provided herein.
     (g) The singular includes the plural and the plural includes the singular.
     Section 21.02. Construction of Words and Phrases:
     (a) Wherever it is provided herein that a party may perform an act or do anything, it shall be construed that such party may, but shall not be obligated to, so perform or so do.
     (b) The words “reenter” and “reentry” as used herein are not restricted to their technical legal meaning.
     (c) The word “person” shall be construed as an individual, fiduciary, estate, trust, partnership, firm, association, corporation, limited liability company, other organization, or a government or governmental or quasi-governmental authority.
     (d) The following words and phrases shall be construed as follows: (i) “At any time” shall be construed as, “at any time or from time to time”; (ii) “Any” shall be construed as “any and all”; and (iii) “Including” shall be construed as “including but not limited to”.

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     Section 21.03. Written Agreement Required:
     No amendment, alteration, modification of or addition to the Lease will be valid or binding unless expressed in writing and signed by Landlord and Tenant.
     Section 21.04. Notice:
     Every notice, request, consent, approval, waiver or other communication under this Lease shall be deemed to have been given if in writing and upon mailing by registered or certified mail, return receipt requested, postage prepaid, or upon delivery by independent overnight courier, (e.g., Federal Express), addressed:
     (a) If to Landlord, to the address designated as Landlord’s Notice Address, or such other address as Landlord designates, with a copy to such other persons as Landlord shall designate.
     (b) If to Tenant, to the address designated as Tenant’s Notice Address, or such other address as Tenant designates, with a copy thereof to the address designated as Tenant’s Notice Copy Address or to such other persons as Tenant shall designate.
  (i)   Landlord’s Notice Address:
Vreeland SPVEF Venture, LLC
c/o Bergman Realty Corporation
555 Route One South
Iselin, NJ 08830
Attn: Michael Bergman
 
  (ii)   Landlord’s Mortgagee Copy Address:
JP Morgan Chase Bank N.A. (“Mortgagee”)
245 Park Avenue, 14th Floor
New York, New York 10017
 
  (iii)   Tenant’s Notice Address:
SCO Group, Inc.
25A Vreeland Road
Florham Park, NJ 07932
Attn:                     
 
  (iv)   Tenant’s Notice Copy Address:
                                                            
                                                            
                                                            
     (c) A party’s attorney may sign a notice on behalf of the party. Notices that are mailed shall be deemed delivered three (3) business days after mailing. Notices that are shipped by independent overnight courier shall be deemed delivered one (1) business day after shipping.
     Section 21.05. Method of Payment:
     Landlord shall have the right to specify the manner of payment of Rent during the Term of this Lease. All amounts payable under this Lease shall be payable in coin or currency of the United States of America.
     Section 21.06. Successors and Assigns:
     Subject to the provisions hereof, this Lease shall bind and inure to the benefit of the parties and their respective successors, representatives, heirs and assigns.

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     Section 21.07. Guarantor of Tenant:
     Any restrictions on or requirements imposed upon Tenant hereunder shall be deemed to extend to any guarantor of Tenant, Tenant’s subtenants, concessionaires and licensees and it shall be Tenant’s obligation to cause the foregoing persons to comply with such restrictions or requirements.
     Section 21.08. Hold Over:
     (a) If Tenant shall remain in possession of the Demised Premises after the end of the Term, a tenancy relationship shall be deemed to arise therefrom and any holdover shall not be construed as a consent by Landlord to the possession by Tenant of the Demised Premises beyond the Expiration Date of this Lease; however, until such time as Tenant complies with Section 7.06 and Article XX hereof, such holding over shall be deemed to be a month-to-month occupancy, subject to all of the provisions, conditions and obligations of this Lease, except that the Rent to be charged Tenant during such hold over period shall be double the monthly Rent in effect for the last month of the Term or any renewal periods, except that the first two (2) months of any holding over shall be based upon one and one half (1.5) times the monthly Rent in effect for the last month of the Term or any renewal periods.
     (b) If Tenant fails to surrender the Demised Premises upon the Expiration, or earlier termination of this Lease as provided for herein, then, in addition to any other liability to Landlord accruing therefrom, Tenant shall indemnify and hold Landlord harmless from and against any loss, cost, liability or expense, including, without limitation, reasonable attorney fees, resulting from such failure to vacate including, without limiting the generality of the foregoing, loss of future rents and any claims made by any succeeding tenant arising due to such failure.
     Section 21.09. Interest:
     Any payment required to be made by Tenant under the provisions of this Lease not made by Tenant within five (5) business days from the date when due shall be payable by Tenant to Landlord on demand with interest thereon at the highest legal rate, or eighteen (18%) percent per annum if there is no legal rate, computed from the date said sum became due to the date of payment thereof to Landlord.
     Section 21.10. Late Charge:
     In order to cover the extra expense involved in handling delinquent payments, Tenant shall pay a “late charge” of five (5%) percent of the amount due when any payment of Rent hereunder is received by Landlord more than five (5) business days after the due date thereof. It is understood and agreed that this charge is for additional expense incurred by Landlord and shall not be considered interest.
     Section 21.11. Non-Waiver:
     The failure of Landlord to insist upon strict performance of any covenants or conditions of this Lease or Landlord’s failure to exercise any option herein conferred in any one or more instances shall not be construed as a waiver or relinquishment of any such covenants, conditions or options, but the same shall be and remain in full force and effect. If the Landlord pursues any remedy granted by the terms of this Lease or pursuant to applicable law, it shall not be construed as a waiver or relinquishment of any other remedy afforded thereby.
     Section 21.12. Broker:
     Tenant represents that there was no broker other than Jones Lang LaSalle and Bergman Realty Corporation (collectively, “Broker”) responsible for bringing about or negotiating this Lease. Tenant agrees to defend, indemnify, and hold Landlord harmless against any claims for brokerage commission or compensation with regard to the Demised Premises by any other broker claiming or alleging to have acted on behalf of or to have dealt with Tenant. Landlord will pay any fees or commissions due the Broker.

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     Section 21.13. Short Form Lease:
     Landlord and Tenant agree that neither party shall record the Lease. Upon request of either party the other shall execute a document in recordable form, or a short form lease or memorandum of lease in proper form for recording, setting forth the Commencement Date and any provisions hereof other than Sections 5.01, 5.02, 5.03, 5.05. The requesting party shall pay all recording fees and costs in connection with any such short form or memorandum of lease.
     Section 21.14. Financial Statements:
     The Tenant agrees, at the request of Landlord, to furnish its current annual financial statement certified to by its certified public accountants, and, if applicable, such annual or quarterly reports as Tenant may file with the Securities and Exchange Commission.
     Section 21.15. Mechanics’ Liens:
     Tenant shall not do or cause anything to be done whereby the Demised Premises may be encumbered by a mechanic’s lien. If any mechanic’s or materialman’s lien is filed against the Demised Premises, the Building or the Real Estate as a result of any additions, alterations, repairs, installations, improvements or any other work or act of Tenant, Tenant shall discharge or bond same within twenty days from the date of filing of the lien. If Tenant shall fail to discharge or bond the lien, Landlord may bond or pay the lien or claim for the account of Tenant without inquiring into the validity of the lien or claim and Tenant shall reimburse Landlord upon demand.
     Section 21.16. Corporate Authority:
     (a) Tenant represents that the undersigned officer(s) [partner(s)] has (have) been duly authorized to enter into this Lease and that the execution and consummation of this Lease by Tenant does not and shall not violate any provision of any bylaws, certificate of incorporation, agreement, [partnership or other agreement] order, judgment, governmental regulation or any other obligations to which Tenant is a party or is subject. Upon execution hereof, Tenant shall deliver a Secretary’s certificate evidencing its authority to execute this Lease [evidence satisfactory to Landlord of the accuracy of the foregoing representation].
     (b) Landlord represents that the undersigned officer of Landlord has been duly authorized to enter into this Lease and that the execution and consummation of this Lease by Landlord does not and shall not violate any provision of any bylaw, certificate of incorporation, agreement, order, judgment, governmental regulation or any other obligation to which Landlord is a party or is subject.
     Section 21.17. Force Majeure:
     Landlord shall not be liable for any delays and other events beyond the reasonable control of a party defined herein as Force(s) Majeure(s), and including, without limitation: acts of God; strikes, lock-outs or other labor difficulty; explosion, sabotage, accident riot or civil commotion; act of war; fire or other casualty; requirements of governing authorities or inability to obtain necessary governmental permits and approvals.
     Section 21.18. Governing Law:
     This Lease shall be governed by and construed pursuant to the Laws of the State of New Jersey.
     Section 21.19. Substituted Premises:
     Landlord reserves the one-time right without Tenant’s consent, on sixty (60) days written notice to Tenant, to substitute other premises within the Building for the Premises described above, provided that the Substituted Premises: (i) contain approximately the same rentable square footage as the Premises, (ii) contain comparable Tenant Improvements, in terms of configuration, layout, window line, quality, supplemental electrical supply and HVAC, and décor, (iii) are made available to Tenant at the same rental rate (per rentable square foot) for such space, as the rental rate specified

33


 

herein, and (iv) shall be completed prior to Tenant’s move-in. Landlord shall pay for all reasonable costs and expenses incurred by Tenant in connection with Tenant’s move to the Substituted Premises, including without limitation, moving expenses, professional fees, stationery costs, relocation of cable, telephone, telecommunication, and similar reasonable costs and expenses.
     Section 21.20. Renewal Option
     (a) Tenant shall, upon giving Landlord at least nine (9) months prior written notice but no more than twelve (12) months from the natural Expiration Date of the Lease (“Exercise Notice”), have the option to renew this Lease for an additional term of five (5) years (“Renewal Term”) upon all the same terms and conditions of the Lease, except for the (A) annual Base Rent, which shall be determined in accordance with the then “Prevailing Fair Market Rental Rate” being charged in the Building and other comparable quality office buildings in the Florham Park, New Jersey office market for: (i) comparable space in size, quality and condition; (ii) comparable term of lease; and (iii) comparable Building services, amenities and location, and (B) Base Year which shall be adjusted to the then current calendar year. In no event, however, shall the Base Rent for the Renewal Term be less than the current annual rent being paid by Tenant (inclusive of Additional Rent payments pursuant to Sections 5.02 and 5.03 hereof) at the time the Renewal Term commences.
     (b) Within fifteen (15) days after receipt of Tenant’s Exercise Notice, Landlord shall send written notice to Tenant of the Prevailing Fair Market Rental Rate for the Renewal Term. In the event Landlord and Tenant cannot agree upon the annual Base Rent for the Renewal Term within thirty (30) days of Landlord’s notice, then within fifteen (15) days thereafter, each party shall select a qualified commercial real estate appraiser with at lease five (5) years experience in appraising office properties in the Florham Park, New Jersey office market and surrounding areas. The two appraisers shall give their opinion of Prevailing Fair Market Rental Rates within twenty (20) days after their retention. If the opinions of the two appraisers differ by three (3%) percent or less, then the average of the two appraisers shall be used as the Prevailing Fair Market Rental Rate. In the event the opinions of the two appraisers differ by more than three (3%) percent, and after good faith efforts over the succeeding ten (10) day period the parties cannot mutually agree on the Base Rent for the Renewal Term, then the appraisers shall immediately and jointly appoint a third appraiser with the qualifications specified above. This third appraiser shall, within five (5) business days, choose either the determination of Landlord’s appraiser or Tenant’s appraiser and such choice of this third appraiser shall be final and binding on Landlord and Tenant. Each party shall pay its own costs for its real estate appraiser and shall equally share the costs of any third appraiser. As soon as Landlord and Tenant have agreed to the Base Rent for the Renewal Term, the parties shall execute an amendment to the Lease confirming the extension of the Term and the adjusted Base Rent.
     (c) Tenant’s option to renew shall be conditioned upon and subject to each of the following:
          (i) Tenant’s timely exercise of this option by providing Landlord its Exercise Notice within the time frame described in paragraph (a) above;
          (ii) Tenant shall not be in default under the terms and conditions of this Lease beyond the applicable grace period for the cure thereof at the time Tenant exercises its option;
          (iii) Tenant shall not have subleased any portion of the Demised Premises or assigned its interest in this Lease to an unaffiliated company, it being expressly understood that this option to renew shall be deemed personal to Tenant and may not be assigned without Landlord’s prior written consent;
          (iv) Tenant shall have no further renewal options other than the option to extend for the Renewal Term set forth in paragraph (a) above; and
          (v) Landlord shall have no obligation to do any work with respect to the Demised Premises.

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     Section 21.21. Right of First Offer:
     During the initial Term of this Lease, and subject to any rights of other tenants currently in occupancy as of the date of this Lease, upon receipt of Tenant’s written request for additional space Landlord shall grant Tenant the “Right of First Offer” to lease any contiguous space on the first (1st) floor of the Building that becomes available (“Offer Space”) prior to Landlord leasing said Offer Space to any prospective tenants. Upon such receipt of Tenant’s written request for additional space, Landlord shall first offer Tenant the right to lease the Offer Space in accordance with the rental terms and conditions proposed by Landlord, but in no event greater then the Prevailing Fair Market Rental Rate as defined in Section 21.20 above (the “Offer Notice”); provided, however if the Offer Space is leased during the first thirteen (13) months of the Term, then the current Base Rental rates then in effect shall apply to the Offer Space. Tenant shall have fifteen (15) days from the receipt of Landlord’s Offer Notice to respond by either (i) electing to exercise its Right of First Offer to lease the Offer Space as presented in Landlord’s Offer Notice, in which case Landlord and Tenant will promptly execute an amendment to this Lease incorporating the Offer Space and the terms and conditions for leasing same; or (ii) rejecting the Offer Space, in which case Landlord shall be free to lease said space to any third party prospects. If Tenant does not respond within said fifteen (15) days or fails to timely exercise its rights hereunder, then this Right of First Offer shall lapse, and Landlord may lease the Offer Space to third parties. This Right of First Offer shall not be applicable: (i) during the last six (6) months of the Lease if Tenant has not exercised its Renewal Option as provided herein, or (ii) during any renewal or extension term of the Lease, or (iii) if Tenant rejects two or more Offers presented by Landlord in accordance herewith. For purposes hereof, space shall not be deemed available unless such space is anticipated by the Landlord to become vacant and available for lease, as Landlord shall have the right to renew and/or extend any lease with any tenant whether or not pursuant to a contractual obligation to do so.
     IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and sealed this Lease as of the day and year first above written.
           
WITNESS:   LANDLORD:
VREELAND SPVEF VENTURE, LLC
 
    By:  Bergman Vreeland Associates, LLC
Its Managing Member
 
     
/s/ John G. Osborne   By:   Michael Bergman    
Witness     Name:   Michael Bergman   
      Title:   Member   
 
WITNESS:   TENANT: SCO GROUP, INC.
 
 
/s/ Jean Acheson   By:   Jeff F. Hunsaker    
Witness     Name:   Jeff F. Hunsaker   
      Title:   Executive Vice President   
 

35


 

EXHIBIT “A”
DESCRIPTION OF THE LAND

36


 

EXHIBIT “B”
OUTLINE OF DEMISED PREMISES

37


 

EXHIBIT “C”
TENANT IMPROVEMENT WORKLETTER
     A. Landlord shall, at its sole cost and expense, provide for the following Tenant Improvement Work to the Initial 1st Floor Premises substantially in accordance with the Preliminary Plan dated                           , 2008 prepared by Landlord’s architect, Jarmel Kizel, AIA, shown attached hereto as Exhibit “C-1” (the “Preliminary Plan”) using Building standard quality materials and finishes (collectively, the “Initial 1st Floor Tenant Improvement Work”):
  1.   Paint the 1st Floor Premises;
 
  2.   Install new carpeting;
 
  3.   Repair and replace ceiling tiles and light lenses as needed;
 
  4.   Recondition the IT room into a conference room; and
 
  5.   Construct six (6) private offices along the window line, each approximately 12’ x 15’. Each office shall be provided a separate 20 amp circuit with two duplex electric outlets.
     B. Landlord, at its sole cost and expense but not to exceed the “3rd Floor Tenant Improvement Allowance” of $27.50 per rentable square foot i.e. $61,765.00 (inclusive of architectural fees, construction drawings, permits and other similar reasonable costs), shall provide for the following Tenant Improvement Work to the 3rd Floor Premises substantially in accordance with the Preliminary Plan using Building standard quality materials and finishes (collectively, “3rd Floor Tenant Improvement Work”):
  1.   Install either a fifteen (15) or twenty (20) ton supplemental air conditioning unit (this may require upgrade to the electrical panel);
 
  2.   Install thirty (30) floor mounted 20 amp circuits (in a location to be determined per architectural plan);
 
  3.   Install an electric meter or sub-meter to measure the electricity actually consumed in the 3rd Floor Premises for the supplemental HVAC equipment and the additional electrical circuits;
 
  4.   Add VCT tile; and
 
  5.   Paint the 3rd Floor Premises.
     C. Landlord shall, at its sole cost and expense, provide for the following Tenant Improvement Work to the Expansion Space substantially in accordance with the Preliminary Plan dated                           , 2008 prepared by Landlord’s architect, Jarmel Kizel, AIA, shown attached hereto as Exhibit “C-1” (the “Preliminary Plan”) using Building standard quality materials and finishes (collectively, “Expansion Space Tenant Improvement Work”):
  1.   Paint the Expansion Space;
 
  2.   Install new carpeting; and
 
  3.   Create an entranceway between the Initial 1st Floor Premises and the Expansion Space.
     Except for the above Initial 1st Floor Tenant Improvement Work, the above 3rd Floor Tenant Improvement Work and the above Expansion Space Tenant Improvement Work (collectively, the “Tenant Improvement Work”), the Premises shall be delivered to Tenant in “as-is” condition. Should the cost of the 3rd Floor Tenant Improvement Work exceed the 3rd Floor Tenant Improvement Allowance (referred to as “Additional 3rd Floor Work Costs”), Landlord shall provide Tenant a written estimate for the total cost of the 3rd Floor Tenant Improvement Work, including any Additional 3rd Floor Work Costs that Tenant shall be responsible to pay for, which Tenant shall approve within three (3) business days of receipt thereof. Prior to Landlord commencing with the Tenant Improvement Work, Tenant shall pay Landlord 50% of the estimated Additional 3rd Floor Work Costs. Upon substantial completion of the Tenant Improvement Work, Landlord shall submit to Tenant a final statement setting forth the total cost of the 3rd Floor Tenant Improvement Work and the Additional 3rd Floor Work Costs that Tenant is responsible to pay for, together with invoices documenting such costs, and Tenant shall pay to Landlord the remaining Additional 3rd Floor Work Costs within ten (10) days after Tenant’s receipt of said statement. In the event the total cost of the 3rd Floor Tenant Improvement Work, including architectural and permit fees, is less than the 3rd Floor Tenant Improvement Allowance, then Tenant agrees that Tenant shall not be entitled to such difference nor to any credit against the monthly installments of rent equal to such difference.

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EXHIBIT “C-1"
PRELIMINARY PLAN

39


 

EXHIBIT “D”
RULES AND REGULATIONS
     Tenant agrees to comply with the following rules and regulations and with such reasonable modifications thereof and additions thereto as Landlord may make for the Building, it being agreed Landlord shall not be responsible for any non-observance thereof by other Tenants.
1. Tenant shall not paint, display, inscribe or affix any sign, picture, advertisement, notice, lettering or direction on any part of the outside or inside of the Building, or on any part of the inside of the Demised Premises which is intended to be seen from outside the Demised Premises, except on the hallway doors of the Demised Premises, and then only of color, size, style, character and material first approved by Landlord in writing which shall not be unreasonable withheld. Landlord reserves the right to remove at Tenant’s expense, all matter other than that above provided for without notice to Tenant.
2. In advertising or other publicity, without Landlord’s prior written consent, Tenant shall not use the name of the Building except as the address of its business and shall not use pictures of the Building in advertising and publicity.
3. Tenant shall not obstruct sidewalks, entrances, passages, courts, corridors, vestibules, halls, elevators and stairways in and about the Building. Tenant shall not place objects against glass partitions or doors or windows which would be unsightly from the Building corridor or exterior of the building.
4. Tenant shall not make noises, cause disturbances or vibrations or use or operate any electrical or electronic devices the emit sound or other waves or disturbances, or create odors that would be offensive to other tenants and occupants of the Building or that would interfere with radio or television broadcasting or reception from or in the Building or elsewhere, and shall not place or install antennae or aerials or similar devices outside of the Demised Premises.
5. Tenant shall not make any room-to-room canvass to solicit business from other tenants in the Building; and shall not exhibit, sell or offer to sell, use, rent, or exchange in or from the Demised Premises unless ordinarily embraced within the Tenant’s use of the Demised Premises specified herein.
6. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building’s heating and air-conditioning, and shall refrain from attempting to adjust any controls other than room thermostats, installed for Tenant’s use. Tenant shall keep corridor doors closed. Landlord shall not permit any object to be placed on or dropped into any grills or devices in the Demised Premises utilized for heating and air-conditioning.
7. Door keys for doors in the Demised Premises will be furnished at the commencement of the Lease by Landlord. Tenant shall not affix additional locks on doors unless they provide a set keys to Landlord, and shall purchase duplicate keys only from Landlord. When the Lease is terminated, Tenant shall return all keys to Landlord and will disclose to Landlord the combination of any safes, cabinets or vaults left in the Demised Premises.
8. Tenant assumes full responsibility for protecting its space from theft, robbery and pilferage which includes keeping doors locked and other means of entry to the Demised Premises closed.
9. If the Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain and comply with, Landlord’s instructions in their installation.
10. The Landlord may require that all persons who enter or leave the Building at any time, if determined by Landlord from time to time to be necessary for the protection of the Building, must identify themselves to security personnel, by registration or otherwise.
11. Peddlers, solicitors and beggars shall be reported to the office of the Building or as Landlord otherwise requests.

40


 

12. Tenant shall not overload floors and lessor must give advance written approval as to size, maximum weight, routing and location of business machines, safes and heavy objects. Tenant shall not install and operate machinery devices of a nature not directly related to Tenant’s ordinary use of the Demised Premises without the written permission of Landlord. Landlord reserves the right to designate the time when and the method whereby freight, small office equipment, supplies, furniture, safes and other like articles may be brought into, moved or removed from the Building or rooms, and to designate the location for temporary disposition of such items. In no event shall any of the foregoing items be taken from Tenant’s space for the purpose of removing same from the building without the express consent of both Landlord and Tenant.
13. Furniture, packages, supplies, merchandise, freight, equipment and other large articles may be brought into the Building only at time and in the manner designated by Landlord. Tenant shall furnish Landlord with a list of furniture, equipment and other similar objects which are to be removed from the Building. Movements of tenant’s property into or out of the Building are entirely at the risk and responsibility of Tenant and Landlord may require permits before allowing anything to be moved in or out of the Building.
14. No person or contractor shall be employed to do janitor work, window washing, cleaning, construction, maintenance or similar services in the Demised Premises except by Landlord.
15. Tenant shall not cook in the Demised Premises or otherwise create any obnoxious odors therein or in the Building or so as to violate any federal, state or municipal fire or zoning laws, regulations or ordinances, nor shall Tenant use any space in the Demised Premises for living quarters, whether temporary or permanent. Notwithstanding the foregoing, Tenant may use a microwave oven for warming food.
16. Tenant shall not use or permit to be brought into the premises or the Building any inflammable oils or fluids other than small quantities of cleaning fluids and office supplies, or any explosive or other articles hazardous to person or property; or do or permit to be done any act or thing which will invalidate be in conflict with fire or other insurance policies covering the Building or its operation, or the Demised Premises, or part of either; or do or permit to be done anything in or upon the Demised Premises, or bring or keep therein, which shall not comply with all rules, regulations or requirements of the Board of Fire Underwriters, or any similar organization (and Tenant shall at all times comply with all such rules, orders, regulations or requirements), or which shall increase the rate of insurance on the Building, its appurtenances or contents. If by reason of the failure of Tenant to comply with the provisions of this paragraph, any insurance premium payable by Landlord shall at any time be increased above what it otherwise would be, Tenant shall reimburse Landlord to the extent of all such increases in premiums paid by Landlord.
17. Tenant shall comply with all applicable federal, state and municipal laws, ordinances and regulations and shall not directly or indirectly make any use of the Demised Premises which may be prohibited by any laws, ordinances or regulations thereof or which shall be dangerous to person or property or shall increase the cost of insurance or require additional coverage.
18. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.
19. Animals (other than seeing eye dogs), birds, bicycles or motorized bikes shall not be brought on, or kept in or about the Building.
20. Tenant shall be responsible for the observance of all of the foregoing by Tenant’s employees, agents, clients, customers, invitees and guests.
21. The charge for after-hours heat or air conditioning shall be determined by the Landlord and confirmed in writing to the Tenant, as the same may change from time to time. There shall be a minimum charge of one-hour for every partial hour of usage.

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EXHIBIT “E”
JANITORIAL SERVICES
General Cleaning Office Area
Cleaning Service provided five (5) days per week.
Cleaning hours Monday through Friday, between 5:30 p.m. and before 8:00 a.m. of the following day.
On the last day of the week the work will be done after 5:30 p.m. Friday, but before 8:00 a.m. Monday.
No cleaning on holidays.
Furniture will be dusted and desk tops will be wiped clean. However, desks with loose papers on the top will not be cleaned.
Window sills and baseboards to be dusted and washed when necessary.
Office wastepaper baskets will be emptied nightly.
Cartons or refuse in excess of that which can be placed in wastebaskets will not be removed. Lessees are required to label such unusual refuse and place near wastebaskets.
Cleaners will not remove nor clean non paper tea or coffee cups or mugs or similar containers; also if such liquids are spilled in wastebaskets the wastebaskets will be emptied but not otherwise cleaned.
Vinyl tile floors will be swept daily.
All rugs will be carpet swept nightly.
Carpets will be vacuumed every night.
All closet shelving, coat racks, etc. will be dusted weekly.
Seat cushions on chairs, sofas, etc. will be vacuumed weekly.
Lavatories
All lavatory floors to be swept and washed with disinfectant nightly.
Tile walls and dividing partitions to be washed and disinfected weekly.
Basins, bowls, urinals to be washed and disinfected daily.
Mirrors, shelves, plumbing work, bright work, and enamel surfaces cleaned nightly.
Waste receptacles and wash dispensaries to be filled with appropriate tissues, towels, and soap supplied by Lessee.

1


 

Main Lobby Elevators, Building Exterior and Corridors
Wipe and wash all floors in Main Lobby nightly.
Wipe and/or vacuum floors nightly.
Polish or vacuum floors weekly in elevators.
Elevator cab to be wiped daily and thoroughly cleaned and polished weekly.
Lobby walls, glass, etc., to be wiped clean daily and thoroughly cleaned and polished weekly.
Lobby entrance doors, windows to be washed weekly.
Exterior windows will be cleaned when necessary but not less two (2) times per year.
Miscellaneous Services
Sweep sidewalk in front of building entrances daily.
Remove snow and ice from sidewalks when accumulation reaches 3” or more.
Remove snow from parking areas when accumulation reaches 3” or more.
Keep stairways clean at all times.
Keep Custodian’s Room and Mechanical Rooms clean and in orderly condition at all times.
Work Excluded
Cleaning services do not include the shampooing of carpet, nor washing nor polishing, nor waxing of furniture, files, cabinets, wastebaskets or other personal property of Lessee. When such work is necessary, Lessee may make necessary arrangements for same directly with Lessor’s cleaning employees.

2


 

EXHIBIT “F”
HOLIDAY SCHEDULE
NEW YEAR’S DAY
PRESIDENT’S DAY
MEMORIAL DAY
INDEPENDENCE DAY
LABOR DAY
THANKSGIVING DAY
CHRISTMAS DAY

 


 

EXHIBIT “G”
COMMENCEMENT DATE MEMORANDUM
     THIS AGREEMENT made the ___ day of                      , 200__ between VREELAND SPVEF VENTURE, LLC, having an office located at c/o Bergman Realty Corporation, 555 Route One South, Iselin, New Jersey 08830, (“Landlord”) and SCO GROUP, INC., a                      corporation having an office address of 355 South 520 West, Lindon, Utah 84042 (hereinafter called “Tenant”).
WITNESSETH:
     WHEREAS, Landlord and Tenant entered into a Lease dated                     , 200__ (the “Lease”) setting forth the terms of occupancy by Tenant for a portion of the first (1st) and third (3rd) floors of a Building known as Florham Park Corporate Center — Building A located at 25A Vreeland Road, Florham Park, New Jersey 07932 consisting of approximately 9,076 rentable square feet (the “Premises”); and
     WHEREAS, the Lease is for an initial Term of sixty-one (61) months (plus the remaining number of days in the month on which the Commencement Date occurs if such date is other than the first day of the month) with the “Commencement Date” of the Term being defined in the Lease Provisions; and
     WHEREAS, it has been determined in accordance with the Lease that                      is the Commencement Date of the initial Term of the Lease.
     NOW THEREFORE, in consideration of the premises and the covenants hereinafter set forth, it is agreed:
  1.   The Commencement Date of the initial term of the Lease is                      and the Expiration Date thereof is                     .
 
  2.   This agreement is executed by the parties for purposes of providing a record of the Commencement and Expiration Dates of the initial term of the Lease.
     IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first above written.
           
WITNESS:   LANDLORD:
VREELAND SPVEF VENTURE, LLC
  By:  Bergman Vreeland Associates, LLC
Its Managing Member
 
 
    By:      
Witness     Name:     
    Title:      
 
WITNESS:   TENANT: SCO GROUP, INC.
 
 
    By:      
      Name:      
      Title:      
 

 

EX-31.1 3 v43726exv31w1.htm EXHIBIT 31.1 exv31w1
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Darl C. McBride, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of The SCO Group, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238, 34-47986, 33-8618 and 33-8760];
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: September 15, 2008  /s/ Darl C. McBride   
  Darl C. McBride   
  President and Chief Executive Officer   

 

EX-31.2 4 v43726exv31w2.htm EXHIBIT 31.2 exv31w2
         
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth R. Nielsen, certify that:
     1. I have reviewed this quarterly report on Form 10-Q of The SCO Group, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238, 34-47986, 33-8618 and 33-8760];
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: September 15, 2008  /s/ Kenneth R. Nielsen   
  Kenneth R. Nielsen   
  Chief Financial Officer and
Principal Accounting Officer 
 

 

EX-32.1 5 v43726exv32w1.htm EXHIBIT 32.1 exv32w1
         
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of The SCO Group, Inc. (the “Company”) on Form 10-Q for the three months ended July 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Darl C. McBride, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
By:   /s/ Darl C. McBride     
  Darl C. McBride     
  President and Chief Executive Officer     
 
Date: September 15, 2008

 

EX-32.2 6 v43726exv32w2.htm EXHIBIT 32.2 exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of The SCO Group, Inc. (the “Company”) on Form 10-Q for the three months ended July 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth R. Nielsen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
  1.   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
By:   /s/ Kenneth R. Nielsen     
  Kenneth R. Nielsen     
  Chief Financial Officer and
Principal Accounting Officer 
   
 
Date: September 15, 2008

 

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