##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2007
 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.
  Delaware
    
    87-0662823(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 
 
 þ o
  o o þ
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##### 



The SCO Group, Inc.
 Table of Contents
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Unaudited Financial StatementsCondensed Consolidated Balance Sheets as of July 31, 2007
and October 31, 2006
    
    
    3Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months ended July
31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine
months ended July 31, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    38Item 6. Exhibits
    
    
    47Signatures
    
    
    48EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
 July 31,
    
    
    October 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,393
    
    
    $
    5,369Restricted cash
    
    
    3,020
    
    
    
    8,024Available-for-sale marketable securities
    
    
    
    
    
    
    2,249Accounts receivable, net of allowance for doubtful accounts of
$87 and $106, respectively
    
    
    3,133
    
    
    
    5,123Other
    
    
    1,328
    
    
    
    1,514Total current assets
    
    
    14,874
    
    
    
    22,279PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    1,990
    
    
    
    2,259Leasehold improvements
    
    
    266
    
    
    
    316Furniture and fixtures
    
    
    78
    
    
    
    782,334
    
    
    
    2,653Less accumulated depreciation and amortization
    
    
    (1,918
    )
    
    
    (2,045
    )Net property and equipment
    
    
    416
    
    
    
    608OTHER ASSETS
    
    
    504
    
    
    
    522Total assets
    
    $
    15,794
    
    
    $
    23,409LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,944
    
    
    $
    2,338Payable to Novell, Inc.
    
    
    431
    
    
    
    2,978Accrued payroll and benefits
    
    
    1,380
    
    
    
    2,507Accrued liabilities
    
    
    2,805
    
    
    
    3,059Deferred revenue
    
    
    2,561
    
    
    
    2,994Royalties payable
    
    
    249
    
    
    
    439Income taxes payable
    
    
    767
    
    
    
    820Total current liabilities
    
    
    10,137
    
    
    
    15,135LONG-TERM LIABILITIES
    
    
    186
    
    
    
    192COMMITMENTS AND CONTINGENCIES (Note 3)STOCKHOLDERS EQUITY:Common stock, $0.001 par value; 45,000 shares authorized,
21,782 and 21,391 shares outstanding, respectively
    
    
    22
    
    
    
    21Additional paid-in capital
    
    
    262,158
    
    
    
    260,259Common stock held in treasury, 297 shares
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    856
    
    
    
    856Accumulated other comprehensive income
    
    
    986
    
    
    
    932Accumulated deficit
    
    
    (256,105
    )
    
    
    (251,540
    )Total stockholders equity
    
    
    5,471
    
    
    
    8,082Total liabilities and stockholders equity
    
    $
    15,794
    
    
    $
    23,409
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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:Products
    
    $
    3,690
    
    
    $
    6,201
    
    
    $
    13,451
    
    
    $
    17,904SCOsource licensing
    
    
    
    
    
    
    31
    
    
    
    23
    
    
    
    95Services
    
    
    996
    
    
    
    1,189
    
    
    
    3,241
    
    
    
    3,891Total revenue
    
    
    4,686
    
    
    
    7,421
    
    
    
    16,715
    
    
    
    21,890COST OF REVENUE:Products
    
    
    329
    
    
    
    478
    
    
    
    1,041
    
    
    
    1,559SCOsource licensing
    
    
    1,156
    
    
    
    2,315
    
    
    
    2,876
    
    
    
    10,087Services
    
    
    448
    
    
    
    666
    
    
    
    1,553
    
    
    
    2,012Total cost of revenue
    
    
    1,933
    
    
    
    3,459
    
    
    
    5,470
    
    
    
    13,658GROSS MARGIN
    
    
    2,753
    
    
    
    3,962
    
    
    
    11,245
    
    
    
    8,232OPERATING EXPENSES:Sales and marketing
    
    
    2,463
    
    
    
    3,111
    
    
    
    7,296
    
    
    
    8,656Research and development
    
    
    1,424
    
    
    
    2,029
    
    
    
    4,737
    
    
    
    5,786General and administrative
    
    
    1,377
    
    
    
    1,829
    
    
    
    4,051
    
    
    
    5,139Amortization of intangibles
    
    
    
    
    
    
    593
    
    
    
    
    
    
    
    1,778Total operating expenses
    
    
    5,264
    
    
    
    7,562
    
    
    
    16,084
    
    
    
    21,359LOSS FROM OPERATIONS
    
    
    (2,511
    )
    
    
    (3,600
    )
    
    
    (4,839
    )
    
    
    (13,127
    )EQUITY IN INCOME (LOSS) OF AFFILIATE
    
    
    9
    
    
    
    
    
    
    
    115
    
    
    
    (8
    )OTHER INCOME (EXPENSE):Interest income
    
    
    112
    
    
    
    191
    
    
    
    351
    
    
    
    542Other income (expense), net
    
    
    20
    
    
    
    (64
    )
    
    
    29
    
    
    
    46Total other income, net
    
    
    132
    
    
    
    127
    
    
    
    380
    
    
    
    588LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (2,370
    )
    
    
    (3,473
    )
    
    
    (4,344
    )
    
    
    (12,547
    )PROVISION FOR INCOME TAXES
    
    
    (28
    )
    
    
    (107
    )
    
    
    (221
    )
    
    
    (308
    )NET LOSS
    
    $
    (2,398
    )
    
    $
    (3,580
    )
    
    $
    (4,565
    )
    
    $
    (12,855
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.11
    )
    
    $
    (0.17
    )
    
    $
    (0.21
    )
    
    $
    (0.62
    )WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING
    
    
    21,372
    
    
    
    21,063
    
    
    
    21,264
    
    
    
    20,703OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (2,398
    )
    
    $
    (3,580
    )
    
    $
    (4,565
    )
    
    $
    (12,855
    )Foreign currency translation adjustment
    
    
    21
    
    
    
    37
    
    
    
    54
    
    
    
    57Unrealized gain on available-for-sale marketable securities
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    49COMPREHENSIVE LOSS
    
    $
    (2,377
    )
    
    $
    (3,539
    )
    
    $
    (4,511
    )
    
    $
    (12,749
    )
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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months Ended July 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (4,565
    )
    
    $
    (12,855
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation
    
    
    1,407
    
    
    
    1,323Depreciation and amortization
    
    
    239
    
    
    
    226Loss on disposition of long-lived assets
    
    
    35
    
    
    
    8Equity in (income) loss of affiliate
    
    
    (115
    )
    
    
    8Amortization of intangibles (including $0 and $252 classified as cost of SCOsource
licensing revenue)
    
    
    
    
    
    
    2,030Changes in operating assets and liabilities:Restricted cash
    
    
    2,457
    
    
    
    1,314Accounts receivable, net
    
    
    1,990
    
    
    
    2,271Other current assets
    
    
    319
    
    
    
    734Accounts payable
    
    
    (394
    )
    
    
    42Accrued payroll and benefits
    
    
    (1,127
    )
    
    
    (922
    )Accrued liabilities
    
    
    (254
    )
    
    
    (31
    )Deferred revenue
    
    
    (433
    )
    
    
    (966
    )Royalties payable
    
    
    (190
    )
    
    
    (134
    )Income taxes payable
    
    
    (53
    )
    
    
    13Long-term liabilities
    
    
    (6
    )
    
    
    (111
    )Net cash used in operating activities
    
    
    (690
    )
    
    
    (7,050
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (81
    )
    
    
    (265
    )Dividend received
    
    
    
    
    
    
    308Purchase of available-for-sale marketable securities
    
    
    
    
    
    
    (6,441
    )Proceeds from sale of available-for-sale marketable securities
    
    
    2,249
    
    
    
    7,507Net cash provided by investing activities
    
    
    2,168
    
    
    
    1,109CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee stock purchase program
    
    
    436
    
    
    
    613Proceeds from exercise of common stock options
    
    
    57
    
    
    
    35Repurchase of common stock
    
    
    
    
    
    
    (32
    )Proceeds from sale of common stock in a private placement, net of issuance costs
    
    
    
    
    
    
    9,809Net cash provided by financing activities
    
    
    493
    
    
    
    10,425NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,971
    
    
    
    4,484EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    53
    
    
    
    105CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,369
    
    
    
    4,272CASH AND CASH EQUIVALENTS, end of period
    
    $
    7,393
    
    
    $
    8,861SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    150
    
    
    $
    247SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:Decrease in common stock subject to rescission
    
    $
    
    
    
    $
    (1,018
    )
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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) ORGANIZATION AND DESCRIPTION OF BUSINESS
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(2) SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Use of Estimates in the Preparation of Financial Statements
  Revenue Recognition
    -7-




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Cash and Cash Equivalents
  Available-for-Sale Marketable Securities
  Net Loss Per Common Share
  -8-




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(3) COMMITMENTS AND CONTINGENCIES
 Litigation
 IBM Corporation
     -9-




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Novell, Inc.
  -10-




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IPO Class Action Matter
    Red Hat, Inc.
  -12-




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Other Matters
    (4) STOCKHOLDERS EQUITY
 Issuance of Common Stock
  Equity Plans
  -13-




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Three Months Ended July 31,
    
    Nine Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Cost of products
    
    $
    2,000
    
    
    $
    5,000
    
    
    $
    5,000
    
    
    $
    12,000Cost of SCOsource licensing
    
    
    66,000
    
    
    
    61,000
    
    
    
    211,000
    
    
    
    171,000Cost of services
    
    
    12,000
    
    
    
    17,000
    
    
    
    29,000
    
    
    
    46,000Sales and marketing
    
    
    68,000
    
    
    
    102,000
    
    
    
    286,000
    
    
    
    261,000Research and development
    
    
    51,000
    
    
    
    41,000
    
    
    
    147,000
    
    
    
    97,000General and administrative
    
    
    197,000
    
    
    
    264,000
    
    
    
    729,000
    
    
    
    736,000Total stock-based compensation
    
    $
    396,000
    
    
    $
    490,000
    
    
    $
    1,407,000
    
    
    $
    1,323,000
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Three Months Ended July 31,
    
    Nine Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    4.7
    %
    
    
    5.0
    %
    
    
    4.7
    %
    
    
    4.8
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    96.9
    %
    
    
    66.2
    %
    
    
    90.0
    %
    
    
    63.4
    %Expected exercise life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
   Change in Control Provision for Employees
  (5) SEGMENT INFORMATION
  Three Months Ended July 31, 2007UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    4,686,000
    
    
    $
    
    
    
    $
    4,686,000Cost of revenue
    
    
    777,000
    
    
    
    1,156,000
    
    
    
    1,933,000Gross margin (deficit)
    
    
    3,909,000
    
    
    
    (1,156,000
    )
    
    
    2,753,000Sales and marketing
    
    
    2,463,000
    
    
    
    
    
    
    
    2,463,000Research and development
    
    
    1,424,000
    
    
    
    
    
    
    
    1,424,000General and administrative
    
    
    1,377,000
    
    
    
    
    
    
    
    1,377,000Total operating expenses
    
    
    5,264,000
    
    
    
    
    
    
    
    5,264,000Loss from operations
    
    $
    (1,355,000
    )
    
    $
    (1,156,000
    )
    
    $
    (2,511,000
    )
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Three Months Ended July 31, 2006UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    7,390,000
    
    
    $
    31,000
    
    
    $
    7,421,000Cost of revenue
    
    
    1,144,000
    
    
    
    2,315,000
    
    
    
    3,459,000Gross margin (deficit)
    
    
    6,246,000
    
    
    
    (2,284,000
    )
    
    
    3,962,000Sales and marketing
    
    
    3,111,000
    
    
    
    
    
    
    
    3,111,000Research and development
    
    
    1,932,000
    
    
    
    97,000
    
    
    
    2,029,000General and administrative
    
    
    1,781,000
    
    
    
    48,000
    
    
    
    1,829,000Amortization of intangibles
    
    
    593,000
    
    
    
    
    
    
    
    593,000Total operating expenses
    
    
    7,417,000
    
    
    
    145,000
    
    
    
    7,562,000Loss from operations
    
    $
    (1,171,000
    )
    
    $
    (2,429,000
    )
    
    $
    (3,600,000
    )
 Nine Months Ended July 31, 2007UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    16,692,000
    
    
    $
    23,000
    
    
    $
    16,715,000Cost of revenue
    
    
    2,594,000
    
    
    
    2,876,000
    
    
    
    5,470,000Gross margin (deficit)
    
    
    14,098,000
    
    
    
    (2,853,000
    )
    
    
    11,245,000Sales and marketing
    
    
    7,296,000
    
    
    
    
    
    
    
    7,296,000Research and development
    
    
    4,737,000
    
    
    
    
    
    
    
    4,737,000General and administrative
    
    
    4,051,000
    
    
    
    
    
    
    
    4,051,000Total operating expenses
    
    
    16,084,000
    
    
    
    
    
    
    
    16,084,000Loss from operations
    
    $
    (1,986,000
    )
    
    $
    (2,853,000
    )
    
    $
    (4,839,000
    )
 Nine Months Ended July 31, 2006UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    21,795,000
    
    
    $
    95,000
    
    
    $
    21,890,000Cost of revenue
    
    
    3,571,000
    
    
    
    10,087,000
    
    
    
    13,658,000Gross margin (deficit)
    
    
    18,224,000
    
    
    
    (9,992,000
    )
    
    
    8,232,000Sales and marketing
    
    
    8,655,000
    
    
    
    1,000
    
    
    
    8,656,000Research and development
    
    
    5,501,000
    
    
    
    285,000
    
    
    
    5,786,000General and administrative
    
    
    4,994,000
    
    
    
    145,000
    
    
    
    5,139,000Amortization of intangibles
    
    
    1,778,000
    
    
    
    
    
    
    
    1,778,000Total operating expenses
    
    
    20,928,000
    
    
    
    431,000
    
    
    
    21,359,000Loss from operations
    
    $
    (2,704,000
    )
    
    $
    (10,423,000
    )
    
    $
    (13,127,000
    )
 (6) SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements can also be identified by words such as
intends, anticipates, expects, believes, plans, and similar terms. Forward-looking
statements are not guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those set forth below under Forward-Looking
Statements and Factors that May Affect Future Results and Financial Condition and Part II, Item 1A
 Risk Factors, and elsewhere in this Form 10-Q . The following discussion should be read in
conjunction with our unaudited condensed consolidated financial statements and notes thereto
included in this Form 10-Q and our audited consolidated financial statements included in our annual
report on Form 10-K for the year ended October 31, 2006 filed with the Securities and Exchange
Commission and managements discussion and analysis contained therein. All information presented
herein is based on the three and nine months ended July 31, 2007 and 2006. We assume no obligation
to revise or update any forward-looking statements for any reason, except as required by law.
 Recent Developments
 Novell, Inc. Ruling
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Bankruptcy Filing
     Business Focus
 UNIX Business.
 -19-




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Three Months Ended July 31,
    
    Nine Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Revenue
    
    $
    4,686,000
    
    
    $
    7,390,000
    
    
    $
    16,692,000
    
    
    $
    21,795,000Cost of revenue
    
    
    777,000
    
    
    
    1,144,000
    
    
    
    2,594,000
    
    
    
    3,571,000Gross margin
    
    
    3,909,000
    
    
    
    6,246,000
    
    
    
    14,098,000
    
    
    
    18,224,000Sales and marketing
    
    
    2,463,000
    
    
    
    3,111,000
    
    
    
    7,296,000
    
    
    
    8,655,000Research and development
    
    
    1,424,000
    
    
    
    1,932,000
    
    
    
    4,737,000
    
    
    
    5,501,000General and administrative
    
    
    1,377,000
    
    
    
    1,781,000
    
    
    
    4,051,000
    
    
    
    4,994,000Amortization of intangibles
    
    
    
    
    
    
    593,000
    
    
    
    
    
    
    
    1,778,000Total operating expenses
    
    
    5,264,000
    
    
    
    7,417,000
    
    
    
    16,084,000
    
    
    
    20,928,000Loss from operations
    
    $
    (1,355,000
    )
    
    $
    (1,171,000
    )
    
    $
    (1,986,000
    )
    
    $
    (2,704,000
    )
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SCOsource Business.
   Three Months Ended July 31,
    
    Nine Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Revenue
    
    $
    
    
    
    $
    31,000
    
    
    $
    23,000
    
    
    $
    95,000Cost of revenue
    
    
    1,156,000
    
    
    
    2,315,000
    
    
    
    2,876,000
    
    
    
    10,087,000Gross deficit
    
    
    (1,156,000
    )
    
    
    (2,284,000
    )
    
    
    (2,853,000
    )
    
    
    (9,992,000
    )Sales and marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Research and development
    
    
    
    
    
    
    97,000
    
    
    
    
    
    
    
    285,000General and administrative
    
    
    
    
    
    
    48,000
    
    
    
    
    
    
    
    145,000Total operating expenses
    
    
    
    
    
    
    145,000
    
    
    
    
    
    
    
    431,000Loss from operations
    
    $
    (1,156,000
    )
    
    $
    (2,429,000
    )
    
    $
    (2,853,000
    )
    
    $
    (10,423,000
    )
   -21-




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##### Table of Contents



Critical Accounting Policies
  
    
    Revenue recognition;
    
    Valuation allowances against deferred income tax assets;
    
    Litigation reserves;
    
    Useful lives and impairment of property and equipment; and
    
    Allowances for doubtful accounts.
 Revenue Recognition
    -22-




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##### Table of Contents



Valuation Allowances Against Deferred Income Tax Assets
 Litigation Reserves.
 Useful Lives and Impairment of Property and Equipment
  Allowance for Doubtful Accounts Receivable
 -23-




---



##### Table of Contents



Results of Operations
  Three Months Ended July 31,
    
    Nine Months Ended July 31,Statement of Operations Data:
    
    2007
    
    2006
    
    2007
    
    2006Revenue:Products
    
    $
    3,690,000
    
    
    $
    6,201,000
    
    
    $
    13,451,000
    
    
    $
    17,904,000SCOsource licensing
    
    
    
    
    
    
    31,000
    
    
    
    23,000
    
    
    
    95,000Services
    
    
    996,000
    
    
    
    1,189,000
    
    
    
    3,241,000
    
    
    
    3,891,000Total revenue
    
    
    4,686,000
    
    
    
    7,421,000
    
    
    
    16,715,000
    
    
    
    21,890,000Cost of revenue:Products
    
    
    329,000
    
    
    
    478,000
    
    
    
    1,041,000
    
    
    
    1,559,000SCOsource licensing
    
    
    1,156,000
    
    
    
    2,315,000
    
    
    
    2,876,000
    
    
    
    10,087,000Services
    
    
    448,000
    
    
    
    666,000
    
    
    
    1,553,000
    
    
    
    2,012,000Total cost of revenue
    
    
    1,933,000
    
    
    
    3,459,000
    
    
    
    5,470,000
    
    
    
    13,658,000Gross margin
    
    
    2,753,000
    
    
    
    3,962,000
    
    
    
    11,245,000
    
    
    
    8,232,000Operating expenses:Sales and marketing
    
    
    2,463,000
    
    
    
    3,111,000
    
    
    
    7,296,000
    
    
    
    8,656,000Research and development
    
    
    1,424,000
    
    
    
    2,029,000
    
    
    
    4,737,000
    
    
    
    5,786,000General and administrative
    
    
    1,377,000
    
    
    
    1,829,000
    
    
    
    4,051,000
    
    
    
    5,139,000Amortization of intangibles
    
    
    
    
    
    
    593,000
    
    
    
    
    
    
    

    1,778,000Total operating expenses
    
    
    5,264,000
    
    
    
    7,562,000
    
    
    
    16,084,000
    
    
    
    21,359,000Loss from operations
    
    
    (2,511,000
    )
    
    
    (3,600,000
    )
    
    
    (4,839,000
    )
    
    
    (13,127,000
    )Equity in income (loss) of affiliate
    
    
    9,000
    
    
    
    
    
    
    

    115,000
    
    
    
    (8,000
    )Other income (expense), net
    
    
    132,000
    
    
    
    127,000
    
    
    
    380,000
    
    
    
    588,000Provision for income taxes
    
    
    (28,000
    )
    
    
    (107,000
    )
    
    
    (221,000
    )
    
    
    (308,000
    )Net loss
    
    $
    (2,398,000
    )
    
    $
    (3,580,000
    )
    
    $
    (4,565,000
    )
    
    $
    (12,855,000
    )
 THREE AND NINE MONTHS ENDED JULY 31, 2007 AND 2006
 Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Revenue
    
    $
    4,686,000
    
    
    
    (37
    )%
    
    $
    7,421,000
 Nine Months Ended July 31,2007
    
    Change
    
    2006Revenue
    
    $
    16,715,000
    
    
    
    (24
    )%
    
    $
    21,890,000
 -24-




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##### Table of Contents



Three Months Ended July 31,2007
    
    Change
    
    2006UNIX revenue
    
    $
    4,686,000
    
    
    
    (37
    )%
    
    $
    7,390,000Percent of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    
    
    
    
    
    (100
    )%
    
    
    31,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006UNIX revenue
    
    $
    16,692,000
    
    
    
    (23
    )%
    
    $
    21,795,000Percent of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    
    23,000
    
    
    
    (76
    )%
    
    
    95,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
   -25-




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##### Table of Contents



Products Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Products revenue
    
    $
    3,690,000
    
    
    
    (40
    )%
    
    $
    6,201,000Percent of total revenue
    
    
    79
    %
    
    
    
    
    
    
    84
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Products revenue
    
    $
    13,451,000
    
    
    
    (25
    )%
    
    $
    17,904,000Percent of total revenue
    
    
    81
    %
    
    
    
    
    
    
    82
    %
    Three Months Ended July 31,2007
    
    Change
    
    2006OpenServer revenue
    
    $
    2,135,000
    
    
    
    (33
    )%
    
    $
    3,184,000Percent of products revenue
    
    
    58
    %
    
    
    
    
    
    
    51
    %UnixWare revenue
    
    
    1,172,000
    
    
    
    (55
    )%
    
    
    2,592,000Percent of products revenue
    
    
    32
    %
    
    
    
    
    
    
    42
    %Other products revenue
    
    
    383,000
    
    
    
    (10
    )%
    
    
    425,000Percent of products revenue
    
    
    10
    %
    
    
    
    
    
    
    7
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006OpenServer revenue
    
    $
    8,202,000
    
    
    
    (19
    )%
    
    $
    10,176,000Percent of products revenue
    
    
    61
    %
    
    
    
    
    
    
    57
    %UnixWare revenue
    
    
    3,820,000
    
    
    
    (35
    )%
    
    
    5,901,000Percent of products revenue
    
    
    28
    %
    
    
    
    
    
    
    33
    %Other products revenue
    
    
    1,429,000
    
    
    
    (22
    )%
    
    
    1,827,000Percent of products revenue
    
    
    11
    %
    
    
    
    
    
    
    10
    %
  -26-




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##### Table of Contents



SCOsource Licensing Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006SCOsource licensing revenue
    
    $
    
    
    
    
    (100
    )%
    
    $
    31,000
 Nine Months Ended July 31,2007
    
    Change
    
    2006SCOsource licensing revenue
    
    $
    23,000
    
    
    
    (76
    )%
    
    $
    95,000
  Services Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Services revenue
    
    $
    996,000
    
    
    
    (16
    )%
    
    $
    1,189,000Percent of total revenue
    
    
    21
    %
    
    
    
    
    
    
    16
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Services revenue
    
    $
    3,241,000
    
    
    
    (17
    )%
    
    $
    3,891,000Percent of total revenue
    
    
    19
    %
    
    
    
    
    
    
    18
    %
   -27-




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##### Table of Contents



Cost of Products Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Cost of products revenue
    
    $
    329,000
    
    
    
    (31
    )%
    
    $
    478,000Percent of products revenue
    
    
    9
    %
    
    
    
    
    
    
    8
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Cost of products revenue
    
    $
    1,041,000
    
    
    
    (33
    )%
    
    $
    1,559,000Percent of products revenue
    
    
    8
    %
    
    
    
    
    
    
    9
    %
  Cost of SCOsource Licensing Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Cost of SCOsource licensing revenue
    
    $
    1,156,000
    
    
    
    (50
    )%
    
    $
    2,315,000
 Nine Months Ended July 31,2007
    
    Change
    
    2006Cost of SCOsource licensing revenue
    
    $
    2,876,000
    
    
    
    (71
    )%
    
    $
    10,087,000
    -28-




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##### Table of Contents



Cost of Services Revenue
 Three Months Ended July 31,2007
    
    Change
    
    2006Cost of services revenue
    
    $
    448,000
    
    
    
    (33
    )%
    
    $
    666,000Percent of services revenue
    
    
    45
    %
    
    
    
    
    
    
    56
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Cost of services revenue
    
    $
    1,553,000
    
    
    
    (23
    )%
    
    $
    2,012,000Percent of services revenue
    
    
    48
    %
    
    
    
    
    
    
    52
    %
  Sales and Marketing
 Three Months Ended July 31,2007
    
    Change
    
    2006Sales and marketing expenses
    
    $
    2,463,000
    
    
    
    (21
    )%
    
    $
    3,111,000Percent of total revenue
    
    
    53
    %
    
    
    
    
    
    
    42
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Sales and marketing expenses
    
    $
    7,296,000
    
    
    
    (16
    )%
    
    $
    8,656,000Percent of total revenue
    
    
    44
    %
    
    
    
    
    
    
    40
    %
  -29-




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##### Table of Contents



Research and Development
 Three Months Ended July 31,2007
    
    Change
    
    2006Research and development expenses
    
    $
    1,424,000
    
    
    
    (30
    )%
    
    $
    2,029,000Percent of total revenue
    
    
    30
    %
    
    
    
    
    
    
    27
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Research and development expenses
    
    $
    4,737,000
    
    
    
    (18
    )%
    
    $
    5,786,000Percent of total revenue
    
    
    28
    %
    
    
    
    
    
    
    26
    %
  General and Administrative
 Three Months Ended July 31,2007
    
    Change
    
    2006General and administrative expenses
    
    $
    1,377,000
    
    
    
    (25
    )%
    
    $
    1,829,000Percent of total revenue
    
    
    29
    %
    
    
    
    
    
    
    25
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006General and administrative expenses
    
    $
    4,051,000
    
    
    
    (21
    )%
    
    $
    5,139,000Percent of total revenue
    
    
    24
    %
    
    
    
    
    
    
    23
    %
  -30-




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##### Table of Contents



Amortization of Intangibles
 Three Months Ended July 31,2007
    
    Change
    
    2006Amortization of intangibles
    
    $
    
    
    
    
    (100
    )%
    
    $
    593,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    8
    %
 Nine Months Ended July 31,2007
    
    Change
    
    2006Amortization of intangibles
    
    $
    
    
    
    
    (100
    )%
    
    $
    1,778,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    8
    %
  Equity in Income (Loss) of Affiliate
   Other Income (Expense), net
  Three Months Ended July 31,
    
    Nine Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Interest income
    
    $
    112,000
    
    
    $
    191,000
    
    
    $
    351,000
    
    
    $
    542,000Other income (expense), net
    
    
    20,000
    
    
    
    (64,000
    )
    
    
    29,000
    
    
    
    46,000Total
    
    $
    132,000
    
    
    $
    127,000
    
    
    $
    380,000
    
    
    $
    588,000
   -31-




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##### Table of Contents



Provision for Income Taxes
  Liquidity and Capital Resources
        -32-




---



##### Table of Contents




    
    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.
  -33-




---



##### Table of Contents



Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1  3 years
    
    3 -5 years
    
    5 yearsOperating lease obligations
    
    $
    1,061,000
    
    
    
    647,000
    
    
    $
    414,000
    
    
    $
    
    
    
    $
    
     -34-




---



##### Table of Contents



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 maintain business operations throughout the
bankruptcy proceeding;
    
    Our intention to use cash, cash equivalents, restricted cash
and subsequent cash inflows to meet our working capital needs
throughout the reorganization process;
    
    Our intention to continue operating and file a plan of
reorganization with the Bankruptcy Court;
    
    The possibility that we may decide to pursue various
strategic alternatives;
    
    Our intention to vigorously defend legal claims and counterclaims brought against
us by others;
    
    Our intention to continue to pursue the SCO Litigation, as allowed by the
Bankruptcy Court;
    
    Our belief that legal matters that we are a party to are not estimable;
    
    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, 2007 and future periods;
    
    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 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, 2007 as compared to
the year ended October 31, 2006, that they will continue to be material to our
financial statements;
    
    Our expectation for the three months ending October 31, 2007 that because of the
unique and unpredictable nature of the SCO Litigation, the occurrence and timing of
certain expenses is difficult to predict, and will be difficult to predict for the
upcoming quarters; and
    
    Our intention to use the cash and cash equivalents as of
July 31, 2007 to run our UNIX business and to pursue the SCO
Litigation.
 -35-




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk.
 Interest Rate Risk.
 Investment Risk.
 -36-




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  Novell
  -37-




---



##### Table of Contents



IBM
  
 ITEM 1A. RISK FACTORS
  We do not have a history of profitable operations and our cash resources are limited.
    A long period of operating under Chapter 11 may harm our business.
  -38-




---



##### Table of Contents



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
  Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.
  
    
    incur additional indebtedness;
    
    pay dividends, repurchase our capital stock or make certain other restricted
payments or investments;
    
    make investments;
    
    sell assets;
 -39-




---



##### Table of Contents




    
    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
    
    create liens;
    
    enter into strategic partnerships and other contracts;
    
    plan for or react to market conditions or meet capital needs
or otherwise restrict our activities or business plans; and
    
    finance our operations, strategic acquisitions, investments or alliances or other
capital needs or to engage in other business activities that would be in our interest.
  We have suffered a significant setback in our lawsuit with Novell that has significantly limited
our claims and raises substantial doubt about our ability to continue as a going concern and we may
not prevail in our lawsuits with IBM, Novell and others.
   -40-




---



##### Table of Contents



If the Court imposes a constructive trust on proceeds of the fiscal year 2003 SCOsource agreements,
we may not be able to continue in business.
  Our claims relating to our UNIX intellectual property may subject us to additional legal
proceedings.
  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.
   -41-




---



##### Table of Contents



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.
   
    
    our ability to operate effectively under Chapter 11 protection and changes in
business attitudes toward UNIX as a viable operating system compared to other
competing operating systems, especially Linux, as well as the possibility that the
automatic stay triggered by our Chapter 11 filing will be lifted or modified, and a
constructive trust will be imposed upon our cash in a significant amount;
    
    the outcome of 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;
    
    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.
   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
 -42-




---



##### Table of Contents



reorganization may
result in holders of our common stock receiving no distribution on account of their interests and
cancellation of their common stock 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.
 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.
    -43-




---



##### Table of Contents



If the market for UNIX continues to contract, our business will be harmed.
  We may lose the support of industry partners leading to an accelerated decline in our UNIX products
and services revenue.
  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.
  Our foreign-based operations and sales create special problems, including the imposition of
governmental controls and taxes and fluctuations in currency exchange rates that could hurt our
results.
  
    
    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.
 
 -44-




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##### Table of Contents



We could lose our listing on the Nasdaq Capital Market and the loss of our listing would make our
stock significantly less liquid and would affect its value.
     -45-




---



##### Table of Contents



Our stock price is volatile.
 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
 There are risks associated with the potential exercise of our outstanding options.
  Common stock available for resale may depress the market price of our common stock.
  Our stock price could decline further because of the activities of short sellers.
  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.
  -46-




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##### Table of Contents



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.
  
 ITEM 6. 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
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)).3.6
    
    Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).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 Bert B. Young, 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 Bert B. Young, 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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##### Table of Contents



ITEM 7. SIGNATURES
  Date: September 17, 2007
    
    THE SCO GROUP, INC.By:
    
    /s/ Bert B. YoungBert B. YoungDuly Authorized Officer and
Chief Financial Officer(Principal Financial and
Accounting Officer)
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Description3.1
    
    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
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)).3.6
    
    Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).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 Bert Young, 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 Bert Young, 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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