##### 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 January 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
(State or other jurisdiction of 
incorporation or organization)
    
    87-0662823
(I.R.S. Employer Identification Number)
 
 
 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 January 31, 2007 and October 31, 2006
    
    3Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended January 31, 2007 and 2006
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2007 and 2006
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition  and Results of Operations
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 4.
    
    Controls and Procedures
    
    29PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    29Item 1A.
    
    Risk Factors
    
    30Item 6.
    
    Exhibits
    
    36Signatures
    
    37EXHIBIT 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)
 January 31,
    
    
    October 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,137
    
    
    $
    5,369Restricted cash
    
    
    4,498
    
    
    
    8,024Available-for-sale marketable securities
    
    
    500
    
    
    
    2,249Accounts receivable, net of allowance for doubtful accounts of
$79 and $106, respectively
    
    
    4,010
    
    
    
    5,123Other
    
    
    1,332
    
    
    
    1,514Total current assets
    
    
    17,477
    
    
    
    22,279PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    2,221
    
    
    
    2,259Leasehold improvements
    
    
    262
    
    
    
    316Furniture and fixtures
    
    
    78
    
    
    
    782,561
    
    
    
    2,653Less accumulated depreciation and amortization
    
    
    (2,042
    )
    
    
    (2,045
    )Net property and equipment
    
    
    519
    
    
    
    608OTHER ASSETS:
    
    
    431
    
    
    
    522Total assets
    
    $
    18,427
    
    
    $
    23,409LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,659
    
    
    $
    2,338Payable to Novell, Inc.
    
    
    519
    
    
    
    2,978Accrued payroll and benefits
    
    
    1,792
    
    
    
    2,507Accrued liabilities
    
    
    2,685
    
    
    
    3,059Deferred revenue
    
    
    2,681
    
    
    
    2,994Royalties payable
    
    
    322
    
    
    
    439Income taxes payable
    
    
    786
    
    
    
    820Total current liabilities
    
    
    10,444
    
    
    
    15,135LONG-TERM LIABILITIES
    
    
    191
    
    
    
    192COMMITMENTS AND CONTINGENCIES (Note 3)STOCKHOLDERS EQUITY:Common stock, $0.001 par value; 45,000 shares authorized,
21,531 and 21,391 shares outstanding, respectively
    
    
    22
    
    
    
    21Additional paid-in capital
    
    
    260,968
    
    
    
    260,259Common stock held in treasury, 297 shares
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    856
    
    
    
    856Accumulated other comprehensive income
    
    
    956
    
    
    
    932Accumulated deficit
    
    
    (252,564
    )
    
    
    (251,540
    )Total stockholders equity
    
    
    7,792
    
    
    
    8,082Total liabilities and stockholders equity
    
    $
    18,427
    
    
    $
    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 January 31,2007
    
    
    2006REVENUE:Products
    
    $
    4,866
    
    
    $
    6,000SCOsource licensing
    
    
    23
    
    
    
    30Services
    
    
    1,126
    
    
    
    1,313Total revenue
    
    
    6,015
    
    
    
    7,343COST OF REVENUE:Products
    
    
    377
    
    
    
    584SCOsource licensing
    
    
    654
    
    
    
    4,010Services
    
    
    559
    
    
    
    637Total cost of revenue
    
    
    1,590
    
    
    
    5,231GROSS MARGIN
    
    
    4,425
    
    
    
    2,112OPERATING EXPENSES:Sales and marketing
    
    
    2,440
    
    
    
    2,688Research and development
    
    
    1,759
    
    
    
    1,871General and administrative
    
    
    1,323
    
    
    
    1,592Amortization of intangibles
    
    
    
    
    
    
    592Total operating expenses
    
    
    5,522
    
    
    
    6,743LOSS FROM OPERATIONS
    
    
    (1,097
    )
    
    
    (4,631
    )EQUITY IN INCOME (LOSS) OF AFFILIATE
    
    
    42
    
    
    
    (8
    )OTHER INCOME (EXPENSE):Interest income
    
    
    114
    
    
    
    152Other income (expense), net
    
    
    29
    
    
    
    (7
    )Total other income, net
    
    
    143
    
    
    
    145LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (912
    )
    
    
    (4,494
    )PROVISION FOR INCOME TAXES
    
    
    (112
    )
    
    
    (87
    )NET LOSS
    
    $
    (1,024
    )
    
    $
    (4,581
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.05
    )
    
    $
    (0.23
    )WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING
    
    
    21,186
    
    
    
    20,062OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (1,024
    )
    
    $
    (4,581
    )Foreign currency translation adjustment
    
    
    24
    
    
    
    (6
    )Unrealized loss on available-for-sale marketable securities
    
    
    
    
    
    
    34COMPREHENSIVE LOSS
    
    $
    (1,000
    )
    
    $
    (4,553
    )
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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Three Months Ended January 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,024
    )
    
    $
    (4,581
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation
    
    
    476
    
    
    
    401Depreciation and amortization
    
    
    88
    
    
    
    79Loss on disposition and write-downs of long-lived assets
    
    
    20
    
    
    
    5Equity in (income) loss of affiliate
    
    
    (42
    )
    
    
    8Amortization of intangibles (including $0 and $85 classified as cost of SCOsource
licensing revenue)
    
    
    
    
    
    
    677Changes in operating assets and liabilities:Restricted cash
    
    
    1,067
    
    
    
    1,117Accounts receivable, net
    
    
    1,113
    
    
    
    1,426Other current assets
    
    
    315
    
    
    
    303Accounts payable
    
    
    (679
    )
    
    
    44Accrued payroll and benefits
    
    
    (715
    )
    
    
    (820
    )Accrued liabilities
    
    
    (374
    )
    
    
    248Deferred revenue
    
    
    (313
    )
    
    
    (204
    )Royalties payable
    
    
    (117
    )
    
    
    (16
    )Income taxes payable
    
    
    (34
    )
    
    
    (63
    )Long-term liabilities
    
    
    (1
    )
    
    
    (3
    )Net cash used in operating activities
    
    
    (220
    )
    
    
    (1,379
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (22
    )
    
    
    (69
    )Purchase of available-for-sale marketable securities
    
    
    
    
    
    
    (1,031
    )Proceeds from sale of available-for-sale marketable securities
    
    
    1,749
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,727
    
    
    
    (1,100
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee stock purchase program
    
    
    230
    
    
    
    301Proceeds from exercise of common stock options
    
    
    4
    
    
    
    23Repurchase of common stock
    
    
    
    
    
    
    (32
    )Proceeds from sale of common stock in a private placement, net of issuance costs
    
    
    
    
    
    
    9,905Net cash provided by financing activities
    
    
    234
    
    
    
    10,197NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,741
    
    
    
    7,718EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    27
    
    
    
    28CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,369
    
    
    
    4,272CASH AND CASH EQUIVALENTS, end of period
    
    $
    7,137
    
    
    $
    12,018SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    103
    
    
    $
    125SUPPLEMENTAL 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
   (2) SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Use of Estimates in the Preparation of Financial Statements
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Revenue Recognition
       Cash and Cash Equivalents
  - 7 -




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Available-for-Sale Marketable Securities
   Net Loss Per Common Share
   (3) COMMITMENTS AND CONTINGENCIES
 Litigation
 IBM Corporation
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Novell, Inc.
      - 10 -




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IPO Class Action Matter
    Red Hat, Inc.
  Other Matters
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(4) STOCKHOLDERS EQUITY
 Issuance of Common Stock
  Equity Plans
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Three Months Ended January 31,2007
    
    2006Cost of products
    
    $
    
    
    
    $
    2,000Cost of SCOsource licensing
    
    
    70,000
    
    
    
    53,000Cost of services
    
    
    3,000
    
    
    
    12,000Sales and marketing
    
    
    111,000
    
    
    
    68,000Research and development
    
    
    43,000
    
    
    
    20,000General and administrative
    
    
    249,000
    
    
    
    246,000Total stock-based compensation
    
    $
    476,000
    
    
    $
    401,000
  Three Months Ended January 31,2007
    
    2006Risk-free interest rate
    
    
    4.8
    %
    
    
    4.4
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    85.9
    %
    
    
    63.0
    %Expected exercise life (in years)
    
    
    5.0
    
    
    
    5.0
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(5) SEGMENT INFORMATION
  Three Months Ended January 31, 2007UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    5,992,000
    
    
    $
    23,000
    
    
    $
    6,015,000Cost of revenue
    
    
    936,000
    
    
    
    654,000
    
    
    
    1,590,000Gross margin (deficit)
    
    
    5,056,000
    
    
    
    (631,000
    )
    
    
    4,425,000Sales and marketing
    
    
    2,440,000
    
    
    
    
    
    
    
    2,440,000Research and development
    
    
    1,759,000
    
    
    
    
    
    
    
    1,759,000General and administrative
    
    
    1,323,000
    
    
    
    
    
    
    
    1,323,000Total operating expenses
    
    
    5,522,000
    
    
    
    
    
    
    
    5,522,000Loss from operations
    
    $
    (466,000
    )
    
    $
    (631,000
    )
    
    $
    (1,097,000
    )
 Three Months Ended January 31, 2006UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    7,313,000
    
    
    $
    30,000
    
    
    $
    7,343,000Cost of revenue
    
    
    1,221,000
    
    
    
    4,010,000
    
    
    
    5,231,000Gross margin (deficit)
    
    
    6,092,000
    
    
    
    (3,980,000
    )
    
    
    2,112,000Sales and marketing
    
    
    2,688,000
    
    
    
    
    
    
    
    2,688,000Research and development
    
    
    1,777,000
    
    
    
    94,000
    
    
    
    1,871,000General and administrative
    
    
    1,532,000
    
    
    
    60,000
    
    
    
    1,592,000Amortization of intangibles
    
    
    592,000
    
    
    
    
    
    
    
    592,000Total operating expenses
    
    
    6,589,000
    
    
    
    154,000
    
    
    
    6,743,000Loss from operations
    
    $
    (497,000
    )
    
    $
    (4,134,000
    )
    
    $
    (4,631,000
    )
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This 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, predicts, 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 months ended January 31, 2007 and 2006. We assume no
obligation to revise or update any forward-looking statements for any reason, except as required by
law.
 Business Focus
 UNIX Business.
   Three Months Ended January 31,2007
    
    2006Revenue
    
    $
    5,992,000
    
    
    $
    7,313,000Cost of revenue
    
    
    936,000
    
    
    
    1,221,000Gross margin
    
    
    5,056,000
    
    
    
    6,092,000Sales and marketing
    
    
    2,440,000
    
    
    
    2,688,000Research and development
    
    
    1,759,000
    
    
    
    1,777,000General and administrative
    
    
    1,323,000
    
    
    
    1,532,000Amortization of intangibles
    
    
    
    
    
    
    592,000Total operating expenses
    
    
    5,522,000
    
    
    
    6,589,000Loss from operations
    
    $
    (466,000
    )
    
    $
    (497,000
    )
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SCOsource Business.
   Three Months Ended January 31,2007
    
    2006Revenue
    
    $
    23,000
    
    
    $
    30,000Cost of revenue
    
    
    654,000
    
    
    
    4,010,000Gross deficit
    
    
    (631,000
    )
    
    
    (3,980,000
    )Research and development
    
    
    
    
    
    
    94,000General and administrative
    
    
    
    
    
    
    60,000Total operating expenses
    
    
    
    
    
    
    154,000Loss from operations
    
    $
    (631,000
    )
    
    $
    (4,134,000
    )
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Critical Accounting Policies
  
    
    Revenue recognition;
    
    Deferred income taxes and related valuation allowances;
    
    Litigation reserves;
    
    Impairment of property and equipment; and
    
    Allowances for doubtful accounts.
 Revenue Recognition
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Deferred Income Tax Assets and Related Valuation Allowance
 Litigation Reserves.
 Impairment of Property and Equipment
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Allowance for Doubtful Accounts Receivable
 Results of Operations
  Three Months Ended January 31,Statement of Operations Data:
    
    2007
    
    2006Revenue:Products
    
    $
    4,866,000
    
    
    $
    6,000,000SCOsource licensing
    
    
    23,000
    
    
    
    30,000Services
    
    
    1,126,000
    
    
    
    1,313,000Total revenue
    
    
    6,015,000
    
    
    
    7,343,000Cost of revenue:Products
    
    
    377,000
    
    
    
    584,000SCOsource licensing
    
    
    654,000
    
    
    
    4,010,000Services
    
    
    559,000
    
    
    
    637,000Total cost of revenue
    
    
    1,590,000
    
    
    
    5,231,000Gross margin
    
    
    4,425,000
    
    
    
    2,112,000Operating expenses:Sales and marketing
    
    
    2,440,000
    
    
    
    2,688,000Research and development
    
    
    1,759,000
    
    
    
    1,871,000General and administrative
    
    
    1,323,000
    
    
    
    1,592,000Amortization of intangibles
    
    
    
    
    
    
    592,000Total operating expenses
    
    
    5,522,000
    
    
    
    6,743,000Loss from operations
    
    
    (1,097,000
    )
    
    
    (4,631,000
    )Equity in income (loss) of affiliate
    
    
    42,000
    
    
    
    (8,000
    )Other income, net
    
    
    143,000
    
    
    
    145,000Provision for income taxes
    
    
    (112,000
    )
    
    
    (87,000
    )Net loss
    
    $
    (1,024,000
    )
    
    $
    (4,581,000
    )
 THREE MONTHS ENDED JANUARY 31, 2007 AND 2006
 Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Revenue
    
    $
    6,015,000
    
    
    
    (18
    )%
    
    $
    7,343,000
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Three Months Ended January 31,2007
    
    Change
    
    2006UNIX revenue
    
    $
    5,992,000
    
    
    
    (18
    )%
    
    $
    7,313,000Percent of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    
    23,000
    
    
    
    (23
    )%
    
    
    30,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
   Products Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Products revenue
    
    $
    4,866,000
    
    
    
    (19
    )%
    
    $
    6,000,000Percent of total revenue
    
    
    81
    %
    
    
    
    
    
    
    82
    %
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Three Months Ended January 31,2007
    
    Change
    
    2006OpenServer revenue
    
    $
    2,978,000
    
    
    
    (18
    )%
    
    $
    3,622,000Percent of products revenue
    
    
    61
    %
    
    
    
    
    
    
    60
    %UnixWare revenue
    
    
    1,471,000
    
    
    
    (15
    )%
    
    
    1,725,000Percent of products revenue
    
    
    30
    %
    
    
    
    
    
    
    29
    %Other products revenue
    
    
    417,000
    
    
    
    (36
    )%
    
    
    653,000Percent of products revenue
    
    
    9
    %
    
    
    
    
    
    
    11
    %
  SCOsource Licensing Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006SCOsource licensing revenue
    
    $
    23,000
    
    
    
    (23
    )%
    
    $
    30,000
   Services Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Services revenue
    
    $
    1,126,000
    
    
    
    (14
    )%
    
    $
    1,313,000Percent of total revenue
    
    
    19
    %
    
    
    
    
    
    
    18
    %
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Cost of Products Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Cost of products revenue
    
    $
    377,000
    
    
    
    (35
    )%
    
    $
    584,000Percent of products revenue
    
    
    8
    %
    
    
    
    
    
    
    10
    %
   Cost of SCOsource Licensing Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Cost of SCOsource licensing revenue
    
    $
    654,000
    
    
    
    (84
    )%
    
    $
    4,010,000
    Cost of Services Revenue
 Three Months Ended January 31,2007
    
    Change
    
    2006Cost of services revenue
    
    $
    559,000
    
    
    
    (12
    )%
    
    $
    637,000Percent of services revenue
    
    
    50
    %
    
    
    
    
    
    
    49
    %
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Sales and Marketing
 Three Months Ended January 31,2007
    
    Change
    
    2006Sales and marketing expenses
    
    $
    2,440,000
    
    
    
    (9
    )%
    
    $
    2,688,000Percent of total revenue
    
    
    41
    %
    
    
    
    
    
    
    37
    %
   Research and Development
 Three Months Ended January 31,2007
    
    Change
    
    2006Research and development expenses
    
    $
    1,759,000
    
    
    
    (6
    )%
    
    $
    1,871,000Percent of total revenue
    
    
    29
    %
    
    
    
    
    
    
    25
    %
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General and Administrative
 Three Months Ended January 31,2007
    
    Change
    
    2006General and administrative expenses
    
    $
    1,323,000
    
    
    
    (17
    )%
    
    $
    1,592,000Percent of total revenue
    
    
    22
    %
    
    
    
    
    
    
    22
    %
   Amortization of Intangibles
 Three Months Ended January 31,2007
    
    Change
    
    2006Amortization of intangibles
    
    $
    
    
    
    
    (100
    )%
    
    $
    592,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    8
    %
  Equity in Income (Loss) of Affiliate
   Other Income (Expense), net
  Three Months Ended January 31,2007
    
    2006Interest income
    
    $
    114,000
    
    
    $
    152,000Other income (expense), net
    
    
    29,000
    
    
    
    (7,000
    )Total
    
    $
    143,000
    
    
    $
    145,000
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Provision for Income Taxes
  Liquidity and Capital Resources
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
    
    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.
    Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1  3 years
    
    3 -5 years
    
    5 yearsOperating lease obligations
    
    $
    1,738,000
    
    
    $
    1,305,000
    
    
    $
    433,000
    
    
    $
    
    
    
    $
    
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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 vigorously defend legal claims and counterclaims brought against
us by others;
    
    Our intention to continue to pursue the SCO Litigation;
    
    Our belief that our allowance for doubtful accounts receivable will remain
consistent with our prior experience 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, 2007 and future periods;
    
    Our expectation that we will continue to be unable to predict the amount and timing
of SCOsource licensing revenue, and when generated, the revenue will be sporadic;
    
    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 for the three months ending April 30, 2007 that the dollar amount
of our cost of products revenue and that cost of products revenue as a percent of
products revenue will be generally consistent to that incurred during the three months
ended January 31, 2007;
    
    Our expectation for the three months ending April 30, 2007 that the dollar amount
of our cost of services revenue and that cost of services revenue as a percent of
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services revenue will be generally consistent to that incurred during the three months
ended January 31, 2007;
    
    Our expectation for the three months ending April 30, 2007 that the dollar amount
of our sales and marketing expenses will be generally consistent to that incurred
during the three months ended January 31, 2007;
    
    Our expectation for the three months ending April 30, 2007 that the dollar amount
of our research and development expenses will be generally consistent to that incurred
during the three months ended January 31, 2007;
    
    Our expectation for the three months ending April 30, 2007 that the dollar amount
of our general and administrative expenses will be generally consistent to that
incurred during the three months ended January 31, 2007;
    
    Our intention to use cash and cash equivalents and available-for-sale marketable
securities to run our UNIX business and pursue the SCO Litigation;
    
    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 April 30, 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 belief that certain legal actions to which we are a party will not have a
material adverse effect on us.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk.
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Interest Rate Risk.
 Investment Risk.
  
 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
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ITEM 1A. RISK FACTORS
  We do not have a history of profitable operations and our cash resources are limited.
    We may not prevail in our lawsuits with IBM, Novell and others, which may adversely affect our
ability to continue in business.
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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 if these costs
are higher than anticipated.
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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.
   
    
    results of, developments in, or costs of the SCO Litigation as well as
adverse publicity regarding our business and the SCO Litigation;
    
    changes in business attitudes toward UNIX as a viable operating system
compared to other competing systems, especially Linux;
    
    the outcome of pending motions for summary judgment and a preliminary
injunction motion;
    
    changes in general economic conditions, such as recessions, that could affect
capital expenditures in the software industry;
    
    the interest level of resellers in recommending our UNIX business solutions
to end users and the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
    
    the contingency and other costs we may pay to the Law Firms representing us
in our efforts to establish and defend our intellectual property rights;
    
    changes in attitudes of customers and partners due to the decline in our UNIX
business and our position against the inclusion of our UNIX code and derivative works
in Linux; and
    
    the activities of short sellers.
   We 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.
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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.
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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.
   If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
  We could lose our listing on the Nasdaq Capital Market if our stock price falls below $1.00 for 30
consecutive business days, and the loss of the listing would make our stock significantly less
liquid and would affect its value.
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Our stock price is volatile.
 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
 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.
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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 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
 (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
    
    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.
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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.
 
 ITEM 7. SIGNATURES
  Date:  March 16, 2007
    THE SCO GROUP, INC.By:
    /s/    Bert B. YoungBert B. YoungDuly Authorized Officer and
Chief Financial Officer

(Principal Financial and
Accounting Officer) - 37 -




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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.
 - 38 -