##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended October 31, 2007
 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 of incorporation)
    
    (I.R.S. EmployerIdentification No.)355 South 520 WestLindon, Utah 84042
    
    (801) 765-4999(Address of principal executive
    
    (Registrants telephoneoffices, including zip code)
    
    number, including area code)
 None
  Common Stock, par value $0.001 per share
Preferred Stock Purchase Rights
 o þ
 o þ
 þ o
 o
 o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



PageNumberPART I.Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25PART II.Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    26Item 6. Selected Financial Data
    
    
    26Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    27Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 8. Financial Statements and Supplementary Data
    
    
    52Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    86Item 9A. Controls and Procedures
    
    
    86Item 9B. Other Information
    
    
    86PART III.Item 10. Directors and Executive Officers of the Registrant
    
    
    86Item 11. Executive Compensation
    
    
    86Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    86Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    87Item 14. Principal Accounting Fees and Services
    
    
    87PART IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    87Signatures
    
    
    92EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I
 
 Item 1. Business
 The Business section and other parts of this Annual Report on Form 10-K (Form 10-K) contain
forward-looking statements relating to our business and strategy. These forward-looking statements
involve risks and uncertainties. Many forward-looking statements are located in Managements
Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of
this Form 10-K . 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 in the section entitled Risk
Factors under Part I, Item 1A of this Form 10-K . We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
 As used in the Form 10-K , SCO and OpenServer are trademarks or registered trademarks of
our Company in the United States and other countries. UNIX and UnixWare are registered
trademarks of The Open Group in the United States and other countries. All other brand or product
names are or may be trademarks of, and are used to identify the products and services of, their
respective owners. As used herein, the Company or us, we, ours, or similar terms refer to
The SCO Group, Inc. and our operating subsidiaries.
 Overview
   Recent Developments
 Novell, Inc. Ruling
  3




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de minimis
   Bankruptcy Filing
   4




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UNIX Business
 Background
    5




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Current Status and Strategy
      Competition
  6




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Products and Services
 OpenServer.
 UnixWare
 7




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Other Products.
 Technical Support Services.
   Other Services.
 Mobility Products and Services.
 Strategic Alliances
  8




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Sales and Marketing
  Americas.
 
    
    Channel Sales  ASMs manage our relationships with our resellers and vertical
solution providers. Resellers sell numerous solutions to small business customers in
their geographic territory. Vertical solution providers provide bundled applications to
specific vertical markets, which include retail point-of-sale, manufacturing, accounting
and medical/pharmaceutical. Many of our resellers and vertical solution providers
purchase operating system platform products directly from us. In order to efficiently
support the thousands of smaller resellers and vertical solution providers, we contract
with major distributors in a two-tier distribution model.
    
    Corporate Sales  ASMs also sell directly to our major corporate accounts with
branch offices or franchisees and other large corporations. Typically, these customers
have an existing suite of third-party or internally developed applications designed to run
on our dependable and scalable OpenServer or UnixWare operating systems. In many cases,
our operating system and the applications are then deployed in an identical fashion across
branch offices or franchisees.
 International.
   9




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
    
    branding our UNIX and mobile products through public relations and web marketing
activities;
    
    maintaining an effective partner program to generate brand awareness and promote our
UNIX and mobile products; as well as
    
    increasing public awareness of our UNIX and mobile products by participating in
strategic tradeshows, conferences and technology forums.
  Software Engineering and Development
    SCOsource Business
 Background
  10




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Intellectual Property Protection
   Employees
  
 Item 1A. Risk Factors
  We do not have a history of profitable operations and our cash resources are limited.
   11




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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.
   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.
  12




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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.
 de
minimis
  13




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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.
  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.
  14




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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.
   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
reorganization plan not confirmed by the Bankruptcy Court;
    
    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
 15




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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.
  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.
  16




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If the market for UNIX continues to contract, our business will be harmed.
  We may lose the support of industry partners leading to an accelerated decline in our UNIX products
and services revenue.
  17




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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.
   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.
   18




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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.
  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.
  19




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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 1B. Unresolved Staff Comments
  
 Item 2. Properties
     
 Item 3. Legal Proceedings
 Bankruptcy Filing
  20




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IBM Corporation
     21




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Novell, Inc.
   22




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23




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de minimis
  IPO Class Action Matter
    24




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Red Hat, Inc.
  Other Matters
    
 Item 4. Submission of Matters to a Vote of Security Holders
  25




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Price of Our Common Stock
  SCO Common StockHigh
    
    LowYear Ended October 31, 2007Quarter ended January 31, 2007
    
    $
    2.98
    
    
    $
    0.85Quarter ended April 30, 2007
    
    
    1.19
    
    
    
    0.82Quarter ended July 31, 2007
    
    
    2.21
    
    
    
    0.77Quarter ended October 31, 2007
    
    
    1.66
    
    
    
    0.15Year Ended October 31, 2006Quarter ended January 31, 2006
    
    $
    4.16
    
    
    $
    3.69Quarter ended April 30, 2006
    
    
    5.07
    
    
    
    4.03Quarter ended July 31, 2006
    
    
    4.74
    
    
    
    2.25Quarter ended October 31, 2006
    
    
    2.89
    
    
    
    1.66
  Dividend Policy
  Issuer Purchases of Equity Securities
  
 Item 6. Selected Financial Data
   26




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Years Ended October 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands, except per share data)Selected Statement of Operations
Data:Total revenue
    
    $
    21,656
    
    
    $
    29,239
    
    
    $
    36,004
    
    
    $
    42,809
    
    
    $
    79,254Gross margin
    
    $
    14,785
    
    
    $
    12,036
    
    
    $
    17,691
    
    
    $
    15,711
    
    
    $
    59,332Income (loss) from operations
    
    $
    (6,505
    )
    
    $
    (17,357
    )
    
    $
    (11,899
    )
    
    $
    (28,573
    )
    
    $
    3,436Net income (loss)
    
    $
    (6,826
    )
    
    $
    (16,598
    )
    
    $
    (10,726
    )
    
    $
    (16,227
    )
    
    $
    5,304Basic net income (loss) per common
share
    
    $
    (0.32
    )
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    (1.07
    )
    
    $
    0.43Diluted net income (loss) per
common share
    
    $
    (0.32
    )
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    (1.07
    )
    
    $
    0.34Weighted average basic common
shares
    
    
    21,264
    
    
    
    20,802
    
    
    
    17,924
    
    
    
    15,155
    
    
    
    12,261Weighted average diluted common
shares
    
    
    21,264
    
    
    
    20,802
    
    
    
    17,924
    
    
    
    15,155
    
    
    
    15,679
 As of October 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Selected Balance Sheet Data:Cash and cash equivalents
    
    $
    5,554
    
    
    $
    5,369
    
    
    $
    4,272
    
    
    $
    12,693
    
    
    $
    64,428Working capital
    
    
    6,445
    
    
    
    7,144
    
    
    
    8,669
    
    
    
    15,413
    
    
    
    37,168Total assets
    
    
    14,309
    
    
    
    23,409
    
    
    
    28,948
    
    
    
    55,400
    
    
    
    94,952Long-term liabilities
    
    
    182
    
    
    
    192
    
    
    
    338
    
    
    
    343
    
    
    
    508Redemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,671Common stock subject to rescission
    
    
    
    
    
    
    
    
    
    
    1,018
    
    
    
    528
    
    
    
    Total stockholders equity
    
    
    3,754
    
    
    
    8,082
    
    
    
    11,337
    
    
    
    21,702
    
    
    
    19,516
 
 Item 7. 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 Form 10-K 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 discussed in the subsection entitled
Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition and
the subsection entitled Risk Factors under Part I, Item 1A of this Form 10-K . The following
discussion should be read in conjunction with our consolidated financial statements and notes
thereto included in Part II, Item 8 of this Form 10-K . All information presented
herein is based on our fiscal year ended October 31, 2007. We assume no obligation to revise
or update any forward-looking statements for any reason, except as required by law.
 27




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Recent Developments
 Novell, Inc. Ruling
 de minimis
   28




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Bankruptcy Filing
       29




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Business Focus
 UNIX Business.
   2007
    
    
    2006
    
    
    2005(In thousands)Revenue
    
    $
    21,623
    
    
    $
    29,123
    
    
    $
    35,838Cost of revenue
    
    
    3,291
    
    
    
    4,896
    
    
    
    5,466Gross margin
    
    
    18,332
    
    
    
    24,227
    
    
    
    30,372Sales and marketing
    
    
    9,686
    
    
    
    12,048
    
    
    
    11,680Research and development
    
    
    6,077
    
    
    
    7,666
    
    
    
    7,948General and administrative
    
    
    5,527
    
    
    
    6,669
    
    
    
    6,604Other (1)
    
    
    
    
    
    
    2,371
    
    
    
    2,372Total operating expenses
    
    
    21,290
    
    
    
    28,754
    
    
    
    28,604Income (loss) from operations
    
    $
    (2,958
    )
    
    $
    (4,527
    )
    
    $
    1,768
 
 (1)
    
    For the year ended October 31, 2007, other costs were $0. For the years ended October 31, 2006
and 2005 other costs consisted of $2,371 and $2,372, respectively for amortization of intangibles.  30




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SCOsource Business.
   2007
    
    
    2006
    
    
    2005(In thousands)Revenue
    
    $
    33
    
    
    $
    116
    
    
    $
    166Cost of revenue
    
    
    3,580
    
    
    
    12,307
    
    
    
    12,847Gross margin (deficit)
    
    
    (3,547
    )
    
    
    (12,191
    )
    
    
    (12,681
    )Sales and marketing
    
    
    
    
    
    
    1
    
    
    
    154Research and development
    
    
    
    
    
    
    379
    
    
    
    389General and administrative
    
    
    
    
    
    
    259
    
    
    
    443Total operating expenses
    
    
    
    
    
    
    639
    
    
    
    986Loss from operations
    
    $
    (3,547
    )
    
    $
    (12,830
    )
    
    $
    (13,667
    )
 31




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Critical Accounting Estimates
   
    
    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
 32




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Valuation Allowances Against Deferred Income Tax Assets
 Litigation Reserves.
 33




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Useful Lives and Impairment of Property and Equipment
  Allowance for Doubtful Accounts Receivable
 34




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Results of Operations
  Years Ended October 31,2007
    
    
    2006
    
    
    2005(In thousands)Statement of Operations Data:Revenue:Products
    
    $
    17,488
    
    
    $
    24,063
    
    
    $
    30,190SCOsource
    
    
    33
    
    
    
    116
    
    
    
    166Services
    
    
    4,135
    
    
    
    5,060
    
    
    
    5,648Total revenue
    
    
    21,656
    
    
    
    29,239
    
    
    
    36,004Cost of revenue:Products
    
    
    1,329
    
    
    
    2,064
    
    
    
    2,544SCOsource licensing
    
    
    3,580
    
    
    
    12,307
    
    
    
    12,847Services
    
    
    1,962
    
    
    
    2,832
    
    
    
    2,922Total cost of revenue
    
    
    6,871
    
    
    
    17,203
    
    
    
    18,313Gross margin
    
    
    14,785
    
    
    
    12,036
    
    
    
    17,691Operating expenses:Sales and marketing
    
    
    9,686
    
    
    
    12,049
    
    
    
    11,834Research and development
    
    
    6,077
    
    
    
    8,045
    
    
    
    8,337General and administrative
    
    
    5,527
    
    
    
    6,928
    
    
    
    7,047Amortization of intangibles
    
    
    
    
    
    
    2,371
    
    
    
    2,372Total operating expenses
    
    
    21,290
    
    
    
    29,393
    
    
    
    29,590Loss from operations
    
    
    (6,505
    )
    
    
    (17,357
    )
    
    
    (11,899
    )Equity in income of affiliate
    
    
    108
    
    
    
    91
    
    
    
    47Reorganization items
    
    
    (700
    )
    
    
    
    
    
    
    Other income, net
    
    
    508
    
    
    
    759
    
    
    
    1,399Provision for income taxes
    
    
    (237
    )
    
    
    (91
    )
    
    
    (273
    )Net loss
    
    $
    (6,826
    )
    
    $
    (16,598
    )
    
    $
    (10,726
    )
 Years Ended October 31, 2007, 2006 and 2005
 Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Revenue
    
    $
    21,656
    
    
    
    (26
    )%
    
    $
    29,239
    
    
    
    (19
    )%
    
    $
    36,004
  35




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2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)UNIX revenue
    
    $
    21,623
    
    
    
    (26
    )%
    
    $
    29,123
    
    
    
    (19
    )%
    
    $
    35,838Percentage of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    100
    %SCOsource revenue
    
    
    33
    
    
    
    (72
    )%
    
    
    116
    
    
    
    (30
    )%
    
    
    166Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    Products Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Product revenue
    
    $
    17,488
    
    
    
    (27
    )%
    
    $
    24,063
    
    
    
    (20
    )%
    
    $
    30,190Percentage of total revenue
    
    
    81
    %
    
    
    
    
    
    
    82
    %
    
    
    
    
    
    
    84
    %
   36




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2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)OpenServer revenue
    
    $
    10,729
    
    
    
    (24
    )%
    
    $
    14,098
    
    
    
    (16
    )%
    
    $
    16,720Percentage of products revenue
    
    
    62
    %
    
    
    
    
    
    
    59
    %
    
    
    
    
    
    
    55
    %UnixWare revenue
    
    $
    4,782
    
    
    
    (36
    )%
    
    $
    7,521
    
    
    
    (16
    )%
    
    $
    8,979Percentage of products revenue
    
    
    27
    %
    
    
    
    
    
    
    31
    %
    
    
    
    
    
    
    30
    %Other products revenue
    
    $
    1,977
    
    
    
    (19
    )%
    
    $
    2,444
    
    
    
    (46
    )%
    
    $
    4,491Percentage of products revenue
    
    
    11
    %
    
    
    
    
    
    
    10
    %
    
    
    
    
    
    
    15
    %
  SCOsource Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)SCOsource revenue
    
    $
    33
    
    
    
    (72
    )%
    
    $
    116
    
    
    
    (30
    )%
    
    $
    166Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
  Services Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Services revenue
    
    $
    4,135
    
    
    
    (18
    )%
    
    $
    5,060
    
    
    
    (10
    )%
    
    $
    5,648Percentage of total revenue
    
    
    19
    %
    
    
    
    
    
    
    18
    %
    
    
    
    
    
    
    16
    %
  37




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##### Table of Contents



Cost of Products Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Cost of products revenue
    
    $
    1,329
    
    
    
    (36
    )%
    
    $
    2,064
    
    
    
    (19
    )%
    
    $
    2,544Percentage of products revenue
    
    
    8
    %
    
    
    
    
    
    
    9
    %
    
    
    
    
    
    
    8
    %
   Cost of SCOsource Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Cost of SCOsource revenue
    
    $
    3,580
    
    
    
    (71
    )%
    
    $
    12,307
    
    
    
    (4
    )%
    
    $
    12,847
    38




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##### Table of Contents



Cost of Services Revenue
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Cost of services revenue
    
    $
    1,962
    
    
    
    (31
    )%
    
    $
    2,832
    
    
    
    (3
    )%
    
    $
    2,922Percentage of services revenue
    
    
    47
    %
    
    
    
    
    
    
    56
    %
    
    
    
    
    
    
    52
    %
   Sales and Marketing
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Sales and marketing expense
    
    $
    9,686
    
    
    
    (20
    )%
    
    $
    12,049
    
    
    
    2
    %
    
    $
    11,834Percentage of total revenue
    
    
    45
    %
    
    
    
    
    
    
    41
    %
    
    
    
    
    
    
    33
    %
   Research and Development
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Research and development expense
    
    $
    6,077
    
    
    
    (24
    )%
    
    $
    8,045
    
    
    
    (4
    )%
    
    $
    8,337Percentage of total revenue
    
    
    28
    %
    
    
    
    
    
    
    28
    %
    
    
    
    
    
    
    23
    %
  39




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##### Table of Contents



General and Administrative
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)General and administrative expense
    
    $
    5,527
    
    
    
    (20
    )%
    
    $
    6,928
    
    
    
    (2
    )%
    
    $
    7,047Percentage of total revenue
    
    
    26
    %
    
    
    
    
    
    
    24
    %
    
    
    
    
    
    
    20
    %
   Amortization of Intangibles
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Amortization of intangibles
    
    $
    
    
    
    
    n/a
    
    
    $
    2,371
    
    
    
    0
    %
    
    $
    2,372Percentage of total revenue
    
    
    0
    %
    
    
    
    
    
    
    8
    %
    
    
    
    
    
    
    7
    %
  Equity in Income of Affiliate
  40




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##### Table of Contents



Reorganization items
 2007
    
    Change
    
    2006
    
    Change
    
    2005(Dollars in thousands)Reorganization items
    
    $
    700
    
    
    
    n/a
    
    
    $
    
    
    
    
    n/a
    
    
    $
    
  Other Income, net
  2007
    
    
    2006
    
    
    2005(In thousands)Interest income
    
    $
    441
    
    
    $
    720
    
    
    $
    377Other income, net
    
    
    67
    
    
    
    39
    
    
    
    1,022Total other income, net
    
    $
    508
    
    
    $
    759
    
    
    $
    1,399
   Provision for Income Taxes
  41




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Quarterly Results of Operations
   42




---



##### Table of Contents



Quarter Ended(In thousands, except per share data)January 31,
    
    April 30,
    
    July 31,
    
    October 31,2007
    
    2007
    
    2007
    
    2007(Unaudited)Revenue
    
    $
    6,015
    
    
    $
    6,014
    
    
    $
    4,686
    
    
    $
    4,941Gross margin
    
    
    4,425
    
    
    
    4,067
    
    
    
    2,753
    
    
    
    3,540Loss from operations
    
    
    (1,097
    )
    
    
    (1,231
    )
    
    
    (2,511
    )
    
    
    (1,666
    )Net loss
    
    
    (1,024
    )
    
    
    (1,143
    )
    
    
    (2,398
    )
    
    
    (2,261
    )Basic and diluted net loss per common share
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.11
    )Weighted average basic and diluted common
shares
    
    
    21,186
    
    
    
    21,233
    
    
    
    21,372
    
    
    
    21,485
 Quarter EndedJanuary 31,
    
    April 30,
    
    July 31,
    
    October 31,2006
    
    2006
    
    2006
    
    2006(Unaudited)Revenue
    
    $
    7,343
    
    
    $
    7,126
    
    
    $
    7,421
    
    
    $
    7,349Gross margin
    
    
    2,112
    
    
    
    2,158
    
    
    
    3,962
    
    
    
    3,804Loss from operations
    
    
    (4,631
    )
    
    
    (4,896
    )
    
    
    (3,600
    )
    
    
    (4,230
    )Net loss
    
    
    (4,581
    )
    
    
    (4,694
    )
    
    
    (3,580
    )
    
    
    (3,743
    )Basic and diluted net loss per common share
    
    $
    (0.23
    )
    
    $
    (0.22
    )
    
    $
    (0.17
    )
    
    $
    (0.18
    )Weighted average basic and diluted common
shares
    
    
    20,062
    
    
    
    20,994
    
    
    
    21,063
    
    
    
    21,094
 Fluctuations in Quarterly Results
 Factors that may affect quarterly results include:
    
    the impact of the recent negative ruling in our litigation with Novell and our upcoming
trial with Novell and our Chapter 11 bankruptcy filing;
    
    the interest level of solution providers in recommending UNIX business solutions to end
users as well as the changing business attitudes toward UNIX as a viable operating system
alternative to other competing systems, especially Linux;
    
    the contingency fees we may pay to the Law Firms representing us in the SCO Litigation;
    
    the level, magnitude and timing of SCOsource license revenue;
    
    the amount of legal fees and related expenses incurred in connection with the SCO
Litigation;
    
    the introduction, development, timing, competitive pricing and market acceptance of our
products and services and those of our competitors; and
    
    changes in general economic conditions that could affect capital expenditures in the
UNIX market.
  43




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Liquidity and Capital Resources
        44




---



##### Table of Contents




    
    33 percent of any aggregate recovery amounts received up to $350,000,000;
    
    plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or
equal to $700,000,000;
    
    plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.
  45




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Contractual Obligations
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1 - 3 years
    
    3 - 5 years
    
    5 years(Dollars in thousands)Operating lease obligations
    
    $
    1,940
    
    
    $
    1,035
    
    
    $
    905
    
    
    $
    
    
    
    $
    
     46




---



##### Table of Contents



de minimis
  Recent Accounting Pronouncements
    47




---



##### Table of Contents



48




---



##### Table of Contents



Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition
  
    
    Our intention to continue our UNIX development and marketing efforts while at the
same time developing and marketing our mobility products and services;
    
    Our belief that the market for mobility products and services is poised for rapid
growth;
    
    Our belief that the success of our mobility products and services offerings will
depend, in part, on the level of commitment and resources we are able to devote to
these offerings, the partnerships we are able to establish, our ability to attract and
retain new customers and partners, and the strength of our mobility offerings;
    
    Our operating strategy to continue to support our existing users of our UNIX
operating system products and protect our intellectual property rights;
    
    Our belief that our OpenServer and UnixWare products will continue to provide a
revenue stream in the year ending October 31, 2008 and our belief that revenue from
such products will continue to decline;
    
    Our expectation that our sales channel should continue to provide reliable UNIX
operating systems for small-to-medium sized business customers;
    
    Our expectation that hardware and software vendors, as well as software developers,
will continue to turn their certification and application development efforts toward
Linux and may elect not to continue to support or certify to our UNIX operating system
products;
    
    Our intention to vigorously defend legal claims and counterclaims brought against
us by others;
    
    Our intention to continue to pursue the SCO Litigation and run our UNIX business,
subject to Bankruptcy Court approval;
    
    Our belief that our cash and cash equivalents, assuming no cash payments are
required to Novell under the Novell litigation, will be adequate for us to execute our
business strategy as well as to continue to pursue the SCO Litigation and that we have
sufficient cash resources to fund our operations for the next 12 months;
    
    Our expectation that maintaining our strategic alliances with solution providers
during the year ending October 31, 2008 will be critical to the success of our UNIX
business;
    
    Our intention to keep our relationships with key partners in certain vertical
markets;
    
    Our belief that our bad debts and our allowance for doubtful accounts receivable
will remain consistent with our prior experience;
    
    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 contained in Linux;
 49




---



##### Table of Contents




    
    Our expectation that UNIX revenue for the year ending October 31, 2008 will decline
from UNIX revenue generated during the year ended October 31, 2007;
    
    Our belief that competition from Linux will continue during the year ending October
31, 2008 and future periods;
    
    Our expectation that future services revenue will depend, in part, on our ability
to generate UNIX products revenue from new customers as well as the renewal of annual
support and services agreements from existing UNIX customers;
    
    Our belief that a key to our future success will be our ability to provide
additional products and services to our reseller channel and to communicate our
product and corporate strategy to these resellers;
    
    Our expectation that enhancements to our UNIX software products will not result in
significant revenue increases in the short-term;
    
    Our belief that a movement in interest rates, either up or down of up to 2%, would
not have a material adverse impact on our cash and cash equivalents;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of
expert, consulting and other expenses relating to our litigation with IBM will
decrease, although it will continue to be material to our financial statements and
cash position;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
cost of products revenue will be lower than the dollar amount of our cost of products
revenue generated during the year ended October 31, 2007;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
cost of SCOsource revenue will be lower than that generated during the year
ended October 31, 2007, exclusive of any potential contingent payments;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
cost of services revenue will be less than the dollar amount of our cost of services
revenue incurred for the year ended October 31, 2007;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
sales and marketing expenses will decrease from that generated during the year ended
October 31, 2007;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
research and development expenses will decrease from that generated during the year
ended October 31, 2007;
    
    Our expectation for the year ending October 31, 2008 that the dollar amount of our
general and administrative expenses will increase from that generated during the year
ended October 31, 2007, as a result of professional and legal fees associated with the
bankruptcy; and
    
    Our belief that certain legal actions to which we are a party will not have a
material adverse effect on us.
  50




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk.
 Interest Rate Risk.
 Investment Risk.
  51




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements and Financial Statement Schedule
 PageConsolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    53Consolidated Balance Sheets as of October 31, 2007 and 2006
    
    
    54Consolidated Statements of Operations and Comprehensive Loss for the Years Ended October 31, 2007, 2006 and 2005
    
    
    55Consolidated Statements of Stockholders Equity for the Years Ended October 31, 2007, 2006 and 2005
    
    
    56Consolidated Statements of Cash Flows for the Years Ended October 31, 2007, 2006 and 2005
    
    
    57Notes to Consolidated Financial Statements
    
    
    58Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    85
 52




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Report of Independent Registered Public Accounting Firm
 
       
 53




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)
 October 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    5,554
    
    
    $
    5,369Restricted cash
    
    
    3,099
    
    
    
    8,024Available-for-sale marketable securities
    
    
    
    
    
    
    2,249Accounts receivable, net of allowance for
doubtful accounts of $85 and $106, respectively
    
    
    3,365
    
    
    
    5,123Other
    
    
    1,298
    
    
    
    1,514Prepaid reorganizational expenses
    
    
    137
    
    
    
    Total current assets
    
    
    13,453
    
    
    
    22,279PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    2,006
    
    
    
    2,259Leasehold improvements
    
    
    268
    
    
    
    316Furniture and fixtures
    
    
    66
    
    
    
    782,340
    
    
    
    2,653Less accumulated depreciation and amortization
    
    
    (1,981
    )
    
    
    (2,045
    )Net property and equipment
    
    
    359
    
    
    
    608OTHER ASSETS
    
    
    497
    
    
    
    522Total assets
    
    $
    14,309
    
    
    $
    23,409LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    252
    
    
    $
    2,338Payable to Novell, Inc.
    
    
    1,148
    
    
    
    2,978Accrued payroll and benefits
    
    
    1,370
    
    
    
    2,507Accrued liabilities
    
    
    1,110
    
    
    
    3,059Accrued reorganizational expenses
    
    
    253
    
    
    
    Deferred revenues
    
    
    2,044
    
    
    
    2,994Royalties payable
    
    
    123
    
    
    
    439Income taxes payable
    
    
    708
    
    
    
    820Total current liabilities
    
    
    7,008
    
    
    
    15,135LONG-TERM LIABILITIES
    
    
    182
    
    
    
    192LIABILITIES SUBJECT TO COMPROMISE
    
    
    3,365
    
    
    
    Total liabilities
    
    
    10,555
    
    
    
    15,327COMMITMENTS AND CONTINGENCIES (Notes 1,5,6 and 8)STOCKHOLDERS EQUITY:Common stock, $0.001 par value: 45,000 shares authorized,
21,782 and 21,391 shares outstanding, respectively
    
    
    22
    
    
    
    21Additional paid-in capital
    
    
    262,659
    
    
    
    260,259Common stock held in treasury; 297 shares outstanding
    
    
    (2,446
    )
    
    
    (2,446
    )Warrants outstanding
    
    
    856
    
    
    
    856Accumulated other comprehensive income
    
    
    1,029
    
    
    
    932Accumulated deficit
    
    
    (258,366
    )
    
    
    (251,540
    )Total stockholders equity
    
    
    3,754
    
    
    
    8,082Total liabilities and stockholders equity
    
    $
    14,309
    
    
    $
    23,409
  54




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Dollars in thousands)
 Year Ended October 31,2007
    
    
    2006
    
    
    2005REVENUE:Products
    
    $
    17,488
    
    
    $
    24,063
    
    
    $
    30,190SCOsource
    
    
    33
    
    
    
    116
    
    
    
    166Services
    
    
    4,135
    
    
    
    5,060
    
    
    
    5,648Total revenue
    
    
    21,656
    
    
    
    29,239
    
    
    
    36,004COST OF REVENUE:Products
    
    
    1,329
    
    
    
    2,064
    
    
    
    2,544SCOsource licensing
    
    
    3,580
    
    
    
    12,307
    
    
    
    12,847Services
    
    
    1,962
    
    
    
    2,832
    
    
    
    2,922Total cost of revenue
    
    
    6,871
    
    
    
    17,203
    
    
    
    18,313GROSS MARGIN
    
    
    14,785
    
    
    
    12,036
    
    
    
    17,691OPERATING EXPENSES:Sales and marketing
    
    
    9,686
    
    
    
    12,049
    
    
    
    11,834Research and development
    
    
    6,077
    
    
    
    8,045
    
    
    
    8,337General and administrative
    
    
    5,527
    
    
    
    6,928
    
    
    
    7,047Amortization of intangibles
    
    
    
    
    
    
    2,371
    
    
    
    2,372Total operating expenses
    
    
    21,290
    
    
    
    29,393
    
    
    
    29,590LOSS FROM OPERATIONS
    
    
    (6,505
    )
    
    
    (17,357
    )
    
    
    (11,899
    )EQUITY IN INCOME OF AFFILIATE
    
    
    108
    
    
    
    91
    
    
    
    47OTHER INCOME (EXPENSE):Reorganization expense
    
    
    (700
    )
    
    
    
    
    
    
    Interest income
    
    
    441
    
    
    
    720
    
    
    
    377Other income, net
    
    
    67
    
    
    
    39
    
    
    
    1,022Total other income (expense), net
    
    
    (192
    )
    
    
    759
    
    
    
    1,399LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (6,589
    )
    
    
    (16,507
    )
    
    
    (10,453
    )PROVISION FOR INCOME TAXES
    
    
    (237
    )
    
    
    (91
    )
    
    
    (273
    )NET LOSS
    
    $
    (6,826
    )
    
    $
    (16,598
    )
    
    $
    (10,726
    )BASIC AND DILUTED NET LOSS
PER COMMON SHARE
    
    
    (0.32
    )
    
    
    (0.80
    )
    
    
    (0.60
    )WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING
    
    
    21,264
    
    
    
    20,802
    
    
    
    17,924OTHER COMPREHENSIVE LOSS:Net loss
    
    $
    (6,826
    )
    
    $
    (16,598
    )
    
    $
    (10,726
    )Foreign currency translation adjustment
    
    
    97
    
    
    
    58
    
    
    
    (145
    )Unrealized gain on available-for-sale
marketable securities
    
    
    
    
    
    
    40
    
    
    
    15COMPREHENSIVE LOSS
    
    $
    (6,729
    )
    
    $
    (16,500
    )
    
    $
    (10,856
    )
  55




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (In thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    Paid - in
    
    Treasury Stock
    
    Warrants
    
    Deferred
    
    Comprehensive
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Shares
    
    Amount
    
    Outstanding
    
    Compensation
    
    Income
    
    Deficit
    
    TotalBalance, October 31, 2004
    
    
    17,956
    
    
    $
    18
    
    
    $
    246,273
    
    
    
    290
    
    
    $
    (2,414
    )
    
    $
    1,099
    
    
    $
    (22
    )
    
    $
    964
    
    
    $
    (224,216
    )
    
    $
    21,702Amortization of stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    (145
    )Issuance of common shares upon exercise of stock options
    
    
    163
    
    
    
    
    
    
    
    239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239Issuance of common shares under employee stock purchase program
    
    
    212
    
    
    
    
    
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    720Expiration of warrant
    
    
    
    
    
    
    
    
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    (243
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock subject to rescission
    
    
    
    
    
    
    
    
    
    
    (490
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (490
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,726
    )
    
    
    (10,726
    )Balance, October 31, 2005
    
    
    18,331
    
    
    
    18
    
    
    
    246,985
    
    
    
    290
    
    
    
    (2,414
    )
    
    
    856
    
    
    
    
    
    
    
    834
    
    
    
    (234,942
    )
    
    
    11,337Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,802
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,802Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    58Issuance of common shares upon exercise of stock options
    
    
    29
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Issuance of common shares under employee stock purchase program
    
    
    179
    
    
    
    
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613Issuance of common stock in a private placement, net of issuances costs
    
    
    2,852
    
    
    
    3
    
    
    
    9,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,809Common stock subject to rescission
    
    
    
    
    
    
    
    
    
    
    1,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,018Acquisition of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,598
    )
    
    
    (16,598
    )Balance, October 31, 2006
    
    
    21,391
    
    
    
    21
    
    
    
    260,259
    
    
    
    297
    
    
    
    (2,446
    )
    
    
    856
    
    
    
    
    
    
    
    932
    
    
    
    (251,540
    )
    
    
    8,082Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,908Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    97Issuance of common shares upon exercise of stock options
    
    
    52
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Issuance of common shares under employee stock purchase program
    
    
    339
    
    
    
    1
    
    
    
    435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,826
    )
    
    
    (6,826
    )Balance, October 31, 2007
    
    
    21,782
    
    
    $
    22
    
    
    $
    262,659
    
    
    
    297
    
    
    $
    (2,466
    )
    
    $
    856
    
    
    $
    
    
    
    $
    1,029
    
    
    $
    (258,366
    )
    
    $
    3,754
  56




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year Ended October 31,2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (6,826
    )
    
    $
    (16,598
    )
    
    $
    (10,726
    )Adjustments to reconcile net loss to net cash used
in operating activities:Amortization of intangibles (including $0, $336 and $334
classified as cost of SCOscource licensing revenue, respectively)
    
    
    
    
    
    
    2,707
    
    
    
    2,706Stock-based compensation
    
    
    1,908
    
    
    
    1,802
    
    
    
    22Depreciation and amortization
    
    
    306
    
    
    
    302
    
    
    
    360Loss on disposition and write-downs of long-lived assets
    
    
    33
    
    
    
    8
    
    
    
    46Equity in income of affiliate
    
    
    (108
    )
    
    
    (91
    )
    
    
    (47
    )Reorganization expense
    
    
    700
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Restricted cash
    
    
    3,213
    
    
    
    (2,171
    )
    
    
    2,125Accounts receivable, net
    
    
    1,758
    
    
    
    1,220
    
    
    
    295Other current assets
    
    
    216
    
    
    
    940
    
    
    
    (584
    )Other assets
    
    
    133
    
    
    
    
    
    
    
    405Accounts payable
    
    
    (287
    )
    
    
    141
    
    
    
    (5,657
    )Accrued payroll and benefits
    
    
    (967
    )
    
    
    (149
    )
    
    
    (713
    )Compensation to law firms
    
    
    
    
    
    
    
    
    
    
    (7,956
    )Accrued liabilities
    
    
    (776
    )
    
    
    (59
    )
    
    
    (737
    )Deferred revenue
    
    
    (950
    )
    
    
    (847
    )
    
    
    (1,036
    )Royalties payable
    
    
    (211
    )
    
    
    33
    
    
    
    52Income taxes payable
    
    
    (112
    )
    
    
    (402
    )
    
    
    (57
    )Long-term liabilities
    
    
    (10
    )
    
    
    (146
    )
    
    
    (5
    )Payments for reorganization expense
    
    
    (584
    )
    
    
    
    
    
    
    Net cash used in operating activities
    
    
    (2,564
    )
    
    
    (13,310
    )
    
    
    (21,507
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (90
    )
    
    
    (340
    )
    
    
    (336
    )Dividend received
    
    
    
    
    
    
    308
    
    
    
    Purchase of available-for-sale marketable securities
    
    
    
    
    
    
    (6,691
    )
    
    
    (13,624
    )Proceeds from sale of available-for-sale marketable securities
    
    
    2,249
    
    
    
    10,607
    
    
    
    26,215Net cash provided by investing activities
    
    
    2,159
    
    
    
    3,884
    
    
    
    12,255CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee
stock purchase program
    
    
    436
    
    
    
    613
    
    
    
    720Proceeds from exercise of common stock options
    
    
    57
    
    
    
    35
    
    
    
    239Repurchase of common stock
    
    
    
    
    
    
    (32
    )
    
    
    Proceeds from sale of common stock in a private placement,
net of issuance costs
    
    
    
    
    
    
    9,809
    
    
    
    Net cash provided by financing activities
    
    
    493
    
    
    
    10,425
    
    
    
    959NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    88
    
    
    
    999
    
    
    
    (8,293
    )EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    97
    
    
    
    98
    
    
    
    (128
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    5,369
    
    
    
    4,272
    
    
    
    12,693CASH AND CASH EQUIVALENTS, end of year
    
    $
    5,554
    
    
    $
    5,369
    
    
    $
    4,272SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for income taxes
    
    $
    300
    
    
    $
    286
    
    
    $
    358SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:Increase (decrease) in common stock subject to rescission
    
    $
    
    
    
    $
    (1,018
    )
    
    $
    490
  57




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) DESCRIPTION OF THE BUSINESS AND GOING CONCERN
      de minimis
 58




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
    Bankruptcy Filing
     59




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
   Going Concern
 .
 (2) SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Financial
Reporting by Entities in Reorganization under Bankruptcy Code (SOP 90-7)
 60




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Use of Estimates in the Preparation of Financial Statements
  Principles of Consolidation
   Subsidiary
    
    LocationSCO Operations, Inc.
    
    United StatesSCO Global, Inc.
    
    United StatesMe Inc.
    
    United StatesCattleback Holdings, Inc.
    
    United StatesSCO Software (UK) Ltd.
    
    United KingdomSCO Japan, Ltd.
    
    JapanSCO Canada, Inc.
    
    CanadaThe SCO Group (Deutschland) GmbH
    
    GermanyThe SCO Group (France) Sarl
    
    FranceSCO Software (India) Private Ltd.
    
    India
 Fair Value of Financial Instruments
  Foreign Currency Translation
  61




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Cash and Cash Equivalents
  Available-for-Sale Marketable Securities
  October 31, 2006Unrealized
    
    
    Fair MarketCost
    
    
    Gains, net
    
    
    Value(In thousands)Corporate notes
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000U.S. Government agencies
    
    
    1,247
    
    
    
    2
    
    
    
    1,249Total
    
    $
    2,247
    
    
    $
    2
    
    
    $
    2,249
  2006Amortized
    
    
    FairCost
    
    
    Value(In thousands)Maturity date:3 to 12 months
    
    $
    
    
    
    $
    Greater than 12 months
    
    
    2,247
    
    
    
    2,249Total
    
    $
    2,247
    
    
    $
    2,249
 Restricted Cash and Payable to Novell, Inc.
  62




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Allowance for Doubtful Accounts Receivable
  Inventories
   Capitalized Software Costs
 Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed
 Impairment of Long-Lived Assets
  Property and Equipment
  63




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    Revenue Recognition
       64




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Royalty Costs
  Advertising
  Income Taxes
  Comprehensive Loss
  Net Loss per Common Share
   65




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (3) GOODWILL AND INTANGIBLE ASSETS
  As of
    
    
    
    
    
    
    
    
    
    
    As ofOctober
    
    
    Year Ended
    
    
    October31, 2005
    
    
    October 31, 2006
    
    
    31, 2006Net Book
    
    
    Amortization
    
    
    
    
    
    
    Net BookValue
    
    
    Expense
    
    
    Additions
    
    
    Value(In thousands)Amortizable intangible assets:Distribution/reseller channel
    
    $
    2,318
    
    
    $
    (2,318
    )
    
    $
    
    
    
    $
    Acquired technology
    
    
    337
    
    
    
    (337
    )
    
    
    
    
    
    
    Trade name
    
    
    52
    
    
    
    (52
    )
    
    
    
    
    
    
    Total intangible assets
    
    $
    2,707
    
    
    $
    (2,707
    )
    
    $
    
    
    
    $
    
  (4) INVESTMENTS IN NON-MARKETABLE SECURITIES
    Sale of Troll Tech Shares
  66




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Investment Impairments and Write-offs
  (5) COMMON STOCK SUBJECT TO RESCISSION
     67




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (6) STOCKHOLDERS EQUITY
 Stock Options
       68




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Weighted AverageOptions
    
    
    Exercise Price(Options in thousands)Balance, October 31, 2004
    
    
    3,161
    
    
    $
    4.18Granted
    
    
    1,118
    
    
    
    4.40Exercised
    
    
    (162
    )
    
    
    1.48Cancelled
    
    
    (293
    )
    
    
    6.63Balance, October 31, 2005
    
    
    3,824
    
    
    
    4.17Granted
    
    
    1,065
    
    
    
    3.84Exercised
    
    
    (29
    )
    
    
    1.21Cancelled
    
    
    (139
    )
    
    
    3.97Balance, October 31, 2006
    
    
    4,721
    
    
    
    4.12Granted
    
    
    1,279
    
    
    
    1.88Exercised
    
    
    (52
    )
    
    
    1.09Cancelled
    
    
    (932
    )
    
    
    4.36Balance, October 31, 2007
    
    
    5,016
    
    
    $
    3.53
   Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageOptions
    
    Contractual
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price(Options in thousands)$0.76 - $1.10
    
    
    1,189
    
    
    5.80 years
    
    $
    0.84
    
    
    
    967
    
    
    $
    0.82$1.12 - $2.30
    
    
    1,397
    
    
    7.00 years
    
    
    1.99
    
    
    
    704
    
    
    
    1.75$3.00 - $3.78
    
    
    708
    
    
    7.84 years
    
    
    3.69
    
    
    
    380
    
    
    
    3.68$3.93 - $4.86
    
    
    1,080
    
    
    7.10 years
    
    
    4.46
    
    
    
    908
    
    
    
    4.46$5.05 - $24.00
    
    
    642
    
    
    6.02 years
    
    
    10.14
    
    
    
    624
    
    
    
    10.295,016
    
    
    6.73 years
    
    $
    3.53
    
    
    
    3,583
    
    
    $
    3.88
  2000 Employee Stock Purchase Plan
  69




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    Stock-based Compensation
 Accounting for Stock
Issued to Employees
 Share Based Payment
   70




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2007
    
    
    2006
    
    
    2005(In thousands)Cost of products
    
    $
    7
    
    
    $
    19
    
    
    $
    Cost of SCOsource licensing
    
    
    282
    
    
    
    231
    
    
    
    Cost of services
    
    
    41
    
    
    
    67
    
    
    
    Sales and marketing
    
    
    376
    
    
    
    371
    
    
    
    14Research and development
    
    
    200
    
    
    
    140
    
    
    
    8General and administrative
    
    
    1,002
    
    
    
    974
    
    
    
    Total stock-based compensation
    
    $
    1,908
    
    
    $
    1,802
    
    
    $
    22
  Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123
 2005(In thousands, except per share data)Net loss:As reported
    
    $
    (10,726
    )Stock-based compensation included in reported net loss
    
    
    22Stock-based compensation under fair value method
    
    
    (1,880
    )Pro forma net loss
    
    $
    (12,584
    )Net loss per basic and diluted common share:As reported
    
    $
    (0.60
    )Pro Forma
    
    $
    (0.70
    )
  2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.5
    %
    
    
    4.8
    %
    
    
    3.9
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    116.7
    %
    
    
    66.2
    %
    
    
    63.4
    %Expected exercise life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    2.7
  Repurchase of Common Stock
  71




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Stockholder Rights Plan
   Change in Control Agreements
   Accounting for Certain Transactions Involving Stock Compensation,
   72




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (7) INCOME TAXES
  2007
    
    
    2006
    
    
    2005(In thousands)Domestic U.S. operations
    
    $
    (7,263
    )
    
    $
    (16,817
    )
    
    $
    (10,333
    )Foreign operations
    
    
    674
    
    
    
    310
    
    
    
    (120
    )Total
    
    $
    (6,589
    )
    
    $
    (16,507
    )
    
    $
    (10,453
    )
  2007
    
    
    2006
    
    
    2005(In thousands)Current:U.S. state
    
    $
    
    
    
    $
    
    
    
    $
    Non  U.S.
    
    
    237
    
    
    
    91
    
    
    
    273Total current
    
    
    237
    
    
    
    91
    
    
    
    273Deferred:U.S federal
    
    
    (1,902
    )
    
    
    (6,221
    )
    
    
    (2,250
    )U.S. state
    
    
    (283
    )
    
    
    (925
    )
    
    
    (334
    )Change in valuation allowance
    
    
    2,185
    
    
    
    7,146
    
    
    
    2,584Total deferred
    
    
    
    
    
    
    
    
    
    
    Total provision for income taxes
    
    $
    237
    
    
    $
    91
    
    
    $
    273
   73




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 2007
    
    
    2006(In thousands)Deferred income tax assets:Net operating loss carry-forward
    
    $
    66,714
    
    
    $
    62,624Intangible assets
    
    
    6,248
    
    
    
    7,315Tax basis in excess of book basis
related to acquired assets
    
    
    2,896
    
    
    
    3,620Reserves and accrued expenses
    
    
    401
    
    
    
    758Stock compensation
    
    
    1,434
    
    
    
    697Book depreciation in excess of tax
    
    
    321
    
    
    
    351Deferred revenue
    
    
    242
    
    
    
    286Basis difference in investments
    
    
    181
    
    
    
    260Capital loss carry-forward
    
    
    133
    
    
    
    474Total deferred income tax assets
    
    
    78,570
    
    
    
    76,385Valuation allowance
    
    
    (78,570
    )
    
    
    (76,385
    )Net deferred income tax assets
    
    $
    
    
    
    $
    
    74




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  2007
    
    2006
    
    2005Benefit at statutory rate
    
    
    (35.0
    )%
    
    
    (35.0
    )%
    
    
    (35.0
    )%Permanent financial reporting to
tax differences
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %Foreign income taxes
    
    
    3.3
    %
    
    
    0.5
    %
    
    
    2.6
    %Change in valuation allowance
    
    
    34.8
    %
    
    
    34.8
    %
    
    
    34.8
    %Total provision for income taxes
    
    
    3.3
    %
    
    
    0.5
    %
    
    
    2.6
    %
 (8) COMMITMENTS AND CONTINGENCIES
 IBM Corporation
     75




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     Novell, Inc.
   76




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
       77




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 de minimis
  IPO Class Action Matter
    Red Hat, Inc.
  78




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Other Matters
    Operating Lease Agreements
  79




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  OperatingLeases(In thousands)Year ending October 31,2008
    
    $
    1,0352009
    
    
    5142010
    
    
    3382011
    
    
    53Thereafter
    
    
    Total minimum payments
    
    $
    1,940
  Contingency Arrangement with Law Firms
  
    
    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.
  (9) RELATED PARTY TRANSACTIONS
   80




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      (10) EMPLOYEE BENEFIT PLAN
  (11) CONCENTRATION OF RISK
   81




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (12) SEGMENT INFORMATION AND GEOGRAPHIC REGIONS
 Segments
  Year Ended October 31, 2007UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenue
    
    $
    21,623
    
    
    $
    33
    
    
    $
    21,656Cost of revenue
    
    
    3,291
    
    
    
    3,580
    
    
    
    6,871Gross margin (deficit)
    
    
    18,332
    
    
    
    (3,547
    )
    
    
    14,785Sales and marketing
    
    
    9,686
    
    
    
    
    
    
    
    9,686Research and development
    
    
    6,077
    
    
    
    
    
    
    
    6,077General and administrative
    
    
    5,527
    
    
    
    
    
    
    
    5,527Total operating expenses
    
    
    21,290
    
    
    
    
    
    
    
    21,290Loss from operations
    
    $
    (2,958
    )
    
    $
    (3,547
    )
    
    $
    (6,505
    )
 Year Ended October 31, 2006UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenue
    
    $
    29,123
    
    
    $
    116
    
    
    $
    29,239Cost of revenue
    
    
    4,896
    
    
    
    12,307
    
    
    
    17,203Gross margin (deficit)
    
    
    24,227
    
    
    
    (12,191
    )
    
    
    12,036Sales and marketing
    
    
    12,048
    
    
    
    1
    
    
    
    12,049Research and development
    
    
    7,666
    
    
    
    379
    
    
    
    8,045General and administrative
    
    
    6,669
    
    
    
    259
    
    
    
    6,928Other
    
    
    2,371
    
    
    
    
    
    
    
    2,371Total operating expenses
    
    
    28,754
    
    
    
    639
    
    
    
    29,393Loss from operations
    
    $
    (4,527
    )
    
    $
    (12,830
    )
    
    $
    (17,357
    )
 82




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Year Ended October 31, 2005UNIX
    
    
    SCOsource
    
    
    Total(In thousands)Revenue
    
    $
    35,838
    
    
    $
    166
    
    
    $
    36,004Cost of revenue
    
    
    5,466
    
    
    
    12,847
    
    
    
    18,313Gross margin (deficit)
    
    
    30,372
    
    
    
    (12,681
    )
    
    
    17,691Sales and marketing
    
    
    11,680
    
    
    
    154
    
    
    
    11,834Research and development
    
    
    7,948
    
    
    
    389
    
    
    
    8,337General and administrative
    
    
    6,604
    
    
    
    443
    
    
    
    7,047Other
    
    
    2,372
    
    
    
    
    
    
    
    2,372Total operating expenses
    
    
    28,604
    
    
    
    986
    
    
    
    29,590Income (loss) from operations
    
    $
    1,768
    
    
    $
    (13,667
    )
    
    $
    (11,899
    )
 Geographic Regions
  Year Ended October 31, 2007Americas
    
    
    International
    
    
    Corporate
    
    
    Total(In thousands)Revenue
    
    $
    10,737
    
    
    $
    10,919
    
    
    $
    
    
    
    $
    21,656Cost of revenue
    
    
    4,981
    
    
    
    1,560
    
    
    
    330
    
    
    
    6,871Gross margin (deficit)
    
    
    5,756
    
    
    
    9,359
    
    
    
    (330
    )
    
    
    14,785Sales and marketing
    
    
    4,609
    
    
    
    4,688
    
    
    
    389
    
    
    
    9,686Research and development
    
    
    2,913
    
    
    
    2,961
    
    
    
    203
    
    
    
    6,077General and administrative
    
    
    1,886
    
    
    
    2,630
    
    
    
    1,011
    
    
    
    5,527Total operating expenses
    
    
    9,408
    
    
    
    10,279
    
    
    
    1,603
    
    
    
    21,290Loss from operations
    
    $
    (3,652
    )
    
    $
    (920
    )
    
    $
    (1,933
    )
    
    $
    (6,505
    )
 83




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THE SCO GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Year Ended October 31, 2006Americas
    
    
    International
    
    
    Corporate
    
    
    Total(In thousands)Revenue
    
    $
    15,749
    
    
    $
    13,490
    
    
    $
    
    
    
    $
    29,239Cost of revenue
    
    
    14,960
    
    
    
    1,926
    
    
    
    317
    
    
    
    17,203Gross margin (deficit)
    
    
    789
    
    
    
    11,564
    
    
    
    (317
    )
    
    
    12,036Sales and marketing
    
    
    4,896
    
    
    
    6,782
    
    
    
    371
    
    
    
    12,049Research and development
    
    
    4,258
    
    
    
    3,647
    
    
    
    140
    
    
    
    8,045General and administrative
    
    
    3,207
    
    
    
    2,747
    
    
    
    974
    
    
    
    6,928Other
    
    
    
    
    
    
    
    
    
    
    2,371
    
    
    
    2,371Total operating expenses
    
    
    12,361
    
    
    
    13,176
    
    
    
    3,856
    
    
    
    29,393Loss from operations
    
    $
    (11,572
    )
    
    $
    (1,612
    )
    
    $
    (4,173
    )
    
    $
    (17,357
    )
 Year Ended October 31, 2005Americas
    
    
    International
    
    
    Corporate
    
    
    Total(In thousands)Revenue
    
    $
    18,634
    
    
    $
    17,370
    
    
    $
    
    
    
    $
    36,004Cost of revenue
    
    
    15,955
    
    
    
    2,358
    
    
    
    
    
    
    
    18,313Gross margin
    
    
    2,679
    
    
    
    15,012
    
    
    
    
    
    
    
    17,691Sales and marketing
    
    
    4,505
    
    
    
    7,315
    
    
    
    14
    
    
    
    11,834Research and development
    
    
    4,331
    
    
    
    3,998
    
    
    
    8
    
    
    
    8,337General and administrative
    
    
    3,664
    
    
    
    3,383
    
    
    
    
    
    
    
    7,047Other
    
    
    
    
    
    
    
    
    
    
    2,372
    
    
    
    2,372Total operating expenses
    
    
    12,500
    
    
    
    14,696
    
    
    
    2,394
    
    
    
    29,590Income (loss) from operations
    
    $
    (9,821
    )
    
    $
    316
    
    
    $
    (2,394
    )
    
    $
    (11,899
    )
  Years Ended October 31,2007
    
    
    2006(In thousands)Long-lived assets:Americas
    
    $
    294
    
    
    $
    515International
    
    
    65
    
    
    
    93Total long-lived assets
    
    $
    359
    
    
    $
    608
 84




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    
    
    
    
    EndDescription
    
    of Period
    
    Expenses
    
    Deductions
    
    of Period(In thousands)Allowance for doubtful accounts:Year ended October 31, 2007
    
    $
    106
    
    
    $
    (1
    )
    
    $
    (20
    )(a)
    
    $
    85Year ended October 31, 2006
    
    
    144
    
    
    
    10
    
    
    
    (48
    )(a)
    
    
    106Year ended October 31, 2005
    
    
    136
    
    
    
    18
    
    
    
    (10
    )(a)
    
    
    144Inventory reserves:Year ended October 31, 2007
    
    
    29
    
    
    
    24
    
    
    
    
    (b)
    
    
    53Year ended October 31, 2006
    
    
    71
    
    
    
    (42
    )
    
    
    
    (b)
    
    
    29Year ended October 31, 2005
    
    
    56
    
    
    
    39
    
    
    
    24
    (b)
    
    
    71Allowance for sales returns:Year ended October 31, 2007
    
    
    308
    
    
    
    301
    
    
    
    (294
    )(c)
    
    
    315Year ended October 31, 2006
    
    
    587
    
    
    
    (23
    )
    
    
    (256
    )(c)
    
    
    308Year ended October 31, 2005
    
    
    258
    
    
    
    967
    
    
    
    (638
    )(c)
    
    
    587
 
 (a)
    
    Represents write-offs of uncollectible accounts receivable(b)
    
    Represents inventory destroyed or scrapped(c)
    
    Represents product returns 85




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
    
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   86




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 PART IV.
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    The following documents are filed as part of this report:
 (1)
    
    Consolidated Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 52 of this report.(2)
    
    Financial Statement Schedule: See Index to Consolidated Financial
Statements at Item 8 on page 52 of this report.(3)
    
    Exhibits are incorporated herein by reference or are filed with this
report as indicated below:
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Reorganization by and among Caldera Systems,
Inc., Caldera International, Inc., now known as The SCO Group, Inc.
(the Registrant), and The Santa Cruz Operation, Inc., and related
amendments (incorporated by reference to Exhibit 2.1 to the
Registrants Registration Statement on Form S-4 (File No.
333-45936)).3.1
    
    Amended and Restated Certificate of Incorporation of Caldera
International, Inc. (incorporated by reference to Exhibit 3.1 to
the Registrant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 the Registrant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 the Registrants
Registration Statement on Form 8-A12G/A (File No. 000-29911)).3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit
3.4 to the Registrants Registration Statement on Form 8-A12G/A
(File No. 000-29911)).3.5
    
    Certificate of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on September 1, 2004
(File No. 000-29911)).3.6
    
    Certificate of Correction correcting the Certificate of Designation
of Series A Junior Participating Preferred Stock (incorporated by
reference to Exhibit 4.2 to the Registrants Current Report on Form
8-K filed on September 1,
 87




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##### Table of Contents



ExhibitNumber
    
    Description2004 (File No. 000-29911)).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement on Form
8-A12G/A (File No. 000-29911)).4.2
    
    Rights Agreement dated as of August 10, 2004 by and between the
Company and Computershare Trust Company, Inc. (incorporated by
reference to Exhibit 4.3 to the Registrants Current Report on Form
8-K filed on September 1, 2004 (File No. 000-29911)).10.1*
    
    1998 Stock Option Plan (incorporated by reference to Exhibit 10.3
to the Registrants Registration Statement on Form S-1 (File No.
333-94351)).10.2*
    
    Amendment No. 1 to 1998 Stock Option Plan. (incorporated by
reference to Exhibit 10.2 to the Registrants Annual Report on Form
10-K for the fiscal year ended October 31, 2004 (File No.
000-29911).10.3*
    
    Form Notice of Grant of Stock Options for 1998 Stock Option Plan.
(incorporated by reference to Exhibit 10.3 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2004 (File No. 000-29911).10.4*
    
    1999 Omnibus Stock Incentive Plan, as amended (incorporated by
reference to Exhibits 10.4 through 10.8 of the Registrants
Registration Statement on Form S-4 (File No. 333-45936)).10.5*
    
    Amendment No. 5 to 1999 Omnibus Stock Incentive Plan (incorporated
by reference to Exhibit 10.5 to the Registrants Annual Report on
Form 10-K for the fiscal year ended October 31, 2004 (File No.
000-29911).10.6*
    
    Amendment No. 6 to 1999 Omnibus Stock Incentive Plan (incorporated
by reference to Exhibit 10.6 to the Registrants Annual Report on
Form 10-K for the fiscal year ended October 31, 2004 (File No.
000-29911).10.7*
    
    Form Notice of Grant of Stock Options for 1999 Omnibus Stock
Incentive Plan (incorporated by reference to Exhibit 10.7 to the
Registrants Annual Report on Form 10-K for the fiscal year ended
October 31, 2004 (File No. 000-29911).10.8*
    
    2000 Employee Stock Purchase Plan, as amended (incorporated by
reference to Exhibit 10.9 to the Registrants Registration
Statement on Form S-4 (File No. 333-45936)).10.9*
    
    Amendment No. 2 to 2000 Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.9 to the Registrants Annual Report on
Form 10-K for the fiscal year ended October 31, 2004 (File No.
000-29911).10.10*
    
    Amendment No. 3 to 2000 Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.10 to the Registrants Annual Report on
Form 10-K for the fiscal year ended October 31, 2004 (File No.
000-29911).10.11*
    
    Amendment No. 4 to 2000 Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.2 to the Registrants Quarterly Report
on Form 10-Q for the fiscal quarter ended July 31, 2003 (File No.
000-29911)).10.12*
    
    Amendment No. 5 to 2000 Employee Stock Purchase Plan.10.13*
    
    2002 Omnibus Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 2003 (File No. 000-29911)).10.14*
    
    Form Notice of Grant of Stock Options for 2002 Omnibus Stock
Incentive Plan (incorporated by reference to Exhibit 99.3 to the
Registrants Current Report on Form 8-K filed on January 27, 2006
(File No. 000-29911).10.15
    
    Office Sublease Agreement by and among the Registrant, Canopy
Properties, Inc. and Gateway Technology Center, LLC, dated January
10, 2002 (incorporated by reference to Exhibit 10.6 to the
Registrants Annual
 88




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##### Table of Contents



ExhibitNumber
    
    DescriptionReport on Form 10-K for the fiscal year ended
October 31, 2003 (File No. 000-29911)).10.16
    
    First Amendment to Office Sublease Agreement by and among the
Registrant and Canopy Properties, Inc., dated September 15, 2003
(incorporated by reference to Exhibit 10.7 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.17
    
    Engagement Letter by and among the Registrant and Morgan Keegan &
Company, Inc., dated August 16, 2002 (incorporated by reference to
Exhibit 10.8 to the Registrants Annual Report on Form 10-K for the
fiscal year ended October 31, 2003 (File No. 000-29911)).10.18
    
    First Amendment to Engagement Letter by and among the Registrant
and Morgan Keegan & Company, Inc., dated February 13, 2003
(incorporated by reference to Exhibit 10.9 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.19
    
    Second Amendment to Engagement Letter by and among the Registrant
and Morgan Keegan & Company, Inc., dated August 16, 2003
(incorporated by reference to Exhibit 10.10 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.20
    
    Warrant to Purchase Shares of Common Stock issued by the Registrant
to Morgan Keegan & Company, Inc., dated August 16, 2002
(incorporated by reference to Exhibit 10.11 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.21
    
    Common Stock Warrant issued by the Registrant to, and accepted and
agreed to by, Sun Microsystems, Inc., dated March 11, 2003
(incorporated by reference to Exhibit 10.12 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.22
    
    Common Stock Warrant issued by the Registrant to, and accepted and
agreed to by, Sun Microsystems, Inc., dated July 31, 2003
(incorporated by reference to Exhibit 10.13 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.23
    
    Common Stock Warrant issued by the Registrant to, and accepted and
agreed to by, Sun Microsystems, Inc., dated October 31, 2003
(incorporated by reference to Exhibit 10.14 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.24
    
    Independent Contractor Agreement by and among the Registrant and S2
Strategic Consulting, LLC, dated July 1, 2003 (incorporated by
reference to Exhibit 10.15 to the Registrants Annual Report on
Form 10-K for the fiscal year ended October 31, 2003 (File No.
000-29911)).10.25
    
    Common Stock Warrant issued by the Registrant to, and accepted and
agreed to by, S2 Strategic Consulting, LLC, dated July 1, 2003
(incorporated by reference to Exhibit 10.16 to the Registrants
Annual Report on Form 10-K for the fiscal year ended October 31,
2003 (File No. 000-29911)).10.26*
    
    Severance Agreement between Ransom H. Love and Caldera
International, Inc. (incorporated by reference to Exhibit 10.16 to
the Registrants Annual Report on Form 10-K for the fiscal year
ended October 31, 2002 (File No. 000-29911)).10.27
    
    Securities Purchase Agreement dated as of October 16, 2003 between
the Registrant and the persons listed therein as Purchasers
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on October 17, 2003 (File No.
000-29911)).
 89




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##### Table of Contents



ExhibitNumber
    
    Description10.28
    
    Registration Rights Agreement dated as of October 16, 2003 between
the Registrant and the persons listed therein as Purchasers
(incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on October 17, 2003 (File No.
000-29911)).10.29
    
    Letter Agreement dated December 8, 2003 among the Registrant,
BayStar Capital II, L.P., Royal Bank of Canada and Acknowledged by
Boies, Schiller & Flexner LLP (incorporated by reference to Exhibit
99.3 to the Registrants Current Report on Form 8-K filed on
December 9, 2003 (File No. 000-29911)).10.30
    
    Asset Purchase Agreement dated June 6, 2003 between the Registrant
and Vultus, Inc. (incorporated by reference to Exhibit 2.1 to
Amendment No. 1 to the Registrants Registration Statement on Form
S-3 (File No. 333-106885)).10.31
    
    Exchange Agreement dated as of February 5, 2004 among SCO, BayStar
Capital II, L.P. and Royal Bank of Canada (incorporated by
reference to Exhibit 99.1 to SCOs Current Report on Form 8-K filed
on February 9, 2004 (File No. 000-29911)).10.32
    
    Stock Repurchase Agreement dated as of May 31, 2004 between the
Registrant and BayStar (incorporated by reference to Exhibit 99.1
to the Registrants Current Report on Form 8-K filed on June 2,
2004 (File No. 000-29911)).10.33
    
    Letter Agreement dated October 31, 2004 among Boies, Schiller &
Flexner LLP, Kevin McBride, Berger Singerman and SCO (incorporated
by reference to Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on November 4, 2004 (File No. 000-29911)).10.34*
    
    First Amendment to the Letter Agreement dated October 31, 2004
among The SCO Group, Inc., Boies, Schiller & Flexner LLP, Kevin
McBride, and Berger Singerman (incorporated by reference to Exhibit
99.1 to SCOs Current Report on Form 8-K filed on June 8, 2006).10.35*
    
    2004 Omnibus Stock Incentive Plan (incorporated by reference to
Exhibit 10.34 to the Registrants Annual Report on Form 10-K for
the fiscal year ended October 31, 2004 (File No. 000-29911).10.36*
    
    Form Notice of Grant of Stock Options for 2004 Omnibus Stock
Incentive Plan (incorporated by reference to Exhibit 99.1 to SCOs
Current Report on Form 8-K filed on July 15, 2005 (File
No. 000-29911)).10.37*
    
    Form of Executive Officer Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 2005 (File No.
000-29911)).10.38*
    
    Form of Executive Officer Stock Option Agreement for the 2002
Omnibus Stock Incentive Plan (incorporated by reference to Exhibit
99.3 to the Registrants Current Report on Form 8-K filed on
November 17, 2006 (File No. 000-29911)).10.39*
    
    The SCO Group Employee Incentive Bonus Program for Fiscal Year 2006
(incorporated by reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on January 26, 2006 (File No.
000-29911)).10.40*
    
    The SCO Group Employee Incentive Bonus Program for Fiscal Year 2007
(incorporated by reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on November 17, 2006 (File No.
000-29911)).10.41*
    
    Form of Change in Control Agreement (incorporated by reference to
Exhibit 99.1 to the Registrants Current Report on Form 8-K filed
on December 16, 2004 (File No. 000-29911)).10.42*
    
    Form of Indemnification Agreement for directors and officers
(incorporated
 90




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##### Table of Contents



ExhibitNumber
    
    Descriptionby reference to Exhibit 10.36 to Post-Effective
Amendment No. 1 to Form S-3 on Form S-1 filed on May 18, 2005 (File
No. 333-116732)).10.43
    
    Common Stock Purchase Agreement dated as of November 29, 2005 among
the Registrant and the persons listed therein as Purchasers
(incorporated by reference to Exhibit 10.43 to Form S-1 filed on
December 22, 2005 (File No. 333-130609)).10.44*
    
    America Sales Compensation Plan for Fiscal Year 2006 (incorporated
by reference to Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on January 27, 2006 (File No. 000-29911)).10.45*
    
    Sales Compensation Plan for Fiscal Year 2007 (incorporated by
reference to Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on November 17, 2006 (File No. 000-29911)).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Tanner LC, Independent Registered Public Accounting Firm.31.1
    
    Certification of Darl C. McBride, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) of the Securities 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 Securities 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.
 
 *
    
    These items identify a management contract or compensatory plan. 91




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##### Table of Contents



Signatures
  THE SCO GROUP, INC.By:
    /s/ Kenneth R. NielsenKenneth R. NielsenChief Financial Officer/
Principal Financial and 
Accounting Officer  Signature
    
    Title
    
    DatePrincipal Executive Officer:/s/ Darl C. McBride
    
    President, Chief Executive
    
    January 28, 2008Darl C. McBride
    
    Officer and DirectorPrincipal Financial andAccounting Officer:/s/ Kenneth R. Nielsen
    
    Chief Financial Officer
    
    January 28, 2008Kenneth R. NielsenDirectors:/s/ Ralph J. Yarro III
    
    Chairman of the Board
    
    January 28, 2008Ralph J. Yarro III/s/ Darcy G. Mott
    
    Director
    
    January 28, 2008Darcy G. Mott/s/ R. Duff Thompson
    
    Director
    
    January 25, 2008R. Duff Thompson/s/ J. Kent Millington
    
    Director
    
    January 28, 2008J. Kent Millington/s/ Daniel W. Campbell
    
    Director
    
    January 28, 2008Daniel W. Campbell/s/ Omar T. Leeman
    
    Director
    
    January 25, 2008Omar T. Leeman
 92