##### 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, 2006
 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)
  Name of Each Exchange on WhichTitle of Each Class
    
    RegisteredCommon Stock, par value $0.001 per share
    
    The NASDAQ Stock Market LLCPreferred Stock Purchase Rights
    
    The NASDAQ Stock Market LLC
 None
 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
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    14Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18PART II.Item 5.
    
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 8.
    
    Financial Statements and Supplementary Data
    
    
    39Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    72Item 9A.
    
    Controls and Procedures
    
    
    72Item 9B.
    
    Other Information
    
    
    72PART III.Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    72Item 11.
    
    Executive Compensation
    
    
    72Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    72Item 13.
    
    Certain Relationships and Related Transactions
    
    
    73Item 14.
    
    Principal Accountant Fees and Services
    
    
    73PART IV.Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    73Signatures
    
    
    
    
    78EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 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
   UNIX Business
 Background
   3




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Current Status and Strategy
      Competition
   4




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Products and Services
 OpenServer.
 UnixWare
 Other Products.
 Technical Support Services.
 5




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Other Services.
 Mobility
Products and Services.
 Strategic Alliances
  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
 6




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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.
   
    
    branding our UNIX and mobile products through public relations and advertising
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
   7




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SCOsource Business
 Background
   Intellectual Property Protection
   Employees
  8




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Item 1A. Risk Factors
  We do not have a history of profitable operations and our cash resources are limited.
    We may
not prevail in our lawsuits with IBM, Novell and others, which may adversely affect our ability to
continue in business.
     9




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Our claims relating to our UNIX intellectual property may subject us to additional legal
proceedings.
  Our Engagement Agreement with the Law Firms representing us in the SCO Litigation requires us to
pay for expert, consulting and other costs, which could harm our liquidity position if these costs
are higher than anticipated.
   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.
  10




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
    
    results of, developments in, or costs of the SCO Litigation as well as adverse
publicity regarding our business and the SCO Litigation;
    
    changes in business attitudes toward UNIX as a viable operating system compared
to other competing systems, especially Linux;
    
    the outcome of pending motions for summary judgment and a
preliminary injunction motion;
    
    changes in general economic conditions, such as recessions, that could affect
capital expenditures in the software industry;
    
    the interest level of resellers in recommending our UNIX business solutions to
end users and the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;
    
    the contingency and other costs we may pay to the Law Firms representing us in
our efforts to establish and defend our intellectual property rights;
    
    changes in attitudes of customers and partners due to the decline in our UNIX
business and our position against the inclusion of our UNIX code and derivative works
in Linux; and
    
    the activities of short sellers.
   We operate in a highly competitive market and face significant competition from a variety of
current and potential sources; many of our current and potential competitors have greater financial
and technical resources than we do; thus, we may fail to compete effectively.
    11




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If the market for UNIX continues to contract, our business will be harmed.
  We may lose the support of industry partners leading to an accelerated decline in our UNIX products
and services revenue.
  We rely on our indirect sales channel for distribution of our products, and any disruption of our
channel at any level could adversely affect the sales of our products.
  Our foreign-based operations and sales create special problems, including the imposition of
governmental controls and taxes and fluctuations in currency exchange rates that could hurt our
results.
  
    
    potential loss of developed technology through piracy, misappropriation, or
more lenient laws regarding intellectual property protection;
    
    imposition of governmental controls, including trade restrictions and other tax
requirements;
    
    fluctuations in currency exchange rates and economic instability;
    
    longer payment cycles for sales in foreign countries; and
    
    seasonal reductions in business activity.
 
 12




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If we are unable to retain key personnel in an intensely competitive environment, our operations
could be adversely affected.
  We could lose our listing on the Nasdaq Capital Market if our stock price falls below $1.00 for 30
consecutive business days, and the loss of the listing would make our stock significantly less
liquid and would affect its value.
  Our stock price is volatile.
 Fluctuations in our
operating results or the failure of our operating results to meet the expectations of public market
analysts and investors may negatively impact our stock price
 13




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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.
  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
  14




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Item 2. Properties
     
 Item 3. Legal Proceedings
 IBM Corporation
    15




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Novell, Inc.
    16




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IPO Class Action Matter
    Red Hat, Inc.
  17




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Other Matters
    
 Item 4. Submission of Matters to a Vote of Security Holders
  
 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, 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
    
    
    
    1.66Year Ended October 31, 2005Quarter ended January 31, 2005
    
    $
    4.99
    
    
    $
    2.85Quarter ended April 30, 2005
    
    
    4.60
    
    
    
    3.42Quarter ended July 31, 2005
    
    
    4.22
    
    
    
    3.50Quarter ended October 31, 2005
    
    
    4.93
    
    
    
    3.75
 18




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Dividend Policy
  Issuer Purchases of Equity Securities
  
 Item 6. Selected Financial Data
   Years Ended October 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except per share data)Statement of Operations Data:Total revenue
    
    $
    29,239,000
    
    
    $
    36,004,000
    
    
    $
    42,809,000
    
    
    $
    79,254,000
    
    
    $
    64,241,000Gross margin
    
    $
    12,036,000
    
    
    $
    17,691,000
    
    
    $
    15,711,000
    
    
    $
    59,332,000
    
    
    $
    45,925,000Income (loss) from operations
    
    $
    (17,357,000
    )
    
    $
    (11,899,000
    )
    
    $
    (28,573,000
    )
    
    $
    3,436,000
    
    
    $
    (24,176,000
    )Net income available (loss
applicable) to common
stockholders
    
    $
    (16,598,000
    )
    
    $
    (10,726,000
    )
    
    $
    (16,227,000
    )
    
    $
    5,304,000
    
    
    $
    (24,877,000
    )Basic net income (loss) per
common share
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    (1.07
    )
    
    $
    0.43
    
    
    $
    (1.93
    )Diluted net income (loss)
per common share
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    (1.07
    )
    
    $
    0.34
    
    
    $
    (1.93
    )Weighted average basic
common shares
    
    
    20,802,000
    
    
    
    17,924,000
    
    
    
    15,155,000
    
    
    
    12,261,000
    
    
    
    12,893,000Weighted averaged diluted
common shares
    
    
    20,802,000
    
    
    
    17,924,000
    
    
    
    15,155,000
    
    
    
    15,679,000
    
    
    
    12,893,000
 As of October 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    5,369,000
    
    
    $
    4,272,000
    
    
    $
    12,693,000
    
    
    $
    64,428,000
    
    
    $
    6,589,000Working capital (deficit)
    
    
    7,144,000
    
    
    
    8,669,000
    
    
    
    15,413,000
    
    
    
    37,168,000
    
    
    
    (6,332,000
    )Total assets
    
    
    23,409,000
    
    
    
    28,948,000
    
    
    
    55,400,000
    
    
    
    94,952,000
    
    
    
    37,406,000Long-term liabilities
    
    
    192,000
    
    
    
    338,000
    
    
    
    343,000
    
    
    
    508,000
    
    
    
    1,625,000Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,671,000
    
    
    
    Common stock subject to rescission
    
    
    
    
    
    
    1,018,000
    
    
    
    528,000
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    8,082,000
    
    
    
    11,337,000
    
    
    
    21,702,000
    
    
    
    19,516,000
    
    
    
    8,177,000
 19




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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, 2006. We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
 Business Focus
 UNIX Business.
   2006
    
    
    2005
    
    
    2004Revenue
    
    $
    29,123,000
    
    
    $
    35,838,000
    
    
    $
    41,980,000Cost of revenue
    
    
    4,896,000
    
    
    
    5,466,000
    
    
    
    7,355,000Gross margin
    
    
    24,227,000
    
    
    
    30,372,000
    
    
    
    34,625,000Sales and marketing
    
    
    12,048,000
    
    
    
    11,680,000
    
    
    
    15,881,000Research and development
    
    
    7,666,000
    
    
    
    7,948,000
    
    
    
    10,175,000General and administrative
    
    
    6,669,000
    
    
    
    6,604,000
    
    
    
    8,180,000Other (1)
    
    
    2,371,000
    
    
    
    2,372,000
    
    
    
    8,089,000Total operating expenses
    
    
    28,754,000
    
    
    
    28,604,000
    
    
    
    42,325,000Income (loss) from operations
    
    $
    (4,527,000
    )
    
    $
    1,768,000
    
    
    $
    (7,700,000
    )
 
 (1)
    
    For the year ended October 31, 2006, other costs consist of $2,371,000 of
amortization of intangibles. For the year ended October 31, 2005, other costs
consist of $2,372,000 of amortization of intangibles. For the year ended October 31,
2004, other costs consist of $3,168,000 of severance and exit costs, $2,566,000 of
amortization of intangibles, and $2,355,000 of losses on disposition and impairment
of long-lived assets.
 20




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SCOsource Business.
   2006
    
    
    2005
    
    
    2004Revenue
    
    $
    116,000
    
    
    $
    166,000
    
    
    $
    829,000Cost of revenue
    
    
    12,307,000
    
    
    
    12,847,000
    
    
    
    19,743,000Gross margin (deficit)
    
    
    (12,191,000
    )
    
    
    (12,681,000
    )
    
    
    (18,914,000
    )Sales and marketing
    
    
    1,000
    
    
    
    154,000
    
    
    
    1,232,000Research and development
    
    
    379,000
    
    
    
    389,000
    
    
    
    486,000General and administrative
    
    
    259,000
    
    
    
    443,000
    
    
    
    241,000Total operating expenses
    
    
    639,000
    
    
    
    986,000
    
    
    
    1,959,000Loss from operations
    
    $
    (12,830,000
    )
    
    $
    (13,667,000
    )
    
    $
    (20,873,000
    )
  21




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Critical Accounting Estimates
   
    
    Revenue recognition;
    
    Deferred income taxes and related valuation allowances;
    
    Litigation reserves;
    
    Impairment of property and equipment; and
    
    Allowances for doubtful accounts.
 Revenue Recognition
   22




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Deferred Income Tax Assets and Related Valuation Allowance
 Litigation Reserves.
 Impairment of Property and Equipment
  23




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Allowance for Doubtful Accounts Receivable
 Results of Operations
  Years Ended October 31,2006
    
    
    2005
    
    
    2004Statement of Operations Data:Revenue:Products
    
    $
    24,063,000
    
    
    $
    30,190,000
    
    
    $
    35,352,000SCOsource licensing
    
    
    116,000
    
    
    
    166,000
    
    
    
    829,000Services
    
    
    5,060,000
    
    
    
    5,648,000
    
    
    
    6,628,000Total revenue
    
    
    29,239,000
    
    
    
    36,004,000
    
    
    
    42,809,000Cost of revenue:Products
    
    
    2,064,000
    
    
    
    2,544,000
    
    
    
    3,221,000SCOsource licensing
    
    
    12,307,000
    
    
    
    12,847,000
    
    
    
    19,743,000Services
    
    
    2,832,000
    
    
    
    2,922,000
    
    
    
    4,134,000Total cost of revenue
    
    
    17,203,000
    
    
    
    18,313,000
    
    
    
    27,098,000Gross margin
    
    
    12,036,000
    
    
    
    17,691,000
    
    
    
    15,711,000Operating expenses:Sales and marketing
    
    
    12,049,000
    
    
    
    11,834,000
    
    
    
    17,113,000Research and development
    
    
    8,045,000
    
    
    
    8,337,000
    
    
    
    10,661,000General and administrative
    
    
    6,928,000
    
    
    
    7,047,000
    
    
    
    8,421,000Amortization of intangibles
    
    
    2,371,000
    
    
    
    2,372,000
    
    
    
    2,566,000Severance and exit costs
    
    
    
    
    
    
    
    
    
    
    3,168,000Loss on disposition and impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    2,355,000Total operating expenses
    
    
    29,393,000
    
    
    
    29,590,000
    
    
    
    44,284,000Loss from operations
    
    
    (17,357,000
    )
    
    
    (11,899,000
    )
    
    
    (28,573,000
    )Equity in income of affiliate
    
    
    91,000
    
    
    
    47,000
    
    
    
    111,000Other income, net
    
    
    759,000
    
    
    
    1,399,000
    
    
    
    6,507,000Provision for income taxes
    
    
    (91,000
    )
    
    
    (273,000
    )
    
    
    (1,395,000
    )Net loss
    
    
    (16,598,000
    )
    
    
    (10,726,000
    )
    
    
    (23,350,000
    )Contributions from redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    7,123,000Net loss applicable to common stockholders
    
    $
    (16,598,000
    )
    
    $
    (10,726,000
    )
    
    $
    (16,227,000
    )
 24




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Years Ended October 31, 2006, 2005 and 2004
 Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Revenue
    
    $
    29,239,000
    
    
    
    (19
    )%
    
    $
    36,004,000
    
    
    
    (16
    )%
    
    $
    42,809,000
   2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004UNIX revenue
    
    $
    29,123,000
    
    
    
    (19
    )%
    
    $
    35,838,000
    
    
    
    (15
    )%
    
    $
    41,980,000Percent of total revenue
    
    
    100
    %
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    98
    %SCOsource revenue
    
    
    116,000
    
    
    
    (30
    )%
    
    
    166,000
    
    
    
    (80
    )%
    
    
    829,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    2
    %
    Products Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Products revenue
    
    $
    24,063,000
    
    
    
    (20
    )%
    
    $
    30,190,000
    
    
    
    (15
    )%
    
    $
    35,352,000Percent of total revenue
    
    
    82
    %
    
    
    
    
    
    
    84
    %
    
    
    
    
    
    
    83
    %
  25




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2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004OpenServer revenue
    
    $
    14,098,000
    
    
    
    (16
    )%
    
    $
    16,720,000
    
    
    
    (9
    )%
    
    $
    18,467,000Percent of products revenue
    
    
    59
    %
    
    
    
    
    
    
    55
    %
    
    
    
    
    
    
    52
    %UnixWare revenue
    
    
    7,521,000
    
    
    
    (16
    )%
    
    
    8,979,000
    
    
    
    (19
    )%
    
    
    11,125,000Percent of products revenue
    
    
    31
    %
    
    
    
    
    
    
    30
    %
    
    
    
    
    
    
    32
    %Other products revenue
    
    
    2,444,000
    
    
    
    (46
    )%
    
    
    4,491,000
    
    
    
    (22
    )%
    
    
    5,760,000Percent of products revenue
    
    
    10
    %
    
    
    
    
    
    
    15
    %
    
    
    
    
    
    
    16
    %
  SCOsource Licensing Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004SCOsource licensing revenue
    
    $
    116,000
    
    
    
    (30
    )%
    
    $
    166,000
    
    
    
    (80
    )%
    
    $
    829,000Percent of total revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    2
    %
   Services Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Services revenue
    
    $
    5,060,000
    
    
    
    (10
    )%
    
    $
    5,648,000
    
    
    
    (15
    )%
    
    $
    6,628,000Percent of total revenue
    
    
    18
    %
    
    
    
    
    
    
    16
    %
    
    
    
    
    
    
    15
    %
  26




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##### Table of Contents



Cost of Products Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Cost of products revenue
    
    $
    2,064,000
    
    
    
    (19
    )%
    
    $
    2,544,000
    
    
    
    (21
    )%
    
    $
    3,221,000Percentage of products revenue
    
    
    9
    %
    
    
    
    
    
    
    8
    %
    
    
    
    
    
    
    9
    %
   Cost of SCOsource Licensing Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Cost of SCOsource
licensing revenue
    
    $
    12,307,000
    
    
    
    (4
    )%
    
    $
    12,847,000
    
    
    
    (35
    )%
    
    $
    19,743,000
    27




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##### Table of Contents



Cost of Services Revenue
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Cost of services revenue
    
    $
    2,832,000
    
    
    
    (3
    )%
    
    $
    2,922,000
    
    
    
    (29
    )%
    
    $
    4,134,000Percentage of services revenue
    
    
    56
    %
    
    
    
    
    
    
    52
    %
    
    
    
    
    
    
    62
    %
   Sales and Marketing
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Sales and marketing expense
    
    $
    12,049,000
    
    
    
    2
    %
    
    $
    11,834,000
    
    
    
    (31
    )%
    
    $
    17,113,000Percentage of total revenue
    
    
    41
    %
    
    
    
    
    
    
    33
    %
    
    
    
    
    
    
    40
    %
   Research and Development
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Research and development expense
    
    $
    8,045,000
    
    
    
    (4
    )%
    
    $
    8,337,000
    
    
    
    (22
    )%
    
    $
    10,661,000Percentage of total revenue
    
    
    28
    %
    
    
    
    
    
    
    23
    %
    
    
    
    
    
    
    25
    %
  28




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General and Administrative
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004General and administrative expense
    
    $
    6,928,000
    
    
    
    (2
    )%
    
    $
    7,047,000
    
    
    
    (16
    )%
    
    $
    8,421,000Percentage of total revenue
    
    
    24
    %
    
    
    
    
    
    
    20
    %
    
    
    
    
    
    
    20
    %
   Amortization of Intangibles
 2006
    
    
    Change
    
    
    2005
    
    
    Change
    
    
    2004Amortization of intangibles
    
    $
    2,371,000
    
    
    
    0
    %
    
    $
    2,372,000
    
    
    
    (8
    )%
    
    $
    2,566,000Percentage of total revenue
    
    
    8
    %
    
    
    
    
    
    
    7
    %
    
    
    
    
    
    
    6
    %
  Equity in Income of Affiliate
   29




---



##### Table of Contents



Other Income, net
  2006
    
    
    2005
    
    
    2004Interest income
    
    $
    720,000
    
    
    $
    377,000
    
    
    $
    905,000Change in fair value of derivative
    
    
    
    
    
    
    
    
    
    
    5,924,000Other income (expense), net
    
    
    39,000
    
    
    
    1,022,000
    
    
    
    (322,000
    )Total other income, net
    
    $
    759,000
    
    
    $
    1,399,000
    
    
    $
    6,507,000
    Provision for Income Taxes
   30




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Contributions From Redeemable Convertible Preferred Stock
    2006
    
    2005
    
    2004Accrual of dividends on preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    (2,047,000
    )Exchange of Series A shares for Series A-1 shares
    
    
    
    
    
    
    
    
    
    
    (6,305,000
    )Repurchase of Series A-1 shares from BayStar
    
    
    
    
    
    
    
    
    
    
    15,475,000Total
    
    $
    
    
    
    $
    
    
    
    $
    7,123,000
 Quarterly Results of Operations
  31




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Quarter EndedJanuary 31,
    
    April 30,
    
    July 31,
    
    October 31,2006
    
    2006
    
    2006
    
    2006(unaudited)Revenue
    
    $
    7,343,000
    
    
    $
    7,126,000
    
    
    $
    7,421,000
    
    
    $
    7,349,000Gross margin
    
    
    2,112,000
    
    
    
    2,158,000
    
    
    
    3,962,000
    
    
    
    3,804,000Loss from operations
    
    
    (4,631,000
    )
    
    
    (4,896,000
    )
    
    
    (3,600,000
    )
    
    
    (4,230,000
    )Net loss applicable to common stockholders
    
    
    (4,581,000
    )
    
    
    (4,694,000
    )
    
    
    (3,580,000
    )
    
    
    (3,743,000
    )Basic and diluted net loss per common share
    
    $
    (0.23
    )
    
    $
    (0.22
    )
    
    $
    (0.17
    )
    
    $
    (0.18
    )Weighted average basic and diluted common
shares
    
    
    20,062,000
    
    
    
    20,994,000
    
    
    
    21,063,000
    
    
    
    21,094,000
 Quarter EndedJanuary 31,
    
    April 30,
    
    July 31,
    
    October 31,2005
    
    2005
    
    2005
    
    2005(unaudited)Revenue
    
    $
    8,865,000
    
    
    $
    9,258,000
    
    
    $
    9,353,000
    
    
    $
    8,528,000Gross margin
    
    
    3,979,000
    
    
    
    5,060,000
    
    
    
    4,873,000
    
    
    
    3,779,000Loss from operations
    
    
    (3,409,000
    )
    
    
    (2,656,000
    )
    
    
    (2,242,000
    )
    
    
    (3,592,000
    )Net loss applicable to common stockholders
    
    
    (2,961,000
    )
    
    
    (1,962,000
    )
    
    
    (2,372,000
    )
    
    
    (3,431,000
    )Basic and diluted net loss per common share
    
    $
    (0.17
    )
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    $
    (0.19
    )Weighted average basic and diluted common
shares
    
    
    17,751,000
    
    
    
    17,913,000
    
    
    
    17,993,000
    
    
    
    18,038,000
 Fluctuations in Quarterly Results
  
    
    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.
  Liquidity and Capital Resources
  32




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33




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
    
    33 percent of any aggregate recovery amounts received up to $350,000,000;
    
    plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or
equal to $700,000,000;
    
    plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.
  Contractual Obligations
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1  3 years
    
    3 -5 years
    
    5 yearsOperating lease obligations
    
    $
    1,664,000
    
    
    $
    1,395,000
    
    
    $
    269,000
    
    
    $
    
    
    
    $
    
   34




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Recent Accounting Pronouncements
     35




---



##### 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, 2007 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;
    
    Our belief that our cash and cash equivalents and available-for-sale marketable
securities 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, 2007 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;
    
    Our expectation that UNIX revenue for the year ending October 31, 2007 will decline
from UNIX revenue generated during the year ended October 31, 2006;
    
    Our belief that competition from Linux will continue during the year ending October
31, 2007 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;
 36




---



##### Table of Contents




    
    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 and our
available-for-sale securities;
    
    Our expectation for the year ending October 31, 2007 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, 2007 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, 2006;
    
    Our expectation for the year ending October 31, 2007 that the dollar amount of our
cost of SCOsource licensing revenue will be lower than that generated during the year
ended October 31, 2006, exclusive of any potential contingent payments;
    
    Our expectation for the year ending October 31, 2007 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, 2006;
    
    Our expectation for the year ending October 31, 2007 that the dollar amount of our
sales and marketing expenses will decrease from that generated during the year ended
October 31, 2006;
    
    Our expectation for the year ending October 31, 2007 that the dollar amount of our
research and development expenses will decrease from that generated during the year
ended October 31, 2006;
    
    Our expectation for the year ending October 31, 2007 that the dollar amount of our
general and administrative expenses will decrease from that generated during the year
ended October 31, 2006; and
    
    Our belief that certain legal actions to which we are a party will not have a
material adverse effect on us.
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk.
 37




---



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Interest Rate Risk.
 Investment Risk.
  38




---



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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 (Tanner LC)
    
    
    40Report of Independent Registered Public Accounting Firm (KPMG LLP)
    
    
    41Consolidated Balance Sheets as of October 31, 2006 and 2005
    
    
    42Consolidated Statements of Operations and Comprehensive Loss for the years ended October 31, 2006, 2005 and 2004
    
    
    43Consolidated Statements of Stockholders Equity for the years ended October 31, 2006, 2005 and 2004
    
    
    44Consolidated Statements of Cash Flows for the years ended October 31, 2006, 2005 and 2004
    
    
    45Notes to Consolidated Financial Statements
    
    
    47Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    71
 39




---



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Report of Independent Registered Public Accounting Firm
 
     
 40




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 41




---



##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
 October 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    5,369
    
    
    $
    4,272Restricted cash
    
    
    8,024
    
    
    
    5,690Available-for-sale marketable securities
    
    
    2,249
    
    
    
    6,165Accounts receivable, net of allowance for doubtful accounts of
$106 and $144, respectively
    
    
    5,123
    
    
    
    6,343Other
    
    
    1,514
    
    
    
    2,454Total current assets
    
    
    22,279
    
    
    
    24,924PROPERTY AND EQUIPMENT:Computer and office equipment
    
    
    2,259
    
    
    
    2,224Leasehold improvements
    
    
    316
    
    
    
    345Furniture and fixtures
    
    
    78
    
    
    
    962,653
    
    
    
    2,665Less accumulated depreciation and amortization
    
    
    (2,045
    )
    
    
    (2,087
    )Net property and equipment
    
    
    608
    
    
    
    578OTHER ASSETS:Intangibles, net
    
    
    
    
    
    
    2,707Other
    
    
    522
    
    
    
    739Total other assets
    
    
    522
    
    
    
    3,446Total assets
    
    $
    23,409
    
    
    $
    28,948LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,338
    
    
    $
    2,197Payable to Novell, Inc.
    
    
    2,978
    
    
    
    2,815Accrued payroll and benefits
    
    
    2,507
    
    
    
    2,656Accrued liabilities
    
    
    3,059
    
    
    
    3,118Deferred revenue
    
    
    2,994
    
    
    
    3,841Royalties payable
    
    
    439
    
    
    
    406Income taxes payable
    
    
    820
    
    
    
    1,222Total current liabilities
    
    
    15,135
    
    
    
    16,255LONG-TERM LIABILITIES
    
    
    192
    
    
    
    338COMMITMENTS AND CONTINGENCIES (Note 9)COMMON STOCK SUBJECT TO RESCISSION (Note 6)
    
    
    
    
    
    
    1,018STOCKHOLDERS EQUITY:Common stock, $0.001 par value; 45,000 shares authorized,
21,391 and 18,331 shares outstanding, respectively
    
    
    21
    
    
    
    18Additional paid-in capital
    
    
    260,259
    
    
    
    246,985Common stock held in treasury; 297 and 290 shares
outstanding, respectively
    
    
    (2,446
    )
    
    
    (2,414
    )Warrants outstanding
    
    
    856
    
    
    
    856Accumulated other comprehensive income
    
    
    932
    
    
    
    834Accumulated deficit
    
    
    (251,540
    )
    
    
    (234,942
    )Total stockholders equity
    
    
    8,082
    
    
    
    11,337Total liabilities and stockholders equity
    
    $
    23,409
    
    
    $
    28,948
  42




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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (in thousands, except per share data)
 Year Ended October 31,2006
    
    

2005
    
    

2004REVENUE:Products
    
    $
    24,063
    
    
    $
    30,190
    
    
    $
    35,352SCOsource licensing
    
    
    116
    
    
    
    166
    
    
    
    829Services
    
    
    5,060
    
    
    
    5,648
    
    
    
    6,628Total revenue
    
    
    29,239
    
    
    
    36,004
    
    
    
    42,809COST OF REVENUE:Products
    
    
    2,064
    
    
    
    2,544
    
    
    
    3,221SCOsource licensing
    
    
    12,307
    
    
    
    12,847
    
    
    
    19,743Services
    
    
    2,832
    
    
    
    2,922
    
    
    
    4,134Total cost of revenue
    
    
    17,203
    
    
    
    18,313
    
    
    
    27,098GROSS MARGIN
    
    
    12,036
    
    
    
    17,691
    
    
    
    15,711OPERATING EXPENSES:Sales and marketing
    
    
    12,049
    
    
    
    11,834
    
    
    
    17,113Research and development
    
    
    8,045
    
    
    
    8,337
    
    
    
    10,661General and administrative
    
    
    6,928
    
    
    
    7,047
    
    
    
    8,421Amortization of intangibles
    
    
    2,371
    
    
    
    2,372
    
    
    
    2,566Severance and exit costs
    
    
    
    
    
    
    
    
    
    
    3,168Loss on disposition and impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    2,355Total
operating expenses
    
    
    29,393
    
    
    
    29,590
    
    
    
    44,284LOSS FROM OPERATIONS
    
    
    (17,357
    )
    
    
    (11,899
    )
    
    
    (28,573
    )EQUITY IN INCOME OF AFFILIATE
    
    
    91
    
    
    
    47
    
    
    
    111OTHER INCOME (EXPENSE):Interest income
    
    
    720
    
    
    
    377
    
    
    
    905Change in fair value of derivative
    
    
    
    
    
    
    
    
    
    
    5,924Other income (expense), net
    
    
    39
    
    
    
    1,022
    
    
    
    (322
    )Total other income, net
    
    
    759
    
    
    
    1,399
    
    
    
    6,507LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (16,507
    )
    
    
    (10,453
    )
    
    
    (21,955
    )PROVISION FOR INCOME TAXES
    
    
    (91
    )
    
    
    (273
    )
    
    
    (1,395
    )NET LOSS
    
    
    (16,598
    )
    
    
    (10,726
    )
    
    
    (23,350
    )CONTRIBUTIONS FROM REDEEMABLE CONVERTIBLE
PREFERRED STOCK
    
    
    
    
    
    
    
    
    
    
    7,123NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
    
    $
    (16,598
    )
    
    $
    (10,726
    )
    
    $
    (16,227
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.80
    )
    
    $
    (0.60
    )
    
    $
    (1.07
    )WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING
    
    
    20,802
    
    
    
    17,924
    
    
    
    15,155OTHER COMPREHENSIVE LOSSNet loss
    
    $
    (16,598
    )
    
    $
    (10,726
    )
    
    $
    (23,350
    )Foreign currency translation adjustment
    
    
    58
    
    
    
    (145
    )
    
    
    105Unrealized gain (loss) on available-for-sale marketable securities
    
    
    40
    
    
    
    15
    
    
    
    (67
    )COMPREHENSIVE LOSS
    
    $
    (16,500
    )
    
    $
    (10,856
    )
    
    $
    (23,312
    )
  43




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THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
  Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    Paid-in
    
    Treasury Stock
    
    Warrants
    
    Deferred
    
    Comprehensive
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Shares
    
    Amount
    
    Outstanding
    
    Compensation
    
    Income (Loss)
    
    Deficit
    
    TotalBalance, October 31, 2003
    
    
    13,824
    
    
    $
    14
    
    
    $
    218,690
    
    
    
    
    
    
    $
    
    
    
    $
    1,099
    
    
    $
    (347
    )
    
    $
    926
    
    
    $
    (200,866
    )
    
    $
    19,516Amortization of stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    325Compensation expense for modifications made to certain option grants
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    502Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )Dividend recorded on exchange of Series A-1 Preferred Stock for
Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (6,305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,305
    )Capital contribution recorded on repurchase of Series A-1
Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    15,475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,475Conversion of Series A-1 Preferred Stock
    
    
    2,846
    
    
    
    3
    
    
    
    18,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,760Dividends on Series A and Series A-1 Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (2,170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,170
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    105Acquisition of common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    (2,414
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,414
    )Cancellation of restricted stock awards for terminated employees
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common shares upon exercise of stock options
    
    
    606
    
    
    
    1
    
    
    
    950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951Issuance of common shares under employee stock purchase program
    
    
    691
    
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Common stock subject to rescission
    
    
    
    
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,350
    )
    
    
    (23,350
    )Balance, 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 a 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 issuance costs
    
    
    2,852
    
    
    
    3
    
    
    
    9,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,809Common stock subject to rescission
    
    
    
    
    
    
    
    
    
    
    1,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,018Acquisition
of common 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
    )
    
    $
    8,082
  44




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended October 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (16,598
    )
    
    $
    (10,726
    )
    
    $
    (23,350
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of intangibles (including $336, $334, and $334 classified as cost of SCOsource
licensing revenue)
    
    
    2,707
    
    
    
    2,706
    
    
    
    2,900Stock-based compensation
    
    
    1,802
    
    
    
    22
    
    
    
    919Depreciation and amortization
    
    
    302
    
    
    
    360
    
    
    
    783Loss on disposition and write-downs of long-lived assets
    
    
    8
    
    
    
    46
    
    
    
    2,355Equity in income of affiliate
    
    
    (91
    )
    
    
    (47
    )
    
    
    (111
    )Change in fair value of derivative
    
    
    
    
    
    
    
    
    
    
    (5,924
    )Changes in operating assets and liabilities:Restricted cash
    
    
    (2,171
    )
    
    
    2,125
    
    
    
    (5,000
    )Accounts receivable, net
    
    
    1,220
    
    
    
    295
    
    
    
    2,644Other current assets
    
    
    940
    
    
    
    (584
    )
    
    
    580Other assets
    
    
    
    
    
    
    405
    
    
    
    84Accounts payable
    
    
    141
    
    
    
    (5,657
    )
    
    
    5,876Accrued payroll and benefits
    
    
    (149
    )
    
    
    (713
    )
    
    
    (1,383
    )Compensation to law firms
    
    
    
    
    
    
    (7,956
    )
    
    
    (2,600
    )Accrued liabilities
    
    
    (59
    )
    
    
    (737
    )
    
    
    101Deferred revenue
    
    
    (847
    )
    
    
    (1,036
    )
    
    
    (624
    )Royalties payable
    
    
    33
    
    
    
    52
    
    
    
    (169
    )Income taxes payable
    
    
    (402
    )
    
    
    (57
    )
    
    
    480Long-term liabilities
    
    
    (146
    )
    
    
    (5
    )
    
    
    (165
    )Net cash used in operating activities
    
    
    (13,310
    )
    
    
    (21,507
    )
    
    
    (22,604
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (340
    )
    
    
    (336
    )
    
    
    (506
    )Dividend received
    
    
    308
    
    
    
    
    
    
    
    Purchase of available-for-sale marketable securities
    
    
    (6,691
    )
    
    
    (13,624
    )
    
    
    (59,224
    )Proceeds from sale of available-for-sale marketable securities
    
    
    10,607
    
    
    
    26,215
    
    
    
    44,496Purchase of minority interest in Japanese subsidiary
    
    
    
    
    
    
    
    
    
    
    (209
    )Net cash provided by (used in) investing activities
    
    
    3,884
    
    
    
    12,255
    
    
    
    (15,443
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock through employee stock purchase program
    
    
    613
    
    
    
    720
    
    
    
    810Proceeds from exercise of common stock options
    
    
    35
    
    
    
    239
    
    
    
    951Repurchase of common stock
    
    
    (32
    )
    
    
    
    
    
    
    (2,414
    )Proceeds from sale of common stock in a private placement, net of issuance costs
    
    
    9,809
    
    
    
    
    
    
    
    Costs incurred in connection with Series A-1 Convertible Preferred Stock issuance
    
    
    
    
    
    
    
    
    
    
    (211
    )Repurchase and retirement of Series A-1 Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (13,000
    )Net cash provided by (used in) financing activities
    
    
    10,425
    
    
    
    959
    
    
    
    (13,864
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    999
    
    
    
    (8,293
    )
    
    
    (51,911
    )EFFECT OF FOREIGN EXCHANGE RATES ON CASH
    
    
    98
    
    
    
    (128
    )
    
    
    176CASH AND CASH EQUIVALENTS, beginning of year
    
    
    4,272
    
    
    
    12,693
    
    
    
    64,428CASH AND CASH EQUIVALENTS, end of year
    
    $
    5,369
    
    
    $
    4,272
    
    
    $
    12,693
  45




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 (in thousands)
 Year Ended October 31,2006
    
    2005
    
    2004SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    286
    
    
    $
    358
    
    
    $
    957SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:Increase (decrease) in common stock subject to rescission
    
    $
    (1,018
    )
    
    $
    490
    
    
    $
    528Accretion of dividends
    
    
    
    
    
    
    
    
    
    
    2,047Capital contribution in connection with repurchase and cancellation of Series A-1 shares
    
    
    
    
    
    
    
    
    
    
    (15,475
    )Dividend in connection with exchange of Series A-1 shares for Series A shares
    
    
    
    
    
    
    
    
    
    
    6,305
  46




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) ORGANIZATION AND DESCRIPTION OF BUSINESS AND LIQUIDITY
       (2) SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates in the Preparation of Financial Statements
  47




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Principles of Consolidation
   Subsidiary
    
    LocationSCO Operations, Inc.
    
    United StatesSCO Global, 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
  Cash and Cash Equivalents
  Available-for-Sale Marketable Securities
  October 31, 2006Unrealized
    
    Fair MarketCost
    
    Gains, net
    
    ValueCorporate notes
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    1,000,000U.S. Government agencies
    
    
    1,247,000
    
    
    
    2,000
    
    
    
    1,249,000Total
    
    $
    2,247,000
    
    
    $
    2,000
    
    
    $
    2,249,000
 48




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 October 31, 2005Unrealized
    
    Fair MarketCost
    
    Losses, net
    
    ValueU.S. Government agencies
    
    $
    3,500,000
    
    
    $
    (35,000
    )
    
    $
    3,465,000Auction rate notes
    
    
    2,700,000
    
    
    
    
    
    
    
    2,700,000Total
    
    $
    6,200,000
    
    
    $
    (35,000
    )
    
    $
    6,165,000
  2006
    
    2005Amortized Cost
    
    Fair Value
    
    Amortized Cost
    
    Fair ValueMaturity date3  12 months
    
    $
    
    
    
    $
    
    
    
    $
    6,200,000
    
    
    $
    6,165,000> 12 months
    
    
    2,247,000
    
    
    
    2,249,000
    
    
    
    
    
    
    
    Total
    
    $
    2,247,000
    
    
    $
    2,249,000
    
    
    $
    6,200,000
    
    
    $
    6,165,000
 Restricted Cash and Payable to Novell, Inc.
  Allowance for Doubtful Accounts Receivable
  Inventories
   49




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Capitalized Software Costs
  Impairment of Long-Lived Assets
  Property and Equipment
    Revenue Recognition
    50




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     Royalty Costs
  Advertising
  Income Taxes
  51




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Comprehensive Loss
  Net Loss per Common Share
   (3) GOODWILL AND INTANGIBLE ASSETS
  As of
    
    Year Ended
    
    As ofOctober 31, 2005
    
    October 31, 2006
    
    October 31, 2006AmortizationNet Book Value
    
    Expense
    
    Additions
    
    Net Book ValueAmortizable intangible assets:Distribution/reseller channel
    
    $
    2,318,000
    
    
    $
    (2,318,000
    )
    
    $
    
    
    
    $
    Acquired technology
    
    
    337,000
    
    
    
    (337,000
    )
    
    
    
    
    
    
    Trade name
    
    
    52,000
    
    
    
    (52,000
    )
    
    
    
    
    
    
    Total intangible assets
    
    $
    2,707,000
    
    
    $
    (2,707,000
    )
    
    $
    
    
    
    $
    As of
    
    Year Ended
    
    As ofOctober 31, 2004
    
    October 31, 2005
    
    October 31, 2005AmortizationNet Book Value
    
    Expense
    
    Additions
    
    Net Book ValueAmortizable intangible assets:Distribution/reseller channel
    
    $
    4,636,000
    
    
    $
    (2,318,000
    )
    
    $
    
    
    
    $
    2,318,000Acquired technology
    
    
    673,000
    
    
    
    (336,000
    )
    
    
    
    
    
    
    337,000Trade name
    
    
    104,000
    
    
    
    (52,000
    )
    
    
    
    
    
    
    52,000Total intangible assets
    
    $
    5,413,000
    
    
    $
    (2,706,000
    )
    
    $
    
    
    
    $
    2,707,000
 52




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   (4) INVESTMENTS IN NON-MARKETABLE SECURITIES
    Sale of Troll Tech Shares
   Investment Impairments and Write-offs
  53




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
     Conversion of Series A-1 Shares and Transfer of Series A-1 Shares to BayStar
  Agreement to Repurchase BayStar Capital Series A-1 Shares
   54




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Fair value of 2,105,263 common shares
    
    $
    9,747,000Cash consideration
    
    
    13,000,000Total value to BayStar
    
    
    22,747,000Carrying value of Series A-1 including dividends
    
    
    38,222,000Capital contribution
    
    $
    (15,475,000
    )
 Dividends
  (6) COMMON STOCK SUBJECT TO RESCISSION
     55




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  (7) STOCKHOLDERS EQUITY
 Stock Options
       56




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Weighted AverageOptions
    
    Exercise PriceBalance, October 31, 2003
    
    
    3,661,000
    
    
    $
    3.74Granted
    
    
    939,000
    
    
    
    7.31Exercised
    
    
    (606,000
    )
    
    
    1.57Cancelled
    
    
    (833,000
    )
    
    
    7.62Balance, October 31, 2004
    
    
    3,161,000
    
    
    
    4.18Granted
    
    
    1,118,000
    
    
    
    4.40Exercised
    
    
    (162,000
    )
    
    
    1.48Cancelled
    
    
    (293,000
    )
    
    
    6.63Balance, October 31, 2005
    
    
    3,824,000
    
    
    
    4.17Granted
    
    
    1,065,000
    
    
    
    3.84Exercised
    
    
    (29,000
    )
    
    
    1.21Cancelled
    
    
    (139,000
    )
    
    
    3.97Balance, October 31, 2006
    
    
    4,721,000
    
    
    $
    4.12
   Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageOptions
    
    Contractual
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$0.76 - $1.12
    
    
    1,186,000
    
    
    5.52
    years
    
    $
    0.88
    
    
    
    1,036,000
    
    
    $
    0.90$1.52 - $3.78
    
    
    1,405,000
    
    
    
    8.03
    
    
    
    3.12
    
    
    
    525,000
    
    
    
    2.20$3.93  $4.85
    
    
    1,273,000
    
    
    
    8.08
    
    
    
    4.38
    
    
    
    666,000
    
    
    
    4.39$4.86 - $28.00
    
    
    857,000
    
    
    
    7.27
    
    
    
    9.83
    
    
    
    572,000
    
    
    
    11.244,721,000
    
    
    7.27
    years
    
    $
    4.12
    
    
    
    2,799,000
    
    
    $
    4.09
  2000 Employee Stock Purchase Plan
  57




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Stock-based Compensation
     2006
    
    2005
    
    2004Cost of products
    
    $
    19,000
    
    
    $
    
    
    
    $
    Cost of SCOsource licensing
    
    
    231,000
    
    
    
    
    
    
    
    Cost of services
    
    
    67,000
    
    
    
    
    
    
    
    Sales and marketing
    
    
    371,000
    
    
    
    14,000
    
    
    
    75,000Research and development
    
    
    140,000
    
    
    
    8,000
    
    
    
    49,000General and administrative
    
    
    974,000
    
    
    
    
    
    
    
    795,000Total stock-based compensation
    
    $
    1,802,000
    
    
    $
    22,000
    
    
    $
    919,000
 58




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   2005
    
    2004Net loss:As reported
    
    $
    (10,726,000
    )
    
    $
    (16,227,000
    )Stock-based compensation included in reported net loss
    
    
    22,000
    
    
    
    919,000Stock-based compensation under fair value method
    
    
    (1,880,000
    )
    
    
    (2,082,000
    )Pro forma net loss
    
    $
    (12,584,000
    )
    
    $
    (17,390,000
    )Net loss per basic and diluted common share:As reported
    
    $
    (0.60
    )
    
    $
    (1.07
    )Pro forma
    
    $
    (0.70
    )
    
    $
    (1.15
    )
  2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.8
    %
    
    
    3.9
    %
    
    
    2.8
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    66.2
    %
    
    
    63.4
    %
    
    
    79.5
    %Expected exercise life (in years)
    
    
    5.0
    
    
    
    2.7
    
    
    
    3.0
  Repurchase of Common Stock
  Stockholder Rights Plan
  59




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Change in Control Agreements
     (8) INCOME TAXES
  2006
    
    2005
    
    2004Domestic U.S. operations
    
    $
    (16,817,000
    )
    
    $
    (10,333,000
    )
    
    $
    (21,875,000
    )Foreign operations
    
    
    310,000
    
    
    
    (120,000
    )
    
    
    (80,000
    )Total
    
    $
    (16,507,000
    )
    
    $
    (10,453,000
    )
    
    $
    (21,955,000
    )
 60




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  2006
    
    2005
    
    2004Current:U.S. state
    
    $
    
    
    
    $
    
    
    
    $
    27,000Non  U.S.
    
    
    91,000
    
    
    
    273,000
    
    
    
    1,368,00091,000
    
    
    
    273,000
    
    
    
    1,395,000Deferred:U.S. federal
    
    
    (6,221,000
    )
    
    
    (2,250,000
    )
    
    
    (13,248,000
    )U.S. state
    
    
    (925,000
    )
    
    
    (334,000
    )
    
    
    (499,000
    )Change in valuation allowance
    
    
    7,146,000
    
    
    
    2,584,000
    
    
    
    13,747,000Total provision for income taxes
    
    $
    91,000
    
    
    $
    273,000
    
    
    $
    1,395,000
   2006
    
    2005Deferred income tax assets:Net operating loss carry-forwards
    
    $
    62,624,000
    
    
    $
    55,917,000Intangible assets
    
    
    7,315,000
    
    
    
    6,486,000Tax basis in excess of book basis related to acquired assets
    
    
    3,620,000
    
    
    
    4,118,000Reserves and accrued expenses
    
    
    758,000
    
    
    
    1,502,000Stock compensation
    
    
    697,000
    
    
    
    Book depreciation in excess of tax
    
    
    351,000
    
    
    
    373,000Deferred revenue
    
    
    286,000
    
    
    
    284,000Basis difference in investments
    
    
    260,000
    
    
    
    138,000Capital loss carry-forward
    
    
    474,000
    
    
    
    474,000Total deferred income tax assets
    
    
    76,385,000
    
    
    
    69,292,000Deferred tax liabilities:Tax on foreign earnings
    
    
    
    
    
    
    (53,000
    )Total deferred income tax liabilities
    
    
    
    
    
    
    (53,000
    )Valuation allowance
    
    
    (76,385,000
    )
    
    
    (69,239,000
    )Net deferred income tax assets
    
    $
    
    
    
    $
    
   61




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   2006
    
    2005
    
    2004Benefit at statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    (34.0
    %)Permanent book to tax differences
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    1.9
    %Foreign income taxes
    
    
    0.5
    %
    
    
    2.6
    %
    
    
    6.4
    %Change in fair value of derivative
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    (9.1
    %)Change in valuation allowance
    
    
    34.8
    %
    
    
    34.8
    %
    
    
    41.2
    %Total provision for income taxes
    
    
    0.5
    %
    
    
    2.6
    %
    
    
    6.4
    %
 (9) COMMITMENTS AND CONTINGENCIES
 Litigation
 IBM Corporation
    62




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      Novell, Inc.
  63




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     IPO Class Action Matter
   64




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Red Hat, Inc.
  Other Matters
    Operating Lease Agreements
  65




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  OperatingLeasesYear ending October 31,2007
    
    $
    1,395,0002008
    
    
    269,000Total minimum payments
    
    $
    1,664,000
  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.
  (10) RELATED PARTY TRANSACTIONS
    66




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      (11) EMPLOYEE BENEFIT PLAN
  (12) CONCENTRATION OF RISK
   (13) SEGMENT INFORMATION AND GEOGRAPHIC REGIONS
 Segments
  67




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Year Ended October 31, 2006UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    29,123,000
    
    
    $
    116,000
    
    
    $
    29,239,000Cost of revenue
    
    
    4,896,000
    
    
    
    12,307,000
    
    
    
    17,203,000Gross margin (deficit)
    
    
    24,227,000
    
    
    
    (12,191,000
    )
    
    
    12,036,000Sales and marketing
    
    
    12,048,000
    
    
    
    1,000
    
    
    
    12,049,000Research and development
    
    
    7,666,000
    
    
    
    379,000
    
    
    
    8,045,000General and administrative
    
    
    6,669,000
    
    
    
    259,000
    
    
    
    6,928,000Other
    
    
    2,371,000
    
    
    
    
    
    
    
    2,371,000Total operating expenses
    
    
    28,754,000
    
    
    
    639,000
    
    
    
    29,393,000Loss from operations
    
    $
    (4,527,000
    )
    
    $
    (12,830,000
    )
    
    $
    (17,357,000
    )
 Year Ended October 31, 2005UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    35,838,000
    
    
    $
    166,000
    
    
    $
    36,004,000Cost of revenue
    
    
    5,466,000
    
    
    
    12,847,000
    
    
    
    18,313,000Gross margin (deficit)
    
    
    30,372,000
    
    
    
    (12,681,000
    )
    
    
    17,691,000Sales and marketing
    
    
    11,680,000
    
    
    
    154,000
    
    
    
    11,834,000Research and development
    
    
    7,948,000
    
    
    
    389,000
    
    
    
    8,337,000General and administrative
    
    
    6,604,000
    
    
    
    443,000
    
    
    
    7,047,000Other
    
    
    2,372,000
    
    
    
    
    
    
    
    2,372,000Total operating expenses
    
    
    28,604,000
    
    
    
    986,000
    
    
    
    29,590,000Income (loss) from operations
    
    $
    1,768,000
    
    
    $
    (13,667,000
    )
    
    $
    (11,899,000
    )
 Year Ended October 31, 2004UNIX
    
    SCOsource
    
    TotalRevenue
    
    $
    41,980,000
    
    
    $
    829,000
    
    
    $
    42,809,000Cost of revenue
    
    
    7,355,000
    
    
    
    19,743,000
    
    
    
    27,098,000Gross margin (deficit)
    
    
    34,625,000
    
    
    
    (18,914,000
    )
    
    
    15,711,000Sales and marketing
    
    
    15,881,000
    
    
    
    1,232,000
    
    
    
    17,113,000Research and development
    
    
    10,175,000
    
    
    
    486,000
    
    
    
    10,661,000General and administrative
    
    
    8,180,000
    
    
    
    241,000
    
    
    
    8,421,000Other
    
    
    8,089,000
    
    
    
    
    
    
    
    8,089,000Total operating expenses
    
    
    42,325,000
    
    
    
    1,959,000
    
    
    
    44,284,000Loss from operations
    
    $
    (7,700,000
    )
    
    $
    (20,873,000
    )
    
    $
    (28,573,000
    )
 68




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  October 31,
    
    
    October 31,2006
    
    
    2005Intangible assets and goodwill:UNIX (reseller channel and trade name)
    
    $
    
    
    
    $
    2,370,000SCOsource (UNIX technology)
    
    
    
    
    
    
    337,000Total intangible assets
    
    $
    
    
    
    $
    2,707,000
 Geographic Regions
  Year Ended October 31, 2006Americas
    
    International
    
    Corporate
    
    TotalRevenue
    
    $
    15,749,000
    
    
    $
    13,490,000
    
    
    $
    
    
    
    $
    29,239,000Cost of revenue
    
    
    14,960,000
    
    
    
    1,926,000
    
    
    
    317,000
    
    
    
    17,203,000Gross margin (deficit)
    
    
    789,000
    
    
    
    11,564,000
    
    
    
    (317,000
    )
    
    
    12,036,000Sales and marketing
    
    
    4,896,000
    
    
    
    6,782,000
    
    
    
    371,000
    
    
    
    12,049,000Research and development
    
    
    4,258,000
    
    
    
    3,647,000
    
    
    
    140,000
    
    
    
    8,045,000General and administrative
    
    
    3,207,000
    
    
    
    2,747,000
    
    
    
    974,000
    
    
    
    6,928,000Other
    
    
    
    
    
    
    
    
    
    
    2,371,000
    
    
    
    2,371,000Total operating expenses
    
    
    12,361,000
    
    
    
    13,176,000
    
    
    
    3,856,000
    
    
    
    29,393,000Loss from operations
    
    $
    (11,572,000
    )
    
    $
    (1,612,000
    )
    
    $
    (4,173,000
    )
    
    $
    (17,357,000
    )
 Year Ended October 31, 2005Americas
    
    International
    
    Corporate
    
    TotalRevenue
    
    $
    18,634,000
    
    
    $
    17,370,000
    
    
    $
    
    
    
    $
    36,004,000Cost of revenue
    
    
    15,955,000
    
    
    
    2,358,000
    
    
    
    
    
    
    
    18,313,000Gross margin
    
    
    2,679,000
    
    
    
    15,012,000
    
    
    
    
    
    
    
    17,691,000Sales and marketing
    
    
    4,505,000
    
    
    
    7,315,000
    
    
    
    14,000
    
    
    
    11,834,000Research and development
    
    
    4,331,000
    
    
    
    3,998,000
    
    
    
    8,000
    
    
    
    8,337,000General and administrative
    
    
    3,664,000
    
    
    
    3,383,000
    
    
    
    
    
    
    
    7,047,000Other
    
    
    
    
    
    
    
    
    
    
    2,372,000
    
    
    
    2,372,000Total operating expenses
    
    
    12,500,000
    
    
    
    14,696,000
    
    
    
    2,394,000
    
    
    
    29,590,000Income (loss) from operations
    
    $
    (9,821,000
    )
    
    $
    316,000
    
    
    $
    (2,394,000
    )
    
    $
    (11,899,000
    )
 69




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Year Ended October 31, 2004Americas
    
    International
    
    Corporate
    
    TotalRevenue
    
    $
    24,531,000
    
    
    $
    18,278,000
    
    
    $
    
    
    
    $
    42,809,000Cost of revenue
    
    
    24,031,000
    
    
    
    3,067,000
    
    
    
    
    
    
    
    27,098,000Gross margin
    
    
    500,000
    
    
    
    15,211,000
    
    
    
    
    
    
    
    15,711,000Sales and marketing
    
    
    8,072,000
    
    
    
    8,966,000
    
    
    
    75,000
    
    
    
    17,113,000Research and development
    
    
    6,215,000
    
    
    
    4,397,000
    
    
    
    49,000
    
    
    
    10,661,000General and administrative
    
    
    4,077,000
    
    
    
    3,549,000
    
    
    
    795,000
    
    
    
    8,421,000Other
    
    
    
    
    
    
    
    
    
    
    8,089,000
    
    
    
    8,089,000Total operating expenses
    
    
    18,364,000
    
    
    
    16,912,000
    
    
    
    9,008,000
    
    
    
    44,284,000Loss from operations
    
    $
    (17,864,000
    )
    
    $
    (1,701,000
    )
    
    $
    (9,008,000
    )
    
    $
    (28,573,000
    )
  October 31,
    
    October 31,2006
    
    2005Long-lived assets:Americas
    
    $
    515,000
    
    
    $
    3,231,000International
    
    
    93,000
    
    
    
    54,000Total long-lived assets
    
    $
    608,000
    
    
    $
    3,285,000
 70




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##### Table of Contents



THE SCO GROUP, INC. AND SUBSIDIARIES
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    Charged to Costs
    
    
    
    
    
    Balance at End ofDescription
    
    Beginning of Period
    
    and Expenses
    
    Deductions
    
    PeriodAllowance for doubtful accounts:Year ended October 31, 2006
    
    $
    144,000
    
    
    $
    10,000
    
    
    $
    (48,000
    ) (a)
    
    $
    106,000Year ended October 31, 2005
    
    
    136,000
    
    
    
    18,000
    
    
    
    (10,000
    ) (a)
    
    
    144,000Year ended October 31, 2004
    
    
    230,000
    
    
    
    11,000
    
    
    
    (105,000
    ) (a)
    
    
    136,000Inventory reserves:Year ended October 31, 2006
    
    
    71,000
    
    
    
    (42,000
    )
    
    
    
    (b)
    
    
    29,000Year ended October 31, 2005
    
    
    56,000
    
    
    
    39,000
    
    
    
    (24,000
    ) (b)
    
    
    71,000Year ended October 31, 2004
    
    
    19,000
    
    
    
    59,000
    
    
    
    (22,000
    ) (b)
    
    
    56,000Allowance for sales returns:Year ended October 31, 2006
    
    
    587,000
    
    
    
    (23,000
    )
    
    
    (256,000
    ) (c)
    
    
    308,000Year ended October 31, 2005
    
    
    258,000
    
    
    
    967,000
    
    
    
    (638,000
    ) (c)
    
    
    587,000Year ended October 31, 2004
    
    
    819,000
    
    
    
    489,000
    
    
    
    (1,050,000
    ) (c)
    
    
    258,000
 
 (a)
    
    Represents write-offs of uncollectible accounts receivable(b)
    
    Represents inventory destroyed or scrapped(c)
    
    Represents product returns 71




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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
  www.sco.com
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   72




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV.
 
 Item 15. Exhibits and Financial Statement Schedules
  (1)
    
    Consolidated Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 39 of this report.(2)
    
    Financial Statement Schedule: See Index to Consolidated Financial
Statements at Item 8 on page 39 of this report.(3)
    
    Exhibits are incorporated herein by reference or are filed with this
report as indicated below:
 Exhibit
#
    
    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, 2004 (File No. 000-29911)).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Exhibit
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Exhibit
#
    
    Description4.1 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. (incorporated by reference to
Exhibit 10.12 to the Registrants Annual Report on
Form 10-K for
the fiscal year ended October 31, 2006 (File No. 000-29911)).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 Report on Form 10-K for the fiscal year ended
October 31, 2003 (File No. 000-29911)).
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Exhibit
#
    
    Description10.16
    
    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)).
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Exhibit
#
    
    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
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##### Table of Contents



Exhibit
#
    
    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.23.2
    
    Consent of KPMG LLP, 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 Bert B. Young, 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 Bert B. Young, Chief Financial Officer, pursuant
to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    These items identify a management contract or compensatory plan. 77




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##### Table of Contents



Signatures
  THE SCO GROUP, INC.By:
    /s/ Bert B. YoungBert B. YoungChief Financial Officer  Signature
    
    Title
    
    DatePrincipal Executive Officer:/s/ Darl C. McBride

Darl C. McBride
    
    President, Chief Executive Officer
and Director
    
    January 26, 2007Principal Financial and
Accounting Officer:/s/ Bert B. Young

Bert B. Young
    
    Chief Financial Officer
    
    January 26, 2007Directors:/s/ Ralph J. Yarro III

Ralph J. Yarro III
    
    Chairman of the Board
    
    January 26, 2007/s/ Darcy G. Mott

Darcy G. Mott
    
    Director
    
    January 26, 2007/s/ Edward E. Iacobucci

Edward E. Iacobucci
    
    Director
    
    January 26, 2007/s/ R. Duff Thompson

R. Duff Thompson
    
    Director
    
    January 26, 2007/s/ J. Kent Millington

J. Kent Millington
    
    Director
    
    January 26, 2007/s/ Daniel W. Campbell

Daniel W. Campbell
    
    Director
    
    January 26, 2007/s/ Omar T. Leeman

Omar T. Leeman
    
    Director
    
    January 26, 2007
 78