##### 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, 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 
incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 
 
   
  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 January 31, 2008
and October 31, 2007
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive
Loss for the three months ended January 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months
ended January 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative
Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls and
Procedures
    
    
    38PART II.
    
    OTHER INFORMATION
    
    
    39Item 1.
    
    Legal Proceedings
    
    
    39Item 1A.
    
    Risk Factors
    
    
    39Item 5.
    
    Other information
    
    
    48Item 6.
    
    Exhibits
    
    
    49Signatures
    
    
    50EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBITI 31.2EXHIBIT 32.1EXHIBIT 32.2
  -2-




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##### Table of Contents



January 31,
    
    
    October 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,797
    
    
    $
    5,554Restricted cash
    
    
    2,091
    
    
    
    3,099Accounts receivable, net of allowance for
doubtful accounts of $153 and $85, respectively
    
    
    4,021
    
    
    
    3,365Other
    
    
    904
    
    
    
    1,298Prepaid reorganization expenses
    
    
    325
    
    
    
    137Total current assets
    
    
    12,138
    
    
    
    13,453PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    2,013
    
    
    
    2,006Leasehold improvements
    
    
    269
    
    
    
    268Furniture and fixtures
    
    
    67
    
    
    
    662,349
    
    
    
    2,340Less accumulated depreciation and amortization
    
    
    (2,046
    )
    
    
    (1,981
    )Net property and equipment
    
    
    303
    
    
    
    359OTHER ASSETS
    
    
    487
    
    
    
    497Total assets
    
    $
    12,928
    
    
    $
    14,309LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    567
    
    
    $
    252Payable to Novell, Inc.
    
    
    172
    
    
    
    1,148Accrued payroll and benefits
    
    
    1,695
    
    
    
    1,370Accrued liabilities
    
    
    658
    
    
    
    1,110Accrued reorganization expenses
    
    
    820
    
    
    
    253Deferred revenues
    
    
    1,962
    
    
    
    2,044Royalties payable
    
    
    211
    
    
    
    123Income taxes payable
    
    
    866
    
    
    
    708Total current liabilities
    
    
    6,951
    
    
    
    7,008LONG-TERM LIABILITIES
    
    
    182
    
    
    
    182LIABILITIES SUBJECT TO COMPROMISE
    
    
    3,363
    
    
    
    3,365Total liabilities
    
    
    10,496
    
    
    
    10,555COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)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
    
    
    262,795
    
    
    
    262,659Common stock held in treasury; 297 shares outstanding
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    856
    
    
    
    856Accumulated other comprehensive income
    
    
    1,059
    
    
    
    1,029Accumulated deficit
    
    
    (259,854
    )
    
    
    (258,366
    )Total stockholders equity
    
    
    2,432
    
    
    
    3,754Total liabilities and stockholders equity
    
    $
    12,928
    
    
    $
    14,309
  -3-




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Three Months Ended January 31,2008
    
    
    2007REVENUES:Products
    
    $
    4,039
    
    
    $
    4,866SCOsource
    
    
    
    
    
    
    23Services
    
    
    833
    
    
    
    1,126Total revenues
    
    
    4,872
    
    
    
    6,015COST OF REVENUES:Products
    
    
    288
    
    
    
    377SCOsource
    
    
    267
    
    
    
    654Services
    
    
    431
    
    
    
    559Total cost of revenues
    
    
    986
    
    
    
    1,590GROSS MARGIN
    
    
    3,886
    
    
    
    4,425OPERATING EXPENSES:Sales and marketing
    
    
    2,741
    
    
    
    2,440Research and development
    
    
    1,273
    
    
    
    1,759General and administrative
    
    
    924
    
    
    
    1,323Total operating expenses
    
    
    4,938
    
    
    
    5,522LOSS FROM OPERATIONS
    
    
    (1,052
    )
    
    
    (1,097
    )EQUITY IN INCOME (LOSS) OF AFFILIATE
    
    
    (11
    )
    
    
    42OTHER INCOME (EXPENSE):Reorganization expense
    
    
    (844
    )
    
    
    Interest income
    
    
    67
    
    
    
    114Other income, net
    
    
    463
    
    
    
    29Total other income (expense), net
    
    
    (314
    )
    
    
    143LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (1,377
    )
    
    
    (912
    )PROVISION FOR INCOME TAXES
    
    
    (111
    )
    
    
    (112
    )NET LOSS
    
    $
    (1,488
    )
    
    $
    (1,024
    )BASIC AND DILUTED NET LOSS
PER COMMON SHARE
    
    $
    (0.07
    )
    
    $
    (0.05
    )WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING
    
    
    21,563
    
    
    
    21,186OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (1,488
    )
    
    $
    (1,024
    )Foreign currency translation adjustment
    
    
    30
    
    
    
    24COMPREHENSIVE LOSS
    
    $
    (1,458
    )
    
    $
    (1,000
    )
  -4-




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Three Months Ended January 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,488
    )
    
    $
    (1,024
    )Adjustments to reconcile net loss to net cash used
in operating activities:Stock-based compensation
    
    
    114
    
    
    
    476Depreciation and amortization
    
    
    58
    
    
    
    88Loss on disposition and write-downs of long-lived assets
    
    
    2
    
    
    
    20Equity in income (loss) of affiliate
    
    
    10
    
    
    
    (42
    )Reorganization expense
    
    
    844
    
    
    
    Changes in operating assets and liabilities:Restricted cash
    
    
    32
    
    
    
    1,067Accounts receivable, net
    
    
    (656
    )
    
    
    1,113Other current assets
    
    
    394
    
    
    
    315Accounts payable
    
    
    315
    
    
    
    (679
    )Accrued payroll and benefits
    
    
    325
    
    
    
    (715
    )Accrued liabilities
    
    
    (452
    )
    
    
    (374
    )Deferred revenue
    
    
    (82
    )
    
    
    (313
    )Royalties payable
    
    
    88
    
    
    
    (117
    )Income taxes payable
    
    
    158
    
    
    
    (34
    )Long-term liabilities
    
    
    
    
    
    
    (1
    )Liabilities subject to compromise
    
    
    (2
    )
    
    
    Payments for reorganization expense
    
    
    (465
    )
    
    
    Net cash used in operating activities
    
    
    (805
    )
    
    
    (220
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (4
    )
    
    
    (22
    )Proceeds from sale of available-for-sale marketable securities
    
    
    
    
    
    
    1,749Net cash (used in) provided by investing activities
    
    
    (4
    )
    
    
    1,727CASH 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
    
    
    (787
    )
    
    
    1,741EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    30
    
    
    
    27CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,554
    
    
    
    5,369CASH AND CASH EQUIVALENTS, end of period
    
    $
    4,797
    
    
    $
    7,137SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    11
    
    
    $
    103
  -5-




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(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
   de minimis
  -6-




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Bankruptcy Filing
    -7-




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Going Concern
  (2) SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  -8-




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Financial Reporting by Entities in Reorganization under Bankruptcy Code
  Use of Estimates in the Preparation of Financial Statements
  Revenue Recognition
    -9-




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Cash and Cash Equivalents
  Net Loss Per Common Share
  -10-




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(3) COMMITMENTS AND CONTINGENCIES
 Litigation
 IBM
     -11-




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Novell, Inc.
  -12-




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-13-




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de minimis
   IPO Class Action Matter
 -14-




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Red Hat, Inc.
  Other Matters
 -15-




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(4) STOCKHOLDERS EQUITY
 Equity Plans
    -16-




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Three Months Ended January 31,2008
    
    
    2007(In thousands)Cost of
SCOsource IP licensing revenue
    
    $
    34
    
    
    $
    70Cost of services revenue
    
    
    5
    
    
    
    3Sales and marketing
    
    
    29
    
    
    
    111Research and development
    
    
    13
    
    
    
    43General and administrative
    
    
    33
    
    
    
    249Total stock-based compensation
    
    $
    114
    
    
    $
    476
  -17-




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Three Months Ended January 31,2008
    
    2007Risk-free interest rate
    
    
    2.7
    %
    
    
    4.8
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    327.2
    %
    
    
    85.9
    %Expected exercise life (in years)
    
    
    5.5
    
    
    
    5.0
   (5) SEGMENT INFORMATION
  Three Months Ended January 31, 2008UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    4,872
    
    
    $
    
    
    
    $
    4,872Cost of revenues
    
    
    719
    
    
    
    267
    
    
    
    986Gross margin (deficit)
    
    
    4,153
    
    
    
    (267
    )
    
    
    3,886Sales and marketing
    
    
    2,741
    
    
    
    
    
    
    
    2,741Research and development
    
    
    1,273
    
    
    
    
    
    
    
    1,273General and administrative
    
    
    924
    
    
    
    
    
    
    
    924Total operating expenses
    
    
    4,938
    
    
    
    
    
    
    
    4,938Loss from operations
    
    $
    (785
    )
    
    $
    (267
    )
    
    $
    (1,052
    )
 -18-




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Three Months Ended January 31, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    5,992
    
    
    $
    23
    
    
    $
    6,015Cost of revenues
    
    
    936
    
    
    
    654
    
    
    
    1,590Gross margin (deficit)
    
    
    5,056
    
    
    
    (631
    )
    
    
    4,425Sales and marketing
    
    
    2,440
    
    
    
    
    
    
    
    2,440Research and development
    
    
    1,759
    
    
    
    
    
    
    
    1,759General and administrative
    
    
    1,323
    
    
    
    
    
    
    
    1,323Total operating expenses
    
    
    5,522
    
    
    
    
    
    
    
    5,522Loss from operations
    
    $
    (466
    )
    
    $
    (631
    )
    
    $
    (1,097
    )
 (6) SUBSEQUENT EVENTS
 , In Re: The SCO Group, Inc, Case No. 07-11337(KG).
   
 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
 -19-




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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 condensed consolidated financial
statements and notes thereto included in this Form 10-Q and our 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 months ended January 31, 2008 and 2007. We
assume no obligation to revise or update any forward-looking statements for any reason, except as
required by law.
 Recent Developments
 Novell, Inc. Ruling de
minimis
 -20-




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Bankruptcy Filing.
 -21-




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, In Re: The SCO Group, Inc, Case No. 07-11337(KG).
    -22-




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Reduction in Force.
 Business Focus
 UNIX Business.
   Three Months Ended January 31,2008
    
    
    2007(In thousands)Revenues
    
    $
    4,872
    
    
    $
    5,992Cost of revenues
    
    
    719
    
    
    
    936Gross margin
    
    
    4,153
    
    
    
    5,056Sales and marketing
    
    
    2,741
    
    
    
    2,440Research and development
    
    
    1,273
    
    
    
    1,759General and administrative
    
    
    924
    
    
    
    1,323Total operating expenses
    
    
    4,938
    
    
    
    5,522Loss from operations
    
    $
    (785
    )
    
    $
    (466
    )
  -23-




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SCOsource Business.
   Three Months Ended January 31,2008
    
    
    2007(In thousands)Revenues
    
    $
    
    
    
    $
    23Cost of revenues
    
    
    267
    
    
    
    654Gross margin
    
    
    (267
    )
    
    
    (631
    )Research and development
    
    
    
    
    
    
    General and administrative
    
    
    
    
    
    
    Total operating expenses
    
    
    
    
    
    
    Loss from operations
    
    $
    (267
    )
    
    $
    (631
    )
 -24-




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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
   -25-




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Valuation Allowances Against Deferred Income Tax Assets
 Litigation Reserves.
 Useful Lives and Impairment of Property and Equipment
  -26-




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Allowance for Doubtful Accounts Receivable
 Results of Operations
  Three Months Ended January 31,Statement of Operations Data:
    
    2008
    
    
    2007(In thousands)Revenues:Products
    
    $
    4,039
    
    
    $
    4,866SCOsource
    
    
    
    
    
    
    23Services
    
    
    833
    
    
    
    1,126Total revenues
    
    
    4,872
    
    
    
    6,015Cost of revenues:Products
    
    
    288
    
    
    
    377SCOsource
    
    
    267
    
    
    
    654Services
    
    
    431
    
    
    
    559Total cost of revenues
    
    
    986
    
    
    
    1,590Gross margin
    
    
    3,886
    
    
    
    4,425Operating expenses:Sales and marketing
    
    
    2,741
    
    
    
    2,440Research and development
    
    
    1,273
    
    
    
    1,759General and administrative
    
    
    924
    
    
    
    1,323Total operating expenses
    
    
    4,938
    
    
    
    5,522Loss from operations
    
    
    (1,052
    )
    
    
    (1,097
    )Equity in income (loss) of affiliate
    
    
    (11
    )
    
    
    42Other income (expense), net
    
    
    (314
    )
    
    
    143Provision for income taxes
    
    
    (111
    )
    
    
    (112
    )Net loss
    
    $
    (1,488
    )
    
    $
    (1,024
    )
 -27-




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THREE MONTHS ENDED JANUARY 31, 2008 AND 2007
 Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(Dollars in thousands)Revenues
    
    $
    4,872
    
    
    
    (19
    )%
    
    $
    6,015
   Three Months Ended January 31,2008
    
    Change
    
    2007(Dollars in thousands)UNIX revenues
    
    $
    4,872
    
    
    
    (19
    )%
    
    $
    5,992Percentage of total revenues
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenues
    
    $
    
    
    
    
    n/a
    
    
    $
    23Percentage of total revenues
    
    
    0
    %
    
    
    
    
    
    
    0
    %
   -28-




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Products Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Products revenues
    
    $
    4,039
    
    
    
    (17
    )%
    
    $
    4,866Percentage of total revenues
    
    
    83
    %
    
    
    
    
    
    
    81
    %
    Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)OpenServer revenues
    
    $
    2,938
    
    
    
    (1
    )%
    
    $
    2,978Percentage of products revenues
    
    
    73
    %
    
    
    
    
    
    
    61
    %UnixWare revenues
    
    
    851
    
    
    
    (42
    )%
    
    $
    1,471Percentage of products revenues
    
    
    21
    %
    
    
    
    
    
    
    30
    %Other products revenues
    
    
    250
    
    
    
    (40
    )%
    
    $
    417Percentage of products revenues
    
    
    6
    %
    
    
    
    
    
    
    9
    %
  SCOsource Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)SCOsource revenues
    
    $
    
    
    
    
    n/a
    
    
    $
    23
 -29-




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Services Revenue
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Services revenues
    
    $
    833
    
    
    
    (26
    )%
    
    $
    1,126Percentage of total revenues
    
    
    17
    %
    
    
    
    
    
    
    19
    %
   Cost of Products Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Cost of products revenues
    
    $
    288
    
    
    
    (24
    )%
    
    $
    377Percentage of products revenues
    
    
    7
    %
    
    
    
    
    
    
    8
    %
   -30-




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Cost of SCOsource Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Cost of SCOsource revenues
    
    $
    267
    
    
    
    (59
    )%
    
    $
    654
    Cost of Services Revenues
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Cost of services revenues
    
    $
    431
    
    
    
    (23
    )%
    
    $
    559Percentage of services revenues
    
    
    52
    %
    
    
    
    
    
    
    50
    %
   Sales and Marketing
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Sales and marketing expense
    
    $
    2,741
    
    
    
    12
    %
    
    $
    2,440Percentage of total revenues
    
    
    56
    %
    
    
    
    
    
    
    41
    %
 -31-




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Research and Development
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Research and development expense
    
    $
    1,273
    
    
    
    (28
    )%
    
    $
    1,759Percentage of total revenues
    
    
    26
    %
    
    
    
    
    
    
    29
    %
   General and Administrative
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)General and administrative expense
    
    $
    924
    
    
    
    (30
    )%
    
    $
    1,323Percentage of total revenues
    
    
    19
    %
    
    
    
    
    
    
    22
    %
  -32-




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Equity in Income (Loss) of Affiliate
   Reorganization items
 Three Months Ended January 31,2008
    
    Change
    
    2007(In thousands)Reorganization items
    
    $
    844
    
    
    
    n/a
    
    
    $
    
  Other Income (Expense), net
  Three Months Ended January 31,2008
    
    
    2007(In thousands)Interest income
    
    $
    67
    
    
    $
    114Other income, net
    
    
    463
    
    
    
    29Total
    
    $
    530
    
    
    $
    143
   Provision for Income Taxes
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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.
  Contractual Obligations
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1 - 3 years
    
    3 - 5 years
    
    5 years(In thousands)Operating lease obligations
    
    $
    1,708
    
    
    $
    772
    
    
    $
    936
    
    
    $
    
    
    
    $
    
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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, cash equivalents, 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 Course;
    
    Our expectation that we will reduce our workforce, and our belief that this
reduction in force 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 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, 2008 and future periods;
    
    Our expectation that we will continue to be unable to predict the amount and timing
of SCOsource revenues, and when generated, the revenues will be sporadic;
    
    Our expectation that future services revenues will depend in part on our ability to
generate UNIX products revenues from new customers as well as the renewal of annual
support and services agreements from existing UNIX customers;
    
    Our expectation that for the year ending October 31, 2008 our total UNIX revenues
will decline from UNIX revenues generated in the year ended October 31, 2007 as a
result of continued competition and negative publicity;
    
    Our expectation for the three months ending April 30, 2008 that the dollar amount
of our cost of products revenues and that cost of products revenues as a percent of
products revenues will be generally consistent to that incurred during the three
months ended January 31, 2008;
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
    
    Our expectation for the three months ending April 30, 2008 that the dollar amount
of our cost of services revenues and that cost of services revenues as a percent of
services revenues will be generally consistent to that incurred during the three
months ended January 31, 2008;
    
    Our expectation for the three months ending April 30, 2008 that the dollar amount
of our sales and marketing expense will be generally consistent to that incurred
during the three months ended January 31, 2008;
    
    Our expectation for the three months ending April 30, 2008 that the dollar amount
of our research and development expense will be generally consistent to that incurred
during the three months ended January 31, 2008;
    
    Our expectation for the three months ending April 30, 2008 that the dollar amount
of our general and administrative expense will be generally consistent to that
incurred during the three months ended January 31, 2008;
    
    Our intention to use cash and cash equivalents 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 April 30, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk.
 Interest Rate Risk.
 Investment Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 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.
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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.
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
    
    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.
 de minimis
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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.
 de minimis
  Our claims relating to our UNIX intellectual property may subject us to additional legal
proceedings.
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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;
    
    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.
   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.
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
    
    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.
    If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
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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.
    If the market for UNIX continues to contract, our business will be harmed.
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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.
    
    
    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.
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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.
  Common stock available for resale may depress the market price of our common stock.
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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 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
 (a)
    
    Exhibits
 3.1
    
    Amended and Restated Certificate of Incorporation of Caldera International,
Inc. (incorporated by reference to Exhibit 3.1 to SCOs Registration Statement on Form
8-A12G/A (File No. 000-29911)).3.2
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding consolidation of outstanding shares (incorporated by reference to Exhibit
3.2 to SCOs Registration Statement on Form 8-A12G/A (File No. 000-29911)).3.3
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation
regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit
3.3 to SCOs Registration Statement on Form 8A12G/A (File No. 000-29911)).3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to
SCOs Registration Statement on Form 8-A12G/A (File No. 000-29911)).3.5
    
    Amendment to the Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.1 to SCOs Current Report on Form 8-K filed on January 4, 2008 (File No.
000-29911)).3.6
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on
February 9, 2004 (File No. 000-29911)).3.7
    
    Certificate of Correction correcting the Certificate of Designation for
Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to
SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).10.1
    
    Second Amendment To Lease Dated December 28, 2007 for lease of Murray Hill,
New Jersey facility.10.2
    
    Fifth Amendment To Sublease Agreement Dated December 14, 2007 for lease of
corporate facilities Lindon, Utah.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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ITEM 7. SIGNATURES
  Date: March 17, 2008
    THE SCO GROUP, INC.By:
    /s/ Kenneth R. NielsenKenneth R. NielsenDuly Authorized Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer) -50-




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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
    
    Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCOs Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).3.6
    
    Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).3.7
    
    Certificate of Correction correcting the Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to SCOs Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).10.1
    
    Second Amendment To Lease Dated December 28, 2007 for lease of Murray Hill, New Jersey facility.10.2
    
    Fifth Amendment To Sublease Agreement Dated December 14, 2007 for lease of corporate facilities Lindon, Utah.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.
 -51-