10-Q 1 v51868e10vq.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 January 31, 2009
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
(State or other jurisdiction of
incorporation or organization)
  87-0662823
(I.R.S. Employer Identification Number)
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 February 28, 2009, there were 21,588,879 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  
    17  
    33  
    34  
       
    34  
    37  
    45  
    46  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-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)
                 
    January 31,     October 31,  
    2009     2008  
ASSETS
               
CURRENT ASSETS:
               
Cash
  $ 1,836     $ 1,237  
Restricted cash
    3,766       2,308  
Accounts receivable, net of allowance for doubtful accounts of $112 and $94, respectively
    2,302       2,801  
Prepaid reorganization expenses
    254       415  
Other
    625       857  
 
           
Total current assets
    8,783       7,618  
OTHER ASSETS
          365  
 
           
Total assets
  $ 8,783     $ 7,983  
 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 717     $ 608  
Payable to Novell, Inc.
    2,142       632  
Accrued payroll and benefits
    937       875  
Accrued liabilities
    335       537  
Accrued reorganization expenses
    180       336  
Deferred revenues
    1,522       1,619  
Royalties payable
    100       107  
Income taxes payable
    590       631  
 
           
Total current liabilities
    6,523       5,345  
LONG-TERM LIABILITIES
    68       68  
LIABILITIES SUBJECT TO COMPROMISE
    6,708       6,700  
 
           
Total liabilities
    13,299       12,113  
 
           
 
               
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
               
 
               
STOCKHOLDERS’ 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
    264,520       264,339  
Common stock held in treasury; 297 shares outstanding
    (2,446 )     (2,446 )
Accumulated other comprehensive income
    900       1,008  
Accumulated deficit
    (267,512 )     (267,053 )
 
           
Total stockholders’ deficit
    (4,516 )     (4,130 )
 
           
Total liabilities and stockholders’ deficit
  $ 8,783     $ 7,983  
 
           
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 January 31,  
    2009     2008  
REVENUES:
               
Products
  $ 2,547     $ 4,039  
Services
    550       833  
SCOsource
           
 
           
Total revenues
    3,097       4,872  
 
           
COST OF REVENUES:
               
Products
    144       288  
Services
    214       431  
SCOsource
    109       267  
 
           
Total cost of revenues
    467       986  
 
           
GROSS MARGIN
    2,630       3,886  
 
           
OPERATING EXPENSES:
               
Sales and marketing
    1,326       2,741  
General and administrative
    810       924  
Research and development
    722       1,273  
 
           
Total operating expenses
    2,858       4,938  
 
           
LOSS FROM OPERATIONS
    (228 )     (1,052 )
 
           
EQUITY IN INCOME (LOSS) OF AFFILIATE
    5       (11 )
 
           
OTHER INCOME (EXPENSE):
               
Reorganization expense
    (237 )     (844 )
Interest expense
    (44 )      
Interest income
    11       67  
Other income, net
    95       463  
 
           
Total other (expense), net
    (175 )     (314 )
 
           
LOSS BEFORE PROVISION FOR INCOME TAXES
    (398 )     (1,377 )
PROVISION FOR INCOME TAXES
    (61 )     (111 )
 
           
NET LOSS
  $ (459 )   $ (1,488 )
 
           
BASIC AND DILUTED NET LOSS PER COMMON SHARE
  $ (0.02 )   $ (0.07 )
 
           
WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING
    21,589       21,563  
 
           
OTHER COMPREHENSIVE LOSS:
               
Net loss
  $ (459 )   $ (1,488 )
Foreign currency translation adjustment
    (108 )     30  
 
           
COMPREHENSIVE LOSS
  $ (567 )   $ (1,458 )
 
           
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)
                 
    Three Months Ended January 31,  
    2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (459 )   $ (1,488 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Stock-based compensation
    181       114  
Depreciation and amortization
          58  
Loss on disposition and write-downs of long-lived assets
          2  
Equity in (income) loss of affiliate
    (5 )     10  
Reorganization expense
    237       844  
Changes in operating assets and liabilities:
               
Restricted cash
    52       32  
Accounts receivable, net
    499       (656 )
Other current assets
    232       394  
Accounts payable
    109       315  
Accrued payroll and benefits
    62       325  
Accrued liabilities
    (202 )     (452 )
Deferred revenue
    (97 )     (82 )
Royalties payable
    (7 )     88  
Income taxes payable
    (41 )     158  
Liabilities subject to compromise
    8       (2 )
Payments for reorganization expense
    (232 )     (465 )
 
           
Net cash provided by (used in) operating activities
    337       (805 )
 
           
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
          (4 )
Dividends received
    370        
 
           
Net cash provided by (used in) investing activities
    370       (4 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of common stock through employee stock purchase program
          22  
 
           
Net cash provided by financing activities
          22  
 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    707       (787 )
EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    (108 )     30  
CASH AND CASH EQUIVALENTS, beginning of period
    1,237       5,554  
 
           
CASH AND CASH EQUIVALENTS, end of period
  $ 1,836     $ 4,797  
 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
  $ 45     $ 11  
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 $459,000 for the three months ended January 31, 2009, and during that same period generated cash of $337,000 from its operating activities. As of January 31, 2009, the Company had a total of $1,836,000 in cash and $3,766,000 in restricted cash, of which $1,500,000 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”), $2,266,000 is payable to Novell for the 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 code and derivatives and that it 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 SCO executed in fiscal year 2003 included older SVRx licenses and that SCO 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 in the United States Bankruptcy Court for the District of Delaware (the “Bancruptcy 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 modified the automatic 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 the Company’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. Upon the modification of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court modified the automatic stay, which started on April 29, 2008 and concluded on May 2, 2008.
     Prior to trial, Novell conceded that it would not be making a claim to a portion of the fees paid to the Company 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 that 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 was not entitled to revenue from those agreements and that SCO had the authority to enter into such agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore the Company was authorized to enter into that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was entitled to $2,547,817 of the revenue from the Sun

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agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was 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 could not be entered because certain of SCO’s claims are stayed pending arbitration and the imposition of a constructive trust remained an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, the Company sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on the Company’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 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, the Company filed papers arguing for the entry of final judgment.
     On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, the Company filed a notice of appeal of that Final Judgment, including adverse rulings in the Court’s summary judgment order of August 10, 2007. On January 23, 2009, the Company filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, the Company filed its brief for its appeal with the Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and early hearing date, the Company is hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.
     On March 13, 2009, the Court denied the Company’s motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.
     As a result of the Court’s judgment of July 16, 2008 against the Company, as of January 31, 2009, the Company has accrued $3,562,000 including the related interest. However, the Company continues to contest this liability. The Company believes that the Court erred and that there are strong grounds to have the adverse rulings embodied in the Final Judgment reversed on appeal. However, in the event that the Company’s assets are further depleted or encumbered, the Company may not be in a financial position to see the appeal of those rulings through to a conclusion or continue the litigation.
Bankruptcy Filing
     On September 14, 2007, The SCO Group, Inc. 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.
     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.

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     On February 13, 2008, the Company entered into a Memorandum of Understanding (the “MOU”) with Stephen Norris Capital Partners, LLC (“SNCP”), a Delaware limited liability company, whereby SNCP agreed to provide financing to fund the Company’s plan of reorganization filed on February 29, 2008. On the same day, the Debtors filed a 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 MOU with SNCP. 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 was conducted on September 16, 2008, at which time the Bankruptcy Court granted the motion for an extension of their exclusive period to submit a plan of reorganization to December 31, 2008 and their exclusive period to solicit acceptances to March 2, 2009.
     On January 8, 2009, the Debtors filed their Amended Reorganization Plan and Disclosure Statement. Under the proposed plan, the Debtors intend to hold an open auction to sell certain assets of the Company including its mobility business assets and its OpenServer operating system assets and business. Through this sale, the Debtors hope to obtain enough consideration to pay their creditors and continue their operations as set forth in the plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, the Company will scale back its operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain SCO assets are not sold, SCO will continue to sell and support its UNIX and mobility businesses and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware, and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.
     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.
     If the Debtors’ plan is not confirmed by the Bankruptcy Court, it is unclear whether the Company would be able to reorganize its businesses and what, if anything, holders of claims against the Company would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that the Debtors’ bankruptcy cases could be converted to a liquidation under Chapter 7 and the Company would have to liquidate its assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if the Company were to emerge as a viable, reorganized entity, and stockholders would likely receive nothing from the liquidation.
     As a result of both the District Court’s August 10, 2007 and July 16, 2008 rulings in the Novell litigation and the uncertainties surrounding the confirmation of the Debtors’ Amended Reorganization Plan, among other matters, there is substantial doubt about the Company’s ability to continue as a going concern.
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 (i) to construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) to reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) to achieve profitability;

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(iv) to achieve sufficient cash flows from operations; and (v) to obtain financing sources to meet the Company’s future liquidity needs. The negative operating trends the Company is experiencing as well as the aforementioned judgment in favor of Novell create substantial doubt as to the Company’s ability to continue as a going concern. The accompanying 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, the acceptance by the Bankruptcy Court of a plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements. The consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.
(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 three months ended January 31, 2009 are not necessarily indicative of the operating results that may be expected for the year ending October 31, 2009.
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.

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     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.
     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. There were no cash equivalents as of January 31, 2009 and October 31, 2008. Cash was $1,836,000 and $1,237,000 as of January 31, 2009 and October 31, 2008, respectively. In October 2008, the Emergency Economic Stabilization Act of 2008 temporarily increased the FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The Company has $250,000 of cash that is federally insured. All remaining amounts of cash as well as restricted cash exceed federally insured limits. To date, the Company has not experienced a material loss or lack of access to its invested cash. However, no assurance can be provided that access to the Company’s invested cash will not be impacted by adverse economic conditions in the financial markets.
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 5,079,000 and 4,684,000 for the three months ended January 31, 2009 and 2008, respectively, are not included in the calculation of diluted net loss per common share because they are anti-dilutive.
(3) COMMITMENTS AND CONTINGENCIES
IBM Corporation
     On or about 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 (the “Court”), under the title The SCO Group, Inc. v. International Business Machines Corporation,

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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 its 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 seeking injunctive relief.
     On or about 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 or about 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. If the Company’s termination of those licenses was valid, the Company believes that 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.
     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 its 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 Company’s December 2005 report included 293 total disclosures, which the Company claims violate its contractual rights and copyrights. The report and the disclosures identified 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 report. 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 filing, which IBM claims meet the required level of specificity. On June 28, 2006, the Magistrate Judge issued a ruling striking over 180 of the technology disclosures challenged by the Company from its December 2005 filing. This ruling is a limitation on the number of technology disclosures the Company made in its December 2005 filing, 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 issued a ruling affirming the Magistrate Judge’s ruling of June 28, 2006. The Company filed a motion to reconsider this ruling and a motion to amend its technology disclosures of December 2005.
     On June 8, 2006, IBM filed a motion to confine the Company’s claims to, and strike allegations in excess of, the December 2005 disclosures. In this motion, IBM claims that the Company’s technology expert reports go beyond the disclosures contained in the Company’s December 2005 submission to the Court 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 order with the Court.
     Both parties filed expert reports and substantially finished expert discovery. IBM filed six motions for summary judgment which, 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 judge’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 Company’s 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 ruling 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. The IBM case is also currently stayed due to the Company’s filing of Chapter 11 bankruptcy.

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Novell, Inc.
     On January 20, 2004, the Company filed suit in Utah state 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 proceeded in the United States District Court for the District of Utah 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. 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 of Novell’s motions to dismiss. On July 29, 2005, Novell filed its answer and counterclaims against the Company, asserting counterclaims for the Company’s alleged breaches of the Asset Purchase Agreement between Novell and the Company’s predecessor-in-interest, The Santa Cruz Operation, 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 Asset Purchase Agreement. 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 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 its 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 Court ordered that portions of claims relating to the SuSE arbitration should be stayed pending the arbitration but 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 is stayed by the bankruptcy cases.
     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. The Company opposed the motion and filed a cross-motion for summary judgment or partial summary judgment. Those motions were argued on January 23, 2007, before the District Court in Utah. 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 the Company’s opposition to this motion, it filed its own cross motion for summary judgment, asking the Court to rule that Novell’s retained rights are much narrower than it 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 Asset Purchase 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 1995 Asset Purchase Agreement, that the Company did not meet its burden of establishing special damages on its slander of title claim, that Novell retained broad rights to waive the Company’s contract claims against IBM, 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. The Company filed its own motions for summary judgment seeking a ruling that it owns the UNIX and UnixWare copyrights, and that Novell’s retained rights are much narrower than Novell now claims. 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 federal judge ruled in favor of Novell on several of the summary judgment motions that were before the Court. The effect of these rulings was to significantly reduce or 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

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of the 1995 Asset Purchase Agreement 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 1995 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 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 were attributable to such SVRx licenses and should be remitted to Novell as well as whether the Company had authority to enter into such SVRx licenses. The range of the payment to Novell was 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 filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court modified the automatic 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 the Company’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 bankruptcy stay applies to the SuSE arbitration proceeding pending in Europe. Upon the modification of the automatic stay, the Court scheduled a four-day trial, which started on April 29, 2008 and concluded on May 2, 2008, on those matters for which the Bankruptcy Court modified the automatic stay. Prior trial, Novell conceded that it would not be making a claim to a portion of the fees paid to the Company 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 that 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 was not entitled to revenue from those agreements and that SCO had the authority to enter into such agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore the Company was authorized to enter into that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was 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 sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was 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 could not be entered because the Company’s claims were stayed pending arbitration and the imposition of a constructive trust remained an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, the Company sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on the Company’s tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of the Company’s current assets were traceable as trust funds. The Company 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 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, the Company filed papers arguing for the entry of final judgment.
     On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, the Company filed a notice of appeal of that Final Judgment, including the adverse rulings in the Court’s summary judgment order of August 10, 2007. On January 23, 2009, the Company filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, the Company filed its brief for its appeal with Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and early hearing date, the Company is hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.

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     On March 13, 2009, the Court denied the Company’s motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.
     As a result of the Court’s judgment of July 16, 2008 against the Company, as of January 31, 2009, the Company has accrued $3,562,000 including the related interest, which amount is included in Liabilities Subject to Compromise. However, the Company continues to contest this liability. The Company believes that the Court erred and that there are strong grounds to have the adverse rulings embodied in the Final Judgment reversed on appeal.
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. 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. On October 10, 2008, the judge in the IPO case granted plaintiffs’ request to withdraw, without prejudice, their motion for class certification in the case. The parties in the approximately 300 coordinated class actions, including the Company, the underwriter defendants, and the plaintiffs in the class action involving the Company, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. The settlement is subject to approval by the parties, termination by the parties under certain circumstances, and Court approval. There is no assurance that the settlement will be concluded or that the Court will approve the settlement.
     Due to the inherent uncertainties of litigation, management 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.

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     On November 20, 2008, the Bankruptcy Court entered an order, based on a stipulation of the parties, that the plaintiffs in the IPO case would not pursue assets of the Company in connection with the case but would look only to insurance coverage to cover any damages that may be awarded to plaintiffs in that case.
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 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 court denied the Company’s motion to dismiss this case; however, the court stayed the case and requested status reports every 90 days regarding the case against IBM. Red Hat filed a motion for reconsideration, which the court denied on March 31, 2005. The Company intends to vigorously defend this action. In the event that the stay is lifted, including the bankruptcy stay, and Red Hat is allowed to pursue its claims, the Company will likely assert counterclaims against Red Hat.
AutoZone, Inc.
     On March 2, 2004, the Company filed suit against AutoZone, Inc., in the Federal District Court for the District of Nevada (the “Nevada District Court”). The Company brought a single claim for copyright infringement based on AutoZone’s use of UNIX copyrighted materials in Linux and asked the Nevada District Court to impose a preliminary injunction against AutoZone. On August 6, 2004, the Nevada District Court granted AutoZone’s motion to stay the case pending resolution of the IBM, Novell, and Red Hat litigations. During the limited discovery that the Nevada District Court permitted, SCO confirmed that AutoZone had also made unauthorized use of materials from SCO’s OpenServer operating system in migrating to Linux. On September 22, 2008, the Nevada District Court held a status conference on the case and decided to lift the stay effective December 31, 2008. On January 6, 2009, the assigned Magistrate Judge issued an order directing the parties to file a proposed discovery plan and scheduling order by January 16, 2009. On that date, the parties filed a Joint Discovery Plan and Scheduling Order proposing January 15, 2010 as the deadline for the parties to complete fact discovery. On February 27, 2009, the parties filed initial disclosures in the case and the case will proceed pursuant to the schedule set forth above.
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

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     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.
     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 January 31, 2009 and 2008 was to record $181,000 and $114,000, respectively, of stock-based compensation expense.. For the three months ended January 31, 2009 and 2008, the Company has allocated stock-based compensation expense to the following statement of operations captions:
                 
    Three Months Ended January 31,  
    2009     2008  
    (In thousands)  
Cost of products
  $ 1     $  
Cost of SCOsource
    39       34  
Cost of services
    7       5  
Sales and marketing
    47       29  
General and administrative
    72       33  
Research and development
    15       13  
 
           
Total stock-based compensation
  $ 181     $ 114  
 
           
     During the three months ended January 31, 2009, there were no options granted or exercised. As of January 31, 2009, there were approximately 5,079,000 stock options outstanding with a weighted average exercise price of $2.81 per share.
     With respect to stock options granted during the three months ended January 31, 2008, the assumptions used in the Black-Scholes option-pricing model are as follows:

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    Three months ended
    January 31, 2008
Risk-free interest rate
    2.7 %
Expected dividend yield
    0.0 %
Volatility
    327.2 %
Expected exercise life (in years)
    5.5  
     The estimated fair value of stock options is amortized over the vesting period of the award.
(5) SEGMENT INFORMATION
     The Company’s resources are allocated and operating results managed to the operating 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 January 31, 2009  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 3,097     $     $ 3,097  
Cost of revenues
    358       109       467  
 
                 
Gross margin (deficit)
    2,739       (109 )     2,630  
 
                 
Sales and marketing
    1,326             1,326  
General and administrative
    810             810  
Research and development
    722             722  
 
                 
Total operating expenses
    2,858             2,858  
 
                 
Loss from operations
  $ (119 )   $ (109 )   $ (228 )
 
                 
                         
    Three Months Ended January 31, 2008  
    UNIX     SCOsource     Total  
    (In thousands)  
Revenues
  $ 4,872     $     $ 4,872  
Cost of revenues
    719       267       986  
 
                 
Gross margin (deficit)
    4,153       (267 )     3,886  
 
                 
Sales and marketing
    2,741             2,741  
General and administrative
    924             924  
Research and development
    1,273             1,273  
 
                 
Total operating expenses
    4,938             4,938  
 
                 
Loss from operations
  $ (785 )   $ (267 )   $ (1,052 )
 
                 
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, 2008 filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. All information presented herein is based on the three months ended January 31, 2009 and 2008. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

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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 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 our contract claims against IBM. The Court ruled that we own the copyrights to post-APA UnixWare code and derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of the Company’s UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 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. 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 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 modified the automatic 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 automatic stay applies to the SuSE arbitration proceeding pending in Europe. Upon the modification of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court modified the automatic 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 we had the authority to enter into the SCOsource licenses. The parties 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, we filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which we argued, 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 we received from the SCOsource agreements and on 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. 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 was not entitled to revenue from those agreements and that SCO had the authority to enter into such 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 that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was 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 sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was 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 could not be entered because certain of our claims are stayed pending arbitration and the imposition of a constructive trust remained 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.
     On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, we filed a notice of appeal of that Final Judgment, including the Court’s summary judgment order of August 10, 2007. On January 23, 2009, we filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, we filed our brief for our appeal with the Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and the early hearing date, the Company is hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.
     On March 13, 2009, the Court denied our motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.
     As a result of the Court’s judgment of July 16, 2008 against us, as of January 31, 2009, we have accrued $3,562,000 including the related interest. However, we, continue to contest this liability. We believe that the Court erred, and that there are strong grounds to have the adverse rulings embodied in the Final Judgment reversed on appeal. However, in the event that our assets are further depleted or encumbered, we may not be in a financial position to see the appeal of those rulings through to a conclusion or continue the litigation.
Bankruptcy Filing
     On September 14, 2007, The SCO Group, Inc. 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. 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.
     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, 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 a disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.

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     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 was conducted on September 16, 2008, at which time the Bankruptcy Court granted the motion for an extension of our exclusive period to submit a plan of reorganization to December 31, 2008 and our exclusive period to solicit acceptances to March 2, 2009.
     On January 8, 2009, the Debtors filed their Amended Reorganization Plan and Disclosure statement. Under the proposed plan, we intend to hold an open auction to sell certain assets of the Company including our mobility business assets and our OpenServer operating system assets and business. Through this sale, the Debtors hope to obtain enough consideration to pay their creditors and continue their operations as set forth in the plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, we will scale back our operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain Company assets are not sold, we will continue to sell and support our UNIX and mobility business and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.
     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 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.
     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 case 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.
     As a result of the District Court’s August 10, 2007 and July 16, 2008 rulings and the uncertainties surrounding the confirmation of our Amended Reorganization Plan, among other matters, there is substantial doubt about our ability to continue as a going concern.
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 months ended January 31, 2009 and 2008:
                 
    Three Months Ended January 31,  
    2009     2008  
    (In thousands)  
Revenue
  $ 3,097     $ 4,872  
Cost of revenue
    358       719  
 
           
Gross margin
    2,739       4,153  
 
           
Sales and marketing
    1,326       2,741  
General and administrative
    810       924  
Research and development
    722       1,273  
 
           
Total operating expenses
    2,858       4,938  
 
           
Loss from operations
  $ (119 )   $ (785 )
 
           
     Revenue from the UNIX business decreased by $1,775,000, or 36%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008. 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, and from continuing negative publicity from the SCO Litigation and our filing for Chapter 11 bankruptcy. 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 $4,938,000 for the three months ended January 31, 2008, a decrease of $2,080,000 or 42%, to $2,858,000 for the three months ended January 31, 2009. This decrease was primarily attributable to cost reduction initiatives, including reduced headcount and related costs, and reduced leased facilities and other reductions.
     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, 2009 will continue to be significant.
     The following table shows the operating results of the SCOsource business for the three months ended January 31, 2009 and 2008:

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    Three Months Ended January 31,  
    2009     2008  
    (In thousands)  
Revenue
  $     $  
Cost of revenue
    109       267  
 
           
Gross margin
    (109 )     (267 )
 
           
Sales and marketing
           
General and administrative
           
Research and development
           
 
           
Total operating expenses
           
 
           
Loss from operations
  $ (109 )   $ (267 )
 
           
     Revenue from our SCOsource business was $0 for the three months ended January 31, 2009 and January 31, 2008.
     Cost of revenue, which primarily includes legal and professional fees incurred in connection with defending our UNIX intellectual property rights in the SCO Litigation, decreased from $267,000, a decrease of $158,000 or 59%, for the three months ended January 31, 2008 to $109,000 for the three months ended January 31, 2009. This decrease was due to fewer legal services 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 consulting 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.
     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

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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 January 31, 2009 and October 31, 2008. 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 $3,562,000 for the Novell claim as a result of the Court order of July 16, 2008. This 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, 2008 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.
     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 $112,000 as of January 31, 2009. 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 positions.

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Results of Operations
     The following table presents our results of operations for the three months ended January 31, 2009 and 2008:
                 
    Three Months Ended January 31,  
    2009     2008  
    (In thousands)          
 
               
Revenue:
               
Products
  $ 2,547     $ 4,039  
Services
    550       833  
SCOsource
           
 
           
Total revenue
    3,097       4,872  
 
           
Cost of revenue:
               
Products
    144       288  
Services
    214       431  
SCOscource
    109       267  
 
           
Total cost of revenue
    467       986  
 
           
Gross margin
    2,630       3,886  
 
           
Operating expenses:
               
Sales and marketing
    1,326       2,741  
General and administrative
    810       924  
Research and development
    722       1,273  
 
           
Total operating expenses
    2,858       4,938  
 
           
Loss from operations
    (228 )     (1,052 )
Equity in income (loss) of affiliate
    5       (11 )
Other expense, net
    (175 )     (314 )
Provision for income taxes
    (61 )     (111 )
 
           
Net loss
  $ (459 )   $ (1,488 )
 
           
THREE MONTHS ENDED JANUARY 31, 2009 AND 2008
Revenue
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Revenue
  $ 3,097       (36 )%   $ 4,872  
     Revenue for the three months ended January 31, 2009 decreased by $1,775,000, or 36%, from the three months ended January 31, 2008. This decrease was primarily attributable to a continued decline in our UNIX business as a result of the factors described below.
     Revenue generated from our UNIX business and SCOsource business is as follows:
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
UNIX revenue
  $ 3,097       (36 )%   $ 4,872  
Percentage of total revenue
    100 %             100 %
SCOsource revenue
  $       n/a     $  
Percentage of total revenue
    0 %             0 %
     The decrease in revenue in the UNIX business of $1,775,000, or 36%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 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

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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, 2009 our UNIX revenues will decline from UNIX revenues generated in the year ended October 31, 2008 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 months ended January 31, 2009 and 2008 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 January 31,
    2009   Change   2008
    (Dollars in thousands)
Products revenue
  $ 2,547       (37 )%   $ 4,039  
Percentage of total revenue
    82 %             83 %
     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 $1,492,000, or 37%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 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, 2009 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 January 31,
    2009   Change   2008
    (Dollars in thousands)
OpenServer revenue
  $ 1,792       (39 )%   $ 2,938  
Percentage of products revenue
    70 %             73 %
UnixWare revenue
  $ 403       (53 )%   $ 851  
Percentage of products revenue
    16 %             21 %
Other products revenue
  $ 352       40 %   $ 250  
Percentage of products revenue
    14 %             6 %
     The decrease in revenue for OpenServer and UnixWare for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 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 increase in other products revenues is primarily attributed to increased sales of SVRx Unix related products in Japan from which the company earns an administration fee.

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SCOsource Revenue
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
SCOsource revenue
  $         n/a     $    
     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 January 31, 2009 and January 31, 2008.
     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.
Services Revenue
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Services revenue
  $ 550       (34 )%   $ 833  
Percentage of total revenue
    18 %             17 %
     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 $283,000, or 34%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 was primarily attributable to the renewal of fewer support and engineering services contracts as a result of decreased sales of UNIX-related products, continued competition, particularly from Linux operating system providers, and continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy
     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 January 31,
    2009   Change   2008
    (Dollars in thousands)
Cost of products revenue
  $ 144       (50 )%   $ 288  
Percentage of products revenue
    6 %             7 %
     Cost of products revenue consists of manufacturing costs, royalties to third-party vendors, technology costs and overhead costs. Cost of products revenue decreased by $144,000 for the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. This 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 January 31,
    2009   Change   2008
    (Dollars in thousands)
Cost of SCOsource revenue
  $ 109       (59 )%   $ 267  
     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 decreased by $158,000, or 59%, during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. This decrease was due to fewer 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 future periods to be higher than the costs incurred for the three months ended January 31, 2009.
Cost of Services Revenue
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Cost of services revenue
  $ 214       (50 )%   $ 431  
Percentage of services revenue
    39 %             52 %
     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 $217,000, or 50%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008. This decrease was primarily attributable to a reduction of employee and employee-related costs.
Sales and Marketing
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Sales and marketing expenses
  $ 1,326       (52 )%   $ 2,741  
Percentage of total revenue
    43 %             56 %
     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 $1,415,000, or 52%, for the three months ended January 31, 2009 compared with the three months ended January 31, 2008 was primarily attributable to lower commissions, lower travel expenses, reduced discretionary marketing spending and lower co-operative advertising as a result of lower revenue. Included in sales and marketing expenses for the three months ended January 31, 2009 and 2008 was $47,000 and $29,000, respectively, for stock-based compensation.
     For the three months ending April 30, 2009, we anticipate that the dollar amount of sales and marketing expenses will be generally consistent with that incurred during the three months ended January 31, 2009.

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Research and Development
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Research and development expenses
  $ 722       (43 )%   $ 1,273  
Percentage of total revenue
    23 %             26 %
     Research and development expenses consist of the salaries and benefits of software engineers, consulting expenses and corporate allocations. Research and development expenses decreased by $551,000, or 43%, for the three months ended January 31, 2009 compared with the three months ended January 31, 2008. The decrease in research and development expenses was primarily attributable to reduced employee and employee-related costs, and lower leased facilities expenses. Included in research and development expenses for the three months ended January 31, 2009 and 2008 was $15,000 and $13,000, respectively, of stock-based compensation.
     For the three months ending April 30, 2009, we anticipate that the dollar amount of research and development expenses will be generally consistent with that incurred during the three months ended January 31, 2009.
General and Administrative
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
General and administrative expenses
  $ 810       (12 )%   $ 924  
Percentage of total revenue
    26 %             19 %
     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 $114,000, or 12%, during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. The decrease in general and administrative expenses was primarily attributable to lower leased facilities expense as a result of a reduction in leased space, reduced bad debt expense resulting from decreased revenues, and reduced insurance expense partially offset by an increase in professional services expenses. Included in general and administrative expenses for the three months ended January 31, 2009 and 2008 was $72,000 and $33,000, respectively, of stock-based compensation.
     For the three months ending April 30, 2009, we anticipate that the dollar amount of general and administrative expenses will be generally consistent with that incurred during the three months ended January 31, 2009.
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. On November 24, 2008, we entered into a Dissolution Agreement and Termination Agreement to dissolve our minority ownership interest in a Chinese company. Under the Agreement, we received a dissolution payment of $370,000 in December 2008. Upon completion of the dissolution of the Chinese company, the majority shareholder of the Chinese company will enter into a distribution agreement with our Company.
Reorganization items
                         
    Three Months Ended January 31,
    2009   Change   2008
    (Dollars in thousands)
Reorganization items
  $ 237       (72 )%   $ 844  

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     Reorganization expense consists of legal and professional fees associated with our Chapter 11 bankruptcy and development of a reorganization plan. Reorganization expense decreased $607,000, or 72% during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. This decrease was due to lower professional fees associated with our Chapter 11 bankruptcy.
Other Income (Expense), net
     Other income (expense) included the following components for the three months ended January 31, 2009 and 2008:
                         
    Three Months Ended January 31,  
    2009     Change     2008  
    (Dollars in thousands)  
Interest expense
  $ (44 )     n/a     $  
Interest income
    11       (84 )%     67  
 
                       
Other income (expense), net
    92       n/a       463  
 
                   
Total
  $ 59             $ 530  
 
                   
     Interest expense for the three months ended January 31, 2009 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 $56,000 for the three months ended January 31, 2009 as compared to the three months ended January 31, 2008 and was primarily attributable to lower cash and available-for-sale marketable securities balances.
     The decrease in other income, net, of $371,000 for the three months ended January 31, 2009 as compared to the three months ended January 31, 2008 was primarily attributable to a realized gain in 2008 as a result of a sale of intellectual property.
Provision for Income Taxes
     The provision for income taxes was $61,000 for the three months ended January 31, 2009 and $111,000 for the three months ended January 31, 2008. Our 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 balance increased from $1,237,000 as of October 31, 2008 to $1,836,000 as of January 31, 2009. As of January 31, 2009, we also had $3,766,000 of restricted cash, of which $1,500,000 is set aside to cover expert and other costs related to the SCO Litigation and $2,266,000 payable to Novell for royalties earned by Novell post bankruptcy petition.
     We intend to use the cash as of January 31, 2009 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 July 31, 2009. 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.
     Our net cash provided by operating activities during the three months ended January 31, 2009 was $337,000 and was attributable to a net loss of $459,000, payments for bankruptcy and reorganizational items of $232,000, offset by non-cash items of $176,000 and a decrease in net operating assets and liabilities of $852,000.

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     Our net cash used in operating activities during the three months ended January 31, 2008 was $805,000 and was attributable to a net loss of $1,488,000, payments for bankruptcy and reorganizational items of $465,000 offset by non-cash items of $184,000 and a decrease in net operating assets and liabilities of $964,000.
     Our investing activities have historically consisted of equipment purchases and the purchase and sale of available-for-sale marketable securities. During the three months ended January 31, 2009, cash provided by investing activities was $370,000, which was from the dissolution payment from our 30% ownership in a Chinese company.
     During the three months ended January 31, 2008, cash used by investing activities was $4,000 which resulted from the purchases of equipment.
     Our financing activities provided $0 of cash during the three months ended January 31, 2009.
     Our financing activities provided $22,000 of cash during the three months ended January 31, 2008, which were generated from proceeds received from the sale of common stock through our employee stock purchase plan.
     Our net accounts receivable balance decreased from $2,801,000 as of October 31, 2008 to $2,302,000 as of January 31, 2009, primarily as a result of lower sales (and related invoicing) generated during the three months ended January 31, 2009 as compared to the three months ended October 31, 2008. The majority of our accounts receivable are current and our allowance for doubtful accounts was $112,000 as of January 31, 2009, which represented approximately 5 percent of our gross accounts receivable balance. Our write-offs of uncollectible accounts during the three months ended January 31, 2009 and 2008 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, 2009 as compared to the year ended October 31, 2008, 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.
     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

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     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 August 31, 2014.
     The following table summarizes our contractual operating lease obligations as of January 31, 2009:
                                         
            Less than                   More than
    Total   1 year   1 - 3 years   3 - 5 years   5 years
    (In thousands)
Operating lease obligations
  $ 1,197     $ 248     $ 723     $ 226     $    
     As of January 31, 2009, 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 also impairs 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 continue to pursue our appeal of the adverse rulings in the Court’s August 10, 2007 and July 16, 2008 orders in the Novell Litigation, and our belief concerning the strength of our appeal;
 
    Our intention to maintain business operations throughout the reorganization process;
 
    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, to have our plan of reorganization confirmed with the Bankruptcy Court and to pursue the strategy described in the plan;
 
    Our intention to vigorously pursue legal claims and counterclaims brought against us by others;
 
    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, 2009 and future periods;

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    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, unpredictable, 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, 2009, our total UNIX revenue will decline from UNIX revenue generated in the year ended October 31, 2008 as a result of continued competition and negative publicity;
 
    Our intention to use cash to run our UNIX and mobility businesses and pursue the SCO Litigation subject to Bankruptcy Court approval;
 
    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, 2009, as compared to the year ended October 31, 2008, that they will continue to be significant to our financial statements;
 
    Our intention to continue our UNIX development and marketing efforts while at the same time developing and marketing our mobility products and services;
 
    Our belief that the market for mobility products and services is poised for rapid growth;
 
    Our belief that the success of our mobility products and services offerings will depend, in part, on the level of commitment and resources we are able to devote to these offerings, the partnerships we are able to establish, our ability to attract and retain new customers and partners, and the strength of our mobility offerings;
 
    Our operating strategy to continue to support our existing users of our UNIX operating system products and protect our intellectual property rights;
 
    Our belief that our OpenServer and UnixWare products will continue to provide a revenue stream in the year ending October 31, 2009, and our belief that revenue from such products will continue to decline;
 
    Our expectation that hardware and software vendors, as well as software developers, will continue to turn their certification and application development efforts toward Linux and may elect not to continue to support or certify to our UNIX operating system products;
 
    Our intention and ability to keep our relationships with key partners in certain vertical markets;
 
    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 belief that a key to our future success will be our ability to provide additional products and services to our reseller channel and to communicate our product and corporate strategy to these resellers;
 
    Our expectation that enhancements to our UNIX software products will not result in significant revenue increases in the short-term;
 
    Our belief that a movement in interest rates, either up or down of up to 2%, would not have a material adverse impact on our cash;
 
    Our expectation that the cost of SCOsource revenue in the future will be difficult to predict and that the cost of SCOsource revenue for the three months ending April 30, 2009 or for future periods could be higher than the three months ended January 31, 2009, especially if the payment of a contingency fee is required;

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    Our expectation for the three months ending April 30, 2009 that the dollar amount of our sales and marketing expenses will be generally consistent with that incurred during the three months ended January 31, 2009;
 
    Our expectation for the three months ending April 30, 2009 that the dollar amount of our research and development expenses will be generally consistent with that incurred during the three months ended January 31, 2009;
 
    Our expectation for the three months ending April 30, 2009 that the dollar amount of our general and administrative expenses will be generally consistent with that incurred during the three months ended January 31, 2009;
 
    Our belief that certain legal actions to which we are a party will not have a material adverse effect on us;
 
    Our belief that upon completion of the dissolution of the Chinese company in which we owned a minority interest, that the majority shareholder of the Chinese company will enter into a distribution agreement with our Company;
 
    Our expectation that a decision on the appeal of the Court’s rulings in the Novell Litigation could be forthcoming in the next five to eight months;
 
    Our expectation that certain assets of the Company, including our mobility business assets and our OpenServer operating system assets, may be sold through an open auction and that enough consideration may be obtained to pay our creditors and continue operations as set forth in the proposed bankruptcy reorganization plan; and
 
    Our expectation that we, in the event Company assets are not sold as planned through an auction, will continue to support our UNIX and mobility business, as well as focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.
     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.
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

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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 January 31, 2009, we did not hold any cost or equity method investments.
ITEM 4T. 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, 2008. 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 these 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 Operation (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 code and 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 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 were attributable to such SVRx licenses and should be remitted to Novell, as well as whether we 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 our filing a voluntary petition for relief under Chapter 11 of the United States 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 modified the automatic stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds

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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 automatic stay applies to the SuSE arbitration proceeding pending in Europe. Upon the modification of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court modified the automatic 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 we had the authority to enter into the SCOsource licenses. The parties 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, we filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which we argued, 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 we received from the SCOsource agreements and on 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. After the trial and arguments, the Court took all matters under advisement and stated that 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 and that we had the authority to enter into such 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 that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was 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 sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was 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 could not be entered because our claims were stayed pending arbitration and the imposition of a constructive trust remained 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.
     On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, we filed a notice of appeal of that Final Judgment, including the Court’s summary judgment order of August 10, 2007. On January 23, 2009, we filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, we filed our brief for our appeal with the Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and early hearing date, we are hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.
     On March 13, 2009, the Court denied our motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.

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      IPO Class Action Matter
     In July 2001, we and several of our 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 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. 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. On October 10, 2008, the judge in the IPO case granted plaintiffs’ request to withdraw, without prejudice, their motion for class certification in the case. The parties in the approximately 300 coordinated class actions, including us, the underwriter defendants, and the plaintiffs in the class action involving us, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including us. The settlement is subject to approval by the parties, termination by the parties under certain circumstances, and Court approval. There is no assurance that the settlement will be concluded or that the Court will approve the settlement.
     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 believe, 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.
     On November 20, 2008, the Bankruptcy Court entered an order, based on a stipulation of the parties, that the plaintiffs in the IPO case would not pursue assets of the company in connection with the case but would only look to insurance coverage to cover any damages that may be awarded to plaintiffs in that case.
      AutoZone, Inc.
     On March 2, 2004, we filed suit against AutoZone, Inc., in the Federal District Court for the District of Nevada (the “Nevada District Court”). We brought a single claim for copyright infringement based on AutoZone’s use of UNIX copyrighted materials in Linux and asked the Nevada District Court to impose a preliminary injunction against AutoZone. On August 6, 2004, the Nevada District Court granted AutoZone’s motion to stay the case pending resolution of the IBM, Novell, and Red Hat litigations. During the limited discovery that the Nevada District Court permitted, SCO confirmed that AutoZone had also made unauthorized use of materials from SCO’s OpenServer operating system in migrating to Linux. On September 22, 2008, the Nevada District Court held a

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status conference on the case and decided to lift the stay effective December 31, 2008. On January 6, 2009, the assigned Magistrate Judge issued an order directing the parties to file a proposed discovery plan and scheduling order by January 16, 2009. On that date, the parties filed a Joint Discovery Plan and Scheduling Order proposing January 15, 2010, as the deadline for the parties to complete fact discovery. On February 27, 2009, the parties filed initial disclosures in the case and the case will proceed pursuant to the schedule set forth above.
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, 2008, 2007 and 2006, we incurred net losses of $8,687,000 $6,826,000 and $16,598,000, respectively. As of January 31, 2009, our accumulated deficit was $267,512,000.
     If our revenue from the sale of our UNIX products and services continues 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. During January 2008 and January 2009, we implemented a reduction in force and decreased our ongoing operating expenses in an effort to decrease our total costs. 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 January 31, 2009, we had a total of $1,836,000 in cash and an additional $1,500,000 is to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,499,000 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.
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 our assets may be liquidated.
     To successfully emerge from Chapter 11 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”), solicit and obtain the requisite acceptances of the Plan, and fulfill 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 a Plan and a Disclosure Statement with the United States Bankruptcy Court. 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

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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. At the hearing to consider that motion on June 17, 2008, the Bankruptcy Court granted the motion. 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 was held on September 16, 2008. The Bankruptcy Court granted the motion for an extension of our exclusive period to submit a plan of reorganization to December 31, 2008 and our exclusive period to solicit acceptances to March 2, 2009.
     On January 8, 2009, we filed our Amended Reorganization Plan and Disclosure Statement. Under the proposed Plan, we intend to hold an open auction to sell certain assets including our mobility business assets and our OpenServer operating system assets and business. Through this sale, we hope to obtain enough consideration to pay our creditors and continue operations as set forth in the Plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, we will scale back our operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain SCO assets are not sold, we will continue to sell and support our UNIX and mobility business and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware, and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.
     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 case 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 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.

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We 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 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 ruled that we own the copyrights to post APA UnixWare code and 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 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 were attributable to such SVRx licenses and should be remitted to Novell, as well as whether we 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 our filing a voluntary petition for relief under Chapter 11 of the United States 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 modified the automatic 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 automatic stay applies to the SuSE arbitration proceeding pending in Europe. Upon the modification of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court modified the automatic 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 we had the authority to enter into the SCOsource licenses. The parties 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, we filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which we argued, 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 we received from the SCOsource agreements and on 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. After the trial and arguments, the Court took all matters under advisement and stated that 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 and that we had the authority to enter into such 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 that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was 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 sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was 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

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judgment could not be entered because our claims were stayed pending arbitration and the imposition of a constructive trust remained 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.
     On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, we filed a notice of appeal of that Final Judgment, including the Court’s summary judgment order of August 10, 2007. On January 23, 2009, we filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, we filed our brief for our appeal with the Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and early hearing date, we are hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.
     On March 13, 2009, the Court denied our motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.
     As a result of this Final Judgment of July 16, 2008 against us, as of January 31, 2009, we have accrued $3,562,000, including the related interest. However, we continue to contest this liability. In the event that our assets are further depleted or encumbered, we may not be in a financial position to see the appeal of those rulings through to a conclusion or continue the litigation.
     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.
     The lawsuits with IBM and Novell will continue to be costly. In the event that we are not successful with the IBM or Novell cases, 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 the appeals and litigation, we may be required to place additional amounts into the escrow account, which could further reduce our liquidity position.
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 that 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 cases. 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 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

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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. with regard to that representation was on November 24, 2004.
     We must pay one or more contingency fees upon any amount 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 will be, subject to certain credits and adjustments, as follows:
    33 percent of any aggregate recovery amounts received up to $350,000,000;
 
    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 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 January 31, 2009, we had a total of $1,836,000 in cash and an additional $1,500,000 of restricted cash to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,499,000 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, these arrangements are 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 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, or our reorganization plan will not be confirmed by the Bankruptcy Court;
 
    the outcome of pending litigation with Novell, including the appeal and pending motions for summary judgment in our lawsuit with IBM, adverse rulings relating to IBM’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;

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    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 region 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.
     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.
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 January 2009 and 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, particularly Darl C. McBride, our Chief Executive Officer, and Ryan E. Tibbitts, our General Counsel. 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 revenue 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 revenue from our UNIX business

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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 revenue from the sale of UNIX products has declined over the last several years. This decrease in revenue 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 revenue 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 revenue.
     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 UNIX operating system products. This would lead to an increased decline in our UNIX products and services revenue 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; and
 
    seasonal reductions in business activity.
     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.

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     During the three months ended April 30, 2004, our India office was assessed withholding taxes by the Government of India Income Tax Department (“Tax Department”). The Tax Department assessed a 15% withholding tax on certain revenue transactions in India that the Tax Department deemed royalty revenue 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 used its authority under Marketplace Rules 4300, 4450(f) and IM-4300 to de-list 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 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 stock” 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 January 31, 2009, we have issued outstanding options to purchase up to approximately 5,079,000 shares of common stock with an average exercise price of $2.81 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.

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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 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)).
 
   
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: March 23, 2009  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)).
 
   
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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