##### 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 April 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-29911
 THE SCO GROUP, INC.
  Delaware
    
    87-0662823(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company
þ(Do not check if a smaller reporting company)
 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 April 30, 2008
and October 31, 2007
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive
Loss for the three and six months ended April 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months
ended April 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 6. Exhibits
    
    
    52Signatures
    
    
    53EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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April 30,
    
    
    October 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,162
    
    
    $
    5,554Restricted cash
    
    
    3,131
    
    
    
    3,099Accounts receivable, net of allowance for
doubtful accounts of $199 and $85, respectively
    
    
    2,738
    
    
    
    3,365Prepaid reorganization expenses
    
    
    475
    
    
    
    137Other
    
    
    935
    
    
    
    1,298Total current assets
    
    
    10,441
    
    
    
    13,453PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    1,704
    
    
    
    2,006Leasehold improvements
    
    
    233
    
    
    
    268Furniture and fixtures
    
    
    60
    
    
    
    661,997
    
    
    
    2,340Less accumulated depreciation and amortization
    
    
    (1,767
    )
    
    
    (1,981
    )Net property and equipment
    
    
    230
    
    
    
    359OTHER ASSETS
    
    
    486
    
    
    
    497Total assets
    
    $
    11,157
    
    
    $
    14,309LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    262
    
    
    $
    252Payable to Novell, Inc.
    
    
    1,268
    
    
    
    1,148Accrued payroll and benefits
    
    
    1,276
    
    
    
    1,370Accrued liabilities
    
    
    615
    
    
    
    1,110Accrued reorganization expenses
    
    
    803
    
    
    
    253Deferred revenues
    
    
    1,920
    
    
    
    2,044Royalties payable
    
    
    116
    
    
    
    123Income taxes payable
    
    
    854
    
    
    
    708Total current liabilities
    
    
    7,114
    
    
    
    7,008LONG-TERM LIABILITIES
    
    
    182
    
    
    
    182LIABILITIES SUBJECT TO COMPROMISE
    
    
    3,239
    
    
    
    3,365Total liabilities
    
    
    10,535
    
    
    
    10,555COMMITMENTS AND CONTINGENCIES (Notes 1,3 and 6)STOCKHOLDERS EQUITY:Common stock, $0.001 par value: 45,000 shares authorized,
21,886 and 21,782 shares outstanding, respectively
    
    
    22
    
    
    
    22Additional paid-in capital
    
    
    263,533
    
    
    
    262,659Common stock held in treasury; 297 shares outstanding
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    356
    
    
    
    856Accumulated other comprehensive income
    
    
    1,081
    
    
    
    1,029Accumulated deficit
    
    
    (261,924
    )
    
    
    (258,366
    )Total stockholders equity
    
    
    622
    
    
    
    3,754Total liabilities and stockholders equity
    
    $
    11,157
    
    
    $
    14,309
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Three Months Ended April 30,
    
    
    Six Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES:Products
    
    $
    3,048
    
    
    $
    4,895
    
    
    $
    7,087
    
    
    $
    9,761SCOsource
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Services
    
    
    613
    
    
    
    1,119
    
    
    
    1,446
    
    
    
    2,245Total revenues
    
    
    3,661
    
    
    
    6,014
    
    
    
    8,533
    
    
    
    12,029COST OF REVENUES:Products
    
    
    186
    
    
    
    335
    
    
    
    474
    
    
    
    712SCOsource
    
    
    333
    
    
    
    1,066
    
    
    
    600
    
    
    
    1,720Services
    
    
    283
    
    
    
    546
    
    
    
    714
    
    
    
    1,105Total cost of revenues
    
    
    802
    
    
    
    1,947
    
    
    
    1,788
    
    
    
    3,537GROSS MARGIN
    
    
    2,859
    
    
    
    4,067
    
    
    
    6,745
    
    
    
    8,492OPERATING EXPENSES:Sales and marketing
    
    
    2,124
    
    
    
    2,393
    
    
    
    4,865
    
    
    
    4,833General and administrative
    
    
    1,273
    
    
    
    1,351
    
    
    
    2,197
    
    
    
    2,674Research and development
    
    
    931
    
    
    
    1,554
    
    
    
    2,204
    
    
    
    3,313Total operating expenses
    
    
    4,328
    
    
    
    5,298
    
    
    
    9,266
    
    
    
    10,820LOSS FROM OPERATIONS
    
    
    (1,469
    )
    
    
    (1,231
    )
    
    
    (2,521
    )
    
    
    (2,328
    )EQUITY IN INCOME (LOSS) OF AFFILIATE
    
    
    
    
    
    
    64
    
    
    
    (11
    )
    
    
    106OTHER INCOME (EXPENSE):Reorganization expense
    
    
    (635
    )
    
    
    
    
    
    
    (1,479
    )
    
    
    Interest income
    
    
    34
    
    
    
    125
    
    
    
    101
    
    
    
    239Other income (expense), net
    
    
    46
    
    
    
    (20
    )
    
    
    509
    
    
    
    9Total other income (expense), net
    
    
    (555
    )
    
    
    105
    
    
    
    (869
    )
    
    
    248LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (2,024
    )
    
    
    (1,062
    )
    
    
    (3,401
    )
    
    
    (1,974
    )PROVISION FOR INCOME TAXES
    
    
    (46
    )
    
    
    (81
    )
    
    
    (157
    )
    
    
    (193
    )NET LOSS
    
    $
    (2,070
    )
    
    $
    (1,143
    )
    
    $
    (3,558
    )
    
    $
    (2,167
    )BASIC AND DILUTED NET LOSS
PER COMMON SHARE
    
    $
    (0.10
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING
    
    
    21,589
    
    
    
    21,233
    
    
    
    21,574
    
    
    
    21,209OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (2,070
    )
    
    $
    (1,143
    )
    
    $
    (3,558
    )
    
    $
    (2,167
    )Foreign currency translation adjustment
    
    
    22
    
    
    
    9
    
    
    
    52
    
    
    
    33COMPREHENSIVE LOSS
    
    $
    (2,048
    )
    
    $
    (1,134
    )
    
    $
    (3,506
    )
    
    $
    (2,134
    )
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Six Months Ended April 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,558
    )
    
    $
    (2,167
    )Adjustments to reconcile net loss to net cash used
in operating activities:Stock-based compensation
    
    
    352
    
    
    
    1,011Depreciation and amortization
    
    
    117
    
    
    
    167Loss on disposition and write-downs of long-lived assets
    
    
    19
    
    
    
    35Equity in income (loss) of affiliate
    
    
    11
    
    
    
    (106
    )Reorganization expense
    
    
    1,479
    
    
    
    Changes in operating assets and liabilities:Restricted cash
    
    
    88
    
    
    
    1,652Accounts receivable, net
    
    
    627
    
    
    
    803Other current assets
    
    
    363
    
    
    
    245Accounts payable
    
    
    10
    
    
    
    (471
    )Accrued payroll and benefits
    
    
    (94
    )
    
    
    (648
    )Accrued liabilities
    
    
    (495
    )
    
    
    (555
    )Deferred revenue
    
    
    (124
    )
    
    
    126Royalties payable
    
    
    (7
    )
    
    
    (90
    )Income taxes payable
    
    
    146
    
    
    
    (49
    )Long-term liabilities
    
    
    
    
    
    
    (3
    )Liabilities subject to compromise
    
    
    (126
    )
    
    
    Payments for reorganization expense
    
    
    (1,267
    )
    
    
    Net cash used in operating activities
    
    
    (2,459
    )
    
    
    (50
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (7
    )
    
    
    (49
    )Proceeds from sale of available-for-sale marketable securities
    
    
    
    
    
    
    2,249Net cash (used in) provided by investing activities
    
    
    (7
    )
    
    
    2,200CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee
stock purchase program
    
    
    22
    
    
    
    230Proceeds from exercise of common stock options
    
    
    
    
    
    
    4Net cash provided by financing activities
    
    
    22
    
    
    
    234NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (2,444
    )
    
    
    2,384EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    52
    
    
    
    34CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,554
    
    
    
    5,369CASH AND CASH EQUIVALENTS, end of period
    
    $
    3,162
    
    
    $
    7,787SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    37
    
    
    $
    150Non cash financing activity  expiration of warrants
    
    $
    500
    
    
    $
    
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(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
     - 6 -




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Bankruptcy Filing
   - 7 -




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Going Concern
  - 8 -




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(2) SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Financial Reporting by Entities in Reorganization under Bankruptcy Code
  Use of Estimates in the Preparation of Financial Statements
  - 9 -




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Revenue Recognition
       - 10 -




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Cash and Cash Equivalents
  Net Loss Per Common Share
   (3) COMMITMENTS AND CONTINGENCIES
 Litigation
 IBM
   - 11 -




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Novell, Inc.
      - 13 -




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IPO Class Action Matter
 In re Initial Public Offering Securities Litigation, 21
MC 92 (SAS)
  - 15 -




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Red Hat, Inc.
  Other Matters
    - 16 -




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(4) STOCKHOLDERS EQUITY
 Equity Plans
       - 17 -




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Three Months Ended April 30,
    
    
    Six Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Cost of products
    
    $
    2
    
    
    $
    3
    
    
    $
    2
    
    
    $
    3Cost of SCOsource
    
    
    66
    
    
    
    74
    
    
    
    100
    
    
    
    144Cost of services
    
    
    7
    
    
    
    14
    
    
    
    13
    
    
    
    17Sales and marketing
    
    
    56
    
    
    
    107
    
    
    
    85
    
    
    
    218Research and development
    
    
    13
    
    
    
    54
    
    
    
    25
    
    
    
    97General and administrative
    
    
    94
    
    
    
    283
    
    
    
    127
    
    
    
    532Total stock-based compensation
    
    $
    238
    
    
    $
    535
    
    
    $
    352
    
    
    $
    1,011
  Three Months Ended April 30,
    
    Six Months Ended April 30,2008
    
    2007
    
    2008
    
    2007Risk-free interest rate
    
    
    3.0
    %
    
    
    4.6
    %
    
    
    2.9
    %
    
    
    4.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    353.3
    %
    
    
    87.2
    %
    
    
    340.2
    %
    
    
    86.6
    %Expected exercise life (in years)
    
    
    5.6
    
    
    
    5.0
    
    
    
    5.5
    
    
    
    5.0
   (5) SEGMENT INFORMATION
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Three Months Ended April 30, 2008UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    3,661
    
    
    $
    
    
    
    $
    3,661Cost of revenues
    
    
    469
    
    
    
    333
    
    
    
    802Gross margin (deficit)
    
    
    3,192
    
    
    
    (333
    )
    
    
    2,859Sales and marketing
    
    
    2,124
    
    
    
    
    
    
    
    2,124Research and development
    
    
    931
    
    
    
    
    
    
    
    931General and administrative
    
    
    1,273
    
    
    
    
    
    
    
    1,273Total operating expenses
    
    
    4,328
    
    
    
    
    
    
    
    4,328Loss from operations
    
    $
    (1,136
    )
    
    $
    (333
    )
    
    $
    (1,469
    )
 Three Months Ended April 30, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    6,014
    
    
    $
    
    
    
    $
    6,014Cost of revenues
    
    
    881
    
    
    
    1,066
    
    
    
    1,947Gross margin (deficit)
    
    
    5,133
    
    
    
    (1,066
    )
    
    
    4,067Sales and marketing
    
    
    2,393
    
    
    
    
    
    
    
    2,393Research and development
    
    
    1,554
    
    
    
    
    
    
    
    1,554General and administrative
    
    
    1,351
    
    
    
    
    
    
    
    1,351Total operating expenses
    
    
    5,298
    
    
    
    
    
    
    
    5,298Loss from operations
    
    $
    (165
    )
    
    $
    (1,066
    )
    
    $
    (1,231
    )
 Six Months Ended April 30, 2008UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    8,533
    
    
    $
    
    
    
    $
    8,533Cost of revenues
    
    
    1,188
    
    
    
    600
    
    
    
    1,788Gross margin (deficit)
    
    
    7,345
    
    
    
    (600
    )
    
    
    6,745Sales and marketing
    
    
    4,865
    
    
    
    
    
    
    
    4,865Research and development
    
    
    2,204
    
    
    
    
    
    
    
    2,204General and administrative
    
    
    2,197
    
    
    
    
    
    
    
    2,197Total operating expenses
    
    
    9,266
    
    
    
    
    
    
    
    9,266Loss from operations
    
    $
    (1,921
    )
    
    $
    (600
    )
    
    $
    (2,521
    )
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Six Months Ended April 30, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    12,006
    
    
    $
    23
    
    
    $
    12,029Cost of revenues
    
    
    1,817
    
    
    
    1,720
    
    
    
    3,537Gross margin (deficit)
    
    
    10,189
    
    
    
    (1,697
    )
    
    
    8,492Sales and marketing
    
    
    4,833
    
    
    
    
    
    
    
    4,833Research and development
    
    
    3,313
    
    
    
    
    
    
    
    3,313General and administrative
    
    
    2,674
    
    
    
    
    
    
    
    2,674Total operating expenses
    
    
    10,820
    
    
    
    
    
    
    
    10,820Loss from operations
    
    $
    (631
    )
    
    $
    (1,697
    )
    
    $
    (2,328
    )
 (6) SUBSEQUENT EVENTS
 , In re: The SCO Group, Inc,
  
 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
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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, 2007
filed with the Securities and Exchange Commission and managements discussion and analysis
contained therein. All information presented herein is based on the three and six months ended
April 30, 2008 and 2007. We assume no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
 Recent Developments
 Novell, Inc. Ruling
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Bankruptcy Filing.
  - 22 -




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, In re: The SCO Group, Inc,
      Reduction in Force.
 - 23 -




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Business Focus
 UNIX Business.
   Three Months Ended April 30,
    
    
    Six Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue
    
    $
    3,661
    
    
    $
    6,014
    
    
    $
    8,533
    
    
    $
    12,006Cost of revenue
    
    
    469
    
    
    
    881
    
    
    
    1,188
    
    
    
    1,817Gross margin
    
    
    3,192
    
    
    
    5,133
    
    
    
    7,345
    
    
    
    10,189Sales and marketing
    
    
    2,124
    
    
    
    2,393
    
    
    
    4,865
    
    
    
    4,833General and administrative
    
    
    1,273
    
    
    
    1,351
    
    
    
    2,197
    
    
    
    2,674Research and development
    
    
    931
    
    
    
    1,554
    
    
    
    2,204
    
    
    
    3,313Total operating expenses
    
    
    4,328
    
    
    
    5,298
    
    
    
    9,266
    
    
    
    10,820Loss from operations
    
    $
    (1,136
    )
    
    $
    (165
    )
    
    $
    (1,921
    )
    
    $
    (631
    )
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SCOsource Business.
   Three Months Ended April 30,
    
    
    Six Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    23Cost of revenue
    
    
    333
    
    
    
    1,066
    
    
    
    600
    
    
    
    1,720Gross deficit
    
    
    (333
    )
    
    
    (1,066
    )
    
    
    (600
    )
    
    
    (1,697
    )Sales and marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from operations
    
    $
    (333
    )
    
    $
    (1,066
    )
    
    $
    (600
    )
    
    $
    (1,697
    )
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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 receivable.
 Revenue Recognition
     - 26 -




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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
 - 27 -




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##### Table of Contents



Results of Operations
  Three Months Ended April 30,
    
    
    Six Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue:Products
    
    $
    3,048
    
    
    $
    4,895
    
    
    $
    7,087
    
    
    $
    9,761SCOsource licensing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Services
    
    
    613
    
    
    
    1,119
    
    
    
    1,446
    
    
    
    2,245Total revenue
    
    
    3,661
    
    
    
    6,014
    
    
    
    8,533
    
    
    
    12,029Cost of revenue:Products
    
    
    186
    
    
    
    335
    
    
    
    474
    
    
    
    712SCOsource licensing
    
    
    333
    
    
    
    1,066
    
    
    
    600
    
    
    
    1,720Services
    
    
    283
    
    
    
    546
    
    
    
    714
    
    
    
    1,105Total cost of revenue
    
    
    802
    
    
    
    1,947
    
    
    
    1,788
    
    
    
    3,537Gross margin
    
    
    2,859
    
    
    
    4,067
    
    
    
    6,745
    
    
    
    8,492Operating expenses:Sales and marketing
    
    
    2,124
    
    
    
    2,393
    
    
    
    4,865
    
    
    
    4,833General and administrative
    
    
    1,273
    
    
    
    1,351
    
    
    
    2,197
    
    
    
    2,674Research and development
    
    
    931
    
    
    
    1,554
    
    
    
    2,204
    
    
    
    3,313Total operating expenses
    
    
    4,328
    
    
    
    5,298
    
    
    
    9,266
    
    
    
    10,820Loss from operations
    
    
    (1,469
    )
    
    
    (1,231
    )
    
    
    (2,521
    )
    
    
    (2,328
    )Equity in income (loss) of affiliate
    
    
    
    
    
    
    64
    
    
    
    (11
    )
    
    
    106Other income (expense), net
    
    
    (555
    )
    
    
    105
    
    
    
    (869
    )
    
    
    248Provision for income taxes
    
    
    (46
    )
    
    
    (81
    )
    
    
    (157
    )
    
    
    (193
    )Net loss
    
    $
    (2,070
    )
    
    $
    (1,143
    )
    
    $
    (3,558
    )
    
    $
    (2,167
    )
 THREE AND SIX MONTHS ENDED APRIL 30, 2008 AND 2007
 Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Revenue
    
    $
    3,661
    
    
    
    (39
    )%
    
    $
    6,014
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Revenue
    
    $
    8,533
    
    

    (29)

    %
    
    
    $12,029
 - 28 -




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##### Table of Contents



Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)UNIX revenue
    
    $
    3,661
    
    
    
    (39
    )%
    
    $
    6,014Percentage of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)UNIX revenue
    
    $
    8,533
    
    
    
    (29
    )%
    
    $
    12,006Percentage of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    23Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
   - 29 -




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##### Table of Contents



Products Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Products revenue
    
    $
    3,048
    
    
    
    (38
    )%
    
    $
    4,895Percentage of total revenue
    
    
    83
    %
    
    
    
    
    
    
    81
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Products revenue
    
    $
    7,087
    
    
    
    (27
    )%
    
    $
    9,761Percentage of total revenue
    
    
    83
    %
    
    
    
    
    
    
    81
    %
    Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)OpenServer revenue
    
    $
    1,843
    
    
    
    (40
    )%
    
    $
    3,090Percentage of products revenue
    
    
    60
    %
    
    
    
    
    
    
    63
    %UnixWare revenue
    
    $
    917
    
    
    
    (22
    )%
    
    $
    1,177Percentage of products revenue
    
    
    30
    %
    
    
    
    
    
    
    24
    %Other products revenue
    
    $
    288
    
    
    
    (54
    )%
    
    $
    628Percentage of products revenue
    
    
    10
    %
    
    
    
    
    
    
    13
    %
 - 30 -




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##### Table of Contents



Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)OpenServer revenue
    
    $
    4,781
    
    
    
    (21
    )%
    
    $
    6,067Percentage of products revenue
    
    
    67
    %
    
    
    
    
    
    
    62
    %UnixWare revenue
    
    $
    1,769
    
    
    
    (33
    )%
    
    $
    2,649Percentage of products revenue
    
    
    25
    %
    
    
    
    
    
    
    27
    %Other products revenue
    
    $
    537
    
    
    
    (49
    )%
    
    $
    1,045Percentage of products revenue
    
    
    8
    %
    
    
    
    
    
    
    11
    %
  SCOsource Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    23
   Services Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Services revenue
    
    $
    613
    
    
    
    (45
    )%
    
    $
    1,119Percentage of total revenue
    
    
    17
    %
    
    
    
    
    
    
    19
    %
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##### Table of Contents



Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Services revenue
    
    $
    1,446
    
    
    
    (36
    )%
    
    $
    2,245Percentage of total revenue
    
    
    17
    %
    
    
    
    
    
    
    19
    %
   Cost of Products Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of products revenue
    
    $
    186
    
    
    
    (44
    )%
    
    $
    335Percentage of products revenue
    
    
    6
    %
    
    
    
    
    
    
    7
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of products revenue
    
    $
    474
    
    
    
    (33
    )%
    
    $
    712Percentage of products revenue
    
    
    7
    %
    
    
    
    
    
    
    7
    %
  Cost of SCOsource Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of SCOsource revenue
    
    $
    333
    
    
    
    (69
    )%
    
    $
    1,066
 - 32 -




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##### Table of Contents



Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of SCOsource revenue
    
    $
    600
    
    
    
    (65
    )%
    
    $
    1,720
    Cost of Services Revenue
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of services revenue
    
    $
    283
    
    
    
    (48
    )%
    
    $
    546Percentage of services revenue
    
    
    46
    %
    
    
    
    
    
    
    49
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Cost of services revenue
    
    $
    714
    
    
    
    (35
    )%
    
    $
    1,105Percentage of services revenue
    
    
    49
    %
    
    
    
    
    
    
    49
    %
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##### Table of Contents



Sales and Marketing
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Sales and marketing expenses
    
    $
    2,124
    
    
    
    (11
    )%
    
    $
    2,393Percentage of total revenue
    
    
    58
    %
    
    
    
    
    
    
    40
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Sales and marketing expenses
    
    $
    4,865
    
    
    
    1
    %
    
    $
    4,833Percentage of total revenue
    
    
    57
    %
    
    
    
    
    
    
    40
    %
   Research and Development
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Research and development expenses
    
    $
    931
    
    
    
    (40
    )%
    
    $
    1,554Percentage of total revenue
    
    
    25
    %
    
    
    
    
    
    
    26
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Research and development expenses
    
    $
    2,204
    
    
    
    (33
    )%
    
    $
    3,313Percentage of total revenue
    
    
    26
    %
    
    
    
    
    
    
    28
    %
 - 34 -




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##### Table of Contents



General and Administrative
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)General and administrative expenses
    
    $
    1,273
    
    
    
    (6
    )%
    
    $
    1,351Percentage of total revenue
    
    
    35
    %
    
    
    
    
    
    
    22
    %
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)General and administrative expenses
    
    $
    2,197
    
    
    
    (18
    )%
    
    $
    2,674Percentage of total revenue
    
    
    26
    %
    
    
    
    
    
    
    22
    %
  Equity in Income (Loss) of Affiliate
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Reorganization items
 Three Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Reorganization items
    
    $
    635
    
    
    
    n/a
    
    
    $
    
 Six Months Ended April 30,2008
    
    Change
    
    2007(Dollars in thousands)Reorganization items
    
    $
    1,479
    
    
    
    n/a
    
    
    $
    
  Other Income (Expense), net
  Three Months Ended April 30,2008
    
    
    Change
    
    
    2007(Dollars in thousands)Interest income
    
    $
    34
    
    
    
    (73
    )%
    
    $
    125Other income (expense), net
    
    
    46
    
    
    
    n/a
    
    
    
    (20
    )Total
    
    $
    80
    
    
    
    
    
    
    $
    105
 Six Months Ended April 30,2008
    

    Change
    
    2007(Dollars in thousands)Interest income
    
    $
    101
    
    
    
    (58
    )%
    
    $
    239Other income (expense), net
    
    
    509
    
    
    
    n/a
    
    
    
    9Total
    
    $
    610
    
    
    
    
    
    
    $
    248
   Provision for Income Taxes
  - 36 -




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Liquidity and Capital Resources
             - 37 -




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
    
    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.
  Contractual Obligations
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1 - 3 years
    
    3 - 5 years
    
    5 years(In thousands)Operating lease obligations
    
    $
    1,347
    
    
    $
    450
    
    
    $
    864
    
    
    $
    33
    
    
    $
    
   - 38 -




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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 appeal the adverse August 10, 2007 summary judgment ruling;
    
    Our belief that the undiscounted future cash flows generated by us will be
sufficient to recover the carrying amounts of our long-lived assets over their
expected remaining useful lives;
    
    Our intention to maintain business operations throughout the reorganization
process;
    
    Our intention to use our cash, restricted cash and subsequent cash inflows to meet
our working capital needs throughout the reorganization process;
    
    Our intention to continue operating and to file a plan of reorganization with the
Bankruptcy Court;
    
    Our belief that our reduction in workforce will allow us to continue to focus on
and serve our UNIX customer base and to deliver on key opportunities with our mobile
products and services;
    
    Our intention to vigorously defend legal claims and counterclaims brought against
us by others;
    
    Our intention to continue to pursue the SCO Litigation;
    
    Our belief that our allowance for doubtful accounts receivable is adequate and that
write-offs of uncollectible accounts will not materially exceed that allowance;
    
    The strength of our intellectual property rights and contractual claims regarding
UNIX generally and specifically the strength of our claim that unauthorized UNIX
source code and derivatives of UNIX source code are prevalent in Linux;
    
    Our belief that competition from Linux will continue during the year ending October
31, 2008 and future periods;
    
    Our expectation that we will continue to be unable to predict the amount and timing
of SCOsource revenue, and when generated, the revenue will be sporadic and dependent
on the outcome of the SCO Litigation;
    
    Our expectation that future services revenue will depend in part on our ability to
generate UNIX products revenue from new customers as well as the renewal of annual
support and services agreements from existing UNIX customers;
 - 39 -




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
    
    Our expectation that for the year ending October 31, 2008 our total
UNIX revenue will decline from UNIX revenue generated in the year ended October
31, 2007 as a result of continued competition and negative publicity;
    
    Our intention to use cash to run our UNIX business and pursue the SCO Litigation;
    
    Our belief that we have sufficient liquidity resources to fund our operations
through at least October 31, 2008;
    
    Our intention to continue to pay for expert, consulting and other expenses through
the conclusion of our litigation with IBM, and our expectation that although these
expenses are expected to decrease for the year ending October 31, 2008 as compared to
the year ended October 31, 2007, that they will continue to be material to our
financial statements;
    
    Our expectation for the three months ending July 31, 2008 that because of the
unique and unpredictable nature of the SCO Litigation, the occurrence and timing of
certain expenses is difficult to predict, and will be difficult to predict for the
upcoming quarters; and
    
    Our belief that certain legal actions to which we are a party will not have a
material adverse effect on us.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk.
 - 40 -




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##### Table of Contents



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
  - 41 -




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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.
   - 42 -




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We may not be able to obtain confirmation of our Chapter 11 plan; we may not be able to emerge from
Bankruptcy and we may be liquidated.
     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.
  - 43 -




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Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business
strategies.
  
    
    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.
  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.
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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.
  - 45 -




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##### Table of Contents



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.
   
    
    33 percent of any aggregate recovery amounts received up to $350,000,000, reduced by
all professional fees previously paid with respect to these proceedings;
    
    plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or
equal to $700,000,000;
    
    plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.
   - 46 -




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##### 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 or the
failure to confirm our reorganization plan;
    
    the outcome of pending litigation with Novell and pending motions for summary
judgment in our lawsuit with IBM and Novell, adverse rulings relating to IBMs and
Novells counterclaims, and results of, developments in, or costs of the SCO
Litigation as well as adverse publicity regarding our business and the SCO Litigation;
    
    changes in general economic conditions, such as recessions, that could affect
capital expenditures in the software industry;
    
    the interest level of resellers in recommending our UNIX business solutions
to end users and the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
    
    the contingency and other costs we may pay to the Law Firms representing us
in our efforts to establish and defend our intellectual property rights;
    
    changes in attitudes of customers and partners due to the decline in our UNIX
business and our position against the inclusion of our UNIX code and derivative works
in Linux; and
    
    the activities of short sellers.
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If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
  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 revenues.
  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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
    
    potential loss of developed technology through piracy, misappropriation, or
more lenient laws regarding intellectual property protection;
    
    imposition of governmental controls, including trade restrictions and other
tax requirements;
    
    fluctuations in currency exchange rates and economic instability;
    
    longer payment cycles for sales in foreign countries;
    
    seasonal reduction in business activity; and
    
    substantial wind down and severance expenses that local law may require be
paid in connection with any termination of our overseas operations.
   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.
   Our stock price is volatile.
  There are risks associated with the potential exercise of our outstanding options.
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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.
  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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect seven members to the Board of Directors to serve until their
successors have been appointed. All directors were elected with Ralph J. Yarro III
receiving 15,830,312 votes in favor and 871,520 votes withheld; R. Duff Thompson
receiving 15,903,214 votes in favor and 798,618 votes withheld; Darcy G. Mott
receiving 15,903,973 votes in favor and 797,859 votes withheld; Darl C. McBride
receiving 15,882,192 votes in favor and 819,680 votes withheld; Daniel W. Campbell
receiving 15,903,271 votes in favor and 798,561 votes withheld; Omar T. Leeman
receiving 15,895,986 votes in favor and 805,846 votes withheld; and J. Kent Millington
receiving 15,904,014 votes in favor and 797,818 votes withheld.2.
    
    To ratify the appointment of Tanner LC as our independent registered public
accounting firm. This motion was passed with 16,344,727 votes in favor, 353,808 votes
against, and 3,297 abstentions.
 - 51 -




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##### Table of Contents



ITEM 6. EXHIBITS
 (a)
    
    Exhibits3.1
    
    Amended and Restated Certificate of Incorporation of Caldera International,
Inc. (incorporated by reference to Exhibit 3.1 to SCOs Registration Statement on Form
8-A12G/A (File No. 000-29911)).3.2
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding consolidation of outstanding shares (incorporated by reference to Exhibit
3.2 to SCOs Registration Statement on Form 8-A12G/A (File No. 000-29911)).3.3
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit
3.3 to SCOs Registration Statement on Form 8A12G/A (File No. 000-29911)).3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to
SCOs Registration Statement on Form 8-A12G/A (File No. 000-29911)).3.5
    
    Amendment to the Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.1 to SCOs Current Report on Form 8-K filed on January 4, 2008 (File No.
000-29911)).3.6
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)).3.7
    
    Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).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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##### Table of Contents



ITEM 7. SIGNATURES
  Date:  June 16, 2008
    THE SCO GROUP, INC.By:

/s/ Kenneth R. NielsenKenneth R. NielsenDuly Authorized Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer) - 53 -




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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
    
    Amendment to the Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.1 to SCOs Current Report on Form 8-K filed on January 4, 2008 (File No.
000-29911)).3.6
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)).3.7
    
    Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).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.
 - 54 -