##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 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(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



The SCO Group, Inc.
 Table of Contents
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Unaudited Financial StatementsCondensed Consolidated Balance Sheets as of July 31, 2008 and October 31, 2007
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine
months ended July 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    37Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    46Signatures
    
    
    47EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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July 31,
    
    
    October 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,117
    
    
    $
    5,554Restricted cash
    
    
    2,680
    
    
    
    3,099Accounts receivable, net of allowance for doubtful
accounts of $124 and $85, respectively
    
    
    2,592
    
    
    
    3,365Prepaid reorganization expenses
    
    
    441
    
    
    
    137Other
    
    
    1,135
    
    
    
    1,298Total current assets
    
    
    8,965
    
    
    
    13,453PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    1,694
    
    
    
    2,006Leasehold improvements
    
    
    233
    
    
    
    268Furniture and fixtures
    
    
    59
    
    
    
    661,986
    
    
    
    2,340Less accumulated depreciation and amortization
    
    
    (1,802
    )
    
    
    (1,981
    )Net property and equipment
    
    
    184
    
    
    
    359OTHER ASSETS
    
    
    373
    
    
    
    497Total assets
    
    $
    9,522
    
    
    $
    14,309LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    377
    
    
    $
    252Payable to Novell, Inc.
    
    
    918
    
    
    
    1,148Accrued payroll and benefits
    
    
    1,010
    
    
    
    1,370Accrued liabilities
    
    
    629
    
    
    
    1,110Accrued reorganization expenses
    
    
    375
    
    
    
    253Deferred revenues
    
    
    1,653
    
    
    
    2,044Royalties payable
    
    
    137
    
    
    
    123Income taxes payable
    
    
    751
    
    
    
    708Total current liabilities
    
    
    5,850
    
    
    
    7,008LONG-TERM LIABILITIES
    
    
    182
    
    
    
    182LIABILITIES SUBJECT TO COMPROMISE
    
    
    6,708
    
    
    
    3,365Total liabilities
    
    
    12,740
    
    
    
    10,555COMMITMENTS AND CONTINGENCIES (Notes 1,3 and 6)STOCKHOLDERS
EQUITY (DEFICIT):Common stock, $0.001 par value: 45,000 shares authorized,
21,886 and 21,782 shares outstanding, respectively
    
    
    22
    
    
    
    22Additional paid-in capital
    
    
    263,921
    
    
    
    262,659Common stock held in treasury; 297 shares outstanding
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    206
    
    
    
    856Accumulated other comprehensive income
    
    
    1,068
    
    
    
    1,029Accumulated deficit
    
    
    (265,989
    )
    
    
    (258,366
    )Total
stockholders equity (deficit)
    
    
    (3,218
    )
    
    
    3,754Total
liabilities and stockholders equity (deficit)
    
    $
    9,522
    
    
    $
    14,309
  3




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Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES:Products
    
    $
    3,170
    
    
    $
    3,690
    
    
    $
    10,257
    
    
    $
    13,451SCOsource
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Services
    
    
    569
    
    
    
    996
    
    
    
    2,015
    
    
    
    3,241Total revenues
    
    
    3,739
    
    
    
    4,686
    
    
    
    12,272
    
    
    
    16,715COST OF REVENUES:Products
    
    
    228
    
    
    
    329
    
    
    
    702
    
    
    
    1,041SCOsource
    
    
    2,876
    
    
    
    1,156
    
    
    
    3,476
    
    
    
    2,876Services
    
    
    245
    
    
    
    448
    
    
    
    959
    
    
    
    1,553Total cost of revenues
    
    
    3,349
    
    
    
    1,933
    
    
    
    5,137
    
    
    
    5,470GROSS MARGIN
    
    
    390
    
    
    
    2,753
    
    
    
    7,135
    
    
    
    11,245OPERATING EXPENSES:Sales and marketing
    
    
    1,765
    
    
    
    2,463
    
    
    
    6,630
    
    
    
    7,296General and administrative
    
    
    889
    
    
    
    1,377
    
    
    
    3,086
    
    
    
    4,051Research and development
    
    
    708
    
    
    
    1,424
    
    
    
    2,912
    
    
    
    4,737Total operating expenses
    
    
    3,362
    
    
    
    5,264
    
    
    
    12,628
    
    
    
    16,084LOSS FROM OPERATIONS
    
    
    (2,972
    )
    
    
    (2,511
    )
    
    
    (5,493
    )
    
    
    (4,839
    )EQUITY IN INCOME (LOSS) OF AFFILIATE
    
    
    1
    
    
    
    9
    
    
    
    (10
    )
    
    
    115OTHER INCOME (EXPENSE):Reorganization expense
    
    
    (183
    )
    
    
    
    
    
    
    (1,662
    )
    
    
    Interest expense
    
    
    (925
    )
    
    
    
    
    
    
    (925
    )
    
    
    Interest income
    
    
    14
    
    
    
    112
    
    
    
    115
    
    
    
    351Other income (expense), net
    
    
    (6
    )
    
    
    20
    
    
    
    503
    
    
    
    29Total other income (expense), net
    
    
    (1,100
    )
    
    
    132
    
    
    
    (1,969
    )
    
    
    380LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (4,071
    )
    
    
    (2,370
    )
    
    
    (7,472
    )
    
    
    (4,344
    )BENEFIT (PROVISION) FOR INCOME TAXES
    
    
    6
    
    
    
    (28
    )
    
    
    (151
    )
    
    
    (221
    )NET LOSS
    
    $
    (4,065
    )
    
    $
    (2,398
    )
    
    $
    (7,623
    )
    
    $
    (4,565
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.19
    )
    
    $
    (0.11
    )
    
    $
    (0.35
    )
    
    $
    (0.21
    )WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING
    
    
    21,589
    
    
    
    21,372
    
    
    
    21,574
    
    
    
    21,264OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (4,065
    )
    
    $
    (2,398
    )
    
    $
    (7,623
    )
    
    $
    (4,565
    )Foreign currency translation adjustment
    
    
    (13
    )
    
    
    21
    
    
    
    39
    
    
    
    54COMPREHENSIVE LOSS
    
    $
    (4,078
    )
    
    $
    (2,377
    )
    
    $
    (7,584
    )
    
    $
    (4,511
    )
  4




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Nine Months Ended July 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (7,623
    )
    
    $
    (4,565
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation
    
    
    590
    
    
    
    1,407Depreciation and amortization
    
    
    164
    
    
    
    239Loss on disposition and write-downs of long-lived assets
    
    
    21
    
    
    
    35Equity in income (loss) of affiliate
    
    
    10
    
    
    
    (115
    )Reorganization expense
    
    
    1,662
    
    
    
    Changes in operating assets and liabilities:Restricted cash
    
    
    189
    
    
    
    2,457Accounts receivable, net
    
    
    773
    
    
    
    1,990Other current assets
    
    
    163
    
    
    
    319Accounts payable
    
    
    125
    
    
    
    (394
    )Accrued payroll and benefits
    
    
    (360
    )
    
    
    (1,127
    )Accrued liabilities
    
    
    (481
    )
    
    
    (254
    )Deferred revenue
    
    
    (391
    )
    
    
    (433
    )Royalties payable
    
    
    14
    
    
    
    (190
    )Income taxes payable
    
    
    43
    
    
    
    (53
    )Long-term liabilities
    
    
    
    
    
    
    (6
    )Liabilities subject to compromise
    
    
    3,343
    
    
    
    Payments for reorganization expense
    
    
    (1,844
    )
    
    
    Net cash used in operating activities
    
    
    (3,602
    )
    
    
    (690
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (10
    )
    
    
    (81
    )Dividends received
    
    
    114
    
    
    
    Proceeds from sale of available-for-sale marketable securities
    
    
    
    
    
    
    2,249Net cash provided by investing activities
    
    
    104
    
    
    
    2,168CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee stock purchase program
    
    
    22
    
    
    
    436Proceeds from exercise of common stock options
    
    
    
    
    
    
    57Net cash provided by financing activities
    
    
    22
    
    
    
    493NET
(DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS
    
    
    (3,476
    )
    
    
    1,971EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    39
    
    
    
    53CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,554
    
    
    
    5,369CASH AND CASH EQUIVALENTS, end of period
    
    $
    2,117
    
    
    $
    7,393SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    48
    
    
    $
    150Non cash financing activity  expiration of warrants
    
    $
    650
    
    
    $
    
  5




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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
  Revenue Recognition
    9




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Cash and Cash Equivalents
  Net Loss Per Common Share
   (3) COMMITMENTS AND CONTINGENCIES
 IBM
   10




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Novell, Inc.
  11




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12




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13




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IPO Class Action Matter
      Red Hat, Inc.
  14




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Other Matters
    (4) STOCKHOLDERS EQUITY
 Equity Plans
     15




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Three Months Ended July 31,
    
    
    Nine months Ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Cost of products
    
    $
    1
    
    
    $
    2
    
    
    $
    3
    
    
    $
    5Cost of SCOsource
    
    
    68
    
    
    
    66
    
    
    
    168
    
    
    
    211Cost of services
    
    
    7
    
    
    
    12
    
    
    
    20
    
    
    
    29Sales and marketing
    
    
    50
    
    
    
    68
    
    
    
    135
    
    
    
    286General and administrative
    
    
    98
    
    
    
    197
    
    
    
    226
    
    
    
    729Research and development
    
    
    13
    
    
    
    51
    
    
    
    38
    
    
    
    147Total stock-based compensation
    
    $
    237
    
    
    $
    396
    
    
    $
    590
    
    
    $
    1,407
  Three Months Ended July 31,
    
    Nine months Ended July 31,2008
    
    2007
    
    2008
    
    2007Risk-free interest rate
    
    
    3.3
    %
    
    
    4.7
    %
    
    
    3.0
    %
    
    
    4.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    369.7
    %
    
    
    96.9
    %
    
    
    350.1
    %
    
    
    90.0
    %Expected exercise life (in years)
    
    
    5.6
    
    
    
    5.0
    
    
    
    5.5
    
    
    
    5.0
   (5) SEGMENT INFORMATION
  Three Months Ended July 31, 2008UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    3,739
    
    
    $
    
    
    
    $
    3,739Cost of revenues
    
    
    473
    
    
    
    2,876
    
    
    
    3,349Gross margin (deficit)
    
    
    3,266
    
    
    
    (2,876
    )
    
    
    390Sales and marketing
    
    
    1,765
    
    
    
    
    
    
    
    1,765General and administrative
    
    
    889
    
    
    
    
    
    
    
    889Research and development
    
    
    708
    
    
    
    
    
    
    
    708Total operating expenses
    
    
    3,362
    
    
    
    
    
    
    
    3,362Loss from operations
    
    $
    (96
    )
    
    $
    (2,876
    )
    
    $
    (2,972
    )
 Three Months Ended July 31, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    4,686
    
    
    $
    
    
    
    $
    4,686Cost of revenues
    
    
    777
    
    
    
    1,156
    
    
    
    1,933Gross margin (deficit)
    
    
    3,909
    
    
    
    (1,156
    )
    
    
    2,753Sales and marketing
    
    
    2,463
    
    
    
    
    
    
    
    2,463General and administrative
    
    
    1,377
    
    
    
    
    
    
    
    1,377Research and development
    
    
    1,424
    
    
    
    
    
    
    
    1,424Total operating expenses
    
    
    5,264
    
    
    
    
    
    
    
    5,264Loss from operations
    
    $
    (1,355
    )
    
    $
    (1,156
    )
    
    $
    (2,511
    )
 Nine months Ended July 31, 2008UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    12,272
    
    
    $
    
    
    
    $
    12,272Cost of revenues
    
    
    1,661
    
    
    
    3,476
    
    
    
    5,137Gross margin (deficit)
    
    
    10,611
    
    
    
    (3,476
    )
    
    
    7,135Sales and marketing
    
    
    6,630
    
    
    
    
    
    
    
    6,630General and administrative
    
    
    3,086
    
    
    
    
    
    
    
    3,086Research and development
    
    
    2,912
    
    
    
    
    
    
    
    2,912Total operating expenses
    
    
    12,628
    
    
    
    
    
    
    
    12,628Loss from operations
    
    $
    (2,017
    )
    
    $
    (3,476
    )
    
    $
    (5,493
    )
 Nine months Ended July 31, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenues
    
    $
    16,692
    
    
    $
    23
    
    
    $
    16,715Cost of revenues
    
    
    2,594
    
    
    
    2,876
    
    
    
    5,470Gross margin (deficit)
    
    
    14,098
    
    
    
    (2,853
    )
    
    
    11,245Sales and marketing
    
    
    7,296
    
    
    
    
    
    
    
    7,296General and administrative
    
    
    4,051
    
    
    
    
    
    
    
    4,051Research and development
    
    
    4,737
    
    
    
    
    
    
    
    4,737Total operating expenses
    
    
    16,084
    
    
    
    
    
    
    
    16,084Loss from operations
    
    $
    (1,986
    )
    
    $
    (2,853
    )
    
    $
    (4,839
    )
 16




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(6) PLAN OF REORGANIZATION STATUS
 , In re: The SCO Group, Inc,
  17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements can also be identified by words such as
intends, anticipates, expects, believes, plans, and similar terms. Forward-looking
statements are not guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those set forth below under Forward-Looking
Statements and Factors that May Affect Future Results and Financial Condition and Part II, Item
1A  Risk Factors and elsewhere in this Form 10-Q . The following discussion should be read in
conjunction with our unaudited condensed consolidated financial statements and notes thereto
included in this Form 10-Q and our audited consolidated financial statements and notes thereto
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 nine months ended July 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
   18




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Bankruptcy Filing.
 19




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Business Focus
 UNIX Business.
 20




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Three Months Ended July 31,
    
    
    Nine months Ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue
    
    $
    3,739
    
    
    $
    4,686
    
    
    $
    12,272
    
    
    $
    16,692Cost of revenue
    
    
    473
    
    
    
    777
    
    
    
    1,661
    
    
    
    2,594Gross margin
    
    
    3,266
    
    
    
    3,909
    
    
    
    10,611
    
    
    
    14,098Sales and marketing
    
    
    1,765
    
    
    
    2,463
    
    
    
    6,630
    
    
    
    7,296General and administrative
    
    
    889
    
    
    
    1,377
    
    
    
    3,086
    
    
    
    4,051Research and development
    
    
    708
    
    
    
    1,424
    
    
    
    2,912
    
    
    
    4,737Total operating expenses
    
    
    3,362
    
    
    
    5,264
    
    
    
    12,628
    
    
    
    16,084Loss from operations
    
    $
    (96
    )
    
    $
    (1,355
    )
    
    $
    (2,017
    )
    
    $
    (1,986
    )
    SCOsource Business.
  21




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Three Months Ended April 30,
    
    
    Nine months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    23Cost of revenue
    
    
    2,876
    
    
    
    1,156
    
    
    
    3,476
    
    
    
    2,876Gross deficit
    
    
    (2,876
    )
    
    
    (1,156
    )
    
    
    (3,476
    )
    
    
    (2,853
    )Sales and marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from operations
    
    $
    (2,876
    )
    
    $
    (1,156
    )
    
    $
    (3,476
    )
    
    $
    (2,853
    )
  Recent Developments
   Critical Accounting Policies
  
    
    Revenue recognition;
    
    Valuation allowances against net deferred income tax assets;
    
    Litigation reserves;
    
    Useful lives and impairment of property and equipment; and
    
    Allowances for doubtful accounts receivable.
 Revenue Recognition
  22




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Valuation Allowances Against Net Deferred Income Tax Assets
 Litigation Reserves. Part II, Item I  Legal Proceedings
  Useful Lives and Impairment of Property and Equipment
  23




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##### Table of Contents



Allowance for Doubtful Accounts Receivable
 Results of Operations
  Three Months Ended July 31,
    
    
    Nine months Ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Revenue:Products
    
    $
    3,170
    
    
    $
    3,690
    
    
    $
    10,257
    
    
    $
    13,451SCOsource licensing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Services
    
    
    569
    
    
    
    996
    
    
    
    2,015
    
    
    
    3,241Total revenue
    
    
    3,739
    
    
    
    4,686
    
    
    
    12,272
    
    
    
    16,715Cost of revenue:Products
    
    
    228
    
    
    
    329
    
    
    
    702
    
    
    
    1,041SCOsource licensing
    
    
    2,876
    
    
    
    1,156
    
    
    
    3,476
    
    
    
    2,876Services
    
    
    245
    
    
    
    448
    
    
    
    959
    
    
    
    1,553Total cost of revenue
    
    
    3,359
    
    
    
    1,933
    
    
    
    5,137
    
    
    
    5,470Gross margin
    
    
    390
    
    
    
    2,753
    
    
    
    7,135
    
    
    
    11,245Operating expenses:Sales and marketing
    
    
    1,765
    
    
    
    2,463
    
    
    
    6,630
    
    
    
    7,296General and administrative
    
    
    889
    
    
    
    1,377
    
    
    
    3,086
    
    
    
    4,051Research and development
    
    
    708
    
    
    
    1,424
    
    
    
    2,912
    
    
    
    4,737Total operating expenses
    
    
    3,362
    
    
    
    5,264
    
    
    
    12,628
    
    
    
    16,084Loss from operations
    
    
    (2,972
    )
    
    
    (2,511
    )
    
    
    (5,493
    )
    
    
    (4,839
    )Equity in income (loss) of affiliate
    
    
    1
    
    
    
    9
    
    
    
    (10
    )
    
    
    115Other income (expense), net
    
    
    (1,100
    )
    
    
    132
    
    
    
    (1,969
    )
    
    
    380Benefit (Provision) for income taxes
    
    
    6
    
    
    
    (28
    )
    
    
    (151
    )
    
    
    (221
    )Net loss
    
    $
    (4,065
    )
    
    $
    (2,398
    )
    
    $
    (7,623
    )
    
    $
    (4,565
    )
 THREE AND NINE MONTHS ENDED JULY 31, 2008 AND 2007
 Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Revenue
    
    $
    3,739
    
    
    
    (20
    )%
    
    $
    4,686
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Revenue
    
    $
    12,272
    
    
    
    (27
    )%
    
    $
    16,715
  24




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##### Table of Contents



Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)UNIX revenue
    
    $
    3,739
    
    
    
    (20
    )%
    
    $
    4,686Percentage of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)UNIX revenue
    
    $
    12,272
    
    
    
    (26
    )%
    
    $
    16,692Percentage of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    23Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
   Products Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Products revenue
    
    $
    3,170
    
    
    
    (14
    )%
    
    $
    3,690Percentage of total revenue
    
    
    85
    %
    
    
    
    
    
    
    79
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Products revenue
    
    $
    10,257
    
    
    
    (24
    )%
    
    $
    13,451Percentage of total revenue
    
    
    84
    %
    
    
    
    
    
    
    80
    %
   25




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##### Table of Contents



Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)OpenServer revenue
    
    $
    2,150
    
    
    
    1
    %
    
    $
    2,135Percentage of products revenue
    
    
    68
    %
    
    
    
    
    
    
    58
    %UnixWare revenue
    
    $
    670
    
    
    
    (43
    )%
    
    $
    1,172Percentage of products revenue
    
    
    21
    %
    
    
    
    
    
    
    32
    %Other products revenue
    
    $
    350
    
    
    
    (8
    )%
    
    $
    383Percentage of products revenue
    
    
    11
    %
    
    
    
    
    
    
    10
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)OpenServer revenue
    
    $
    6,931
    
    
    
    (15
    )%
    
    $
    8,202Percentage of products revenue
    
    
    68
    %
    
    
    
    
    
    
    61
    %UnixWare revenue
    
    $
    2,438
    
    
    
    (36
    )%
    
    $
    3,820Percentage of products revenue
    
    
    24
    %
    
    
    
    
    
    
    28
    %Other products revenue
    
    $
    888
    
    
    
    (38
    )%
    
    $
    1,429Percentage of products revenue
    
    
    8
    %
    
    
    
    
    
    
    11
    %
  SCOsource Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)SCOsource revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    23
   26




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Services Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Services revenue
    
    $
    569
    
    
    
    (43
    )%
    
    $
    996Percentage of total revenue
    
    
    15
    %
    
    
    
    
    
    
    21
    %
 Nine Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Services revenue
    
    $
    2,015
    
    
    
    (38
    )%
    
    $
    3,241Percentage of total revenue
    
    
    16
    %
    
    
    
    
    
    
    19
    %
   Cost of Products Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of products revenue
    
    $
    228
    
    
    
    (31
    )%
    
    $
    329Percentage of products revenue
    
    
    7
    %
    
    
    
    
    
    
    9
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of products revenue
    
    $
    702
    
    
    
    (33
    )%
    
    $
    1,041Percentage of products revenue
    
    
    7
    %
    
    
    
    
    
    
    8
    %
  27




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Cost of SCOsource Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of SCOsource revenue
    
    $
    2,876
    
    
    
    149
    %
    
    $
    1,156
 Nine Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of SCOsource revenue
    
    $
    3,476
    
    
    
    21
    %
    
    $
    2,876
  Recent Developments
  Cost of Services Revenue
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of services revenue
    
    $
    245
    
    
    
    (45
    )%
    
    $
    448Percentage of services revenue
    
    
    43
    %
    
    
    
    
    
    
    45
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Cost of services revenue
    
    $
    959
    
    
    
    (38
    )%
    
    $
    1,553Percentage of services revenue
    
    
    48
    %
    
    
    
    
    
    
    48
    %
  28




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Sales and Marketing
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Sales and marketing expenses
    
    $
    1,765
    
    
    
    (28
    )%
    
    $
    2,463Percentage of total revenue
    
    
    47
    %
    
    
    
    
    
    
    53
    %
 Nine Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Sales and marketing expenses
    
    $
    6,630
    
    
    
    (9
    )%
    
    $
    7,296Percentage of total revenue
    
    
    54
    %
    
    
    
    
    
    
    44
    %
   Research and Development
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Research and development expenses
    
    $
    708
    
    
    
    (50
    )%
    
    $
    1,424Percentage of total revenue
    
    
    19
    %
    
    
    
    
    
    
    30
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Research and development expenses
    
    $
    2,912
    
    
    
    (39
    )%
    
    $
    4,737Percentage of total revenue
    
    
    24
    %
    
    
    
    
    
    
    28
    %
   29




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General and Administrative
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)General and administrative expenses
    
    $
    889
    
    
    
    (35
    )%
    
    $
    1,377Percentage of total revenue
    
    
    24
    %
    
    
    
    
    
    
    29
    %
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)General and administrative expenses
    
    $
    3,086
    
    
    
    (24
    )%
    
    $
    4,051Percentage of total revenue
    
    
    25
    %
    
    
    
    
    
    
    24
    %
   Equity in Income (Loss) of Affiliate
  Reorganization items
 Three Months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Reorganization items
    
    $
    183
    
    
    
    n/a
    
    
    $
    
 Nine months Ended July 31,2008
    
    Change
    
    2007(Dollars in thousands)Reorganization items
    
    $
    1,662
    
    
    
    n/a
    
    
    $
    
  30




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Other Income (Expense), net
  Three Months Ended July 31,2008
    
    
    Change
    
    
    2007(Dollars in thousands)Interest expense
    
    $
    (925
    )
    
    
    n/a
    
    
    $
    Interest income
    
    
    14
    
    
    
    (88
    )%
    
    
    112Other income (expense), net
    
    
    (6
    )
    
    
    n/a
    
    
    
    20Total
    
    $
    (917
    )
    
    
    
    
    
    $
    132
 Nine Months Ended July 31,2008
    
    
    Change
    
    
    2007(Dollars in thousands)Interest expense
    
    $
    (925
    )
    
    
    n/a
    
    
    $
    Interest income
    
    
    115
    
    
    
    (67
    )%
    
    
    351Other income (expense), net
    
    
    503
    
    
    
    n/a
    
    
    
    29Total
    
    $
    (307
    )
    
    
    
    
    
    $
    380
 Recent
Developments.
   Benefit (Provision) for Income Taxes
  Liquidity and Capital Resources
    31




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Recent Developments
          
    
    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.
 32




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Contractual Obligations
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1  3 years
    
    3  5 years
    
    5 years(In thousands)Operating lease obligations
    
    $
    1,414
    
    
    $
    216
    
    
    $
    768
    
    
    $
    430
    
    
    $
    
    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 shortly file papers arguing for the entry of final judgement;
    
    Our intention to appeal the adverse August 10, 2007
summary judgment ruling and the July 16, 2008 order, and our belief
concerning the strength of our potential appeal;
    
    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;
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
    
    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 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 for the three months ending October 31, 2008, the dollar amount of
sales and marketing expense will be generally consistent with that incurred during the
three months ended July 31, 2008;
    
    Our expectation that for the three months ending October 31,
2008, the dollar amount of research and development expenses will be
generally consistent with that incurred during the three months ended
July 31, 2008;
    
    Our expectation that for the three months ending October 31,
2008, the dollar amount of general and administrative expenses will
be generally consistent with that incurred during the three
months ended July 31, 2008;
    
    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;
    
    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 April 30, 2009;
    
    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 October 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.
 Part II, Item 1A-Risk Factors
 34




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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.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 in Part 1, Item 1. Unaudited Financial
Statements  Notes to Condensed Consolidated Financial Statements,
 Novell, Inc. Ruling
 35




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36




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##### Table of Contents



ITEM 1A. RISK FACTORS
  We do not have a history of profitable operations and our cash resources are limited.
    37




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A long period of operating under Chapter 11 may harm our business.
   We may not be able to obtain confirmation of our Chapter 11 plan; 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.
  38




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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.
     39




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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.
  40




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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.
   41




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Developments in the SCO Litigation and fluctuations in our operating results or the failure of our
operating results to meet the expectations of public market analysts and investors may negatively
impact our stock price 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.
   Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent
Developments, Novell, Inc. Ruling. A long period of operating under Chapter 11 may harm our business, We
may not be able
to obtain confirmation of our Chapter 11 plan, A plan of reorganization may result in holders
of our common stock receiving no distribution on account of their interests and cancellation of
their common stock, and Operating under the U.S. Bankruptcy Code may restrict our ability to pursue
our business strategies.
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##### Table of Contents



If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
 A long period of
operating under Chapter 11 may harm our business.
 We operate in a highly competitive market and face significant competition from a variety of
current and potential sources; many of our current and potential competitors have greater financial
and technical resources than we do; thus, we may fail to compete effectively.
    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.
  43




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##### Table of Contents



We rely on our indirect sales channel for distribution of our products, and any disruption of our
channel at any level could adversely affect the sales of our products.
  Our foreign-based operations and sales are subject to the imposition of governmental controls
and taxes and fluctuations in currency exchange rates that could hurt our results.
  
    
    potential loss of developed technology through piracy, misappropriation, or more
lenient laws regarding intellectual property protection;
    
    imposition of governmental controls, including trade restrictions and other tax
requirements;
    
    fluctuations in currency exchange rates and economic instability;
    
    longer payment cycles for sales in foreign countries;
    
    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.
   44




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##### Table of Contents



Our stock price is volatile.
  There are risks associated with the potential exercise of our outstanding options.
  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
   45




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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)).10.1
    
    Lease Agreement with Vreeland Spvef Venture, LLC dated August 5,
2008 for lease of Florham Park, New Jersey facility.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.
 46




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##### Table of Contents



SIGNATURES
  Date: September 15, 2008
    THE SCO GROUP, INC.By:

/s/
Kenneth R. NielsenKenneth R. NielsenDuly Authorized Officer and Chief Financial Officer
(Principal Financial and Accounting Officer) 47




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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)).10.1
    
    Lease Agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for lease of Florham
Park, New Jersey facility.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.
 48