UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July~~January 31, ~~2008~~2009


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.

(Exact name of registrant as specified in its charter)

Delaware		87-0662823
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)


Delaware (State or other jurisdiction of incorporation or organization)		87-0662823 (I.R.S. Employer Identification Number)

355 South 520 West ~~Suite 100 Lindon, Utah 84042 (Address of principal executive offices and zip code)~~

~~(801)~~Suite ~~765-4999~~100 Lindon, Utah 84042 (~~Registrant’s~~Address ~~telephone~~of ~~number,~~principal ~~including~~executive ~~area~~offices and zip code)

(801) 765-4999

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check ~~One~~one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
YES o NO þ

As of ~~September~~February 928, ~~2008~~2009, there were 21,~~886~~588,~~288~~879 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.

The SCO Group, Inc.

Table of Contents

	Page
	Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 2008 and October 31, 2007		3
Condensed Consolidated Balance Sheets as of January 31, 2009 and October 31, 2008		3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended July 31, 2008 and 2007		4
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended January 31, 2009 and 2008		4
Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2008 and 2007		5
Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2009 and 2008		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1817
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3533
Item 4. Controls and Procedures		35
Item 4T. Controls and Procedures		34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		3534
Item 1A. Risk Factors		37
Item 5. Other Information		45
Item 6. Exhibits		45
Item 6. Exhibits		46
Signatures		46
Signatures		47
EX-31.1
EXHIBIT 10.1
EX-31.2
EXHIBIT 31.1
EX-32.1
EXHIBIT 31.2
EX-32.2
EXHIBIT 32.1
EXHIBIT 32.2

THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)

	July 31,			October 31,
	January 31,			October 31,
	2008			2007
	2009			2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,117		$	5,554
Cash	$	1,836		$	1,237
Restricted cash		23,~~680~~766			32,~~099~~308
Accounts receivable, net of allowance for doubtful accounts of $124 and $85, respectively		2,592			3,365
Accounts receivable, net of allowance for doubtful accounts of $112 and $94, respectively		2,302			2,801
Prepaid reorganization expenses		~~441~~254			~~137~~415
Other		~~1,135~~625			~~1,298~~857
Total current assets		8,~~965~~783			137,~~453~~618
PROPERTY AND EQUIPMENT:
OTHER ASSETS		—			365
Computer and office equipment		1,694			2,006
Total assets	$	8,783		$	7,983
Leasehold improvements		233			268
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Furniture and fixtures		59			66
		1,986			2,340
Less accumulated depreciation and amortization		(1,802	)		(1,981	)
Net property and equipment		184			359
OTHER ASSETS		373			497
Total assets	$	9,522		$	14,309
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	~~377~~717		$	~~252~~608
Payable to Novell, Inc.		~~918~~2,142			~~1,148~~632
Accrued payroll and benefits		~~1,010~~937			~~1,370~~875
Accrued liabilities		~~629~~335			~~1,110~~537
Accrued reorganization expenses		~~375~~180			~~253~~336
Deferred revenues		1,~~653~~522			21,~~044~~619
Royalties payable		~~137~~100			~~123~~107
Income taxes payable		~~751~~590			~~708~~631
Total current liabilities		56,~~850~~523			75,~~008~~345
LONG-TERM LIABILITIES		~~182~~68			~~182~~68
LIABILITIES SUBJECT TO COMPROMISE		6,708			36,~~365~~700
Total liabilities		1213,~~740~~299			1012,~~555~~113
COMMITMENTS AND CONTINGENCIES (Notes 1,3 and 6)
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
STOCKHOLDERS’ EQUITY (DEFICIT):
STOCKHOLDERS’ DEFICIT:
Common stock, $0.001 par value: 45,000 shares authorized, 21,886 and 21,782 shares outstanding, respectively		22			22
Additional paid-in capital		~~263~~264,~~921~~520			~~262~~264,~~659~~339
Common stock held in treasury; 297 shares outstanding		(2,446	)		(2,446	)
Warrants outstanding		206			856
Accumulated other comprehensive income		900			1,008
Accumulated other comprehensive income		1,068			1,029
Accumulated deficit		(267,512	)		(267,053	)
Accumulated deficit		(265,989	)		(258,366	)
Total stockholders’ deficit		(4,516	)		(4,130	)
Total stockholders’ equity (deficit)		(3,218	)		3,754
Total liabilities and stockholders’ deficit	$	8,783		$	7,983
Total liabilities and stockholders’ equity (deficit)	$	9,522		$	14,309

See accompanying notes to condensed consolidated financial statements.

THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(unaudited)

	Three Months Ended July 31,						Nine Months Ended July 31,
	Three Months Ended January 31,
	2008			2007			2008			2007
	2009			2008
REVENUES:
Products	$	32,~~170~~547		$	34,~~690~~039		$	~~10,257~~		$	~~13,451~~
SCOsource		—			—			—			23
Services		550			833
Services		569			996			2,015			3,241
SCOsource		—			—
Total revenues		3,~~739~~097			4,~~686~~872			~~12,272~~			~~16,715~~
COST OF REVENUES:
Products		~~228~~144			~~329~~288			~~702~~			~~1,041~~
SCOsource		2,876			1,156			3,476			2,876
Services		214			431
Services		245			448			959			1,553
SCOsource		109			267
Total cost of revenues		~~3,349~~467			~~1,933~~986			~~5,137~~			~~5,470~~
GROSS MARGIN		~~390~~2,630			23,~~753~~886			~~7,135~~			~~11,245~~
OPERATING EXPENSES:
Sales and marketing		1,~~765~~326			2,~~463~~741			~~6,630~~			~~7,296~~
General and administrative		~~889~~810			~~1,377~~924			~~3,086~~			~~4,051~~
Research and development		~~708~~722			1,~~424~~273			~~2,912~~			~~4,737~~
Total operating expenses		32,~~362~~858			54,~~264~~938			~~12,628~~			~~16,084~~
LOSS FROM OPERATIONS		(~~2,972~~228	)		(21,~~511~~052	)		~~(5,493~~	)		~~(4,839~~	)
EQUITY IN INCOME (LOSS) OF AFFILIATE		15			9(11	)		~~(10~~	)		~~115~~
OTHER INCOME (EXPENSE):
Reorganization expense		(~~183~~237	)		—(844	)		~~(1,662~~	)		—
Interest expense		(~~925~~44	)		—			~~(925~~	)		—
Interest income		1411			~~112~~67			~~115~~			~~351~~
Other income (expense), net		(6	)		20			503			29
Other income, net		95			463
Total other income (expense), net		(1,100	)		132			(1,969	)		380
Total other (expense), net		(175	)		(314	)
LOSS BEFORE PROVISION FOR INCOME TAXES		(~~4,071~~398	)		(21,~~370~~377	)		~~(7,472~~	)		~~(4,344~~	)
BENEFIT (PROVISION) FOR INCOME TAXES		6			(28	)		(151	)		(221	)
PROVISION FOR INCOME TAXES		(61	)		(111	)
NET LOSS	$	(~~4,065~~459	)	$	(21,~~398~~488	)	$	~~(7,623~~	)	$	~~(4,565~~	)
BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.1902	)	$	(0.1107	)	$	~~(0.35~~	)	$	~~(0.21~~	)
WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING		21,589			21,~~372~~563			~~21,574~~			~~21,264~~
OTHER COMPREHENSIVE LOSS:
Net loss	$	(~~4,065~~459	)	$	(21,~~398~~488	)	$	~~(7,623~~	)	$	~~(4,565~~	)
Foreign currency translation adjustment		(13108	)		2130			39			54
COMPREHENSIVE LOSS	$	(~~4,078~~567	)	$	(21,~~377~~458	)	$	~~(7,584~~	)	$	~~(4,511~~	)

See accompanying notes to condensed consolidated financial statements.

THE SCO GROUP, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

	Nine Months Ended July 31,
	Three Months Ended January 31,
	2008			2007
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(~~7,623~~459	)	$	(41,~~565~~488	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation		~~590~~181			~~1,407~~114
Depreciation and amortization		~~164~~—			~~239~~58
Loss on disposition and write-downs of long-lived assets		21—			352
Equity in income (loss) of affiliate		10			(115	)
Equity in (income) loss of affiliate		(5	)		10
Reorganization expense		~~1,662~~237			—844
Changes in operating assets and liabilities:
Restricted cash		~~189~~52			~~2,457~~32
Accounts receivable, net		~~773~~499			~~1,990~~(656	)
Other current assets		~~163~~232			~~319~~394
Accounts payable		~~125~~109			~~(394~~315	)
Accrued payroll and benefits		~~(360~~62	)		~~(1,127~~325	)
Accrued liabilities		(~~481~~202	)		(~~254~~452	)
Deferred revenue		(~~391~~97	)		(~~433~~82	)
Royalties payable		14(7	)		~~(190~~88	)
Income taxes payable		43(41	)		~~(53~~158	)
Long-term liabilities		—			(6	)
Liabilities subject to compromise		8			(2	)
Liabilities subject to compromise		3,343			—
Payments for reorganization expense		(232	)		(465	)
Payments for reorganization expense		(1,844	)		—
Net cash provided by (used in) operating activities		337			(805	)
Net cash used in operating activities		(3,602	)		(690	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		~~(10~~—	)		(814	)
Dividends received		~~114~~370			—
Proceeds from sale of available-for-sale marketable securities		—			2,249
Net cash provided by (used in) investing activities		370			(4	)
Net cash provided by investing activities		104			2,168
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock through employee stock purchase program		22—			~~436~~22
Proceeds from exercise of common stock options		—			57
Net cash provided by financing activities		—			22
Net cash provided by financing activities		22			493
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		707			(787	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(3,476	)		1,971
EFFECT OF FOREIGN EXCHANGE RATES ON CASH		(108	)		30
EFFECT OF FOREIGN EXCHANGE RATES ON CASH		39			53
CASH AND CASH EQUIVALENTS, beginning of period		1,237			5,554
CASH AND CASH EQUIVALENTS, beginning of period		5,554			5,369
CASH AND CASH EQUIVALENTS, end of period	$	1,836		$	4,797
CASH AND CASH EQUIVALENTS, end of period	$	2,117		$	7,393
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	4845		$	~~150~~11
Non cash financing activity — expiration of warrants	$	650		$	—

See accompanying notes to condensed consolidated financial statements.

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

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

The SCO Group, Inc. (the “Company”) markets reliable, cost-effective UNIX software products and related services for the small-to-medium sized business market, including replicated site franchises of Fortune 1000 companies. In 2003, the Company established its SCOsource business to market, protect and defend its intellectual property surrounding the UNIX operating system which it acquired in 2001 from The Santa Cruz Operation (“Santa Cruz”), which changed its name to Tarantella, Inc., and was subsequently acquired by Sun Microsystems.

The Company incurred a net loss of $7459,~~623,~~000 for the ~~nine~~three months ended ~~July~~January 31, ~~2008~~2009, and during that same period ~~used~~generated cash of $3337,~~602,~~000 infrom its operating activities. As of ~~July~~January 31, ~~2008,~~ 2009, the Company had a total of $21,~~117~~836,000 in cash and $23,~~680~~766,000 in restricted cash, of which $1,~~639~~500,000 is designated to pay for experts, consultants and other expenses in connection with the litigation between the Company and IBM, Novell and Red Hat (the “SCO Litigation”), ~~and the remaining~~ $12,~~041~~266,000 ~~of restricted cash~~ is payable to Novell for the post bankruptcy petition retained binary royalty stream.

On August 10, 2007, the federal judge overseeing the Company’s lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or to eliminate certain of the Company’s claims in both the Novell case (“Novell Litigation”) and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and Santa Cruz (the “APA”), and that Novell retained broad rights to waive the Company’s contract claims against IBM. The Court ruled that the Company owns the copyrights to post-APA UnixWare code and derivatives and that ~~the~~it ~~Company~~ has certain other ownership rights in the UNIX technology. The Company was directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that ~~the~~SCO ~~Company~~ executed in fiscal year 2003 ~~and thereafter~~ included older SVRx licenses and that ~~the~~SCO ~~Company~~ was possibly required to remit some portion of the proceeds to Novell. Over the Company’s objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether SCO had authority to enter into such SVRx licenses. Based on Novell’s allegations, the potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

The trial of these issues, however, was automatically stayed as a result of the Company’s filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ~~(the “Bankruptcy Code”)~~ in the United States Bankruptcy Court for the District of Delaware (the “~~Bankruptcy~~Bancruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court ~~lifted~~modified the automatic stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of ~~SCO~~the Company’s alleged lack of authority to enter into them, but the Bankruptcy Court ~~retained~~ retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the automatic stay applies to the SuSE ~~arbritation~~ arbitration proceeding pending in Europe. Upon the ~~partial~~modification ~~lifting~~ of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court ~~lifted~~modified the automatic stay, which started on April 29, 2008 and concluded on May 2, 2008, .

OnPrior ~~December 21,~~to ~~2007~~trial, Novell ~~filed~~conceded athat ~~motion~~it ~~for~~would ~~summary~~not ~~judgment~~be onmaking ~~the~~a ~~issue~~claim ofto ~~whether~~a ~~the Company~~portion ~~had~~of the ~~authority~~fees paid to ~~enter into~~ the ~~SCOsource~~Company ~~licenses.~~by ~~The~~Microsoft ~~parties~~in ~~have~~2003 ~~fully~~and ~~briefed~~Novell ~~the motion,~~therefore ~~and~~reduced the ~~Court~~principal ~~set~~amount ~~oral~~of ~~argument on this and any other pending motions for summary judgment~~its ~~for~~claim ~~April 30,~~to ~~2008. On March 7~~$19, ~~2008~~979,561. ~~the~~After ~~Company filed a Motion for Judgment on~~ the ~~Pleadings~~trial ~~on Novell’s~~and ~~Claims for Money or Claim for Declaratory Relief~~arguments, ~~in which~~ the ~~Company~~Court ~~argues,~~took ~~based~~all ~~on Novell’s~~matters ~~version~~under ~~of the facts, that either its claims for money from SCOsource agreements or its~~advisement ~~claim~~and ~~seeking~~stated ~~a declaration~~ that ~~SCO~~it ~~lacked~~would ~~the~~attempt ~~authority~~ to ~~enter~~issue ~~into~~a ~~those~~ruling ~~agreements~~without ~~must~~undue ~~fail~~delay. ~~The Court heard oral arguments on this motion, as well as Novell’s pending motion for summary judgment, on the second day of trial, April 30, 2008.~~

~~After~~agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the ~~trial~~amount ~~and~~of prejudgment interest it sought based on this award. On August 29, 2008, ~~arguments~~Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court ~~took~~that ~~all~~the parties ~~matters~~had ~~under~~agreed ~~advisement~~that ~~and~~Novell ~~stated~~was itentitled ~~would~~to ~~attempt~~$918,122 toin ~~issue~~prejudgment ainterest through that date, ~~ruling~~plus ~~without~~$489 ~~undue~~per ~~delay~~day until the entry of final judgment, based on the Court’s $2,547,817 award.

OnIn its ruling of July 16, 2008, the Court ~~entered~~also ~~its~~directed ~~Findings~~Novell ofto ~~Fact,~~file ~~Conclusions~~a ofproposed ~~Law, and Order,~~Final ~~ruling~~Judgment ~~that~~consistent ~~(1)~~ with the ~~SCOsource~~Court’s ~~agreements~~trial ~~with~~and ~~Linux~~summary ~~end-users~~judgment ~~were~~orders. ~~not~~In ~~SVRx~~its ~~licenses~~proposed ~~and therefore~~submission ~~Novell~~to isthe ~~not~~Court ~~entitled~~in tocompliance ~~revenue~~with ~~from~~this ~~those~~order, ~~agreements;~~Novell ~~(2)~~ took the ~~2003~~position ~~SCOsource~~that ~~agreement~~final ~~with Microsoft~~judgment ~~contained~~could annot be ~~SVRx~~entered ~~License~~because ~~that~~certain ~~was~~of ~~incidental~~SCO’s toclaims ~~the~~are ~~UnixWare~~stayed ~~license~~pending inarbitration and the ~~agreement, and~~imposition ~~therefore~~of ~~SCO~~a constructive ~~was~~trust ~~authorized~~remained toan ~~enter~~open ~~into~~question in the ~~license~~Bankruptcy ~~and~~Court. ~~Novell~~Subsequently, isin ~~not~~order ~~entitled~~ to ~~revenue~~ ~~from~~expedite the ~~agreement;~~entry ~~(3) the~~of ~~2003~~final ~~SCOsource~~judgment, ~~agreement~~the ~~with~~Company ~~Sun~~sought ~~also~~to ~~contained~~resolve anthese ~~authorized incidental~~issues ~~SVRx~~with ~~license~~Novell and agreed ~~Novell~~to isan ~~not~~extension ~~entitled~~of toNovell’s ~~revenue~~deadline ~~attributable~~for tofiling ~~that~~its ~~license;~~submission. ~~and~~Based ~~(4)~~ on the ~~same~~Company’s tracing of Sun’s ~~agreement~~payments ~~contained~~under anits ~~unauthorized~~2003 ~~amendment~~SCOsource ~~of a prior UNIX~~ agreement, ~~and~~ Novell is ~~entitled~~agreed tothat only $2625,~~547,817~~487 of SCO’s ~~the~~current ~~revenue~~assets ~~from~~were ~~the~~traceable ~~Sun~~as ~~agreement~~trust asfunds. ~~attributable~~SCO toalso ~~that~~proposed ~~amendment. The~~dismissing ~~Court~~its ~~directed~~stayed ~~Novell~~claims with toprejudice ~~file~~on athe ~~brief~~basis ~~identifying~~of the ~~amount~~Court’s ofruling ~~prejudgment~~that ~~interest~~Novell itowns ~~seeks~~the pre-APA UNIX copyrights in ~~based~~the onCourt’s ~~this~~summary ~~award~~judgment order of August 10, 2007. On August 29, 2008, ~~Novell~~in ~~filed~~its anSubmission Regarding ~~Unopposed~~the ~~Submission~~Entry ~~Regarding Prejudgment~~of ~~Interest~~Final Judgment, ~~informing~~Novell informed the Court ~~that~~of the parties’ ~~agree~~agreement ~~that~~as ~~Novell is entitled~~ to ~~$918~~the trust amount,~~122~~ inbut ~~prejudgment~~Novell ~~interest~~stood ~~through~~by its position that ~~date,~~final ~~plus~~judgment ~~$489~~could ~~per~~not ~~day~~be ~~until~~entered in light of the ~~entry~~stayed ofclaims. ~~final judgment~~On September 15, ~~based~~2008, onthe Company filed papers arguing for the ~~Court’s~~entry of ~~$2,547,817~~final ~~award~~judgment.

InOn ~~its ruling of July~~November 1620, 2008, ~~the~~after ~~Court~~further ~~also~~negotiations ~~directed~~between ~~Novell~~the toparties, ~~file~~the aCourt ~~proposed~~entered ~~Final~~a Final Judgment, ~~consistent~~incorporating ~~with~~ the ~~Court’s~~material ~~trial~~rulings ~~and~~from ~~summary~~the ~~judgment~~August 10, ~~orders.~~2007 Inand ~~its~~July 16, ~~proposed submission~~2008 torulings ~~the~~as ~~Court~~explained inabove. ~~compliance~~On ~~with~~November 25, ~~this order~~2008, ~~Novell took~~ the ~~position~~Company ~~that~~filed ~~final~~a ~~judgment~~notice ~~cannot~~of ~~be entered~~appeal ~~because certain SCO claims are stayed pending arbitration and the imposition~~ of athat ~~constructive~~Final ~~trust~~Judgment, ~~remains~~including anadverse ~~open~~rulings ~~question~~ in the ~~Bankruptcy~~ Court.’s ~~Subsequently,~~summary injudgment order ~~to expedite the entry~~ of ~~final judgment~~August 10, ~~SCO~~2007. On ~~sought~~January 23, to2009, ~~resolve~~the ~~these~~Company ~~issues~~filed ~~with Novell and agreed to~~ an ~~extension~~unopposed ofmotion ~~Novell’s deadline~~ for ~~filing~~an ~~its~~expedited ~~submission.~~appeal ~~Based~~with onthe ~~SCO’s~~United States ~~tracing~~Court of ~~Sun’s payments~~Appeals ~~under~~for ~~its~~the ~~2003~~Tenth ~~SCOsource~~Circuit ~~agreement,~~(the ~~Novell~~“Tenth ~~agreed~~Circuit ~~that~~Court”) ~~only~~which ~~$625,487~~was ofgranted ~~SCO’s~~by ~~current~~the ~~assets~~Tenth ~~were~~Circuit ~~traceable~~Court ason ~~trust~~January 29, ~~funds~~2009. ~~SCO~~On ~~also~~March 4, ~~proposed~~2009, ~~dismissing its~~the ~~stayed~~Company ~~claims~~filed ~~with~~its ~~prejudice~~brief onfor ~~the~~its appeal ~~basis~~with of the Tenth Circuit Court~~’s ruling~~. ~~that~~The ~~Novell~~Tenth ~~owns~~Circuit ~~the~~Court ~~pre-APA~~has ~~UNIX~~placed ~~copy~~the ~~rights~~case inon the calendar ~~Court’s~~for ~~summary~~oral ~~judgment~~argument ~~order~~on ~~of August 10~~May 6, ~~2007~~2009. On ~~August 29,~~With ~~2008, in its Submission Regarding~~ the ~~Entry~~expedited ~~of Final Judgment~~appeal, ~~Novell~~and ~~informed~~early ~~the~~hearing ~~Court~~date, of the Company ~~parties’~~is ~~agreement~~hopeful asa todecision on the ~~trust~~appeal ~~amount, but Novell stood by its position that final judgment~~ could ~~not~~ be ~~entered~~forthcoming in ~~light of~~ the ~~stayed~~next ~~claims.~~five Onto ~~September~~eight 15months, ~~2008,~~but ~~SCO~~it could ~~filed~~be ~~papers~~several ~~arguing~~months ~~for the~~beyond ~~entry~~that oftime ~~final judgment~~frame.

AsOn aMarch 13, ~~result~~2009, ~~of this order from~~ the Court, denied the Company’s ~~has~~motion ~~accrued~~to ~~$3,473,000~~stay ~~for~~the ~~this~~taxation of costs ~~contingent~~relating ~~liability~~to the trial and ~~related~~final ~~interest~~judgment. ~~However,~~These ~~the~~costs ~~Company~~total $127,432, ~~continues~~and relate to ~~contest~~such ~~this~~things as ~~liability.~~transcription ~~The~~charges ~~Company~~and ~~believes~~deposition ~~that~~expenses. ~~this~~According to the Court’s order isthese incosts ~~error,~~will ~~and~~be added ~~that~~to the ~~Company~~issues ~~has~~that ~~strong grounds~~are toon ~~overturn~~appeal itwith ~~and~~ the ~~August 10,~~Tenth ~~2007~~Circuit ~~summary~~Court ~~judgment~~and ~~upon~~resolved through that appeal.

~~The~~As ~~Company~~a ~~intends~~result toof ~~appeal~~ the ~~adverse~~Court’s ~~August~~judgment of July 1016, ~~2007~~2008 ~~summary~~against ~~judgment~~the ~~ruling~~Company, ~~and~~as ~~the~~of ~~July~~January 31, 162009, ~~2008~~the ~~order~~Company ashas ~~soon~~accrued as$3,562,000 ~~Final~~including ~~Judgment~~the isrelated ~~entered~~interest. ~~upon~~However, ~~those~~the ~~orders~~Company continues to contest this liability. The Company believes that the Court erred and that there are strong grounds to have the adverse rulings embodied in the Final Judgment reversed on appeal. However, in the event that the Company’s assets are further depleted or ~~frozen~~encumbered, the Company may not be in a financial position to see the appeal of those rulings through to a conclusion or continue the litigation.

The Company’s management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and the Company’s entry into Chapter 11, among other factors, there is substantial doubt about the Company’s ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.

Absent a significant cash payment to Novell being required by the final resolution for the aforementioned court order, management believes that the undiscounted future cash flows generated by the Company will be sufficient to recover the carrying values of the Company’s long-lived assets over their expected remaining useful lives. However, if a significant cash payment is required the carrying amount of the Company’s long-lived assets may not be recovered.

Bankruptcy Filing

On September 14, 2007, ~~the~~The ~~Company~~SCO Group, Inc. and its wholly owned subsidiary, SCO Operations, Inc. (collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the ~~United~~ United States Bankruptcy Code in the Bankruptcy Court for the District of Delaware. The Debtors’ ~~Chapter~~ Chapter 11 cases are being jointly administered under Case No. 07-11337(KG). The Debtors continue to to exercise control over their assets and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company’s foreign subsidiaries were not included in the filings. The Company’s foreign subsidiaries, as non-debtors, are not subject to the requirements of the Bankruptcy Code and are not subject to Bankruptcy Court supervision.

On September 18, 2007, the Bankruptcy Court granted the Debtors’ motions to maintain their existing bank accounts and cash management systems, to pay pre-bankruptcy wage-related items, to establish procedures relating to utility providers and to employ temporary employees.

As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements, in the ordinary course of business, or, if outside the ordinary course of business, subject to Bankruptcy Court approval.

~~On February 13, 2008, the Company entered into a Memorandum of Understanding (the “MOU”) with~~7 Stephen Norris Capital Partners, LLC, a Delaware limited liability company (“SNCP”), whereby SNCP agreed to provide financing to fund the Company’s plan of reorganization filed on February 29, 2008. On the same day, the Company filed its disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.

OnTable February 29, 2008, the Debtors filed their joint Chapter 11 Plan of Reorganization (the “Plan”) and Disclosure Statement in Connection with the Plan (the “Disclosure Statement”). A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding the Debtors’ progress towards a new Memorandum of Understanding (“MOU”) with Stephen Norris Capital Partners, LLC. Therefore, the Debtors indicated that they were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU. Contents

On ~~May~~February 1213, 2008, the ~~Debtors~~Company ~~filed~~entered into a ~~motion~~Memorandum ~~seeking an extension~~ of ~~their~~Understanding ~~exclusive~~(the ~~periods~~“MOU”) towith ~~submit~~Stephen ~~and~~Norris ~~solicit~~Capital ~~acceptances~~Partners, ofLLC an(“SNCP”), ~~amended~~a orDelaware ~~new~~limited ~~plan~~liability ofcompany, ~~reorganization~~whereby ~~to August 11 and October~~SNCP ~~13,~~agreed ~~2008,~~to ~~respectively.~~provide Afinancing ~~hearing~~ to ~~consider~~fund ~~that~~the ~~motion~~Company’s ~~was~~plan ~~scheduled~~of ~~for~~reorganization ~~June~~filed on February 1729, 2008. ~~The Bankruptcy~~On ~~Court granted~~ the ~~motion~~same ~~on June 17~~day, ~~2008.~~the ~~The~~ Debtors filed ~~another~~a ~~motion~~disclosure ~~for~~statement ~~an extension~~in ofconnection ~~their~~with ~~exclusive~~the ~~periods to submit and solicit acceptances of a~~ plan of ~~reorganization~~ ~~to a date 45 and 105 days~~reorganization, ~~respectively,~~under ~~following~~the anterms ~~entry~~contemplated ofby ~~a final judgment in~~ the ~~Novell Litigation~~MOU. ~~The hearing on that motion will be heard September 16, 2008.~~

On February 29, 2008, the Debtors filed their joint Chapter 11 Plan of Reorganization (the “Plan”) and Disclosure Statement in Connection with the Plan (the “Disclosure Statement”). A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding the Debtors’ progress towards a new MOU with SNCP. Therefore, the Debtors indicated that they were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU.

On May 12, 2008, the Debtors filed a motion seeking an extension of their exclusive periods to submit and solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, 2008, respectively. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of their exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following an entry of a final judgment in the Novell Litigation. The hearing on that motion was conducted on September 16, 2008, at which time the Bankruptcy Court granted the motion for an extension of their exclusive period to submit a plan of reorganization to December 31, 2008 and their exclusive period to solicit acceptances to March 2, 2009.

On January 8, 2009, the Debtors filed their Amended Reorganization Plan and Disclosure Statement. Under the proposed plan, the Debtors intend to hold an open auction to sell certain assets of the Company including its mobility business assets and its OpenServer operating system assets and business. Through this sale, the Debtors hope to obtain enough consideration to pay their creditors and continue their operations as set forth in the plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, the Company will scale back its operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain SCO assets are not sold, SCO will continue to sell and support its UNIX and mobility businesses and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware, and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive, or as to the timing of such distributions, if any. A plan of reorganization could result in holders of the Company’s stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of the Company’s equity security holders.

~~Under~~If the ~~supervision~~Debtors’ ofplan is not confirmed by the Bankruptcy Court, it is unclear whether the Company would be able to reorganize its businesses and what, if anything, holders of claims against the Company ~~may~~would ~~decide~~ultimately receive with respect to ~~pursue~~their ~~various~~claims. If an alternative reorganization ~~strategic~~could ~~alternatives~~not asbe ~~deemed~~agreed ~~appropriate~~upon, byit is possible that the ~~Company~~Debtors’s ~~Board~~bankruptcy ofcases ~~Directors~~could be converted to ~~serve~~a liquidation under Chapter 7 and the ~~best~~Company would have to liquidate its assets, in which case it is ~~interests~~likely that holders of claims would receive substantially less favorable treatment than they would receive if the Company ~~and~~were ~~its~~to ~~stakeholders~~emerge as a viable, ~~including~~reorganized ~~asset~~entity, ~~sales~~and orstockholders ~~strategic~~would likely ~~partnerships~~receive nothing from the liquidation.

As a result of both the District Court’s August 10, 2007 and July 16, 2008 rulings in the Novell litigation and the uncertainties surrounding the confirmation of the Debtors’ Amended Reorganization Plan, among other matters, there is substantial doubt about the Company’s ability to continue as a going concern.

Going Concern

The Debtors are operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of the Company as a going concern is contingent upon, among other things, the Debtors’ ability to (i) to construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) to reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) to achieve profitability; ~~(iv) achieve sufficient cash flows from operating activities; and (v) obtain~~ financing sources to meet the Company’s future obligations. These matters as well as the aforementioned ruling in favor of Novell create substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and the classification of liabilities that might result from the outcome of these uncertainties. In addition, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

(iv) to achieve sufficient cash flows from operations; and (v) to obtain financing sources to meet the Company’s future liquidity needs. The negative operating trends the Company is experiencing as well as the aforementioned judgment in favor of Novell create substantial doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability of assets and the classification of liabilities that might result from the outcome of these uncertainties. In addition, the acceptance by the Bankruptcy Court of a plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements. The consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

(2) SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) on a basis consistent with the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s most recent annual report on Form 10-K, are adequate to make the information presented not misleading.

American Institute of Certified Public Accountants Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization under Bankruptcy Code, which is applicable to companies under Chapter 11 of the Bankruptcy Code, generally does not change the manner in which financial statements are prepared. It does, however, require among other disclosures that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations. The balance sheets must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, reorganization items must be disclosed separately in the statements of cash flows.

Operating results for the ~~nine~~three months ended ~~July~~January 31, ~~2008~~2009 are not necessarily indicative of of the operating results that may be expected for the year ending October 31, ~~2008~~2009.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s critical accounting policies and estimates include: revenue recognition, allowances for doubtful accounts receivable, useful lives and impairment of long-lived assets, litigation reserves, and valuation allowances against net deferred income tax assets.

Revenue Recognition

The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, as modified by SOP 98-9. The Company’s revenue has historically been from three sources: (i) product license revenue, primarily from product sales to resellers, end users and original equipment manufacturers (“OEMs”); (ii) technical support service revenue, primarily from providing technical support and consulting services to end users; and (iii) revenue from SCOsource licensing.

The Company recognizes product revenue upon shipment if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is probable and product returns are reasonably estimable.

The majority of the Company’s revenue transactions relate to product-only sales. On occasion, the Company has revenue transactions that have multiple elements (such as software products, maintenance, technical support services, and other services). For software agreements that have multiple elements, the Company allocates revenue to each component of the contract based on the relative fair value of the elements. The fair value of each element is based on vendor specific objective evidence (“VSOE”). VSOE is established when such elements are sold separately. The Company recognizes revenue when the criteria for product revenue recognition set forth above have been met. If VSOE of all undelivered elements exists, but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue in the period when persuasive evidence of an arrangement is obtained assuming all other revenue recognition criteria are met.

The Company recognizes product revenue from OEMs when the software is sold by the OEM to an end-user customer. Revenue from technical support services and consulting services is recognized as the related services are performed. Revenue for maintenance is recognized ratably over the maintenance period.

The Company considers an arrangement with payment terms longer than the Company’s normal business practice not to be fixed or determinable and revenue is recognized when the fee becomes due. The Company typically provides stock rotation rights for sales made through its distribution channel and sales to distributors are recognized upon shipment by the distributor to end users. For direct sales not through the Company’s distribution channel, sales are typically non-refundable and non-cancelable and revenue is recognized upon shipment. The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.

The Company’s SCOsource revenue to date has been primarily generated from agreements to utilize the Company’s UNIX source code as well as from intellectual property agreements. The Company recognizes revenue from SCOsource agreements when a signed contract exists, the fee is fixed or determinable, collection of the receivable is probable and delivery has occurred. If the payment terms extend beyond the Company’s normal payment terms, revenue is recognized as the payments become due.

Cash and Cash Equivalents

The Company considers all investments purchased with original maturities of three or fewer months to be cash equivalents. ~~Cash~~There ~~equivalents~~ were $0no ~~and~~cash ~~$1,926,000~~equivalents as of ~~July~~January 31, ~~2008~~2009 and October 31, ~~2007, respectively~~2008. Cash was $21,~~117~~836,000 and $31,~~628~~237,000 as of ~~July~~January 31, ~~2008~~2009 and October 31, ~~2007~~2008, respectively. In October 2008, the Emergency Economic Stabilization Act of 2008 temporarily increased the FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The Company has $~~100~~250,000 of cash that is federally insured. ~~through~~All ~~the~~remaining amounts of cash as ~~financial~~well ~~institutions~~as inrestricted ~~which~~cash itexceed isfederally ~~deposited~~insured limits. ~~All~~To ~~remaining~~date, ~~amounts~~the ofCompany ~~cash~~has ~~and~~not ~~restricted~~experienced ~~cash~~a asmaterial loss or lack of ~~July 31~~access to its invested cash. However, ~~2008~~no ~~exceed~~assurance ~~federally~~can ~~insured~~be ~~limits~~provided that access to the Company’s invested cash will not be impacted by adverse economic conditions in the financial markets.

Net Loss Per Common Share

Basic net income or loss per common share (“Basic EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (“Diluted EPS”) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock. If dilutive, the Company computes Diluted EPS using the treasury stock method.

Due to the fact that for all periods presented the Company has incurred net losses, common share equivalents of 45,~~322~~079,000 and 54,~~646~~684,000 for the three ~~and nine~~ months ended ~~July~~January 31, ~~2008~~2009 and ~~2007,~~ 2008, respectively, are not included in the calculation of diluted net loss per common share because they are anti-dilutive.

(3) COMMITMENTS AND CONTINGENCIES

IBM Corporation

On or about March 6, 2003, the Company filed a civil complaint against IBM. The case is pending in the United States District Court for the District of Utah (the “Court”), ~~styled~~under the title The SCO Group, Inc. v. International Business Machines Corporation, ~~Civil No. 2:03CV0294. In this action, the Company claims that IBM~~ breached its UNIX source code licenses (both the IBM and Sequent Computer Systems, Inc. (“Sequent”) licenses) by disclosing restricted information concerning the UNIX source code and derivative works and related information in connection with IBM’s efforts to promote the Linux operating system. The Company’s complaint includes, among other things, claims for breach of contract, unfair competition, tortious interference and copyright infringement. The Company is seeking damages in an amount to be proved at trial and injunctive relief.

On March 6, 2003, the Company notified IBM that IBM was not in compliance with the Company’s UNIX source code license agreement and on or about June 13, 2003, the Company delivered to IBM a notice of termination of that agreement, which underlies IBM’s AIX software. On August 11, 2003, the Company sent a similar notice terminating the Sequent source code license. IBM disputes the Company’s right to terminate those licenses. In the event the Company’s termination of those licenses is valid and not ultimately defeated by Novell’s claims, the Company believes IBM is exposed to substantial damages and injunctive relief claims based on its continued use and distribution of the AIX operating system. On June 9, 2003, Novell sent the Company a notice purporting to waive the Company’s claims against IBM regarding its license breaches.

OnCivil ~~February~~No. ~~27,~~2:03CV0294. ~~2004~~In this action, the Company ~~filed~~claims athat ~~second~~IBM ~~amended~~breached ~~complaint~~its ~~which~~UNIX ~~alleges nine causes~~source ofcode ~~action~~licenses ~~that~~(both ~~are~~the ~~similar~~IBM toand ~~those~~Sequent ~~set~~Computer ~~forth above~~Systems, ~~added~~Inc. a(“Sequent”) ~~new~~licenses) ~~claim~~by ~~for copyright infringement,~~disclosing ~~and~~restricted ~~removed~~information concerning the ~~claim~~UNIX ~~for~~source ~~misappropriation~~code ofand ~~trade~~derivative ~~secrets.~~works ~~IBM filed an answer~~ and 14related information ~~counterclaims.~~in ~~Among~~connection ~~other~~with ~~things,~~its ~~IBM~~efforts ~~asserted~~to ~~that~~promote the ~~Company~~Linux ~~does~~operating ~~not~~system. ~~have~~The ~~the right to terminate IBM~~Company’s ~~UNIX licenses and claimed that the Company breached the GNU General Public License~~complaint ~~and~~includes, ~~infringed~~among ~~certain~~other ~~patents~~things, ~~held by IBM. IBM’s counterclaims include~~ claims for breach of contract, ~~violation of the Lanham Act,~~ unfair competition, ~~intentional~~ tortious interference ~~with prospective economic relations, unfair~~ and ~~deceptive~~copyright ~~trade practices, promissory estoppel, patent~~ infringement. ~~and~~The aCompany ~~declaratory~~is ~~judgment~~seeking ~~claim~~damages ~~for~~in ~~non-infringement~~an ofamount ~~copyrights.~~to Onbe ~~October 6,~~proved ~~2005,~~at ~~IBM~~trial ~~voluntarily~~and ~~dismissed~~seeking ~~with~~injunctive ~~prejudice its claims for patent infringement~~relief.

On ~~December~~or about March 226, ~~2005~~2003, the Company ~~filed~~notified IBM that IBM was not in compliance with the Company’s UNIX source code license agreement and on or about June 13, 2003, the Company delivered to IBM a ~~voluminous~~notice ~~report~~of ~~detailing~~termination of that agreement, which underlies IBM’s ~~misuse~~AIX ofsoftware. On or about August 11, 2003, the Company sent a similar notice terminating the Sequent source code license. IBM disputes the Company’s ~~proprietary~~right ~~material~~to ~~(the~~terminate ~~“December 2005~~those ~~Submission”)~~licenses. ~~The~~If the Company’s ~~December 2005 Submission~~termination ~~included~~of ~~293~~those licenses ~~total~~was ~~disclosures~~valid, ~~which~~ the Company believes that IBM is exposed to substantial damages and injunctive relief claims ~~violate~~based on its ~~contractual~~continued ~~rights~~ use and ~~copyrights~~distribution of the AIX operating system. ~~The~~On ~~December~~June ~~2005~~9, 2003, ~~Submission~~Novell ~~and~~sent the ~~disclosures~~Company ~~identified~~a ~~therein~~notice ~~are~~purporting to waive the ~~result of~~Company’s ~~analysis~~claims byagainst ~~experienced~~IBM regarding ~~outside~~its ~~technical~~license ~~consultants~~breaches.

On February 1327, ~~2006~~2004, ~~IBM filed a motion with~~ the ~~Court seeking to limit the~~ Company’s ~~claims as~~filed ~~set~~a ~~forth~~second inamended ~~the~~complaint ~~December 2005~~which ~~Submission.~~alleges ~~IBM~~nine ~~argued that, of the 293 items the Company had~~causes ~~identified, 201 did not meet the level~~ of ~~specificity~~action ~~required by the Court. IBM requested~~ that ~~the Company~~are besimilar ~~limited~~ to 93those ~~items~~ set forth ~~in the December 2005 Submission~~above, ~~which~~added ~~IBM~~a ~~claimed~~new ~~meet the~~claim ~~required~~for ~~level~~copyright ~~of specificity. On June 28~~infringement, and ~~2006,~~removed the ~~Magistrate~~claim ~~Judge~~for ~~issued~~misappropriation ~~a ruling striking over 180~~ of ~~the~~trade ~~technology~~secrets. ~~disclosures~~IBM ~~identified~~filed inan ~~the~~answer ~~December 2005~~and ~~Submission~~14 counterclaims. ~~This~~Among ~~ruling~~other isthings, ~~a limitation~~IBM onasserted that the ~~number~~Company ofdoes ~~technology~~not ~~disclosures~~have the ~~Company~~right ~~made~~to terminate in its ~~December 2005 Submission,~~UNIX ~~but~~licenses ~~means~~and claimed that ~~over 100 of~~ the ~~challenged~~Company ~~items~~breached ~~remain in~~ the ~~case.~~GNU OnGeneral ~~July 13,~~Public ~~2006,~~License ~~the~~and ~~Company~~infringed ~~filed~~certain ~~objections~~patents toheld ~~the~~by ~~Magistrate~~IBM. ~~Judge~~IBM’s ~~order~~counterclaims ~~with~~include ~~the~~claims ~~Court;~~for ~~those~~breach ~~objections~~of ~~challenged~~contract, ~~the~~violation ~~process~~of ~~and~~ the ~~result~~Lanham ~~embodied~~Act, inunfair ~~the~~competition, ~~Magistrate~~intentional ~~Judge’s~~interference ~~order.~~with prospective Oneconomic ~~November 29~~relations, ~~2006,~~ ~~the~~unfair ~~Court~~and ~~affirmed~~deceptive ~~the~~trade ~~Magistrate~~practices, ~~Judge’s~~promissory ~~order of June 28~~estoppel, ~~2006.~~patent infringement ~~The~~and ~~Company filed~~ a ~~motion to~~declaratory ~~reconsider~~judgment ~~the~~claim ~~Court’s~~for ~~ruling~~non-infringement ~~and~~of acopyrights. ~~motion~~On ~~to amend the December~~October 6, 2005, ~~Submission.~~IBM ~~The~~voluntarily ~~District Judge~~dismissed ~~has~~with ~~not~~prejudice ~~ruled~~its onclaims ~~these~~for ~~motions~~patent infringement.

On ~~June~~December 822, ~~2006~~2005, ~~IBM~~the Company filed a ~~motion~~voluminous toreport ~~confine~~detailing ~~the Company~~IBM’s ~~claims~~misuse ~~to, and strike allegations in excess~~ of, the ~~December 2005 Submission. In this motion, IBM claims that the~~ Company’s ~~technology~~ ~~expert~~proprietary ~~reports~~material. goThe ~~beyond the disclosures contained in the~~ Company’s December 2005 ~~Submission~~ ~~and~~report ~~that~~included ~~those~~293 ~~expert~~total ~~reports~~disclosures, which ~~should~~the beCompany ~~restricted~~claims toviolate ~~that~~its ~~extent.~~contractual Onrights ~~December 21,~~and ~~2006, the Magistrate Judge granted IBM’s motion~~copyrights. The ~~Company~~report ~~filed~~and ~~objections~~the disclosures toidentified ~~that~~are ~~ruling with~~ the ~~Court.~~ ~~The~~result ~~District~~of ~~Judge~~analysis ~~has~~by ~~not~~experienced ~~ruled~~outside ontechnical ~~these objections~~consultants.

~~Both~~On ~~parties~~February 13, ~~have~~2006, IBM filed ~~expert~~a ~~reports~~motion ~~and~~with ~~substantially~~the ~~finished~~Court ~~expert~~seeking ~~discovery~~to limit the Company’s claims as set forth in the December 2005 report. IBM ~~filed~~argued that, of the 293 items the Company had ~~six~~identified, ~~motions~~201 ~~for~~did ~~summary~~not ~~judgment~~meet the level of specificity required by the Court. IBM requested that, ifthe Company ~~granted~~be limited to 93 items set forth in ~~whole~~the orDecember 2005 filing, which IBM claims meet the required level of specificity. On June 28, 2006, the Magistrate Judge issued a ruling striking over 180 of the technology disclosures challenged by the Company from its December 2005 filing. This ruling is a limitation on the number of technology disclosures the Company made in ~~substantial~~its ~~part~~December 2005 filing, ~~could~~but ~~resolve~~means that over 100 of the challenged items remain in the case. On July 13, 2006, the Company filed objections to the Magistrate Judge’s ~~claims~~order with the Court; those objections challenged the process and the result embodied in ~~IBM~~the Magistrate Judge’s ~~favor~~order. orOn ~~substantially~~November 29, 2006, ~~reduce~~the Court issued a ruling affirming the ~~Company~~Magistrate Judge’s ~~claims~~ruling of June 28, 2006. The Company filed ~~three~~ ~~motions~~a ~~for~~motion ~~summary~~to ~~judgment~~reconsider this ruling and a motion to amend its technology disclosures of December 2005.

AsOn ~~a result of the Court’s order of August~~June 108, ~~2007~~2006, inIBM ~~the~~filed ~~SCO~~a v.motion ~~Novell~~to ~~case,~~confine ~~several of~~ the Company’s claims ~~against~~to, ~~IBM~~and ~~may~~strike ~~be dismissed. These claims include its claims that IBM breached~~allegations ~~its~~in ~~UNIX~~excess ~~license~~of, ~~agreements and~~ the ~~claims~~December 2005 ~~arising~~disclosures. ~~from~~In ~~its~~this ~~termination~~motion, of IBM’s ~~UNIX~~claims ~~licenses. The Company believes~~ that the ~~Court~~Company’s technology ~~August 10,~~expert ~~2007~~reports ~~ruling~~go ~~does~~beyond ~~not~~the ~~resolve~~disclosures ~~certain~~contained ~~claims~~ in the ~~case,~~ ~~or aspects of those claims, including the~~ Company’s ~~claim for unfair competition arising out~~December 2005 ofsubmission to the ~~Project~~Court ~~Monterey~~and ~~initiative~~that inthose ~~the~~expert ~~late~~reports ~~1990’s.~~should ~~IBM~~be ~~has~~restricted ~~taken~~to ~~the position~~ that ~~the~~extent. ~~Court’s~~On ~~order of August~~December 1021, ~~2007~~2006, in the ~~Novell~~Magistrate ~~case~~Judge ~~resolves~~granted ~~all of the Company’s claims against~~ IBM ~~in IBM~~’s ~~favor~~motion. The Company ~~disputes~~filed ~~this~~objections ~~position.~~to ~~IBM’s~~that order ~~counterclaims~~with ~~against~~ the ~~Company remain in the case subject to pending motions for summary judgment~~Court.

~~Proceedings~~Both inparties ~~the~~filed ~~SCO~~expert vreports and substantially finished expert discovery. IBM ~~matter~~filed ~~were~~six motions ~~automatically~~for ~~stayed~~summary asjudgment awhich, ~~result~~if ofgranted ~~the~~in whole or in substantial part, could resolve the Company’s ~~filing~~ aclaims ~~voluntary~~in ~~petition~~IBM’s ~~for~~favor ~~relief~~or ~~under~~substantially ~~Chapter 11~~reduce of the ~~Bankruptcy~~Company’s ~~Code~~claims. onThe ~~September 14,~~Company filed ~~2007~~three motions for summary judgment.

As a result of the judge’s order of August 10, 2007, in the SCO v. Novell case, ~~Inc~~several of the Company’s claims against IBM may be dismissed. These claims include its claims that IBM breached its UNIX license agreements and the Company’s claims arising from its termination of IBM’s UNIX licenses. The Company believes that the Court’s August 10, 2007 ruling does not resolve certain claims in the case, or aspects of those claims, including the Company’s claim for unfair competition arising out of the Project Monterey initiative in the late 1990’s. IBM has taken the position that the Court’s ruling of August 10, 2007 in the Novell case resolves all of the Company’s claims against IBM in IBM’s favor. The Company disputes this position. IBM’s counterclaims against the Company remain in the case subject to pending motions for summary judgment. The IBM case is also currently stayed due to the Company’s filing of Chapter 11 bankruptcy.

On January 20, 2004, the Company filed suit in Court against Novell, Inc. for slander of title seeking relief for its alleged bad faith effort to interfere with the Company’s ownership of copyrights related to the Company’s UNIX source code and derivative works and the Company’s UnixWare product. The case is pending in the Court under the caption, The SCO Group, Inc. v. Novell, Inc., Civil No. 2:04CV00139. In the lawsuit, the Company requested preliminary and permanent injunctive relief as well as damages.

~~Through these claims, the Company seeks to require~~ Novell ~~to assign to the Company all copyrights that the Company believes Novell has wrongfully registered~~, to prevent Novell from claiming any ownership interest in those copyrights, and to require Novell to retract or withdraw all representations it has made regarding its purported ownership of those copyrights and UNIX itselfInc.

~~Novell~~On ~~filed two motions to dismiss claiming~~January 20, ~~among other things~~2004, ~~that~~the ~~Novell’s~~Company ~~false statements~~filed ~~were~~suit ~~not~~in ~~issued~~Utah ~~with~~state ~~malice~~court ~~and~~against ~~are~~Novell, ~~privileged under the law~~Inc. ~~The Court denied both~~for ~~motions.~~slander Onof ~~July 29,~~title ~~2005,~~seeking ~~Novell~~relief ~~filed~~for its ~~answer~~alleged ~~and~~bad ~~counterclaims~~faith ~~against~~effort ~~the~~to ~~Company,~~interfere ~~asserting counterclaims~~with ~~for~~ the Company’s ownership ~~alleged~~of ~~breaches~~copyrights ofrelated to the ~~1995~~Company’s ~~Asset~~UNIX ~~Purchase~~source ~~Agreement~~code ~~between Novell~~and derivative works and the Company’s ~~predecessor-in-interest,~~UnixWare product. The ~~Santa~~case ~~Cruz~~proceeded ~~Operation~~in (the ~~“APA”),~~United States District Court for ~~slander~~the District of ~~title,~~Utah ~~restitution/unjust~~under ~~enrichment~~the caption, anThe ~~accounting~~SCO ~~related~~Group, toInc. v. Novell’s, ~~retained~~Inc., ~~interest~~Civil ~~in SRVx~~No. 2:04CV00139. ~~royalties~~In the lawsuit, ~~and~~the ~~for~~Company ~~declaratory~~requested ~~relief~~preliminary ~~regarding~~and ~~Novell’s~~permanent ~~alleged~~injunctive ~~rights~~relief ~~under~~as ~~the~~well ~~APA.~~as ~~On or~~damages. ~~about~~Through ~~December 30,~~these ~~2005~~claims, the Company ~~filed~~seeks ato ~~motion~~require ~~for~~Novell ~~leave~~ to ~~amend~~assign ~~its~~to ~~complaint~~the toCompany ~~assert~~all copyrights ~~additional~~that ~~claims~~the ~~against~~Company believes Novell ~~including~~has ~~copyright~~wrongfully ~~infringement~~registered, ~~unfair~~to ~~competition~~prevent ~~and~~Novell afrom ~~breach~~claiming any ofownership ~~Novell’s~~interest ~~limited~~in ~~license~~those copyrights, and to ~~use~~require ~~the~~Novell ~~Company’s~~to ~~UNIX~~retract ~~code.~~or ~~Novell~~withdraw ~~consented~~all representations toit ~~the~~has ~~Company’s filing~~made regarding its purported ownership of ~~these~~those ~~additional~~copyrights ~~claims~~and UNIX itself.

~~On or about April 10, 2006,~~ Novell filed atwo ~~motion~~motions to ~~stay~~dismiss ~~the~~claiming, ~~case~~among inother ~~Utah~~things, ~~pending~~that aNovell’s ~~request~~false ~~for~~statements ~~arbitration~~were ~~that~~not ~~Novell~~issued ~~and~~with ~~its~~malice ~~subsidiary~~and ~~SuSE~~are ~~Linux,~~privileged ~~GmbH~~under ~~(“SuSE”)~~the ~~filed~~law. onThe ~~the~~court ~~same~~denied ~~date~~both inof ~~the~~Novell’s ~~International~~motions ~~Court~~to ~~of Arbitration~~dismiss. ~~Through~~On ~~these~~July 29, ~~proceedings~~2005, Novell ~~claims~~filed ~~that~~its answer and counterclaims against the Company ~~granted~~, ~~SuSE~~asserting counterclaims for the ~~right~~Company’s toalleged ~~use~~breaches ~~UNIX~~of ~~intellectual~~the ~~property~~Asset ~~through~~Purchase Agreement between Novell and the Company’s ~~participation~~ predecessor-in-interest, ~~the UnitedLinux~~The ~~initiative~~Santa inCruz ~~2002~~Operation, ~~and~~for slander ~~that~~of title, ~~through~~restitution/unjust ~~its~~enrichment, ~~acquisition~~an ofaccounting ~~SuSE,~~related to Novell’s ~~acquired~~retained interest ~~SuSE~~in SRVx royalties, and for declaratory relief regarding Novell’s ~~rights~~ asalleged arights ~~member~~under ofthe Asset ~~UnitedLinux~~Purchase Agreement. On ~~August~~or about December 2130, ~~2006~~2005, the ~~District~~Company ~~Court~~filed ~~ordered~~a ~~that~~motion ~~portions~~for ofleave to ~~claims~~amend ~~related~~its complaint to ~~SuSE~~assert ~~should~~additional beclaims ~~stayed~~against ~~pending~~Novell ~~the~~including ~~arbitration~~copyright ~~but~~infringement, unfair ~~that~~competition ~~the~~and ~~other~~a ~~portions~~breach of Novell’s limited license to use the Company’s UNIX code. Novell ~~claims~~consented into the ~~case~~Company’s ~~should~~filing ~~proceed~~of these additional claims.

~~The~~On ~~three-person~~or ~~arbitration~~about ~~panel~~April 10, ~~has~~2006, ~~been~~Novell ~~selected~~filed ~~for~~a motion to stay the ~~SuSE~~case in Utah pending a request for arbitration ~~but~~that Novell and SuSE Linux, GmbH (“SuSE”) filed on the same date in the International Court of Arbitration. Through these proceedings, Novell claims that ~~process~~the Company ~~has~~granted ~~been~~SuSE ~~stayed~~the byright to use its intellectual property through the ~~Bankruptcy~~Company’s ~~Court~~participation in ~~Delaware~~the UnitedLinux initiative in 2002 and that, through its acquisition of SuSE, Novell acquired SuSE’s rights as ~~explained~~a ~~below~~member of UnitedLinux. On August 21, 2006, the Court ordered that portions of claims relating to the SuSE arbitration should be stayed pending the arbitration but the other portions of claims in the case should proceed.

InThe ~~September 2006,~~three-person ~~Novell~~arbitration ~~filed~~panel anhas ~~Amended~~been ~~Counterclaim~~selected ~~asserting nine claims~~ for ~~relief including, among other things, claims for slander of title, breach of contract, declaratory relief and claims for an accounting and for a constructive trust over certain revenue~~ the ~~Company collected~~SuSE ~~from~~arbitration ~~Sun~~but ~~and Microsoft in 2003. In September 2006, Novell also filed a motion for summary judgment or a preliminary injunction, asking the Court to rule~~ that ~~Novell was entitled to that~~process ~~revenue~~is ~~under~~stayed ~~the~~by ~~APA. The Company opposed~~ the ~~motion~~bankruptcy ~~and filed a cross-motion for summary judgment or partial summary judgment~~cases. ~~Those motions were argued before the Court on January 23, 2007.~~

In September 2006, Novell filed an Amended Counterclaim asserting nine claims for relief including, among other things, claims for slander of title, breach of contract, declaratory relief and claims for an accounting, and for a constructive trust over certain revenue the Company collected from Sun and Microsoft in 2003. In September 2006, Novell also filed a motion for summary judgment or a preliminary injunction. The Company opposed the motion and filed a cross-motion for summary judgment or partial summary judgment. Those motions were argued on January 23, 2007, before the District Court in Utah. On December 1, 2006, Novell also filed a motion for summary judgment on its Fourth Counterclaim, asking the Court to rule that Novell had retained broad waiver rights and ~~other~~ other rights over SVRx ~~Licenses~~licenses it transferred under the 1995 Asset Purchase Agreement. With ~~its~~the Company’s opposition to this motion, ~~the~~it ~~Company~~ filed its own cross- motion for summary judgment, asking the Court to rule that ~~the rights~~ Novell’s retained ~~under~~rights ~~the APA~~ are much narrower than ~~Novell~~it claims.

On April 9, 2007, the Company filed a Motion for Partial Summary Judgment on its First, Second, and Fifth Causes of Action and for Summary Judgment on Novell’s First Counterclaim, arguing that Novell transferred the UNIX and UnixWare copyrights under the plain language of the amended Asset Purchase Agreement, as confirmed by testimony of at least nine witnesses, including Novell’s own CEO at the time of the Asset Purchase Agreement. On April 20, 2007, Novell filed motions for summary judgment asking the Court to rule that Novell retained the UNIX and UnixWare copyrights under the ~~APA~~1995 Asset Purchase Agreement, that the Company did not meet its burden of establishing special damages on its slander of title claim, that Novell retained broad rights to waive the Company’s contract claims against IBM, and that the portion of the Company’s contract and unfair-competition claims based on non-compete provisions in the APA and a related agreement should not proceed to a jury trial. The Company filed its own motions for summary judgment seeking a ruling that it owns the UNIX and UnixWare copyrights, and that Novell’s retained rights are much narrower than Novell now claims. On May 31 and June 4, 2007, the Court heard oral argument on these motions and the pending motion and cross-motion for summary judgment on Novell’s Fourth Counterclaim, taking the motions under advisement.

On August 10, 2007, the ~~Court~~federal judge ruled in favor of Novell on several of the summary ~~judgment~~ judgment motions that were ~~pending~~before the Court. The effect of these rulings was to significantly reduce or to eliminate certain of the Company’s claims in both the Novell and IBM cases, and possibly others. The ~~Court~~ court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time ~~of the~~ APA and that Novell retained broad rights to waive the Company’s contract claims against IBM. The Court also ruled that the Company owns the copyrights to post-APA UnixWare derivatives and that the Company has certain other ownership rights in the UNIX technology. The Company was directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that the Company executed in fiscal year 2003 and thereafter included older SVRx licenses and that the Company was possibly required to remit some portion of the proceeds to Novell. Over the Company’s objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether SCO had authority to enter into such SVRx licenses. Based on Novell’s allegations, the potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

~~The~~of ~~trial~~the of1995 ~~these~~Asset ~~issues,~~Purchase ~~however,~~Agreement ~~was~~and ~~automatically~~that ~~stayed~~Novell asretained abroad ~~result~~rights ofto ~~the~~waive the Company’s ~~filing~~ acontract ~~voluntary~~claims ~~petition~~against ~~for~~IBM. ~~relief~~The ~~under~~Court ~~Chapter 11~~ruled ofthat the ~~Bankruptcy~~Company ~~Code~~owns onthe ~~September 14, 2007.~~copyrights Onto ~~October 4,~~post 1995 ~~2007,~~derivatives ~~Novell~~and ~~filed~~that athe ~~Motion~~Company ~~for~~has ~~Relief~~certain ~~from~~other ~~Automatic~~ownership ~~Stay.~~rights Onin ~~November 27, 2007,~~ the ~~Bankruptcy~~UNIX ~~Court~~technology. The ~~lifted~~Company ~~the~~was ~~stay~~directed to ~~permit~~accept Novell’s towaiver ~~pursue~~of ~~the~~its ~~trial~~UNIX ~~scheduled~~contract inclaims ~~the Court~~against onIBM. In addition, the ~~allocation~~Court ofdetermined ~~proceeds~~that ~~from~~certain ~~the~~ SCOsource licensing agreements ~~and~~that the ~~question~~Company executed ofin ~~SCO’s~~fiscal ~~alleged lack~~year of2003 ~~authority~~included toolder ~~enter~~SVRx ~~into~~licenses ~~them,~~and ~~but~~that the ~~Bankruptcy~~Company ~~Court~~was ~~retained~~possibly required ~~jurisdiction~~ to ~~determine whether~~remit some portion of the proceeds to ~~impose~~Novell. Over the Company’s objection, a ~~constructive~~bench trial ~~trust~~was set to begin on ~~any~~September 17, ~~amounts~~2007, ~~found~~and tothe befederal ~~payable~~judge was to ~~Novell.~~determine ~~The~~what ~~Bankruptcy~~portion, ~~Court~~if ~~also~~any, ~~ruled~~of ~~that~~the proceeds of the ~~automatic~~SCOsource ~~stay~~agreements ~~applies~~were attributable to ~~the~~such ~~SuSE~~SVRx ~~arbitration~~licenses ~~proceeding~~and should ~~pending~~be ~~in Europe.~~remitted Asto ~~described~~Novell ~~above~~as ~~and~~well ~~below,~~as ~~upon~~whether the ~~partial~~Company ~~lifting~~had ofauthority ~~the~~to ~~automatic~~enter ~~stay,~~into ~~the~~such ~~Court~~SVRx ~~scheduled~~licenses. aThe ~~four-day~~range ~~trial~~of onthe ~~those~~payment ~~matters~~to ~~for~~Novell ~~which~~was ~~the~~from ~~Bankruptcy~~a ~~Court~~de ~~lifted~~minimis ~~the~~amount ~~stay,~~to ~~which started~~in onexcess ~~April 29~~of $30,000,000, ~~2008~~the ~~and~~latter ~~concluded~~amount onbeing ~~May 2~~the amount claimed by Novell, ~~2008~~plus interest.

OnThe ~~December 21,~~trial ~~2007,~~of ~~Novell~~these ~~filed~~issues, ahowever, ~~motion~~was ~~for~~automatically ~~summary~~stayed ~~judgment~~as ona ~~the~~result ~~issue~~ of ~~whether~~ the Company ~~had~~filing a ~~the~~voluntary ~~authority~~petition tofor ~~enter~~relief ~~into~~under ~~the~~Chapter 11 ~~SCOsource~~of ~~licenses.~~the ~~The~~United ~~parties~~States ~~have~~Bankruptcy ~~fully~~Code ~~briefed~~in the United ~~motion,~~States ~~and~~Bankruptcy ~~the~~ Court ~~set~~for ~~oral~~the ~~argument~~District of Delaware on ~~this~~September 14, ~~and~~2007. ~~any~~On ~~other~~October 4, ~~pending~~2007, Novell ~~motions~~filed ~~for~~a ~~summary~~Motion ~~judgment~~ for ~~April 30,~~Relief ~~2008~~from Automatic Stay. On ~~March~~November 727, ~~2008~~2007, the ~~Company~~Bankruptcy ~~filed~~Court modified athe ~~Motion~~automatic ~~for~~stay ~~Judgment~~to onpermit Novell to pursue the ~~Pleadings~~trial ~~on Novell’s~~scheduled ~~Claims~~in ~~for~~the ~~Money~~Court oron ~~Claim~~the allocation ~~for~~of ~~Declaratory~~proceeds ~~Relief,~~from inthe ~~which~~SCOsource agreements and the ~~Company~~question ~~argues,~~of ~~based~~the ~~on Novell~~Company’s ~~version~~alleged lack of ~~the~~authority ~~facts,~~to ~~that~~enter ~~either~~into ~~its~~them, ~~claims~~but ~~for~~the ~~money~~Bankruptcy ~~from~~Court ~~SCOsource~~retained ~~agreements~~jurisdiction orto ~~its~~determine ~~claim~~whether ~~seeking~~to impose a ~~declaration~~constructive ~~that~~trust ~~SCO~~on ~~lacked~~any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the ~~authority~~bankruptcy stay applies to ~~enter~~the ~~into~~SuSE ~~those~~arbitration ~~agreements~~proceeding ~~must~~pending ~~fail.~~in ~~The~~Europe. Upon the modification of the automatic stay, the Court ~~heard~~scheduled ~~oral~~a ~~arguments~~four-day ontrial, ~~this~~which started ~~motion~~on April 29, as2008 ~~well~~and asconcluded ~~Novell’s~~on ~~pending~~May 2, ~~motion~~2008, on those matters for ~~summary~~which the Bankruptcy ~~judgment~~Court modified the automatic stay. Prior trial, onNovell conceded that it would not be making a claim to a portion of the ~~second~~fees ~~day~~paid to the Company by Microsoft in 2003 and Novell therefore reduced the principal amount of ~~trial~~its claim to $19,979,561. ~~April 30~~After the trial and arguments, ~~2008~~the Court took all matters under advisement and stated that it would attempt to issue a ruling without undue delay.

~~From~~On ~~April~~July ~~29 through May 2~~16, 2008, the Court ~~held~~entered aits ~~bench~~Findings ~~trial~~of onFact, ~~Novell’s~~Conclusions ~~monetary~~of ~~claim~~Law, ~~for~~and Order, ~~certain~~ruling ~~portions~~that of(1) the ~~fees~~SCOsource ~~SCO~~agreements ~~received~~with ~~from~~Linux ~~the~~end-users ~~SCOsource~~were ~~agreements~~not SVRx licenses and ontherefore Novell ~~whether~~was not entitled to revenue from those agreements and that SCO had the authority to enter into ~~those~~such agreements,; as(2) the ~~explained~~2003 ~~above.~~SCOsource ~~Prior~~agreement with Microsoft contained an SVRx license that was incidental to the ~~commencement~~UnixWare oflicense in the ~~trial~~ agreement, ~~Novell~~and ~~conceded~~therefore the Company was authorized to enter into that itSVRx ~~would~~license ~~not~~and beNovell ~~making~~was anot ~~claim~~entitled to arevenue ~~portion~~from ofthe agreement; and (3) the ~~fees~~2003 ~~paid~~SCOsource toagreement ~~SCO~~with bySun contained an unauthorized amendment of a ~~Microsoft~~prior inUNIX ~~2003~~buy out agreement, and Novell ~~therefore~~was ~~reduced~~entitled to $2,547,817 of the ~~principal~~revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of ~~its~~prejudgment ~~claim~~interest toit ~~$19~~sought based on this award. On August 29,~~979~~ 2008,~~561.~~ Novell filed ~~After~~an ~~the~~Unopposed ~~trial~~Submission ~~and~~Regarding ~~arguments~~Prejudgment Interest, informing the Court ~~took~~that ~~all~~the ~~matters~~parties ~~under~~had agreed ~~advisement~~that ~~and~~Novell ~~stated~~was itentitled ~~would~~to $918,122 in prejudgment interest through that date, plus $489 ~~attempt~~per today ~~issue~~until athe ~~ruling~~entry ~~without~~of ~~undue~~final ~~delay~~judgment, based on the Court’s $2,547,817 award.

OnIn its ruling of July 16, 2008, the Court ~~entered~~also ~~its~~directed ~~Findings~~Novell ofto ~~Fact,~~file ~~Conclusions~~a ofproposed ~~Law, and Order,~~Final ~~ruling~~Judgment ~~that~~consistent ~~(1)~~ with the ~~SCOsource~~court’s ~~agreements~~trial ~~with~~and ~~Linux~~summary ~~end-users~~judgment ~~were~~orders. ~~not~~In ~~SVRx~~its ~~licenses~~proposed ~~and therefore~~submission ~~Novell~~to isthe ~~not~~court ~~entitled~~in tocompliance ~~revenue~~with ~~from~~this ~~those~~order, ~~agreements;~~Novell ~~(2)~~ took the ~~2003~~position ~~SCOsource~~that ~~agreement~~final ~~with Microsoft~~judgment ~~contained~~could annot be ~~SVRx~~entered ~~license~~because ~~that~~the ~~was~~Company’s ~~incidental~~claims towere ~~the~~stayed ~~UnixWare~~pending ~~license~~arbitration inand the ~~agreement, and~~imposition ~~therefore~~of ~~SCO~~a constructive ~~was~~trust ~~authorized~~remained toan ~~enter~~open ~~into~~question in the ~~license~~Bankruptcy ~~and~~Court. ~~Novell~~Subsequently, isin ~~not~~order ~~entitled~~ to ~~revenue~~ ~~from~~expedite the ~~agreement;~~entry ~~(3) the~~of ~~2003~~final ~~SCOsource~~judgment, ~~agreement~~the ~~with~~Company ~~Sun~~sought ~~also~~to ~~contained~~resolve anthese ~~authorized incidental~~issues ~~SVRx~~with ~~license~~Novell and agreed ~~Novell~~to isan ~~not~~extension ~~entitled~~of toNovell’s ~~revenue~~deadline ~~attributable~~for tofiling ~~that~~its ~~license;~~submission. ~~and~~Based ~~(4)~~ on the ~~same~~Company’s tracing of Sun’s ~~agreement~~payments ~~contained~~under anits ~~unauthorized~~2003 ~~amendment~~SCOsource ~~of a prior UNIX~~ agreement, ~~and~~ Novell is ~~entitled~~agreed tothat only $2625,~~547,817~~487 of the ~~revenue~~Company’s ~~from~~current ~~the~~assets ~~Sun~~were ~~agreement~~traceable as ~~attributable~~trust ~~to that amendment~~funds. The ~~Court~~Company ~~directed~~also ~~Novell~~proposed todismissing its ~~file~~stayed aclaims ~~brief~~with ~~identifying~~prejudice on the ~~amount~~basis of ~~prejudgment~~the ~~interest~~Court’s itruling ~~seeks~~that Novell owns the pre-APA ~~based~~UNIX oncopyrights ~~this~~in ~~award~~the Court’s summary judgment order of August 10, 2007. On August 29, 2008, ~~Novell~~in its ~~filed~~Submission anRegarding ~~Unopposed~~the ~~Submission~~Entry ~~Regarding Prejudgment~~of ~~Interest~~Final Judgment, ~~informing~~Novell informed the Court ~~that~~of the parties’ agreement ~~agree~~as ~~that~~to ~~Novell~~the istrust ~~entitled to $918~~amount,~~122~~ inbut ~~prejudgment~~Novell ~~interest~~stood ~~through~~by its position that ~~date,~~final ~~plus~~judgment ~~$489~~could ~~per~~not ~~day~~be entered ~~until~~in light of the ~~entry~~stayed ofclaims. ~~final judgment~~On September 15, ~~based~~2008, onthe Company filed papers arguing for the ~~Court’s~~entry ~~$2,547,817~~of ~~award~~final judgment.

InOn ~~its ruling of July~~November 1620, 2008, ~~the~~after ~~Court~~further ~~also~~negotiations ~~directed~~between ~~Novell~~the toparties, ~~file~~the aCourt ~~proposed~~entered ~~Final~~a Final Judgment, ~~consistent~~incorporating ~~with~~ the ~~Court’s~~material ~~trial~~rulings ~~and~~from ~~summary~~the ~~judgment~~August 10, ~~orders.~~2007 Inand ~~its~~July 16, ~~proposed submission~~2008 torulings ~~the~~as ~~Court~~explained inabove. ~~compliance~~On ~~with~~November 25, ~~this order~~2008, ~~Novell took~~ the ~~position~~Company ~~that~~filed ~~final~~a ~~judgment~~notice ~~cannot~~of ~~be entered~~appeal ~~because certain SCO claims are stayed pending arbitration and the imposition~~ of athat ~~constructive~~Final ~~trust~~Judgment, ~~remains~~including anthe ~~open~~adverse ~~question~~rulings in the ~~Bankruptcy~~ Court.’s ~~Subsequently,~~summary injudgment order toof August 10, ~~expedite~~2007. ~~the~~On ~~entry~~January 23, ~~of final judgment~~2009, ~~SCO~~the ~~sought~~Company tofiled ~~resolve~~an ~~these~~unopposed ~~issues~~motion ~~with~~for ~~Novell~~an ~~and~~expedited ~~agreed~~appeal towith the anUnited ~~extension~~States Court of ~~Novell’s~~Appeals ~~deadline~~ for ~~filing~~the ~~its~~Tenth ~~submission.~~Circuit ~~Based~~(the on“Tenth ~~SCO’s~~Circuit ~~tracing~~Court”) ofwhich ~~Sun’s~~was granted ~~payments~~by ~~under~~the ~~its~~Tenth ~~2003~~Circuit ~~SCOsource~~Court ~~agreement~~on January 29, ~~Novell~~2009. ~~agreed~~On ~~that~~March 4, ~~only $625~~2009,~~487~~ ofthe ~~SCO’s~~Company ~~current assets~~filed ~~were~~its ~~traceable~~brief ~~as trust funds. SCO also proposed dismissing~~for its ~~stayed~~appeal ~~claims~~ with ~~prejudice~~Tenth onCircuit ~~the~~Court. ~~basis~~The ofTenth ~~the~~Circuit Court~~’s ruling~~ ~~that~~has ~~Novell~~placed ~~owns~~ the ~~pre-APA~~case ~~UNIX~~on ~~copyrights in~~ the calendar ~~Court’s~~for ~~summary~~oral ~~judgement~~argument ~~order~~on ~~of August 10~~May 6, ~~2007~~2009. On ~~August 29,~~With ~~2008, in its Submission Regarding~~ the ~~Entry~~expedited ~~of Final Judgment~~appeal, ~~Novell~~and ~~informed~~early ~~the~~hearing ~~Court~~date, of the Company ~~parties’~~is ~~agreement~~hopeful asa todecision on the ~~trust~~appeal ~~amount, but Novell stood by its position that final judgment~~ could ~~not~~ be ~~entered~~forthcoming in ~~light of~~ the ~~stayed~~next ~~claims.~~five Onto ~~September~~eight 15months, ~~2008,~~ ~~SCO~~but ~~filed~~it could ~~papers~~be ~~arguing~~several ~~for the~~months ~~entry~~beyond ofthat ~~final~~time ~~judgment~~frame.

As a result of this order from the Court, the Company has accrued $3,473,000 for this contingent liability and related interest. However, the Board of Directors and management of the Company, continue to contest this liability. They believe that this order is in error, and that the Company has strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.

The Company intends to appeal the adverse August 10, 2007 summary judgment ruling and the July 16, 2008 order as soon as Final Judgment is entered upon those orders.

On March 13, 2009, the Court denied the Company’s motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.

As a result of the Court’s judgment of July 16, 2008 against the Company, as of January 31, 2009, the Company has accrued $3,562,000 including the related interest, which amount is included in Liabilities Subject to Compromise. However, the Company continues to contest this liability. The Company believes that the Court erred and that there are strong grounds to have the adverse rulings embodied in the Final Judgment reversed on appeal.

IPO Class Action Matter

In July 2001, the Company and several of its former officers and directors (the “Individual Defendants”) were named as defendants in class action complaints alleging violations of the federal securities laws in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed a Consolidated Amended Complaint, which is now the operative complaint. The complaint seeks unspecified damages and alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Registration Statement for the Company’s initial public offering was false and misleading because it did not disclose these arrangements.

The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss with respect to the Company.

On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six “focus” cases, which are intended to serve as test cases. Plaintiffs selected these six cases, which do not include the Company. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

Prior to the Second Circuit’s December 5, 2006 ruling, a majority of the issuers, including the Company, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed by the plaintiffs and the issuers terminating the proposed settlement. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. ~~The amended complaints include a number of changes, such as changes to the definition of the purported class of investors, and the elimination of the individual defendants as defendants.~~ On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them. On March 26, 2008, the district court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. On October 10, 2008, the judge in the IPO case granted plaintiffs’ request to withdraw, without prejudice, their motion for class certification in the case. The parties in the approximately 300 coordinated class actions, including the Company, the underwriter defendants, and the plaintiffs in the class action involving the Company, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. The settlement is ~~awaiting~~subject ato ~~decision~~approval ~~from~~by the parties, termination by the parties under certain circumstances, and Court onapproval. There is no assurance that the ~~class~~settlement ~~certification~~will ~~motion~~be concluded or that the Court will approve the settlement.

Due to the inherent uncertainties of litigation, ~~the~~management ~~Company~~ cannot predict the ultimate outcome of this matter. The Company has notified its underwriters and insurance companies of the existence of the claims. Management presently believes, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on the Company’s results of operations, liquidity or financial position, and will not exceed the $200,000 self-insured retention already paid or accrued by the Company.

Red Hat, Inc.

On August 4, 2003, Red Hat, Inc. filed a complaint against the Company. The action is pending in the United States District Court for the District of Delaware (the “District Court of Delaware”) under the case caption, Red Hat, Inc. v. The SCO Group, Inc., Civil No. 03-772. Red Hat asserts that the Linux operating system does not infringe on the Company’s UNIX intellectual property rights and seeks a declaratory judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat claims the Company has engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, trade libel and disparagement. On April 6, 2004, the District Court of Delaware denied the Company’s motion to dismiss this case; however, the District Court of Delaware stayed the case and requested status reports every 90 days regarding the case against IBM. Red Hat filed a motion for reconsideration, which the District Court of Delaware denied on March 31, 2005. This matter was also automatically stayed upon the Company’s filing its Chapter 11 petitions. In the event that the stay is lifted, including the automatic stay, and Red Hat is allowed to pursue its claims, the Company will likely assert counterclaims against Red Hat. The Company intends to vigorously defend this action.

On November 20, 2008, the Bankruptcy Court entered an order, based on a stipulation of the parties, that the plaintiffs in the IPO case would not pursue assets of the Company in connection with the case but would look only to insurance coverage to cover any damages that may be awarded to plaintiffs in that case.

Red Hat, Inc.

On August 4, 2003, Red Hat, Inc. filed a complaint against the Company. The action is pending in the United States District Court for the District of Delaware under the case caption, Red Hat, Inc. v. The SCO Group, Inc., Civil No. 03-772. Red Hat asserts that the Linux operating system does not infringe on the Company’s UNIX intellectual property rights and seeks a declaratory judgment for non-infringement of copyrights and no misappropriation of trade secrets. In addition, Red Hat claims the Company has engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, trade libel and disparagement. On April 6, 2004, the court denied the Company’s motion to dismiss this case; however, the court stayed the case and requested status reports every 90 days regarding the case against IBM. Red Hat filed a motion for reconsideration, which the court denied on March 31, 2005. The Company intends to vigorously defend this action. In the event that the stay is lifted, including the bankruptcy stay, and Red Hat is allowed to pursue its claims, the Company will likely assert counterclaims against Red Hat.

AutoZone, Inc.

On March 2, 2004, the Company filed suit against AutoZone, Inc., in the Federal District Court for the District of Nevada (the “Nevada District Court”). The Company brought a single claim for copyright infringement based on AutoZone’s use of UNIX copyrighted materials in Linux and asked the Nevada District Court to impose a preliminary injunction against AutoZone. On August 6, 2004, the Nevada District Court granted AutoZone’s motion to stay the case pending resolution of the IBM, Novell, and Red Hat litigations. During the limited discovery that the Nevada District Court permitted, SCO confirmed that AutoZone had also made unauthorized use of materials from SCO’s OpenServer operating system in migrating to Linux. On September 22, 2008, the Nevada District Court held a status conference on the case and decided to lift the stay effective December 31, 2008. On January 6, 2009, the assigned Magistrate Judge issued an order directing the parties to file a proposed discovery plan and scheduling order by January 16, 2009. On that date, the parties filed a Joint Discovery Plan and Scheduling Order proposing January 15, 2010 as the deadline for the parties to complete fact discovery. On February 27, 2009, the parties filed initial disclosures in the case and the case will proceed pursuant to the schedule set forth above.

Other Matters

In April 2003, the Company’s former Indian distributor filed a claim in India, requesting summary judgment for payment of approximately $1,428,000, and an order that the Company trade in India only through the distributor and/or give a security deposit until the claim is paid. The distributor claims that the Company is responsible to repurchase certain software products and to reimburse the distributor for certain other operating costs. Management does not believe that the Company is responsible to reimburse the distributor for any operating costs and also believes that the return rights related to any remaining inventory have lapsed. The distributor also requested that the Indian Courts grant interim relief in the form of attachment of local assets. These requests for interim relief have failed in the Court, discovery has commenced, and hearings on the main claims have been held and are ongoing. The Company intends to vigorously defend this action.

Pursuit and defense of the above-mentioned matters will be costly, and management expects legal fees and related expenses will be substantial. A material, negative impact on the Company’s results of operations, liquidity or financial position from the Red Hat, IPO Class Action, or Indian Distributor matters, or the IBM or Novell counterclaims is not estimable.

The Company is a party to certain other legal proceedings arising in the ordinary course of business, and management believes, after consultation with legal counsel, that the ultimate outcome of these legal proceedings will not have a material adverse effect on the Company’s results of operations, liquidity or financial position.

(4) STOCKHOLDERS’ EQUITY

Equity Plans

During the year ended October 31, 1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”) that provided for the granting of nonqualified stock options to purchase shares of common stock. On December 1, 1999, the Company’s board of directors approved the 1999 Omnibus Stock Incentive Plan (the “1999 Plan”), which was intended to serve as the successor equity incentive program to the 1998 Plan. The 1999 Plan allows for the grant of awards in the form of incentive and non-qualified stock options, stock appreciation rights, restricted shares, phantom stock and stock bonuses. Awards may be granted to individuals in the Company’s employ or service.

On May 16, 2003, the Company’s stockholders approved the 2002 Omnibus Stock Incentive Plan (the “2002 Plan”) upon the recommendation of the board of directors. The 2002 Plan permits the award of stock options, stock appreciation rights, restricted stock, phantom stock rights, and stock bonuses. Stock options may have an exercise price equal to, less than, or greater than the fair market value of the common stock on the date of grant, except that the exercise price of incentive stock options must be equal to or greater than the fair market value of the common stock as of the date of grant.

On April 20, 2004, the Company’s stockholders approved the 2004 Omnibus Stock Incentive Plan (the “2004 Plan”) upon the recommendation of the board of directors. The 2004 Plan allows for the award of up to 1,500,000 shares of the Company’s common stock and permits the award of stock options, stock appreciation rights, restricted stock, phantom stock rights, and stock bonuses. The 2004 Plan incorporates an evergreen formula pursuant to which on each November 1, the aggregate number of shares reserved for issuance under the 2004 Plan will increase by a number of shares equal to 3% of the outstanding shares on the day preceding (October 31). The 2004 Plan is administered by the compensation committee of the Company’s board of directors. The compensation committee has the ability to determine the terms of the option, the exercise price, the number of shares subject to each option, and the exercisability of the options. Stock options may have an exercise price equal to, less than, or greater than the fair market value of the common stock on the date of grant, except that the exercise price of incentive stock options must be equal to or greater than the fair market value of the common stock as of the date of grant. Shares issued pursuant to the 2004 Plan may be authorized and unissued shares, treasury shares or shares acquired by the Company for purposes of the 2004 Plan.

Under the terms of the 1998, 1999, 2002 and 2004 Plans, options generally expire 10 years from the date of grant or within 90 days of termination. Options granted under these plans generally vest at 25% after the completion of 1 year of service and then 1/36 per month for the remaining 3 years and would be fully vested at the end of 4 years.

The board of directors may suspend, revise, terminate or amend any of the option plans at any time; provided, however, that stockholder approval must be obtained if and to the extent that the board of directors deems it appropriate to satisfy Section 162(m) of the Code, Section 422 of the Code or the rules of any stock exchange on which the common stock is listed. No action under the option plans may, without the consent of the participant, reduce the participant’s rights under any outstanding award.

The effect of accounting for stock-based awards for the three months ended ~~July~~January 31, ~~2008 and~~2009 ~~2007~~and 2008 was to record $~~237~~181,000 and $~~396~~114,000, respectively, of stock-based compensation expense. ~~For the nine months ended July 31, 2008 and 2007, $590,000 and $1,407,000, respectively, of stock-based compensation expense was recorded~~. For the three ~~and nine~~ months ended ~~July~~January 31, ~~2008~~2009 and ~~2007~~2008, the Company has allocated stock-based compensation expense to the following statement of operations captions:

	Three Months Ended July 31,				Nine months Ended July 31,
	Three Months Ended January 31,
	2008		2007		2008		2007
	2009		2008
	(In thousands)
Cost of products	$	1	$	2—	$	3	$	5
Cost of SCOsource		6839		6634		~~168~~		~~211~~
Cost of services		7		125		20		29
Sales and marketing		5047		6829		~~135~~		~~286~~
General and administrative		9872		~~197~~33		~~226~~		~~729~~
Research and development		1315		5113		38		~~147~~
Total stock-based compensation	$	~~237~~181	$	~~396~~114	$	~~590~~	$	~~1,407~~

~~With~~During ~~respect~~the tothree ~~stock~~months ~~options~~ended ~~granted~~January 31, ~~during~~2009, ~~the~~there ~~three~~were ~~and~~no ~~nine~~options ~~months~~granted ~~ended~~or ~~July~~exercised. As of January 31, ~~2008~~2009, ~~and 2007~~there were approximately 5,079,000 ~~the~~stock ~~assumptions~~options ~~used~~outstanding inwith ~~the~~a ~~Black-Scholes~~weighted average ~~option-pricing~~exercise ~~model~~price ~~are~~of as$2.81 ~~follows:~~per share.

	Three Months Ended July 31,						Nine months Ended July 31,
	2008			2007			2008			2007
Risk-free interest rate		3.3	%		4.7	%		3.0	%		4.7	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		369.7	%		96.9	%		350.1	%		90.0	%
Expected exercise life (in years)		5.6			5.0			5.5			5.0

With respect to stock options granted during the three months ended January 31, 2008, the assumptions used in the Black-Scholes option-pricing model are as follows:

The estimated fair value of stock options is amortized over the vesting period of the award.

During the nine months ended July 31, 2008, the Company granted options to purchase approximately 60,000 shares of common stock with an average exercise price of $0.08 per share. None of these stock options were granted with an exercise price below the quoted market price on the date of grant. During the nine months ended July 31, 2008, no options to purchase common stock were exercised. As of July 31, 2008, there were approximately 4,309,000 stock options outstanding with a weighted average exercise price of $3.37per share.

(5) SEGMENT INFORMATION

The Company’s resources are allocated and operating results managed to the operating income (loss) level for each of the Company’s segments: UNIX and SCOsource. Both segments are based on the Company’s UNIX intellectual property. The UNIX business sells and distributes UNIX products and services through an extensive distribution channel and to corporate end-users and the SCOsource business enforces and protects the Company’s UNIX intellectual property. Segment disclosures for the Company are as follows:

	Three Months Ended July 31, 2008
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	3,739		$	—		$	3,739
Cost of revenues		473			2,876			3,349
Gross margin (deficit)		3,266			(2,876	)		390
Sales and marketing		1,765			—			1,765
General and administrative		889			—			889
Research and development		708			—			708
Total operating expenses		3,362			—			3,362
Loss from operations	$	(96	)	$	(2,876	)	$	(2,972	)

	Three Months Ended July 31, 2007
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	4,686		$	—		$	4,686
Cost of revenues		777			1,156			1,933
Gross margin (deficit)		3,909			(1,156	)		2,753
Sales and marketing		2,463			—			2,463
General and administrative		1,377			—			1,377
Research and development		1,424			—			1,424
Total operating expenses		5,264			—			5,264
Loss from operations	$	(1,355	)	$	(1,156	)	$	(2,511	)

	Nine months Ended July 31, 2008
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	12,272		$	—		$	12,272
Cost of revenues		1,661			3,476			5,137
Gross margin (deficit)		10,611			(3,476	)		7,135
Sales and marketing		6,630			—			6,630
General and administrative		3,086			—			3,086
Research and development		2,912			—			2,912
Total operating expenses		12,628			—			12,628
Loss from operations	$	(2,017	)	$	(3,476	)	$	(5,493	)

	Nine months Ended July 31, 2007
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	16,692		$	23		$	16,715
Cost of revenues		2,594			2,876			5,470
Gross margin (deficit)		14,098			(2,853	)		11,245
Sales and marketing		7,296			—			7,296
General and administrative		4,051			—			4,051
Research and development		4,737			—			4,737
Total operating expenses		16,084			—			16,084
Loss from operations	$	(1,986	)	$	(2,853	)	$	(4,839	)

(6) PLAN OF REORGANIZATION STATUS


	Three months ended
	January 31, 2008
Risk-free interest rate		2.7	%
Expected dividend yield		0.0	%
Volatility		327.2	%
Expected exercise life (in years)		5.5

OnThe ~~February 13,~~estimated ~~2008,~~fair ~~the~~value ~~Company entered into a Memorandum~~ of ~~Understanding~~stock ~~(the~~options ~~“MOU”)~~is ~~with Stephen~~amortized ~~Norris~~over ~~Capital Partners, LLC, a Delaware limited liability company (“SNCP”), whereby, SNCP agreed to provide financing to fund~~ the ~~Company’s~~vesting ~~plan~~period of ~~reorganization filed on February 29, 2008 in~~ the ~~Company’s Chapter 11 bankruptcy case presently pending in the United States Bankruptcy Court for the District of Delaware, In re: The SCO Group, Inc, Case No~~award. ~~07-11337(KG). The Company on the~~ ~~same day filed its disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.~~

The MOU is not a definitive agreement. It is a non-binding summary of the intentions of the parties and is subject to change. As such, the MOU, the plan of reorganization and the transactions they contemplate are subject to various changes and conditions precedent, including: (15) ~~SNCP’s~~SEGMENT ~~due~~INFORMATION diligence and (2) the Bankruptcy Court’s approval. A hearing to approve the adequacy of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding the Company’s progress towards a new MOU with SNCP. Therefore, the Company indicated that it was not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU. On May 12, 2008, the Company filed a motion seeking an extension of its exclusive periods to submit and solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, 2008, respectively. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of their exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion will be heard on September 16, 2008.

The Company’s resources are allocated and operating results managed to the operating loss level for each of the Company’s segments: UNIX and SCOsource. Both segments are based on the Company’s UNIX intellectual property. The UNIX business sells and distributes UNIX products and services through an extensive distribution channel and to corporate end-users and the SCOsource business enforces and protects the Company’s UNIX intellectual property. Segment disclosures for the Company are as follows:


	Three Months Ended January 31, 2009
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	3,097		$	—		$	3,097
Cost of revenues		358			109			467

Gross margin (deficit)		2,739			(109	)		2,630

Sales and marketing		1,326			—			1,326
General and administrative		810			—			810
Research and development		722			—			722

Total operating expenses		2,858			—			2,858

Loss from operations	$	(119	)	$	(109	)	$	(228	)


	Three Months Ended January 31, 2008
	UNIX			SCOsource			Total
	(In thousands)
Revenues	$	4,872		$	—		$	4,872
Cost of revenues		719			267			986

Gross margin (deficit)		4,153			(267	)		3,886

Sales and marketing		2,741			—			2,741
General and administrative		924			—			924
Research and development		1,273			—			1,273

Total operating expenses		4,938			—			4,938

Loss from operations	$	(785	)	$	(267	)	$	(1,052	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “intends,” “anticipates,” “expects,” “believes,” “plans,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those set forth below under “Forward-Looking Statements and Factors that May Affect Future Results and Financial Condition” and “Part II, Item 1A — Risk Factors” and elsewhere in this Form 10-Q. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended October 31, 2008 filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. All information presented herein is based on the three months ended January 31, 2009 and 2008. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “intends,” “anticipates,” “expects,” “believes,” “plans,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those set forth below under “Forward-Looking Statements and Factors that May Affect Future Results and Financial Condition” and “Part II, Item 1A — Risk Factors” and elsewhere in this Form 10-Q. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended October 31, 2007 filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. All information presented herein is based on the three and nine months ended July 31, 2008 and 2007. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Recent Developments

Novell, Inc. Ruling. ~~On August 10, 2007, the federal judge overseeing our lawsuit with Novell,~~ Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or eliminate certain of our claims in both the Novell case (the “Novell Litigation” and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and the Santa Cruz Operations (the “APA”), and that Novell retained broad rights to waive our contract claims against IBM. The Court also ruled that we own the copyrights to post APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

~~The~~On ~~trial of these issues~~August 10, ~~however~~2007, ~~was~~the ~~automatically~~federal ~~stayed~~judge asoverseeing aour ~~result~~lawsuit ofwith ~~our~~Novell, ~~filing~~Inc. a(“Novell”) ~~voluntary~~ruled ~~petition~~in ~~for~~favor ~~relief~~of ~~under~~Novell ~~Chapter 11~~on several of the ~~United~~summary judgment motions that were before the United States ~~Bankruptcy~~District ~~Code~~Court in Utah (the ~~“Bankruptcy~~ ~~Code~~“Court”). inThe ~~the~~effect ~~United~~of ~~States~~these ~~Bankruptcy~~rulings ~~Court~~was ~~for~~to ~~the~~significantly reduce ~~District~~or to eliminate certain of ~~Delaware~~the (Company’s claims in both the ~~“Bankruptcy~~ ~~Court~~Novell case (“Novell Litigation”) onand ~~September 14~~the IBM case, ~~2007.~~and Onpossibly ~~October 4,~~others ~~2007~~(collectively, the “SCO Litigation”). The Court ruled that Novell ~~filed~~was athe ~~Motion~~owner ~~for~~of ~~Relief from~~the ~~Automatic~~UNIX ~~Stay.~~and OnUnixWare ~~November 27,~~copyrights ~~2007,~~that existed at the ~~Bankruptcy~~time ~~Court~~of ~~lifted~~the 1995 Asset Purchase Agreement between Novell and Santa Cruz (the ~~stay~~“APA”), toand ~~permit~~that Novell toretained ~~pursue~~broad ~~the~~rights ~~trial~~to ~~scheduled~~waive inour ~~the~~contract claims against IBM. The Court onruled that we own the ~~allocation~~copyrights to ofpost-APA ~~proceeds~~UnixWare ~~from~~code ~~the~~and ~~SCOsource~~derivatives ~~agreements~~ and ~~the~~that ~~question~~we ofhave ~~our~~certain ~~alleged~~other ~~lack~~ownership ofrights ~~authority~~in the UNIX technology. We were directed to ~~enter~~accept ~~into~~Novell’s ~~them,~~waiver ~~but~~of the ~~Bankruptcy~~Company’s UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we ~~retained~~executed ~~jurisdiction~~in tofiscal ~~determine~~year ~~whether~~2003 toincluded ~~impose~~older aSVRx ~~constructive~~licenses ~~trust~~and onthat ~~any~~we ~~amounts~~were ~~found~~possibly required to beremit ~~payable~~some portion of the proceeds to Novell. ~~The~~Over ~~Bankruptcy~~our ~~Court~~objection, ~~also~~a ~~ruled~~bench ~~that~~trial was set to begin on September 17, 2007, and the ~~bankruptcy~~federal ~~stay~~judge ~~applies~~was to determine what portion, if any, of the ~~SuSE~~proceeds of ~~arbitration~~the ~~proceeding~~SCOsource ~~pending~~agreements inis ~~Europe.~~attributable ~~Upon~~to ~~the~~such ~~partial~~SVRx ~~lifting~~licenses ofand ~~the~~should ~~automatic~~be ~~stay,~~remitted ~~the~~to ~~Court~~Novell, as ~~scheduled~~well aas ~~four-day~~whether ~~trial~~we had authority to enter into such SVRx licenses. Based on ~~those~~Novell’s ~~matters~~allegations, the potential payment to Novell for ~~which~~those ~~the~~SVRx ~~Bankruptcy~~licenses ~~Court~~ranged ~~lifted~~from ~~the~~a ~~stay,~~de ~~which~~minimis amount to in ~~started~~excess onof ~~April 29~~$30,000,000, ~~2008~~the ~~and~~latter ~~concluded~~amount onbeing ~~May 2~~the amount claimed by Novell, ~~2008~~plus interest.

OnThe ~~December 21~~trial of these issues, ~~2007~~however, ~~Novell~~was ~~filed~~automatically stayed as a ~~motion~~result ~~for~~of ~~summary~~our ~~judgment~~filing ona voluntary ~~the~~petition ~~issue~~for ofrelief ~~whether~~under ~~the Company~~Chapter 11 ~~had~~of the ~~authority~~United toStates ~~enter~~Bankruptcy ~~into~~Code (the “Bankruptcy ~~SCOsource~~Code”) ~~licenses.~~in ~~The~~the ~~parties~~United ~~have~~States ~~fully~~Bankruptcy ~~briefed~~Court for the ~~motion,~~ ~~and~~District of Delaware (the “Bankruptcy Court”) ~~set~~on ~~oral~~September 14, ~~argument~~2007. onOn ~~this~~October 4, ~~and~~2007, ~~any~~Novell ~~other~~filed ~~pending~~a ~~motions~~Motion for ~~summary judgment~~Relief ~~for~~from ~~April 30,~~Automatic ~~2008~~Stay. On ~~March~~November 727, ~~2008~~2007, the ~~Company~~Bankruptcy ~~filed~~Court amodified ~~Motion~~the ~~for~~automatic ~~Judgment~~stay onto permit Novell to pursue the ~~Pleadings~~trial ~~on Novell’s~~scheduled ~~Claims~~in ~~for~~the ~~Money~~Court oron ~~Claim~~the ~~for~~allocation ~~Declaratory~~of ~~Relief,~~proceeds infrom ~~which~~the SCOsource agreements and the ~~Company~~question ~~argues,~~of ~~based~~our ~~on Novell’s~~alleged ~~version~~lack of ~~the~~authority ~~facts~~to enter into them, ~~that~~but ~~either~~the Bankruptcy ~~its~~Court ~~claims~~retained ~~for~~jurisdiction ~~money~~to ~~from~~determine ~~SCOsource~~whether ~~agreements~~to orimpose ~~its~~a constructive trust on any ~~claim~~amounts ~~seeking~~found ato ~~declaration~~be ~~that~~payable ~~SCO~~to ~~lacked~~Novell. The Bankruptcy Court also ruled that the ~~authority~~automatic stay applies to ~~enter~~the ~~into~~SuSE ~~those~~arbitration ~~agreements~~proceeding ~~must~~pending ~~fail~~in Europe. Upon the modification of the ~~The~~automatic stay, the Court ~~heard~~scheduled ~~oral~~a ~~arguments~~four-day trial on ~~this~~those ~~motion,~~matters asfor ~~well~~which asthe ~~Novell’s~~Bankruptcy Court ~~pending~~modified ~~motion~~the ~~for~~automatic ~~summary judgment~~stay, which started on ~~the~~April 29, ~~second~~2008 ~~day~~and ofconcluded ~~trial,~~on ~~April~~May 302, 2008.

On December 21, 2007, Novell filed a motion for summary judgment on the issue of whether we had the authority to enter into the SCOsource licenses. The parties fully briefed the motion, and the Court set oral argument on this and any other pending motions for summary judgment for April 30, 2008. On March 7, 2008, we filed a Motion for Judgment on the Pleadings on Novell’s Claims for Money or Claim for Declaratory Relief, in which we argued, based on Novell’s version of the facts, that either its claims for money from SCOsource agreements or its claim seeking a declaration that SCO lacked the authority to enter into those agreements must fail. The Court heard oral arguments on this motion, as well as Novell’s pending motion for summary judgment, on the second day of trial, April 30, 2008.

From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.

On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell was not entitled to revenue from those agreements and that SCO had the authority to enter into such agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx License that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

~~From~~In ~~April 29~~its ~~through~~ruling ~~May~~of July 216, 2008, the Court ~~held~~also directed Novell to file a ~~bench~~proposed ~~trial~~Final Judgment onconsistent ~~Novell~~with the Court’s ~~monetary~~trial ~~claim~~and ~~for~~summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment could not be entered because certain ~~portions~~of our claims are stayed pending arbitration and the imposition of ~~fees~~a constructive wetrust ~~received~~remained ~~from~~an open question in the ~~SCOsource~~Bankruptcy ~~agreements~~Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on ~~whether~~our wetracing ~~had~~of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis ~~authority~~of tothe ~~enter~~Court’s ~~into~~ruling ~~those~~that ~~agreements~~Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as ~~explained~~to ~~above~~the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.

~~Prior~~ On toNovember 20, 2008, after further negotiations between the ~~commencement~~parties, ofthe Court entered a Final Judgment, incorporating the ~~trial~~material rulings from the August 10, ~~Novell~~2007 ~~conceded~~and ~~that~~July 16, it2008 rulings ~~would~~as ~~not~~explained beabove. ~~making~~On November 25, 2008, we filed a ~~claim~~notice toof appeal of that Final aJudgment, ~~portion~~including the Court’s summary judgment order of August 10, 2007. On January 23, 2009, we filed an unopposed motion for an expedited appeal with the ~~fees~~United ~~paid~~States toCourt usof Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by ~~Microsoft~~the inTenth ~~2003~~Circuit ~~and~~Court ~~Novell~~on ~~therefore~~January 29, ~~reduced~~2009. On March 4, 2009, we filed our brief for our appeal with the ~~principal~~Tenth Circuit Court. The ~~amount~~Tenth ofCircuit ~~its~~Court ~~claim~~has toplaced ~~$19~~the case on the calendar for oral argument on May 6,~~979,561~~ 2009. ~~After~~With the expedited ~~trial~~appeal, and ~~arguments~~the early hearing date, the ~~Court~~Company ~~took~~is ~~all~~hopeful ~~matters~~a ~~under~~decision on the appeal could ~~advisement~~be ~~and~~forthcoming ~~stated~~in itthe ~~would~~next ~~attempt~~five to ~~issue~~eight amonths, ~~ruling~~but ~~without~~it ~~undue~~could ~~delay~~be several months beyond that time frame.

On ~~July~~March 1613, ~~2008~~2009, the Court ~~entered~~denied ~~its~~our ~~Findings~~motion ofto ~~Fact,~~stay ~~Conclusions of Law, and Order, ruling that (1)~~ the ~~SCOsource~~taxation ~~agreements~~of ~~with~~costs ~~Linux~~relating ~~end-users were not SVRx licenses and therefore Novell is not entitled~~ to ~~revenue from those agreements; (2)~~ the ~~2003 SCOsource agreement with~~ ~~Microsoft~~trial ~~contained~~and anfinal ~~SVRx~~judgment. ~~license~~These ~~that~~costs ~~was~~total ~~incidental to the UnixWare license in the agreement~~$127, ~~and~~432, ~~therefore we were authorized to enter into the license~~ and ~~Novell~~relate ~~is not entitled~~ to ~~revenue from~~such ~~the~~things ~~agreement;~~as ~~(3) the 2003 SCOsource agreement with Sun also contained an authorized~~transcription ~~incidental~~charges ~~SVRx license~~ and ~~Novell~~deposition isexpenses. ~~not~~According ~~entitled~~ to ~~revenue attributable to that license; and (4)~~ the ~~same~~Court’s ~~Sun~~order ~~agreement~~these ~~contained~~costs anwill ~~unauthorized~~be ~~amendment~~added ~~of a prior UNIX agreement, and Novell is entitled~~ to ~~$2,547,817 of~~ the issues ~~revenue from the Sun agreement as attributable to~~ that ~~amendment. The~~are ~~Court~~on ~~directed~~appeal ~~Novell~~with ~~to file a brief identifying~~ the ~~amount~~Tenth ofCircuit ~~prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the~~ Court ~~that~~and ~~the~~resolved ~~parties agree that Novell is entitled to $918,122 in prejudgment interest~~ through that ~~date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award~~appeal.

InAs ~~its~~a ~~ruling~~result of ~~July 16, 2008,~~ the Court ~~also directed Novell to file a proposed Final Judgment consistent with the Court~~’s ~~trial and summary~~ judgment ~~orders.~~of InJuly 16, ~~its~~2008 ~~proposed~~against ~~submission to the Court in compliance with this order~~us, ~~Novell~~as ~~took the position that final judgment cannot be entered because certain~~ of ~~our~~January 31, ~~claims~~2009, ~~are stayed pending arbitration and the imposition of a~~we ~~constructive~~have ~~trust~~accrued ~~remains~~$3,562,000 anincluding ~~open question in~~ the ~~Bankruptcy~~related ~~Court~~interest. ~~Subsequently~~However, ~~in order to expedite the entry of final judgment~~we, wecontinue ~~sought~~ to ~~resolve~~contest ~~these issues with Novell and agreed to~~this ~~an extension of Novell’s deadline for filing its submission~~liability. ~~Based~~We onbelieve ~~our~~that ~~tracing~~the ofCourt ~~Sun’s payments under its 2003 SCOsource agreement~~erred, ~~Novell~~and ~~agreed~~ that ~~only~~there ~~$625,487~~are ofstrong ~~our~~grounds ~~current~~to ~~assets were~~have ~~traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on~~ the ~~basis of the Court’s~~adverse ~~ruling~~rulings ~~that~~embodied ~~Novell owns the pre-APA UNIX copyrights~~ in the ~~Court’s~~ ~~summary~~Final ~~judgment~~Judgment ~~order~~reversed ofon ~~August 10, 2007~~appeal. ~~On August 29~~However, ~~2008,~~ in ~~its Submission Regarding~~ the ~~Entry~~event ofthat ~~Final~~our ~~Judgment, Novell informed the Court of the parties’~~assets ~~agreement~~are asfurther todepleted ~~the~~or ~~trust amount~~encumbered, ~~but~~we ~~Novell~~may ~~stood by its position that final judgment could~~ not be ~~entered~~ in ~~light~~a offinancial ~~the~~position ~~stayed~~to ~~claims.~~see Onthe ~~September~~appeal ~~15,~~of those ~~2008,~~rulings wethrough ~~filed~~to ~~papers~~a ~~arguing~~conclusion ~~for~~or continue the ~~entry of final judgment~~litigation.

AsBankruptcy ~~a result of this order from the Court, we have accrued $3,473,000 for this contingent~~Filing liability and related interest. However, we continue to contest this liability. We believe that this order is in error, and that we have strong grounds to overturn it and the August 10, 2007 summary judgment upon appeal.

WeOn ~~intend~~September 14, to2007, ~~appeal~~The SCO Group, Inc. and its wholly owned subsidiary, SCO Operations, Inc. (collectively, the ~~adverse~~“Debtors”), ~~August~~filed voluntary petitions for relief under Chapter ~~10,~~11 ~~2007~~of ~~summary~~the United ~~judgment~~States ~~ruling~~Bankruptcy ~~and~~Code in the ~~July~~Bankruptcy Court for the District of Delaware. The Debtors’ Chapter ~~16,~~11 ~~2008~~cases are being jointly administered under Case No. 07-11337(KG). The Debtors continue ~~order~~to asexercise ~~soon~~control over their assets and operate their businesses as ~~Final~~“debtors-in-possession” ~~Judgment~~under the isjurisdiction ~~entered~~of ~~upon~~the ~~those~~Bankruptcy ~~orders.~~Court ~~However,~~and in accordance with the ~~event~~applicable ~~that~~provisions ~~our~~of ~~assets~~the ~~are~~Bankruptcy ~~further~~Code ~~depleted~~and ororders ~~frozen,~~of wethe ~~may~~Bankruptcy Court. Our foreign subsidiaries were not beincluded in the afilings. ~~financial~~Our ~~position~~foreign subsidiaries, as non-debtors, are not subject to ~~appeal~~the ~~those~~requirements ~~rulings~~of the Bankruptcy Code and are not subject to Bankruptcy Court supervision.

~~Our~~On ~~management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on~~ September 1418, 2007, ~~was~~the ~~appropriate~~Bankruptcy ~~and~~Court ~~necessary.~~granted ~~As a result of both~~ the ~~Court~~Debtors’s ~~August 10,~~motions ~~2007~~to ~~order~~maintain ~~and~~their existing ~~our~~bank ~~entry~~accounts ~~into~~and ~~Chapter 11,~~cash ~~among~~management ~~other factors~~systems, ~~there is substantial doubt about our ability~~ to ~~continue~~pay aspre-bankruptcy awage-related ~~going~~items, ~~concern including continuing the SCO~~to ~~Litigation~~establish orprocedures ~~appealing~~relating ~~the~~to ~~adverse~~utility ~~ruling~~providers ~~of August 10, 2007~~ and ~~the~~to ~~July 16,~~employ ~~2008~~temporary ~~order~~employees.

~~Absent~~As a ~~significant~~result ~~cash~~of ~~payment~~the toChapter 11 ~~Novell~~filings, ~~being~~realization ~~required~~of byassets ~~the~~and ~~final~~liquidation ~~resolution~~of ~~for this~~liabilities ~~matter,~~are wesubject ~~believe~~to ~~that~~uncertainty. ~~the~~While ~~undiscounted~~operating ~~future~~as ~~cash~~debtors-in-possession ~~flows~~under ~~generated~~the byprotection usof Chapter 11 ~~will~~of bethe ~~sufficient~~Bankruptcy ~~to recover~~Code, the ~~carrying~~Debtors ~~values~~may ofsell ~~our~~or ~~long-lived~~otherwise dispose of assets ~~over~~and liquidate ~~their~~or ~~expected~~settle ~~remaining~~liabilities ~~useful~~for ~~lives. However,~~amounts ifother athan ~~significant~~those ~~cash~~reflected ~~payment~~in isthe ~~required~~consolidated financial statements, in the ~~carrying~~ordinary ~~amount~~course of ~~our~~business, ~~long-lived~~or, ~~assets~~if ~~may not~~outside bethe ~~recovered~~ordinary ~~(which~~course ~~totaled $184~~of business,~~000~~ assubject ofto ~~July 31,~~Bankruptcy ~~2008)~~Court approval.

WeOn ~~intend~~February 13, to2008, ~~maintain~~we ~~business~~entered ~~operations~~into ~~throughout~~a ~~the~~Memorandum ~~reorganization~~of ~~process.~~Understanding ~~Subject~~(the to“MOU”) with Stephen ~~the~~Norris ~~Bankruptcy~~Capital ~~Court’s~~Partners, ~~approval~~LLC, wea ~~intend~~Delaware limited liability company (“SNCP”), whereby SNCP agreed to provide ~~use~~financing to fund our ~~cash~~plan of reorganization filed on February 29, ~~restricted~~2008. ~~cash~~On ~~and~~the ~~subsequent~~same ~~cash~~day, ~~inflows~~we tofiled ~~meet~~a ~~our~~disclosure ~~working~~statement ~~capital~~in ~~needs~~connection ~~throughout~~with the plan of reorganization, ~~process~~under the terms contemplated by the MOU.

Bankruptcy Filing. On September 14, 2007, The SCO Group, Inc. (the “Company”) and its wholly owned subsidiary, SCO Operations, Inc. (collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Debtors’ Chapter 11 cases are being jointly administered under Case Nos. 07-11337 and 07-11338(KG). As the Debtors, we continue to exercise control over our assets and operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Our foreign subsidiaries were not included in the filings. Our foreign subsidiaries, as non-debtors, are not subject to the requirements of the Bankruptcy Code and are not subject to Bankruptcy Court supervision.

On ~~September~~February 1829, ~~2007~~2008, the ~~Bankruptcy~~Debtors ~~Court~~filed ~~granted~~their ~~our~~joint ~~motions~~Chapter 11 Plan of Reorganization (the “Plan”) and Disclosure Statement in Connection with the Plan (the “Disclosure Statement”). A hearing to ~~maintain~~approve ~~our~~the ~~existing~~adequacy ~~bank~~of the Disclosure Statement was scheduled before the Bankruptcy ~~accounts~~Court ~~and~~on ~~cash~~April 2, ~~management~~2008. ~~systems~~The April 2, to2008 ~~pay~~hearing ~~pre-bankruptcy~~proceeded ~~wage-related~~as ~~items~~a status conference regarding the Debtors’ progress towards a new Memorandum of Understanding (“MOU”) with Stephen Norris Capital Partners, toLLC. ~~establish~~Therefore, the Debtors indicated that they were not presently seeking approval of ~~procedures~~the ~~relating~~adequacy toof ~~utility~~the ~~providers~~Disclosure ~~and~~Statement, which would need to ~~employ~~be ~~temporary~~amended ~~employees~~to reflect the changes to the MOU.

On ~~February~~May 1312, 2008, wethe ~~entered~~Debtors ~~into~~filed a ~~Memorandum~~motion ofseeking ~~Understanding~~an ~~(the~~extension ~~“MOU”)~~of ~~with~~their ~~Stephen~~exclusive periods to ~~Norris~~submit ~~Capital~~and ~~Partners~~solicit acceptances of an amended or new plan of reorganization to August 11 and October 13, ~~LLC~~2008, arespectively. ~~Delaware~~A ~~limited~~hearing ~~liability~~to ~~company~~consider ~~(“SNCP”)~~that motion was scheduled for June 17, ~~whereby~~2008. ~~SNCP~~The Bankruptcy ~~agreed~~Court togranted the motion on June 17, 2008. The Debtors filed another motion for an ~~provide~~extension ~~financing~~of their exclusive periods to ~~fund~~submit ~~our~~and solicit acceptances of a plan of reorganization to ~~filed~~a ondate ~~February~~45 and 105 29days, ~~2008.~~respectively, Onfollowing an entry of a final judgment in the ~~same~~Novell Litigation. ~~day~~The hearing on that motion was conducted on September 16, we ~~filed~~2008, ~~our~~at ~~disclosure~~which ~~statement~~time inthe Bankruptcy ~~connection~~Court ~~with~~granted the ~~plan~~motion for an extension of our exclusive period to submit a plan of reorganization to December 31, ~~under~~2008 ~~the~~and ~~terms contemplated~~our byexclusive ~~the~~period ~~MOU~~to solicit acceptances to March 2, 2009.

~~The~~On ~~MOU~~January 8, is2009, ~~not~~the aDebtors ~~definitive~~filed ~~agreement.~~their ItAmended isReorganization aPlan ~~non-binding~~and ~~summary~~Disclosure statement. ofUnder the ~~intentions~~proposed plan, we intend to hold an open auction to sell certain assets of the ~~parties~~Company including our mobility business assets and isour ~~subject~~OpenServer tooperating ~~change~~system assets and business. AsThrough ~~such~~this sale, the ~~MOU,~~Debtors ~~our~~hope ~~plan~~to ofobtain ~~reorganization~~enough ~~and~~consideration ~~the~~to ~~transactions~~pay their creditors ~~they~~and ~~contemplate~~continue ~~are~~their ~~subject~~operations toas ~~various~~set ~~changes~~forth ~~and~~in ~~conditions~~the ~~precedent,~~plan. ~~including:~~In ~~(1) SNCP’s~~the ~~due diligence~~event ~~and~~that ~~(2)~~ the ~~Bankruptcy~~asset ~~Court’s~~sale ~~approval.~~does Onnot generate ~~February 29,~~enough ~~2008~~cash to meet the aforementioned objectives, we ~~filed~~will ~~the~~scale ~~Plan~~back our operations and ~~the~~costs, ~~Disclosure~~and ~~Statement.~~initiate Aother ~~hearing~~strategies to ~~approve~~implement the ~~adequacy~~plan of ~~the~~reorganization. ~~Disclosure~~In ~~Statement~~the ~~was~~event that ~~scheduled~~certain ~~before~~Company ~~the~~assets ~~Bankruptcy~~are ~~Court~~not ~~on April 2~~sold, ~~2008.~~we ~~The~~will ~~April 2,~~continue ~~2008~~to ~~hearing~~sell ~~proceeded~~and assupport aour UNIX and mobility ~~status~~business ~~conference~~and ~~regarding~~will ~~our~~also ~~progress~~focus ~~towards~~on the following key provisions: (a) an ~~new~~enhanced ~~MOU~~pricing and discount strategy, (b) an updated “true-up” licensing program with ~~SNCP.~~current ~~Therefore~~customers, we(c) reducing ~~indicated that~~overall weoperating ~~were~~costs, ~~not~~(d) delivering ~~presently~~SCO ~~seeking~~UNIX ~~approval~~Virtual ofproduct ~~the~~lines ~~adequacy~~for ofVMware ~~the~~and ~~Disclosure~~Hyper-V ~~Statement,~~to ~~which~~allow ~~would~~SCO ~~need~~legacy applications to berun ~~amended~~on tomodern ~~reflect~~hardware ~~the~~and ~~changes~~(e) shipping toFCmobilelife and FCtasks for the iPhone ~~MOU~~with a new pricing structure.

OnUnder ~~May 12,~~the ~~2008~~priority scheme established by the Bankruptcy Code, weunless ~~filed~~creditors aagree otherwise, ~~motion~~post-petition ~~seeking~~liabilities anand ~~extension~~prepetition ofliabilities ~~our~~must ~~exclusive~~be ~~periods~~satisfied toin ~~submit~~full ~~and~~before ~~solicit~~stockholders ~~acceptances~~are ofentitled anto ~~amended~~receive any distribution or ~~new~~retain any property under a plan of reorganization. The ultimate recovery to ~~August 11~~creditors and/or ~~October 13~~stockholders, ~~2008~~if any, will not be ~~respectively~~determined until confirmation of a plan or plans of reorganization. ANo ~~hearing~~assurance tocan ~~consider~~be ~~that~~given ~~motion~~as ~~was~~to what ~~scheduled~~values, ~~for~~if ~~June 17~~any, ~~2008.~~will ~~The~~be ~~Bankruptcy Court~~ascribed ~~granted~~in the ~~motion~~Chapter 11 oncases ~~June 17,~~to ~~2008.~~each Weof ~~filed~~these ~~another~~constituencies ~~motion~~or what ~~for~~types anor ~~extension~~amounts of ~~our exclusive~~distributions, ~~periods~~if toany, ~~submit~~they ~~and~~would ~~solicit~~receive, ~~acceptances~~or as to the timing of asuch distributions, if any. A plan of reorganization tocould aresult ~~date~~in 45holders ~~and 105 days,~~of ~~respectively,~~our ~~following~~stock ~~the~~receiving ~~entry~~no distribution on account of atheir ~~final~~interests ~~judgment~~and incancellation ~~the~~of ~~Novell~~their ~~Litigation~~existing stock. ~~The~~If certain ~~hearing~~requirements onof ~~that~~the ~~motion~~Bankruptcy ~~will~~Code are met, a plan of reorganization can be ~~heard~~confirmed notwithstanding onits ~~September 16,~~rejection ~~2008~~by the class comprising the interests of our equity security holders.

AsIf aour ~~result~~Plan ofis not confirmed by the ~~Chapter 11~~Bankruptcy ~~filings~~Court, ~~realization~~it ofis ~~assets~~unclear whether we would be able to reorganize our businesses and ~~liquidation~~what, if anything, holders of ~~liabilities~~claims against us would ultimately ~~are~~receive ~~subject~~with respect to ~~uncertainty~~their claims. ~~While~~If ~~operating~~an asalternative ~~debtors-in-possession~~reorganization ~~under~~could ~~the~~not ~~protection~~be ofagreed upon, it ~~Chapter 11~~is ofpossible ~~the~~that ~~Bankruptcy~~our ~~Code,~~bankruptcy wecase ~~may~~could ~~sell~~be orconverted ~~otherwise~~to ~~dispose~~a ofliquidation ~~assets~~under Chapter 7 and we would have to liquidate ~~or settle~~our ~~liabilities~~assets, ~~for~~in ~~amounts~~which ~~other~~case ~~than~~it ~~those~~is ~~reflected~~likely inthat ~~the~~holders ~~condensed~~of ~~consolidated~~claims ~~financial~~would receive ~~statements,~~substantially inless ~~the~~favorable ~~ordinary~~treatment ~~course~~than ofthey ~~business,~~would ~~or,~~receive if ~~outside~~we ~~the~~were ~~ordinary~~to ~~course~~emerge ofas ~~business~~a viable, ~~subject~~reorganized toentity; ~~Bankruptcy~~and ~~Court~~stockholders ~~approval~~would likely receive nothing from the liquidation.

InAs ~~addition,~~a ~~under~~result ~~the~~of ~~priority scheme established by~~ the ~~Bankruptcy~~District ~~Code,~~Court’s ~~unless creditors agree otherwise~~August 10, ~~post-petition~~2007 ~~liabilities~~ and ~~prepetition~~July 16, ~~liabilities~~2008 ~~must~~rulings ~~be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery by creditors~~ and~~/or~~ ~~stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in~~ the ~~Chapter 11 cases to each of these constituencies or~~ ~~what~~uncertainties ~~types~~surrounding ~~or amounts of distributions, if any, they would receive, or as to~~ the ~~timing~~confirmation of ~~any such distributions. A plan of reorganization could result in holders of~~ our ~~stock~~Amended ~~receiving~~Reorganization ~~no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met~~Plan, aamong ~~plan~~other ~~of reorganization can be confirmed~~matters, ~~notwithstanding~~there ~~its~~is ~~rejection~~substantial bydoubt ~~the~~about ~~class comprising the interests of~~ our ~~equity~~ability ~~security holders. Accordingly, we urge that the appropriate caution be exercised with respect~~ to ~~existing~~continue ~~and future investments in any of these securities~~ as ~~the~~a ~~value~~going ~~and prospects are highly speculative~~concern.

Under the supervision of the Bankruptcy Court, we may decide to pursue various strategic alternatives as deemed appropriate by our board of directors to serve the best interests of the Company and our stockholders, including asset sales or strategic partnerships.

Business Focus

UNIX Business. Our UNIX business serves the needs of small-to-medium sized businesses as well as replicated site franchisees of Fortune 1000 companies, by providing reliable, cost effective ~~UNIX~~ UNIX software technology for distributed, embedded and network-based systems. Our UNIX business ~~includes~~ includes our mobility product and services offerings. Our largest source of UNIX business revenue is derived from existing customers through our worldwide, indirect, leveraged channel of partners, ~~which~~ which includes distributors and independent solution providers. We have a presence in a number of countries that provide support and services to customers and resellers. The other principal channel for selling and marketing our UNIX products is through existing customers that have a large number of replicated sites or franchisees.

We access these corporations through their information technology or purchasing departments with our Area Sales Managers (“ASMs”) in the United States and through our reseller channel in countries outside the United States. In addition, we also sell our operating system products to original equipment manufacturers (“OEMs”). Our sales of UNIX products and services during the last several years have been primarily to existing UNIX customers and not newly acquired customers. Our UNIX business revenue depends significantly on our ability to market and sell our products to existing customers and to generate upgrades from existing customers.

The following table shows the operating results of the UNIX business for the three ~~and nine~~ months ended ~~July~~January 31, ~~2008~~2009 and ~~2007~~2008:

Three Months Ended July 31,

Nine months Ended July 31,

Three Months Ended January 31,

2008

2007

2008

2007

2009

2008

(In thousands)

Revenue

3,~~739~~097

4,~~686~~872

~~12,272~~

~~16,692~~

Cost of revenue

~~473~~358

~~777~~719

~~1,661~~

~~2,594~~

Gross margin

32,~~266~~739

34,~~909~~153

~~10,611~~

~~14,098~~

Sales and marketing

1,~~765~~326

2,~~463~~741

~~6,630~~

~~7,296~~

General and administrative

~~889~~810

~~1,377~~924

~~3,086~~

~~4,051~~

Research and development

~~708~~722

1,~~424~~273

~~2,912~~

~~4,737~~

Total operating expenses

32,~~362~~858

54,~~264~~938

~~12,628~~

~~16,084~~

Loss from operations

(96119

)

(~~1,355~~785

)

~~(2,017~~

)

~~(1,986~~

)

Revenue from the UNIX business decreased by $~~947~~1,775,000, or 2036%, for the three months ended ~~July~~ January 31, ~~2008~~2009 compared to the three months ended ~~July~~January 31, ~~2007 and revenue from the UNIX business decreased by $4,420,000, or 26%, for the nine months ended July 31,~~ 2008 ~~compared to the nine months ended July 31, 2007~~. The revenue from this business has been declining over the last several years primarily as a result of increased competition from alternative operating systems, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing for Chapter 11 bankruptcy. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. The Linux operating system competes directly with our OpenServer and UnixWare products and has taken significant market share from these products.

Operating costs for the UNIX business decreased from $54,~~264~~938,000 for the three months ended ~~July~~January 31, ~~2007 to $3~~2008,~~362,000~~ ~~for~~a ~~the~~decrease ~~three~~of ~~months ended July 31, 2008 and operating costs for the UNIX business decreased from~~ $162,~~084~~080,000 ~~for~~or ~~the nine months ended July 31~~42%, ~~2007~~ to $122,~~628~~858,000 for the ~~nine~~three months ended ~~July~~ January 31, ~~2008~~2009. ~~These~~This ~~decreases~~decrease ~~were~~was primarily attributable to ~~reduced~~cost reduction initiatives, including reduced headcount and related costs, and reduced leased facilities and other reductions.

The decline in our UNIX business revenue will continue if the factors that have contributed to the decline described above continue or industry partners continue to withdraw their support for our products. The decline in our UNIX business and our SCOsource business may cause industry partners, developers and hardware and software vendors to choose not to support or certify to our UNIX operating system products. This would lead to an accelerated decline in revenue and an increase in negative cash flows from our UNIX business.

SCOsource Business. During the year ended October 31, 2003, we became aware that our UNIX code and derivative works had been inappropriately included by others in the Linux operating system. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. The Linux operating system competes directly with our OpenServer and UnixWare products and has taken significant market share from these products.

In an effort to establish, protect and defend our UNIX intellectual property rights, we initiated our SCOsource business. We have incurred significant legal costs in an effort to defend and protect our UNIX intellectual property rights. We expect that costs and expenses for this business for the year ending October 31, ~~2008~~2009 will continue to be significant.

The following table shows the operating results of the SCOsource business for the three months ended January 31, 2009 and 2008:

The following table shows the operating results of the SCOsource business for the three and nine months ended July 31, 2008 and 2007:


	Three Months Ended January 31,
	2009			2008
	(In thousands)
Revenue	$	—		$	—
Cost of revenue		109			267

Gross margin		(109	)		(267	)

Sales and marketing		—			—
General and administrative		—			—
Research and development		—			—

Total operating expenses		—			—

Loss from operations	$	(109	)	$	(267	)

	Three Months Ended April 30,						Nine months Ended April 30,
	2008			2007			2008			2007
	(In thousands)
Revenue	$	—		$	—		$	—		$	23
Cost of revenue		2,876			1,156			3,476			2,876
Gross deficit		(2,876	)		(1,156	)		(3,476	)		(2,853	)
Sales and marketing		—			—			—			—
General and administrative		—			—			—			—
Research and development		—			—			—			—
Total operating expenses		—			—			—			—
Loss from operations	$	(2,876	)	$	(1,156	)	$	(3,476	)	$	(2,853	)

Revenue from our SCOsource business was $0 for the three months ended January 31, 2009 and January 31, 2008.

~~Revenue~~Cost ~~from~~of ~~our~~revenue, ~~SCOsource~~which ~~business~~primarily ~~was~~includes $0legal ~~for~~and ~~the~~professional ~~three~~fees ~~months~~incurred ~~ended~~in ~~July 31,~~connection with ~~2007~~defending ~~and~~our ~~July 31,~~UNIX ~~2008.~~intellectual ~~Revenue~~property rights in the SCO Litigation, decreased from $267,000, a decrease of $23158,000 or 59%, for the ~~nine~~three months ended ~~July~~January 31, ~~2007~~2008 to $0 109,000 for the ~~nine~~ three months ended ~~July~~January 31, ~~2008~~2009. ~~Revenue~~This decrease was due to fewer legal services provided by technical, industry, damage and other experts in connection with the ~~nine~~SCO ~~month~~Litigation. ~~period~~In addition ~~ended~~to ~~July 31~~the expenses incurred above, ~~2007~~we ~~was~~may ~~primarily~~pay one or more contingency fees upon certain ~~attributable~~amounts towe ~~sales~~or our stockholders may receive as a result of ~~our~~a ~~SCOsource~~settlement, IPjudgment, ~~agreements~~or a sale of our company.

~~Cost~~Because of ~~revenue,~~the ~~which~~unique ~~primarily includes legal~~ and ~~professional~~unpredictable ~~fees~~nature ~~incurred~~of ~~in connection with defending our UNIX intellectual property rights in~~ the SCO Litigation, ~~increased from $1,156,000 for~~ the ~~three~~occurrence ~~months~~and timing ~~ended~~of ~~July 31,~~certain ~~2007~~expenses tosuch ~~$2,876,000~~as ~~for the three months ended July 31~~damage, ~~2008~~industry and ~~increased~~technical ~~from~~review ~~$2,876,000~~and ~~for~~other ~~the~~consulting ~~nine~~is difficult ~~months ended July 31, 2007~~ to ~~$3,476,000~~predict; ~~for the~~it ~~nine~~is ~~months~~therefore ~~ended~~difficult ~~July 31, 2008. These increases were due~~ to ~~the~~predict ~~$2,548,000 judgment in~~ the ~~Novell~~ ~~litigation~~total ~~for~~cost anof ~~unauthorized~~SCOsource ~~amendment~~revenue ~~to a prior UNIX agreement with Sun as previously mentioned under Recent Developments partially offset by decreases~~ in ~~legal expenses provided by~~ ~~technical, industry, damage and other experts in connection with~~ the ~~SCO Litigation~~future. ~~In addition to~~ ~~the expenses incurred above, we may pay one or more contingency fees upon certain amounts we or our stockholders may receive as a result of a settlement, judgment, or a sale of our company.~~

Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses such as damage, industry and technical review and other consultants is difficult to predict; it is therefore difficult to predict the total cost of SCOsource revenue in the future.

Because of the uncertainties related to our SCOsource business, the success of the SCOsource business depends on the strength of our intellectual property rights and claims regarding UNIX, including our claims against Novell and the strength of our claim that unauthorized UNIX source code and derivative works are contained in Linux.

Critical Accounting Policies

Our critical accounting policies and estimates include the following:

	•		Revenue recognition;

	•		Valuation allowances against net deferred income tax assets;

	•		Litigation reserves;

	•		Useful lives and impairment of property and equipment; and

	•		Allowances for doubtful accounts receivable.

Revenue Recognition. We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, as modified by SOP 98-9. Our revenue has historically been from three sources: (i) product license revenue, primarily from product sales to resellers, end users and OEMs; (ii) technical support service revenue, primarily from providing technical support and consulting services to end users; and (iii) revenue from SCOsource.

We recognize product revenues upon shipment if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is probable and product returns are reasonably estimable.

The majority of our revenue transactions relate to product-only sales. On occasion, we have revenue transactions that have multiple elements (such as software products, maintenance, technical support services, and other services). For software agreements that have multiple elements, we allocate revenue to each component of the contract based on the relative fair value of the elements. The fair value of each element is based on vendor specific objective evidence (“VSOE”). VSOE is established when such elements are sold separately. We recognize revenue when the criteria for product revenue recognition set forth above have been met. If VSOE of all undelivered elements exists, but VSOE does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the license fee is recognized as revenue in the period when persuasive evidence of an arrangement is obtained assuming all other revenue recognition criteria are met.

We recognize product revenues from OEMs when the software is sold by the OEM to an end-user customer. Revenues from technical support services and consulting services are recognized as the related services are performed. Revenues for maintenance are recognized ratably over the maintenance period.

We consider an arrangement with payment terms longer than our normal business practice not to be fixed or determinable and revenue is recognized when the fee becomes due. We typically provide stock rotation rights for sales made through our distribution channel and sales to distributors are recognized upon shipment by the distributor to end users. For direct sales not through our distribution channel, sales are typically non-refundable and non-cancelable and revenue is recognized upon shipment. We estimate our product returns based on historical experience and maintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.

Our SCOsource revenues to date have been primarily generated from agreements to utilize our UNIX source code as well as from intellectual property compliance agreements. We recognize revenue from SCOsource agreements when a signed contract exists, the fee is fixed or determinable, collection of the receivable is probable and delivery has occurred. If the payment terms extend beyond our normal payment terms, revenue is recognized as the payments become due.

Valuation Allowances Against Net Deferred Income Tax Assets. The amount, and ultimate realization, of our net deferred income tax assets depends, in part, upon the tax laws in effect, our future earnings, if any, and other future events, the effects of which cannot be determined. We provided a valuation allowance against our entire net deferred income tax assets as of ~~July~~January 31, ~~2008~~2009 and October 31, ~~2007~~2008. The valuation allowance was recorded because of our history of net operating losses and the uncertainties regarding our future operating profitability and taxable income.

Litigation Reserves. We are party to a number of legal matters described in more detail elsewhere in this Form 10-Q, including under Part II, Item I — Legal Proceedings. Pursuit and defense of these matters will be costly, and management expects the costs for legal fees and related expenses will be substantial. We have accrued $3,~~473~~562,000 for the Novell claim as a result of the ~~court~~Court order of July 16, 2008. This ~~contingent~~ liability is included in the caption Liabilities Subject to Compromise. However, we continue to contest this liability. We believe that this order is in error, and that we have strong grounds to overturn it and the August 10, ~~2007~~ 2008 summary judgment upon appeal.

A material, negative impact on our results of operations or financial position from the Red Hat, Inc., IPO Class Action, or Indian Distributor matters, or the IBM counterclaims may be probable but not estimable. Because these matters are not estimable, we have not recorded any reserves or contingencies related to these legal matters. In the event that our assumptions used to evaluate these matters change in future periods, we may be required to record a liability for an adverse outcome, which could have a material adverse effect on our results of operations, financial position and liquidity.

Useful Lives and Impairment of Property and Equipment. We review our long-lived assets for impairment at each balance sheet date and when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

~~Write-downs~~Allowance offor ~~long-lived~~Doubtful ~~assets~~Accounts ~~may~~Receivable. beWe ~~necessary~~offer ~~if,~~credit interms on the ~~future,~~sale ~~the~~of ~~fair~~our ~~value~~products to a majority of our customers and require no collateral from these customers. We perform ongoing ~~assets~~credit isevaluations ~~less~~of ~~than~~our ~~the~~customers’ ~~carrying~~financial ~~value.~~condition Ifand ~~the~~maintain ~~operating~~an ~~trends~~allowance for doubtful accounts based upon our ~~UNIX~~historical orcollection ~~SCOsource businesses~~experience ~~licensing~~and ~~continue~~a specific review of customer balances to ~~decline~~determine expected collectability. Our policies for determining allowances for doubtful accounts receivable have been applied consistently. Our allowance for doubtful accounts receivable was $112,000 weas ~~may~~of beJanuary 31, ~~required~~2009. toWe ~~record~~have annot ~~impairment~~experienced ~~charge~~material indifferences afrom the actual amounts provided for bad debts and our recorded estimates. However, our actual bad debts in future periods ~~period~~may ~~related~~differ tofrom our current estimates and the ~~carrying~~differences ~~value~~may ofbe material, which may have an adverse impact on our ~~long-lived~~future ~~assets~~accounts receivable and cash positions.

Allowance for Doubtful Accounts Receivable. We offer credit terms on the sale of our products to a majority of our customers and require no collateral from these customers. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for doubtful accounts based upon our historical collection experience and a specific review of customer balances to determine expected collectability. Our policies for determining allowances for doubtful accounts receivable have been applied consistently. Our allowance for doubtful accounts receivable was $124,000 as of July 31, 2008. We have not experienced material differences from the actual amounts provided for bad debts and our recorded estimates. However, our actual bad debts in future periods may differ from our current estimates and the differences may be material, which may have an adverse impact on our future accounts receivable and cash position.

Results of Operations

The following table presents our results of operations for the three ~~and nine~~ months ended ~~July~~ January 31, 2009 ~~2008~~ and ~~2007~~2008:

	Three Months Ended July 31,						Nine months Ended July 31,
	Three Months Ended January 31,
	2008			2007			2008			2007
	2009			2008
	(In thousands)
Revenue:
Products	$	32,~~170~~547		$	34,~~690~~039		$	~~10,257~~		$	~~13,451~~
SCOsource licensing		—			—			—			23
Services		550			833
Services		569			996			2,015			3,241
SCOsource		—			—
Total revenue		3,~~739~~097			4,~~686~~872			~~12,272~~			~~16,715~~
Cost of revenue:
Products		~~228~~144			~~329~~288			~~702~~			~~1,041~~
SCOsource licensing		2,876			1,156			3,476			2,876
Services		214			431
Services		245			448			959			1,553
SCOscource		109			267
Total cost of revenue		~~3,359~~467			~~1,933~~986			~~5,137~~			~~5,470~~
Gross margin		~~390~~2,630			23,~~753~~886			~~7,135~~			~~11,245~~
Operating expenses:
Sales and marketing		1,~~765~~326			2,~~463~~741			~~6,630~~			~~7,296~~
General and administrative		~~889~~810			~~1,377~~924			~~3,086~~			~~4,051~~
Research and development		~~708~~722			1,~~424~~273			~~2,912~~			~~4,737~~
Total operating expenses		32,~~362~~858			54,~~264~~938			~~12,628~~			~~16,084~~
Loss from operations		(~~2,972~~228	)		(21,~~511~~052	)		~~(5,493~~	)		~~(4,839~~	)
Equity in income (loss) of affiliate		15			9(11	)		~~(10~~	)		~~115~~
Other income (expense), net		(1,100	)		132			(1,969	)		380
Other expense, net		(175	)		(314	)
Benefit (Provision) for income taxes		6			(28	)		(151	)		(221	)
Provision for income taxes		(61	)		(111	)
Net loss	$	(~~4,065~~459	)	$	(21,~~398~~488	)	$	~~(7,623~~	)	$	~~(4,565~~	)

THREE ~~AND NINE~~ MONTHS ENDED ~~JULY~~JANUARY 31, ~~2008~~2009 AND ~~2007~~2008

Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008		Change			2007
	2009		Change			2008
	(Dollars in thousands)
Revenue	$	3,~~739~~097		(2036	)%	$	4,~~686~~872

	Nine months Ended July 31,
	2008		Change			2007
	(Dollars in thousands)
Revenue	$	12,272		(27	)%	$	16,715

Revenue for the three months ended January 31, 2009 decreased by $1,775,000, or 36%, from the three months ended January 31, 2008. This decrease was primarily attributable to a continued decline in our UNIX business as a result of the factors described below.

Revenue ~~for~~generated ~~the three months ended July 31, 2008 decreased by $947,000, or 20%,~~ from the three months ended July 31, 2007 and revenue for the nine months ended July 31, 2008 decreased by $4,443,000, or 27%, from the nine months ended July 31, 2007. These decreases were primarily attributable to a continued decline in our UNIX business asand aSCOsource ~~result~~business ofis ~~the~~as ~~factors described~~follows: ~~below.~~


	Three Months Ended January 31,
	2009			Change			2008
	(Dollars in thousands)
UNIX revenue	$	3,097			(36	)%	$	4,872
Percentage of total revenue		100	%					100	%
SCOsource revenue	$	—			n/a		$	—
Percentage of total revenue		0	%					0	%

The decrease in revenue in the UNIX business of $1,775,000, or 36%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 was primarily attributable to continued competition from other operating systems, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing Chapter 11 bankruptcy. We believe

~~Revenue~~that ~~generated~~the ~~from~~inclusion of our UNIX ~~business~~code and ~~SCOsource~~derivative ~~business~~works isin Linux has been a contributor to the decline in our UNIX revenues because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. We anticipate that for the year ending October 31, 2009 our UNIX revenues will decline from UNIX revenues generated in the year ended October 31, 2008 as ~~follows:~~a result of this continued competition and negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy.

	Three Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
UNIX revenue	$	3,739			(20	)%	$	4,686
Percentage of total revenue		100	%					100	%
SCOsource revenue	$	—			n/a		$	—
Percentage of total revenue		0	%					0	%

Sales of our UNIX products and services during the three months ended January 31, 2009 and 2008 were primarily to existing customers. Our UNIX business revenue depends significantly on our ability to market our products to existing customers and to generate upgrades from existing customers. Our UNIX revenue may be lower than currently anticipated if (i) we are not successful with our existing customers, (ii) we lose the support of any of our existing hardware and software vendors, or (iii) our key industry partners withdraw their marketing and certification support or direct their support to our competitors.

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
UNIX revenue	$	12,272			(26	)%	$	16,692
Percentage of total revenue		100	%					100	%
SCOsource revenue	$	—			n/a		$	23
Percentage of total revenue		0	%					0	%

The decrease in revenue in the UNIX business of $947,000, or 20%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and the decrease in revenue in the UNIX business of $4,420,000, or 26%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007 was primarily attributable to continued competition from other operating systems, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing Chapter 11 bankruptcy. We believe that the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX revenues because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. We anticipate that for the year ending October 31, 2008 our UNIX revenues will decline from UNIX revenues generated in the year ended October 31, 2007 as a result of this continued competition and negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy.

Sales of our UNIX products and services during the three and nine months ended July 31, 2008 and 2007 were primarily to existing customers. Our UNIX business revenue depends significantly on our ability to market our products to existing customers and to generate upgrades from existing customers. Our UNIX revenue may be lower than currently anticipated if (i) we are not successful with our existing customers, (ii) we lose the support of any of our existing hardware and software vendors, or (iii) our key industry partners withdraw their marketing and certification support or direct their support to our competitors.

Products Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Products revenue	$	32,~~170~~547			(1437	)%	$	34,~~690~~039
Percentage of total revenue		8582	%					7983	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Products revenue	$	10,257			(24	)%	$	13,451
Percentage of total revenue		84	%					80	%

Our products revenue consists of software licenses for UNIX products such as OpenServer and UnixWare, as well as sales of UNIX-related products. Products revenue also includes revenue derived from OEMs, distribution partners and large accounts. We rely heavily on our two-tier distribution channel and any disruption in our distribution channel could have an adverse impact on future revenue.

The decrease in products revenue of $~~520~~1,492,000, or 1437%, for the three months ended ~~July~~January 31, ~~2008~~ 2009 compared to the three months ended ~~July~~January 31, ~~2007~~2008 ~~and~~was ~~the~~primarily ~~decrease~~attributable into decreased sales of OpenServer and UnixWare products. ~~revenue~~These ofdecreases primarily resulted from continued $3competition in the operating system market,~~194~~ particularly Linux,~~000,~~ orand ~~24%~~from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy, which have adversely impacted and delayed our customers’ buying decisions. We believe that this competition from Linux will continue for the ~~nine~~year ~~months~~ending ~~ended July~~October 31, ~~2008~~2009 ~~compared~~and future periods.

Our products revenue was derived primarily from sales of our OpenServer and UnixWare products. Other products revenue consists mainly of products maintenance and other UNIX-related products. Revenue for these products was as follows:


	Three Months Ended January 31,
	2009			Change			2008
	(Dollars in thousands)
OpenServer revenue	$	1,792			(39	)%	$	2,938
Percentage of products revenue		70	%					73	%
UnixWare revenue	$	403			(53	)%	$	851
Percentage of products revenue		16	%					21	%
Other products revenue	$	352			40	%	$	250
Percentage of products revenue		14	%					6	%

The decrease in revenue for OpenServer and UnixWare for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 is primarily the result of continued competition, particularly from Linux operating system providers, and from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy. The increase in other products revenues is primarily attributed to increased sales of SVRx Unix related products in Japan from which the company earns an administration fee.

to the nine months ended July 31, 2007 was primarily attributable to decreased sales of OpenServer and UnixWare products. These decreases primarily resulted from continued competition in the operating system market, particularly Linux, and from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy, which have adversely impacted and delayed our customers’ buying decisions. We believe that this competition from Linux will continue for the year ending October 31, 2008 and future periods.

	Three Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
OpenServer revenue	$	2,150			1	%	$	2,135
Percentage of products revenue		68	%					58	%
UnixWare revenue	$	670			(43	)%	$	1,172
Percentage of products revenue		21	%					32	%
Other products revenue	$	350			(8	)%	$	383
Percentage of products revenue		11	%					10	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
OpenServer revenue	$	6,931			(15	)%	$	8,202
Percentage of products revenue		68	%					61	%
UnixWare revenue	$	2,438			(36	)%	$	3,820
Percentage of products revenue		24	%					28	%
Other products revenue	$	888			(38	)%	$	1,429
Percentage of products revenue		8	%					11	%

The decrease in revenue for OpenServer and UnixWare for the three and nine months ended July 31, 2008 compared to the three and nine months ended July 31, 2007 is primarily the result of continued competition, particularly from Linux operating system providers, and from continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy. The decrease in other products revenues is primarily attributed to decreased sales of UNIX-related products and decreased sales of products maintenance, which is sold separately from the product.

SCOsource Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008		Change		2007
	2009		Change		2008
	(Dollars in thousands)
SCOsource revenue	$	—		n/a	$	—

	Nine months Ended July 31,
	2008		Change		2007
	(Dollars in thousands)
SCOsource revenue	$	—		n/a	$	23

We initiated our SCOsource business for the purpose of protecting and defending our intellectual property rights in our UNIX source code and derivative works. SCOsource revenue was $0 for the three months ended July 31, 2008 and July 31, 2007 and was $0 for the nine months ended July 31, 2008 compared to $23,000 for the nine months ended July 31, 2007. Revenues for the nine months ended July 31, 2007 were primarily attributable to sales of our SCOsource agreements.

We are unable to predict the amount and timing of future SCOsource revenue, and if generated, the revenue will be sporadic and may be dependent on the outcome of the SCO Litigation.

Services Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Services revenue	$	~~569~~550			(4334	)%	$	~~996~~833
Percentage of total revenue		1518	%					2117	%

	Nine Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Services revenue	$	2,015			(38	)%	$	3,241
Percentage of total revenue		16	%					19	%

Services revenue consists primarily of technical support fees, engineering services fees, professional services fees and consulting fees. These fees are typically charged and invoiced separately from UNIX products sales. The decrease in services revenue of $283,000, or 34%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008 was primarily attributable to the renewal of fewer support and engineering services contracts as a result of decreased sales of UNIX-related products, continued competition, particularly from Linux operating system providers, and continuing negative publicity from the SCO Litigation and our filing of Chapter 11 bankruptcy

Services revenue consists primarily of technical support fees, engineering services fees, professional services fees and consulting fees. These fees are typically charged and invoiced separately from UNIX products sales. The decrease in services revenue of $427,000, or 43%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and the decrease in services revenue of $1,226,000, or 38%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007 was primarily attributable to the renewal of fewer support and engineering services contracts.

The majority of our support and professional services revenue continues to be derived from services for UNIX-based operating system products. Our future level of services revenue depends in part on our ability to generate UNIX products revenue from new customers as well as to renew annual support and services agreements with existing UNIX customers.

Cost of Products Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Cost of products revenue	$	~~228~~144			(3150	)%	$	~~329~~288
Percentage of products revenue		76	%					97	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Cost of products revenue	$	702			(33	)%	$	1,041
Percentage of products revenue		7	%					8	%

Cost of products revenue consists of manufacturing costs, royalties to third-party vendors, technology costs and overhead costs. Cost of products revenue decreased by $144,000 for the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. This decrease in the dollar amount of cost of products revenue was primarily attributable to lower products revenue as margins did not vary considerably.

~~Cost of products revenue consists of manufacturing costs, royalties to third-party vendors,~~26 technology costs and overhead costs. Cost of products revenue decreased by $101,000 for the three months ended July 31, 2008 as compared to the three months ended July 31, 2007 and decreased by $339,000 for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. These decrease in the dollar amount of cost of products revenue was primarily attributable to lower products revenue as margins did not vary considerably.

Cost of SCOsource Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008		Change			2007
	2009		Change			2008
	(Dollars in thousands)
Cost of SCOsource revenue	$	~~2,876~~109		~~149~~(59	)%	$	~~1,156~~267

	Nine Months Ended July 31,
	2008		Change			2007
	(Dollars in thousands)
Cost of SCOsource revenue	$	3,476		21	%	$	2,876

Cost of SCOsource revenue includes legal and professional fees incurred in connection with our SCO Litigation, the salaries and related personnel costs of SCOsource employees, and an allocation of corporate costs.

Cost of SCOsource revenue ~~increased~~decreased by $1158,~~720,~~000, or ~~149~~59%, during the three months ended ~~July~~January 31, ~~2008~~2009 as compared to the three months ended ~~July~~January 31, ~~2007 and increased by $600,000, or 21%, for the nine months ended July 31,~~ 2008 ~~as compared to the nine months ended July 31, 2007~~. ~~These increases~~This ~~were~~decrease was due to ~~the $2,548,000 judgment in the Novell litigation for an unauthorized~~fewer ~~amendment to a prior UNIX agreement with Sun as previously mentioned under Recent Developments, which is partially offset by decreases in~~ legal services provided by technical, industry, damage and other experts in connection with the SCO Litigation.

Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses is difficult to predict, and will be difficult to predict in the future. We will continue to make payments for technical, damage and industry experts, consultants and for other fees. Future legal fees may include contingency payments made to the law firms as a result of a settlement, judgment, or sale of our Company, which could cause the cost of SCOsource revenue for ~~the three months ending October 31, 2008 or for~~ future periods to be higher than the costs incurred for the three months ended ~~July~~January 31, ~~2008~~2009.

Cost of Services Revenue

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Cost of services revenue	$	~~245~~214			(4550	)%	$	~~448~~431
Percentage of services revenue		4339	%					4552	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Cost of services revenue	$	959			(38	)%	$	1,553
Percentage of services revenue		48	%					48	%

Cost of services revenue includes the salaries and related personnel costs of employees delivering services revenue as well as third-party service agreements. Cost of services revenue decreased by $217,000, or 50%, for the three months ended January 31, 2009 compared to the three months ended January 31, 2008. This decrease was primarily attributable to a reduction of employee and employee-related costs.

Cost of services revenue includes the salaries and related personnel costs of employees delivering services revenue as well as third-party service agreements. Cost of services revenue decreased by $203,000, or 45%, for the three months ended July 31, 2008 compared to the three months ended July 31, 2007 and decreased by $594,000, or 38%, for the nine months ended July 31, 2008 compared to the nine months ended July 31, 2007. These decreases were primarily attributable to a reduction of employee and employee-related costs.

Sales and Marketing

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Sales and marketing expenses	$	1,~~765~~326			(2852	)%	$	2,~~463~~741
Percentage of total revenue		4743	%					5356	%

	Nine Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Sales and marketing expenses	$	6,630			(9	)%	$	7,296
Percentage of total revenue		54	%					44	%

Sales and marketing expenses consist of the salaries, commissions and other personnel costs of employees involved in the revenue generation process, as well as advertising and corporate allocations. The decrease in sales and marketing expenses of $1,415,000, or 52%, for the three months ended January 31, 2009 compared with the three months ended January 31, 2008 was primarily attributable to lower commissions, lower travel expenses, reduced discretionary marketing spending and lower co-operative advertising as a result of lower revenue. Included in sales and marketing expenses for the three months ended January 31, 2009 and 2008 was $47,000 and $29,000, respectively, for stock-based compensation.

~~Sales~~For ~~and marketing expenses consist of~~ the salaries, commissions and other personnel costs of employees involved in the revenue generation process, as well as advertising and corporate allocations. The decrease in sales and marketing expenses of $698,000, or 28%, for the three months ~~ended~~ ~~July 31,~~ending ~~2008 compared with the three months ended July~~April 3130, ~~2007 and the decrease of $666~~2009,~~000,~~ orwe ~~9%,~~anticipate ~~for~~that the ~~nine~~dollar ~~months~~amount ended July 31, 2008 compared with the nine months ended July 31, 2007 was primarily attributable to lower commissions, lower travel expenses, reduced discretionary marketing spending and lower co-operative advertising as a result of ~~lower revenue, partially offset by an increase in severance and termination costs. Included in~~ sales and ~~marketing~~ marketing expenses ~~for~~will ~~the~~be ~~three~~generally ~~months~~consistent ~~ended~~with ~~July 31,~~that ~~2008~~incurred ~~and~~during ~~2007 was $50,000 and $68,000, respectively, for stock-based compensation. Included in sales and marketing expenses for~~ the ~~nine~~three months ended ~~July~~January 31, ~~2008 and 2007 was $135,000 and $286,000, respectively, for stock-based compensation~~2009.

~~For the three months ending October 31, 2008, we anticipate that the dollar amount of sales~~27 ~~and marketing expenses will be generally consistent with that incurred during the three months ended July 31, 2008.~~

Research and Development

	Three Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Research and development expenses	$	708			(50	)%	$	1,424
Percentage of total revenue		19	%					30	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Research and development expenses	$	2,912			(39	)%	$	4,737
Percentage of total revenue		24	%					28	%

Research and development expenses consist of the salaries and benefits of software engineers, consulting expenses and corporate allocations. Research and development expenses decreased by $716,000, or 50%, for the three months ended July 31, 2008 compared with the three months ended July 31, 2007 and decreased by $1,825,000, or 39%, for the nine months ended July 31, 2008 compared with the nine months ended July 31, 2007. The decrease in research and development expenses was primarily attributable to reduced employee and employee-related costs. Included in research and development expenses for the three months ended July 31, 2008 and 2007 was $13,000 and $51,000, respectively, of stock-based compensation. Included in research and development expenses for the nine months ended July 31, 2008 and 2007 was $38,000 and $147,000, respectively, for stock-based compensation.

For the three months ending October 31, 2008, we anticipate that the dollar amount of research and development expenses will be generally consistent with that incurred during the three months ended July 31, 2008.

Research and Development


	Three Months Ended January 31,
	2009			Change			2008
	(Dollars in thousands)
Research and development expenses	$	722			(43	)%	$	1,273
Percentage of total revenue		23	%					26	%

Research and development expenses consist of the salaries and benefits of software engineers, consulting expenses and corporate allocations. Research and development expenses decreased by $551,000, or 43%, for the three months ended January 31, 2009 compared with the three months ended January 31, 2008. The decrease in research and development expenses was primarily attributable to reduced employee and employee-related costs, and lower leased facilities expenses. Included in research and development expenses for the three months ended January 31, 2009 and 2008 was $15,000 and $13,000, respectively, of stock-based compensation.

For the three months ending April 30, 2009, we anticipate that the dollar amount of research and development expenses will be generally consistent with that incurred during the three months ended January 31, 2009.

General and Administrative

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
General and administrative expenses	$	~~889~~810			(3512	)%	$	~~1,377~~924
Percentage of total revenue		2426	%					2919	%

	Nine months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
General and administrative expenses	$	3,086			(24	)%	$	4,051
Percentage of total revenue		25	%					24	%

General and administrative expenses consist of the salaries and benefits of finance, human resources, and executive management and expenses for professional services and corporate allocations. General and administrative expenses decreased by $114,000, or 12%, during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. The decrease in general and administrative expenses was primarily attributable to lower leased facilities expense as a result of a reduction in leased space, reduced bad debt expense resulting from decreased revenues, and reduced insurance expense partially offset by an increase in professional services expenses. Included in general and administrative expenses for the three months ended January 31, 2009 and 2008 was $72,000 and $33,000, respectively, of stock-based compensation.

~~General~~For ~~and administrative expenses consist of~~ the salaries and benefits of finance, human resources, and executive management and expenses for professional services and corporate allocations. General and administrative expenses decreased by $488,000, or 35%, during the three ~~months~~ ~~ended July 31, 2008 as compared to the three~~ months ~~ended~~ending ~~July~~April 3130, ~~2007 and decreased by $965~~2009,~~000,~~ orwe ~~24%,~~anticipate ~~during~~that the ~~nine~~dollar ~~months~~amount ~~ended~~of ~~July 31, 2008 as compared to the nine months ended July 31, 2007. The decrease in~~ general and administrative expenses ~~was~~will ~~primarily~~be ~~attributable~~generally ~~to decreased~~consistent ~~professional~~with ~~services~~that ~~costs~~incurred ~~and~~during ~~reduced stock-based compensation expenses. Included in general and administrative expenses for~~ the three months ~~ended July 31, 2008 and 2007 was $98,000~~ ~~and $197,000, respectively, of stock-based compensation. Included in general and administrative expenses for the nine months~~ ended ~~July~~January 31, ~~2008 and 2007 was $226,000 and $729,000, respectively, for stock-based compensation~~2009.

For the three months ending October 31, 2008, we anticipate that the dollar amount of general and administrative expenses will be generally consistent with that incurred during the three months ended July 31, 2008.

Equity in Income (Loss) of Affiliate

We account for our ownership interests in companies in which we own at least 20% and less than 50% using the equity method of accounting. Under the equity method, we record our portion of the entities’ net income or net loss in our consolidated statements of operations. AsOn ~~of July~~November 3124, 2008, we entered into a Dissolution Agreement and Termination Agreement to dissolve our minority ownership interest in a Chinese company. Under the ~~carrying~~Agreement, ~~value~~we ofreceived ~~our~~a ~~investment~~dissolution ofpayment of $~~373~~370,000 ~~was~~in ~~for~~December 2008. ~~our~~Upon ~~30%~~completion ~~ownership~~of inthe adissolution of the Chinese company, the majority shareholder of the Chinese company will enter into a distribution agreement with our Company.

Reorganization items

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008		Change			2007
	2009		Change			2008
	(Dollars in thousands)
Reorganization items	$	~~183~~237		~~n/a~~(72	)%	$	—844

	Nine months Ended July 31,
	2008		Change		2007
	(Dollars in thousands)
Reorganization items	$	1,662		n/a	$	—

Reorganization expense consists of legal and professional fees associated with our Chapter 11 bankruptcy and development of a reorganization plan.

Reorganization expense consists of legal and professional fees associated with our Chapter 11 bankruptcy and development of a reorganization plan. Reorganization expense decreased $607,000, or 72% during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008. This decrease was due to lower professional fees associated with our Chapter 11 bankruptcy.

Other Income (Expense), net

Other income (expense) included the following components for the three ~~and nine~~ months ended January ~~July~~ 31, ~~2008~~2009 and ~~2007~~2008:

	Three Months Ended July 31,
	Three Months Ended January 31,
	2008			Change			2007
	2009			Change			2008
	(Dollars in thousands)
Interest expense	$	(~~925~~44	)		n/a		$	—
Interest income		1411			(8884	)%		~~112~~67
Other income (expense), net		(692	)		n/a			20463
Total	$	~~(917~~59	)				$	~~132~~530

	Nine Months Ended July 31,
	2008			Change			2007
	(Dollars in thousands)
Interest expense	$	(925	)		n/a		$	—
Interest income		115			(67	)%		351
Other income (expense), net		503			n/a			29
Total	$	(307	)				$	380

Interest expense for the three months ended January 31, 2009 is due to the interest assessed in the July 16, 2008 court order in the Novell litigation as mentioned in Recent Developments.

Interest ~~expense~~income decreased by $56,000 for the three months ~~and nine months~~ ended ~~July~~January 31, ~~2008~~2009 isas ~~due~~ compared to the ~~interest~~ ~~assessed~~three inmonths ~~the~~ended ~~July~~January 1631, 2008 ~~court~~and ~~order~~was inprimarily ~~the~~attributable ~~Novell~~to ~~litigation~~lower ascash ~~mentioned~~and available-for-sale inmarketable ~~Recent Developments~~securities balances.

~~Interest~~The decrease in other income, ~~decreased~~net, byof $98371,000 for the three months ended ~~July~~January 31, ~~2008~~2009 as compared to the three months ended ~~July~~January 31, ~~2007~~2008 ~~and~~was ~~decreased~~primarily byattributable ~~$236,000~~to ~~for~~a ~~the~~realized ~~nine months ended July 31,~~gain in 2008 as ~~compared~~a toresult ~~the~~of ~~nine~~a ~~months ended July 31, 2007 and was primarily attributable to lower cash and available-for-~~sale ~~marketable~~of ~~securities~~intellectual ~~balances~~property.

~~Other~~Provision ~~income (expense), net, decreased $26,000~~ for ~~the~~Income ~~three months ended July 31, 2008 as~~Taxes compared to the three months ended July 31, 2007 and increased $474,000 for the nine months ended July 31, 2008 as compared to the nine months ended July 31, 2007. The nine month increase was primarily attributable to a realized gain as a result of a sale of intellectual property.

~~Benefit~~ The ~~(Provision)~~provision for ~~Income~~income ~~Taxes~~taxes was $61,000 for the three months ended January 31, 2009 and $111,000 for the three months ended January 31, 2008. Our provision for income taxes is primarily related to earnings in foreign subsidiaries as well as from withholding taxes on revenue generated in certain foreign locations.

The benefit (provision) for income taxes was a $6,000 tax benefit for the three months ended July 31, 2008 and a $28,000 tax provision for the three months ended July 31, 2007, and was a $151,000 tax provision for the nine months ended July 31, 2008 and a $221,000 tax provision for the nine months ended July 31, 2007. Our benefit (provision) for income taxes is primarily related to earnings in foreign subsidiaries as well as from withholding taxes on revenue generated in certain foreign locations.

Liquidity and Capital Resources

Our cash ~~and cash equivalents~~ balance ~~decreased~~increased from $51,~~554~~237,000 as of October 31, ~~2007~~2008 to $21,~~117~~836,000 as of ~~July~~ January 31, ~~2008~~2009. As of ~~July~~January 31, ~~2008~~2009, we also had $23,~~680~~766,000 of restricted cash, of which $1,~~639~~500,000 is set aside to cover expert and other costs related to the SCO Litigation and $12,~~041~~266,000 payable to Novell for royalties earned by Novell post bankruptcy petition.

We intend to use the cash as of ~~July~~January 31, ~~2008~~2009 to run our UNIX business and pursue the SCO Litigation, and believe that we have sufficient liquidity resources to fund our operations through at least ~~April~~July 3031, 2009. ~~However,~~As as a result of both the Court’s August 10, 2007 order and our entry into Chapter 11, among other matters, there is substantial doubt about our ability to continue as a going concern.

We are operating pursuant to Chapter 11 of the Bankruptcy Code and continuation of our business as a going concern is contingent upon, among other things, our ability to (i) construct and obtain confirmation of a plan of reorganization under the Bankruptcy Code; (ii) reduce payroll and benefits costs and liabilities under the bankruptcy process; (iii) achieve profitability; (iv) achieve sufficient cash flows from operating activities; and (v) obtain financing sources to meet our future obligations. These matters as well as the aforementioned ruling in favor of Novell create substantial doubt about our ability to continue as a going concern.

Our net cash provided by operating activities during the three months ended January 31, 2009 was $337,000 and was attributable to a net loss of $459,000, payments for bankruptcy and reorganizational items of $232,000, offset by non-cash items of $176,000 and a decrease in net operating assets and liabilities of $852,000.

Our net cash used in operating activities during the ~~nine~~three months ended ~~July~~January 31, 2008 was $3805,~~602,~~000 and was attributable to a net loss of $71,~~623~~488,000, ~~and~~payments afor ~~net~~bankruptcy ~~decrease in operating assets~~ and reorganizational ~~liabilities~~items of $~~107~~465,000, ~~partially~~ offset by ~~increase~~non-cash initems ~~liabilities subject to compromise~~ of $3184,~~343,~~000 ~~for~~and ~~Novell~~a ~~under~~decrease ~~the court order as full discussed~~ in ~~Recent~~net operating ~~Developments~~assets and ~~by non-cash~~liabilities ~~items~~ of $~~785~~964,000.

Our ~~net~~investing ~~cash~~activities ~~used~~have inhistorically ~~operating~~consisted ~~activities~~of ~~during~~equipment purchases and the ~~nine~~purchase and sale of available-for-sale marketable securities. During the three months ended ~~July~~January 31, ~~2007 was~~ ~~$690~~2009,~~000~~ ~~and~~cash ~~was~~provided ~~attributable~~by toinvesting aactivities ~~net~~was ~~loss of~~ $4370,~~565,~~000, ~~partially~~which ~~offset~~was byfrom athe ~~net~~dissolution ~~increase in~~payment ~~operating~~from ~~assets~~our ~~and~~30% ~~liabilities~~ownership ofin ~~$2,309,000~~a ~~and~~Chinese ~~non-cash items of $1,566,000~~company.

~~Our investing activities have historically consisted of equipment purchases and the purchase and sale of available-for-sale marketable securities.~~ During the ~~nine~~three months ended ~~July~~January 31, 2008, cash ~~provided~~used by investing activities was $~~104~~4,000, which ~~was~~resulted from ~~distributions from our 30% ownership in a Chinese company of $114,000, partially offset by~~ the purchases of equipment ~~of $10,000~~.

~~During~~Our ~~the~~financing ~~nine~~activities ~~months ended July 31, 2007, cash~~ provided ~~by investing activities was~~ $~~2,168,000,~~0 ~~which was primarily a result~~ of ~~proceeds~~cash ~~from~~during the ~~sale~~three ofmonths ~~available-for-sale~~ended ~~marketable securities of $2~~January 31,~~249,000,~~ ~~offset by purchases of equipment of $81,000~~2009.

Our financing activities provided $22,000 of cash during the ~~nine~~three months ended ~~July~~January 31, 2008, which were generated from proceeds received from the sale of common stock through our ~~employee~~ employee stock purchase plan.

Our ~~financing~~net ~~activities~~accounts ~~provided~~receivable balance decreased from $~~493~~2,801,000 as of ~~cash~~October 31, 2008 to $2,302,000 as of January 31, 2009, primarily as a result of lower sales (and related invoicing) generated during the ~~nine~~three months ended ~~July~~January 31, ~~2007. The~~2009 ~~primary~~as ~~sources~~compared ofto ~~cash~~the ~~were~~three ~~from~~months ~~the~~ended October 31, ~~exercise~~2008. The majority of ~~options~~our toaccounts ~~acquire~~receivable ~~common~~are ~~stock~~current ofand our allowance for doubtful accounts was $57112,000 ~~and~~ ~~proceeds~~as of ~~$436~~January 31,~~000~~ ~~received~~2009, ~~from~~which ~~the~~represented ~~sale~~approximately 5 percent of our ~~common~~gross ~~stock~~accounts ~~through~~receivable ~~our~~balance. ~~employee~~Our ~~stock~~write-offs ~~purchase~~of uncollectible accounts during the three ~~plan~~months ended January 31, 2009 and 2008 were not significant.

~~Our~~We ~~net~~are ~~accounts~~continuing ~~receivable~~to ~~balance~~pay ~~decreased~~for ~~from $3~~expert,~~365,000~~ asconsulting ofand ~~October 31,~~other ~~2007~~expenses relating to the SCO ~~$2,592,000~~Litigation. asThese ofexpenses ~~July 31,~~have ~~2008,~~been ~~primarily~~material asin athe ~~result~~past ofand ~~lower~~even ~~sales~~though ~~(and~~we ~~related~~expect ~~invoicing)~~these expenses ~~generated~~to ~~during~~be ~~the~~lower ~~three~~for ~~months~~the ~~ended~~year ~~July~~ending October 31, ~~2008~~2009 as compared to the ~~three~~year ~~months~~ ended October ~~31, 2007. The majority of our accounts receivable are current and our allowance for doubtful accounts was $124,000 as of July~~ 31, 2008, ~~which represented approximately 5 percent of our gross~~we ~~accounts~~expect ~~receivable~~them ~~balance.~~to ~~Our~~continue ~~write-offs~~to ofbe ~~uncollectible~~material ~~accounts~~to ~~during~~our ~~the~~financial ~~three and nine months ended July 31, 2008 and 2007 were not significant~~statements.

We are continuing to pay for expert, consulting and other expenses relating to the SCO Litigation. These expenses have been material in the past and even though we expect these expenses to be lower for the year ending October 31, 2008 as compared to the year ended October 31, 2007, we expect them to continue to be material to our financial statements.

In addition to the cash expenditures mentioned above, we may pay one or more contingency fees upon certain amounts we or our stockholders may receive as a result of a settlement, judgment, or a sale of our company. On October 31, 2004, we entered into an engagement agreement (the “Engagement Agreement”) with Boies, Schiller & Flexner LLP, Kevin McBride and Berger Singerman P.A. (the “Law Firms”). This Engagement Agreement superseded and replaced the original engagement agreement that was entered into in February 2003. The Engagement Agreement governs the relationship between the Law Firms and us in connection with the Law Firms’ representation of us in the SCO Litigation. Berger Singerman P.A. was a member of this group of Law Firms. With our consent, the engagement of this firm was mutually terminated. The last payment received by Berger Singerman P.A. was on November 24, 2004. Further, Berger Singerman P.A. waived its rights under the Engagement Agreement upon the parties’ agreement for Berger Singerman P.A. to represent the Debtors in their bankruptcy cases.

We may pay one or more contingency fees upon certain amounts that we or our stockholders may receive as a result of a settlement, judgment or a sale of the company. The contingency fee amounts payable to the Law Firms (which no longer includes Berger Singerman P.A.) will be, subject to certain credits and adjustments, as follows:

	•		33 percent of any aggregate recovery amounts received up to $350,000,000, reduced by all professional fees previously paid relating to these proceedings;

	•		plus 25 percent of any aggregate recovery amounts above $350,000,000 but less than or equal to $700,000,000;

	•		plus 20 percent of any aggregate recovery amounts in excess of $700,000,000.

The Engagement Agreement provides that, except for the compensation obligations specifically described above, we will not be obligated to pay any legal fees, whether hourly, contingent or otherwise, to the Law Firms, or any other law firms that may be engaged by the Law Firms, in connection with the SCO Litigation through the end of the current litigation between us and IBM, including any appeals.

Contractual Obligations

~~We have entered into operating leases for our corporate offices located in the United States~~30 ~~and our international sales offices. We have commitments under these leases that extend through the year ending August 31, 2013.~~

TheTable following table summarizes our contractual operating lease obligations as of July 31, 2008: Contents

			Less than						More than
	Total		1 year		1 — 3 years		3 — 5 years		5 years
	(In thousands)
Operating lease obligations	$	1,414	$	216	$	768	$	430	$	—

We have entered into operating leases for our corporate offices located in the United States and our international sales offices. We have commitments under these leases that extend through August 31, 2014.

AsThe offollowing ~~July 31,~~table ~~2008,~~summarizes weour ~~did~~contractual ~~not~~operating ~~have~~lease ~~any long-term debt~~ obligations, ~~purchase~~as ~~obligations~~of orJanuary 31, ~~material capital lease obligations.~~2009:


			Less than						More than
	Total		1 year		1 - 3 years		3 - 5 years		5 years
	(In thousands)
Operating lease obligations	$	1,197	$	248	$	723	$	226	$	—

As of January 31, 2009, we did not have any long-term debt obligations, purchase obligations or material capital lease obligations.

Our ability to reduce costs to offset revenue declines in our UNIX business is limited because of contractual commitments to maintain and support our existing UNIX customers. The decline in our UNIX business may be accelerated if industry partners withdraw their support as a result of the SCO Litigation. In addition, the SCO Litigation may cause industry partners, developers and hardware and software vendors to choose not to support or certify to our UNIX operating system products. This would lead to an accelerated decline in our UNIX products and services revenue. If our UNIX products and services revenue is less than expected, our liquidity will be adversely impacted.

In the event that cash required to fund operations and strategic initiatives exceeds our current cash resources, we will be required to reduce costs and perhaps raise additional capital. We may not be able to reduce costs in a manner that does not impair our ability to maintain our UNIX business and pursue the SCO Litigation. We may not be able to raise capital for any number of reasons, including those listed under the section “Risk Factors” under Part II, Item 1A of this Form 10-Q. If additional equity financing is available, it may not be available to us on favorable terms or at all and may be dilutive to our existing stockholders. In addition, if our stock price declines, we may not be able to access the public equity markets on acceptable terms, if at all. Our ability to effect acquisitions for our common stock would also be impaired. The restructuring imposed by the Bankruptcy Court may also adversely affect our ability to raise debt or equity capital. Our delisting from NASDAQ ~~will~~ also ~~impair~~impairs our ability to raise capital.

Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition

With the exception of historical facts, the statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current expectations and beliefs regarding our future results of operations, performance and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These forward-looking statements include, but are not limited to, statements concerning:

• Our intention to ~~shortly~~continue ~~file~~to ~~papers~~pursue ~~arguing~~our ~~for~~appeal of the ~~entry~~adverse rulings in the Court’s August 10, 2007 and July 16, 2008 orders in the Novell Litigation, and our belief concerning the strength of ~~final~~our ~~judgement~~appeal; • Our intention to ~~appeal~~maintain business operations throughout the ~~adverse~~reorganization ~~August~~process; ~~10,~~• ~~2007~~Our ~~summary~~intention ~~judgment~~to ~~ruling~~use our cash, restricted cash and subsequent cash inflows to meet our working capital needs throughout the ~~July~~reorganization ~~16,~~process; ~~2008~~• ~~order~~Our intention to continue operating, ~~and~~to have our ~~belief~~plan ~~concerning~~of reorganization confirmed with the ~~strength~~Bankruptcy ofCourt ~~our~~and ~~potential~~to ~~appeal~~pursue the strategy described in the plan; • Our intention to vigorously pursue legal claims and counterclaims brought against us by others; • Our belief that ~~the~~our ~~undiscounted~~allowance ~~future~~for ~~cash~~doubtful ~~flows~~accounts ~~generated~~receivable byis usadequate and that write-offs of uncollectible accounts will benot ~~sufficient~~materially toexceed ~~recover~~that ~~the~~allowance; ~~carrying~~• ~~amounts~~The strength of our ~~long-lived~~intellectual ~~assets~~property ~~over~~rights ~~their~~and ~~expected~~contractual ~~remaining~~claims ~~useful~~regarding ~~lives~~UNIX generally and specifically the strength of our claim that unauthorized UNIX source code and derivatives of UNIX source code are prevalent in Linux; • Our ~~intention~~belief tothat ~~maintain~~competition ~~business~~from ~~operations~~Linux ~~throughout~~will continue during the ~~reorganization~~year ~~process~~ending October 31, 2009 and future periods;

3331

• Our ~~intention~~expectation tothat ~~use~~we ~~our~~will ~~cash,~~continue ~~restricted~~to ~~cash~~be ~~and~~unable ~~subsequent~~to ~~cash~~predict ~~inflows~~the toamount ~~meet~~and ~~our~~timing ~~working~~of ~~capital~~SCOsource ~~needs~~revenue, ~~throughout~~and ~~the~~when ~~reorganization~~generated, ~~process;~~the •revenue ~~Our~~will ~~intention~~be tosporadic, ~~continue~~unpredictable, ~~operating~~ and todependent ~~file~~on athe ~~plan~~outcome of ~~reorganization with~~ the ~~Bankruptcy~~SCO ~~Court~~Litigation; • Our ~~intention~~expectation tothat ~~vigorously~~future ~~defend~~services ~~legal~~revenue ~~claims~~will ~~and~~depend ~~counterclaims~~in ~~brought~~part ~~against~~on usour byability ~~others;~~to •generate ~~Our~~UNIX ~~intention~~products torevenue ~~continue~~from tonew ~~pursue~~customers as well as the ~~SCO~~renewal ~~Litigation~~of annual support and services agreements from existing UNIX customers; • Our ~~belief~~expectation that ~~our allowance~~ for ~~doubtful~~the ~~accounts~~year ~~receivable~~ending isOctober ~~adequate~~31, ~~and~~2009, ~~that~~our ~~write-offs~~total ofUNIX ~~uncollectible~~revenue ~~accounts~~ will ~~not~~decline ~~materially~~from ~~exceed~~UNIX ~~that~~revenue ~~allowance;~~generated •in ~~The~~the ~~strength~~year ofended ~~our~~October ~~intellectual~~31, ~~property~~2008 ~~rights~~as ~~and~~a ~~contractual~~result ~~claims~~of ~~regarding~~continued ~~UNIX~~competition ~~generally~~ and ~~specifically~~negative ~~the~~publicity; ~~strength~~• ofOur ~~our~~intention ~~claim~~to ~~that~~use ~~unauthorized~~cash to run our UNIX ~~source~~and ~~code~~mobility businesses and ~~derivatives~~pursue ofthe ~~UNIX~~SCO ~~source~~Litigation ~~code~~subject ~~are~~to ~~prevalent~~Bankruptcy inCourt ~~Linux~~approval; • Our ~~belief~~intention ~~that~~to ~~competition from Linux will~~ continue ~~during~~to ~~the~~pay ~~year~~for ~~ending October 31~~expert, ~~2008~~consulting and ~~future~~other ~~periods;~~expenses •through ~~Our~~the ~~expectation~~conclusion ~~that~~of ~~for~~our ~~the~~litigation ~~three~~with ~~months~~IBM, ~~ending~~and ~~October~~our ~~31,~~expectation ~~2008,~~that ~~the~~although ~~dollar~~these ~~amount~~expenses ofare ~~sales~~expected ~~and~~to ~~marketing~~decrease ~~expense~~for ~~will~~the beyear ~~generally~~ending ~~consistent~~October ~~with~~31, ~~that~~2009, ~~incurred~~as ~~during~~compared to the ~~three~~year ~~months~~ ended ~~July~~October 31, 2008;, •that ~~Our~~they ~~expectation~~will ~~that~~continue ~~for~~to ~~the~~be ~~three~~significant ~~months~~to ~~ending~~our ~~October~~financial ~~31,~~statements; ~~2008,~~• ~~the~~Our ~~dollar~~intention ~~amount~~to ofcontinue ~~research~~our ~~and~~UNIX development ~~expenses~~and ~~will~~marketing beefforts ~~generally~~while ~~consistent~~at ~~with~~the ~~that~~same ~~incurred~~time ~~during~~developing ~~the~~and ~~three~~marketing ~~months~~our ~~ended~~mobility ~~July~~products ~~31,~~and ~~2008~~services; • Our ~~expectation~~belief that ~~for~~ the ~~three~~market ~~months~~for ~~ending~~mobility ~~October~~products ~~31,~~and ~~2008,~~services ~~the~~is ~~dollar~~poised ~~amount~~for ofrapid ~~general~~growth; ~~and~~• ~~administrative~~Our ~~expenses~~belief ~~will~~that bethe ~~generally~~success ~~consistent~~of ~~with~~our ~~that~~mobility ~~incurred~~products ~~during~~and ~~the~~services ~~three~~offerings ~~months~~will ~~ended~~depend, ~~July~~in 31part, ~~2008;~~on •the ~~Our~~level ~~expectation~~of ~~that~~commitment and resources we ~~will~~are ~~continue~~able to bedevote ~~unable~~ to ~~predict~~these offerings, the ~~amount~~partnerships ~~and~~we ~~timing~~are ofable ~~SCOsource~~to ~~revenue~~establish, ~~and~~our ~~when~~ability ~~generated,~~to ~~the~~attract ~~revenue~~and ~~will~~retain benew ~~sporadic~~customers and ~~dependent~~partners, onand the ~~outcome~~strength of ~~the~~our ~~SCO~~mobility ~~Litigation~~offerings; • Our ~~expectation~~operating ~~that~~strategy ~~future~~to ~~services~~continue ~~revenue~~to ~~will~~support ~~depend~~our inexisting ~~part~~users onof our ~~ability~~UNIX tooperating ~~generate~~system ~~UNIX~~ products ~~revenue~~and ~~from~~protect ~~new~~our ~~customers~~intellectual asproperty ~~well~~rights; as• ~~the~~Our ~~renewal~~belief ofthat ~~annual~~our ~~support~~OpenServer and ~~services~~UnixWare ~~agreements~~products ~~from~~will ~~existing~~continue ~~UNIX~~to ~~customers;~~provide •a ~~Our~~revenue ~~expectation~~stream ~~that~~in ~~for~~ the year ending October 31, ~~2008~~2009, and our ~~total~~belief ~~UNIX~~that revenue from such products will ~~decline~~continue ~~from~~to ~~UNIX~~decline; ~~revenue~~• ~~generated~~Our inexpectation ~~the~~that ~~year~~hardware ~~ended~~and ~~October~~software 31vendors, ~~2007~~as well as asoftware ~~result~~developers, ofwill ~~continued~~continue ~~competition~~to turn their certification and ~~negative~~application ~~publicity~~development efforts toward Linux and may elect not to continue to support or certify to our UNIX operating system products; • Our intention toand ~~use~~ability ~~cash~~ to ~~run~~keep our ~~UNIX~~relationships ~~business~~with ~~and~~key ~~pursue~~partners ~~the~~in ~~SCO~~certain ~~Litigation~~vertical markets; • Our ~~belief~~expectation that wefuture ~~have~~services ~~sufficient~~revenue ~~liquidity~~will ~~resources~~depend, toin ~~fund~~part, on our ~~operations~~ability ~~through~~to atgenerate ~~least~~UNIX ~~April~~products ~~30,~~revenue ~~2009;~~from •new ~~Our~~customers ~~intention~~as towell ~~continue~~as tothe ~~pay~~renewal ~~for~~of ~~expert,~~annual ~~consulting~~support and ~~other~~services ~~expenses~~agreements ~~through~~from ~~the~~existing ~~conclusion~~UNIX ofcustomers; • Our belief that a key to our ~~litigation~~future ~~with~~success ~~IBM,~~will ~~and~~be our ~~expectation~~ability ~~that~~to ~~although~~provide ~~these~~additional ~~expenses~~products ~~are~~and ~~expected~~services to ~~decrease~~our ~~for~~reseller ~~the~~channel ~~year~~and ~~ending~~to ~~October~~communicate ~~31,~~our ~~2008~~product asand ~~compared~~corporate strategy to ~~the~~these ~~year~~resellers; ~~ended~~• ~~October~~Our ~~31,~~expectation ~~2007,~~ that ~~they~~enhancements to our UNIX software products will ~~continue~~not toresult bein ~~material~~significant torevenue ~~our~~increases ~~financial~~in ~~statements~~the short-term; • Our ~~expectation~~belief ~~for~~that ~~the~~a ~~three~~movement ~~months~~in ~~ending~~interest ~~October 31~~rates, ~~2008~~either ~~that~~up ~~because~~or down of ~~the~~up ~~unique~~to ~~and~~2%, ~~unpredictable~~would ~~nature~~not ofhave ~~the~~a ~~SCO~~material ~~Litigation,~~adverse ~~the~~impact ~~occurrence~~on ~~and~~our ~~timing~~cash; of• ~~certain~~Our ~~expenses~~expectation isthat ~~difficult~~the tocost ~~predict,~~of ~~and~~SCOsource revenue in the future will be difficult to predict and that the cost of SCOsource revenue for the ~~upcoming~~three ~~quarters;~~months ~~and~~ending •April ~~Our~~30, ~~belief~~2009 ~~that~~or ~~certain~~for ~~legal~~future ~~actions~~periods tocould ~~which~~be wehigher ~~are~~than athe ~~party~~three ~~will~~months ~~not~~ended ~~have~~January a31, ~~material~~2009, ~~adverse~~especially ~~effect~~if onthe ~~us.~~payment of a contingency fee is required;

~~We wish to caution readers that our operating results are subject to various risks and~~32 uncertainties that could cause our actual results and outcomes to differ materially from those discussed or anticipated, including confirmation of a plan of reorganization, the outcomes and developments in our Chapter 11 bankruptcy case, court rulings in the bankruptcy proceedings, the impact of the bankruptcy proceedings or other pending litigation, developments in our litigation, our cash balances and available cash, continued competitive pressure on the Company’s operating system products, which could impact the Company’s results of operations, adverse developments in and increased or unforeseen legal costs related to the Company’s litigation, the inability to devote sufficient resources to the development and marketing of the Company’s products, including the Me Inc. mobile services and development platform, and the possibility that customers and companies with whom the Company has formed partnerships will decide to terminate or reduce their relationships with the Company, and the factors set forth below in Part II, Item 1A-Risk Factors. We also wish to advise readers not to place any undue reliance on the forward-looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.

	•		Our expectation for the three months ending April 30, 2009 that the dollar amount of our sales and marketing expenses will be generally consistent with that incurred during the three months ended January 31, 2009;

	•		Our expectation for the three months ending April 30, 2009 that the dollar amount of our research and development expenses will be generally consistent with that incurred during the three months ended January 31, 2009;

	•		Our expectation for the three months ending April 30, 2009 that the dollar amount of our general and administrative expenses will be generally consistent with that incurred during the three months ended January 31, 2009;

	•		Our belief that certain legal actions to which we are a party will not have a material adverse effect on us;

	•		Our belief that upon completion of the dissolution of the Chinese company in which we owned a minority interest, that the majority shareholder of the Chinese company will enter into a distribution agreement with our Company;

	•		Our expectation that a decision on the appeal of the Court’s rulings in the Novell Litigation could be forthcoming in the next five to eight months;

	•		Our expectation that certain assets of the Company, including our mobility business assets and our OpenServer operating system assets, may be sold through an open auction and that enough consideration may be obtained to pay our creditors and continue operations as set forth in the proposed bankruptcy reorganization plan; and

	•		Our expectation that we, in the event Company assets are not sold as planned through an auction, will continue to support our UNIX and mobility business, as well as focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.

We wish to caution readers that our operating results are subject to various risks and uncertainties that could cause our actual results and outcomes to differ materially from those discussed or anticipated, including confirmation of a plan of reorganization, the outcomes and developments in our Chapter 11 bankruptcy case, court rulings in the bankruptcy proceedings, the impact of the bankruptcy proceedings or other pending litigation, developments in our litigation, our cash balances and available cash, continued competitive pressure on the Company’s operating system products, which could impact the Company’s results of operations, adverse developments in and increased or unforeseen legal costs related to the Company’s litigation, the inability to devote sufficient resources to the development and marketing of the Company’s products, including the Me Inc. mobile services and development platform, and the possibility that customers and companies with whom the Company has formed partnerships will decide to terminate or reduce their relationships with the Company, and the factors set forth below in Part II, Item 1A-Risk Factors. We also wish to advise readers not to place any undue reliance on the forward-looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk. We have foreign offices and operations in Europe and Asia. As a result, a portion of our revenues are derived from sales to customers outside the United States. Our international revenues are primarily denominated in U.S. dollars, Euros and United Kingdom Pounds. Most of the operating expenses related to our foreign-based operations are denominated in foreign currencies and therefore operating results are affected by changes in the U.S. dollar exchange rate in relation to foreign currencies such as the Euro, among others. If the U.S. dollar weakens compared to the Euro and other currencies, our operating expenses for foreign operations will be higher when translated back into U.S. dollars. Our revenues can also be affected by general economic conditions in the United States, Europe and other international markets. Our results of operations may be affected in the short term by fluctuations in foreign currency exchange rates.

Interest Rate Risk. The primary objective of our cash management strategy is to invest available funds in a manner that assures safety and liquidity and maximizes yield within such constraints. We believe that a hypothetical movement in interest rates, either up ~~or down of up to~~ ~~2%, would not have a material adverse impact on our cash. We do not borrow money for short-term investment purposes.~~

~~Investment Risk. We have historically invested in equity instruments of privately held and~~33 public companies in the technology industry for business and strategic purposes. Investments are accounted for under the cost method if our ownership is less than 20 percent and we are not able to exercise influence over operations. We account for our ownership interests in companies in which we own at least 20% and less than 50% using the equity method of accounting. Under the equity method, we record our portion of the entities’ net income or net loss in our consolidated statements of operations. Our investment policy is to regularly review the assumptions and operating performance of these companies and to record impairment losses when events and circumstances indicate that these investments may be impaired. As of July 31, 2008, we did not hold any cost method investments. As of July 31, 2008, the carrying value of our equity method investment of $373,000 was for our 30% ownership in a Chinese company.

ITEMTable 4.of CONTROLS AND PROCEDURES Contents

or down of up to 2%, would not have a material adverse impact on our cash. We do not borrow money for short-term investment purposes.

Investment Risk. We have historically invested in equity instruments of privately held and public companies in the technology industry for business and strategic purposes. Investments are accounted for under the cost method if our ownership is less than 20 percent and we are not able to exercise influence over operations. We account for our ownership interests in companies in which we own at least 20% and less than 50% using the equity method of accounting. Under the equity method, we record our portion of the entities’ net income or net loss in our consolidated statements of operations. Our investment policy is to regularly review the assumptions and operating performance of these companies and to record impairment losses when events and circumstances indicate that these investments may be impaired. As of January 31, 2009, we did not hold any cost or equity method investments.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting. During the most recent fiscal quarter covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Certain legal proceedings in which we are involved are discussed in Part I, Item 3, of our Annual Report on Form 10-K for the year ended October 31, ~~2007~~2008. In addition, for more information regarding our legal proceedings, please see Note 3 included in Part 1, Item 1. Unaudited Financial Statements — Notes to Condensed Consolidated Financial Statements, which information is incorporated herein by reference. We have included disclosure updating these legal proceedings below:

On August 10, 2007, the federal judge overseeing our lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court in Utah (the “Court”). The effect of these rulings was to significantly reduce or eliminate certain of our claims in both the Novell case (the “Novell Litigation” and the IBM case, and possibly others (collectively, the “SCO Litigation”). The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the 1995 Asset Purchase Agreement between Novell and The Santa Cruz Operation (the “APA”), and that Novell retained broad rights to waive our contract claims against IBM. The Court ruled that we own the copyrights to post APA UnixWare code and derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements were attributable to such SVRx licenses and should be remitted to Novell, as well as whether we had authority to enter into such SVRx licenses. Based on Novell’s allegations, the potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

The trial of these issues, however, was automatically stayed as a result of our filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court modified the automatic stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds

from the SCOsource agreements and the question of our alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the bankruptcy automatic stay applies to the SuSE arbitration proceeding pending in Europe. Upon the modification of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court modified the automatic stay, which started on April 29, 2008 and concluded on May 2, 2008.

From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated that it would attempt to issue a ruling without undue delay.

On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements and that we had the authority to enter into such agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment could not be entered because our claims were stayed pending arbitration and the imposition of a constructive trust remained an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.

On November 20, 2008, after further negotiations between the parties, the Court entered a Final Judgment, incorporating the material rulings from the August 10, 2007 and July 16, 2008 rulings as explained above. On November 25, 2008, we filed a notice of appeal of that Final Judgment, including the Court’s summary judgment order of August 10, 2007. On January 23, 2009, we filed an unopposed motion for an expedited appeal with the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit Court”) which was granted by the Tenth Circuit Court on January 29, 2009. On March 4, 2009, we filed our brief for our appeal with the Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 6, 2009. With the expedited appeal, and early hearing date, we are hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.

On March 13, 2009, the Court denied our motion to stay the taxation of costs relating to the trial and final judgment. These costs total $127,432, and relate to such things as transcription charges and deposition expenses. According to the Court’s order these costs will be added to the issues that are on appeal with the Tenth Circuit Court and resolved through that appeal.

own the copyrights to post APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of our UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007 and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest.

The trial of these issues, however, was automatically stayed as a result of our filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on September 14, 2007. On October 4, 2007, Novell filed a Motion for Relief from Automatic Stay. On November 27, 2007, the Bankruptcy Court lifted the stay to permit Novell to pursue the trial scheduled in the Court on the allocation of proceeds from the SCOsource agreements and the question of our alleged lack of authority to enter into them, but the Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell. The Bankruptcy Court also ruled that the bankruptcy stay applies to the SuSE arbitration proceeding pending in Europe. Upon the partial lifting of the automatic stay, the Court scheduled a four-day trial on those matters for which the Bankruptcy Court lifted the stay, which started on April 29, 2008 and concluded on May 2, 2008.

From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements, as explained above. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated it would attempt to issue a ruling without undue delay.

On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.

IPO Class Action Matter

In July 2001, we and several of ~~its~~our former officers and directors (the “Individual Defendants”) were named as defendants in class action complaints alleging violations of the federal securities laws in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed a Consolidated Amended Complaint, which is now the operative complaint. The complaint seeks unspecified damages and alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 ~~promulgated~~ promulgated thereunder. Plaintiffs allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Registration Statement for the Company’s initial public offering was false and misleading because it did not disclose these arrangements.

allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Registration Statement for the Company’s initial public offering was false and misleading because it did not disclose these arrangements.

On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six “focus” cases, which are intended to serve as test cases. Plaintiffs selected these six cases, which do not include us. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

Prior to the Second Circuit’s December 5, 2006 ruling, a majority of the issuers, including us, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could not be approved. On June 25, 2007, the district court approved a stipulation filed by the plaintiffs and the issuers terminating the proposed settlement. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. ~~The amended complaints include a number of changes, such as changes to the definition of the purported class of investors, and the elimination of the individual defendants as defendants.~~ On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases. On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them. On March 26, 2008, the district court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. WeOn ~~are~~October 10, ~~awaiting~~2008, athe ~~decision~~judge ~~from~~in the ~~Court~~IPO oncase ~~the~~granted plaintiffs’ request to withdraw, without prejudice, their motion for class certification ~~motion~~in the case. The parties in the approximately 300 coordinated class actions, including us, the underwriter defendants, and the plaintiffs in the class action involving us, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including us. The settlement is subject to approval by the parties, termination by the parties under certain circumstances, and Court approval. There is no assurance that the settlement will be concluded or that the Court will approve the settlement.

Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of this matter. We have notified our underwriters and insurance companies of the existence of the claims. We presently ~~believes~~believe, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on our results of operations, liquidity or financial position and will not exceed the $200,000 self-insured retention already paid or accrued by us.

On November 20, 2008, the Bankruptcy Court entered an order, based on a stipulation of the parties, that the plaintiffs in the IPO case would not pursue assets of the company in connection with the case but would only look to insurance coverage to cover any damages that may be awarded to plaintiffs in that case.

AutoZone, Inc.

On March 2, 2004, we filed suit against AutoZone, Inc., in the Federal District Court for the District of Nevada (the “Nevada District Court”). We brought a single claim for copyright infringement based on AutoZone’s use of UNIX copyrighted materials in Linux and asked the Nevada District Court to impose a preliminary injunction against AutoZone. On August 6, 2004, the Nevada District Court granted AutoZone’s motion to stay the case pending resolution of the IBM, Novell, and Red Hat litigations. During the limited discovery that the Nevada District Court permitted, SCO confirmed that AutoZone had also made unauthorized use of materials from SCO’s OpenServer operating system in migrating to Linux. On September 22, 2008, the Nevada District Court held a

status conference on the case and decided to lift the stay effective December 31, 2008. On January 6, 2009, the assigned Magistrate Judge issued an order directing the parties to file a proposed discovery plan and scheduling order by January 16, 2009. On that date, the parties filed a Joint Discovery Plan and Scheduling Order proposing January 15, 2010, as the deadline for the parties to complete fact discovery. On February 27, 2009, the parties filed initial disclosures in the case and the case will proceed pursuant to the schedule set forth above.

ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. In addition to the other information contained in this Form 10-Q, you should consider the following risk factors before investing in our securities.

We do not have a history of profitable operations and our cash resources are limited.

For the years ended October 31, ~~2007~~2008, ~~2006~~2007 and ~~2005~~2006, we incurred net losses ~~applicable to common stockholders~~ of $68,~~826~~687,000, $166,~~598~~826,000 and $1016,~~726~~598,000, respectively~~, and for the nine months ended July 31, 2008 we incurred a net loss of $7,623,000~~. As of ~~July~~January 31, ~~2008~~2009, our accumulated deficit was $~~265~~267,~~989~~512,000.

If our ~~revenues~~revenue from the sale of our UNIX products and services ~~continue~~continues to decline, or if we continue to devote significant cash resources to the SCO Litigation, we will need to further reduce operating expenses to generate positive cash flows. OnDuring January ~~31,~~ 2008, ~~in an effort to reduce ongoing operating expenses~~ and ~~to conform our business to our current objectives and opportunities~~January 2009, we implemented ~~began the implementation of~~ a reduction in force. Weand ~~reduced~~decreased our ~~workforce~~ongoing byoperating 25expenses ~~positions~~in oran aeffort to ~~reduction~~decrease ~~of approximately 21% of~~ our total ~~workforce and this reduction was completed in April 2008~~costs. We may not be able to further reduce operating expenses without damaging our ability to support our existing UNIX business. Additionally, we may not be able to achieve ~~profitability~~ profitability through additional cost-cutting actions.

As of ~~July~~January 31, ~~2008~~2009, we had a total of $21,~~117~~836,000 in cash and an additional $~~2,680,000 of restricted cash of which $~~1,~~639~~500,000 is to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,~~361~~499,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with our legal counsel in the SCO Litigation. Our limited cash resources may not be sufficient to fund continuing losses from operations and the expenses of the SCO Litigation.

A long period of operating under Chapter 11 may harm our business.

A long period of operating under Chapter 11 could adversely affect our business and operations. So long as the Chapter 11 cases continue, our senior management will be required to spend a significant amount of time and effort dealing with the bankruptcy reorganization instead of focusing exclusively on business operations. A prolonged period of operating under Chapter 11 may also make it more difficult to attract and retain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to successfully reorganize our businesses and seek to establish alternative commercial relationships.

Furthermore, so long as the Chapter 11 cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the cases. A prolonged continuation of the Chapter 11 cases may also require us to seek financing. If we require financing during the Chapter 11 cases and we are unable to obtain the financing on favorable terms or at all, our chances of successfully reorganizing our businesses may be seriously jeopardized.

We may not be able to obtain confirmation of our Chapter 11 plan; we may not be able to emerge from ~~Bankruptcy~~bankruptcy and weour assets may be liquidated.

To successfully emerge from Chapter 11 ~~bankruptcy protection~~ as a viable entity, one must meet certain statutory requirements with respect to adequacy of disclosure with respect to the Chapter 11 plan of reorganization (the “Plan”), ~~soliciting~~solicit and ~~obtaining~~obtain the requisite acceptances of the Plan, and ~~fulfilling~~ fulfill other statutory conditions for confirmation. We may not receive the requisite acceptances to confirm the Plan. Even if the requisite acceptances of the Plan are received, the Bankruptcy Court may not confirm the Plan.

On February 29, 2008, we filed ~~the~~a Plan and a Disclosure Statement with the United States Bankruptcy Court. ~~The Plan is subject to, among other conditions, Bankruptcy Court approval.~~ A hearing for approval of the Disclosure Statement was scheduled before the Bankruptcy Court on April 2, 2008. The April 2, 2008 hearing proceeded as a status conference regarding our progress towards a new Memorandum of Understanding (“MOU”) with Stephen Norris ~~Capital Partners, LLC. Therefore, we~~ ~~indicated that we were not presently seeking approval of the adequacy of the Disclosure Statement, which would need to be amended to reflect the changes to the MOU.~~

~~On May 12, 2008, we filed a motion seeking an extension of our exclusive period to submit and~~37 solicit acceptance to an amended or new plan of reorganization. A hearing to consider that motion was scheduled for June 17, 2008. The Bankruptcy Court granted the motion on June 17, 2008. The Debtors filed another motion for an extension of our exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion is scheduled for September 16, 2008. If our motion is denied, creditors may file their own proposed plans of reorganization. Plans filed by creditors may be less favorable to our stockholders.

If we lose our motion to extend the exclusive period to file our Plan or if our Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if anything, holders of claims against us would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that our bankruptcy proceeding could be converted to a liquidation under Chapter 7 and we would have to liquidate our assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if we were to emerge as a viable, reorganized entity and stockholders would likely receive nothing from the liquidation.

A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock.

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. No assurance can be provided regarding the date any plan or plans of reorganization will be proposed, confirmed or consummated or regarding when any distributions could be made to parties in interest. A plan of reorganization could result in holders of our common stock receiving no distribution on account

ofCapital ~~their~~Partners, ~~interests and cancellation of their existing stock~~LLC. ~~If certain requirements of the Bankruptcy Code are met~~Therefore, ~~a plan~~we ofindicated ~~reorganization~~that ~~can~~we bewere ~~confirmed~~not ~~notwithstanding~~presently ~~its~~seeking ~~rejection~~approval by of the ~~class~~adequacy ~~comprising~~of the ~~interests~~ ofDisclosure ~~our~~Statement, ~~equity~~which ~~security~~would ~~holders.~~need ~~Therefore,~~to anbe ~~investment~~amended into ~~our~~reflect ~~common~~the ~~stock~~changes ~~is highly~~to ~~speculative~~the MOU.

On May 12, 2008, we filed a motion seeking an extension of our exclusive period to submit and solicit acceptance to an amended or new plan of reorganization. At the hearing to consider that motion on June 17, 2008, the Bankruptcy Court granted the motion. The Debtors filed another motion for an extension of our exclusive periods to submit and solicit acceptances of a plan of reorganization to a date 45 and 105 days, respectively, following the entry of a final judgment in the Novell Litigation. The hearing on that motion was held on September 16, 2008. The Bankruptcy Court granted the motion for an extension of our exclusive period to submit a plan of reorganization to December 31, 2008 and our exclusive period to solicit acceptances to March 2, 2009.

On January 8, 2009, we filed our Amended Reorganization Plan and Disclosure Statement. Under the proposed Plan, we intend to hold an open auction to sell certain assets including our mobility business assets and our OpenServer operating system assets and business. Through this sale, we hope to obtain enough consideration to pay our creditors and continue operations as set forth in the Plan. In the event that the asset sale does not generate enough cash to meet the aforementioned objectives, we will scale back our operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain SCO assets are not sold, we will continue to sell and support our UNIX and mobility business and will also focus on the following key provisions: (a) an enhanced pricing and discount strategy, (b) an updated “true-up” licensing program with current customers, (c) reducing overall operating costs, (d) delivering SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware, and (e) shipping FCmobilelife and FCtasks for the iPhone with a new pricing structure.

If our Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if anything, holders of claims against us would ultimately receive with respect to their claims. If an alternative reorganization could not be agreed upon, it is possible that our bankruptcy case could be converted to a liquidation under Chapter 7 and we would have to liquidate our assets, in which case it is likely that holders of claims would receive substantially less favorable treatment than they would receive if we were to emerge as a viable, reorganized entity and stockholders would likely receive nothing from the liquidation.

A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock.

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, post-petition liabilities and prepetition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies or what types or amounts of distributions, if any, they would receive. No assurance can be provided regarding the date any plan or plans of reorganization will be proposed, confirmed or consummated or regarding when any distributions could be made to parties in interest. A plan of reorganization could result in holders of our common stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the class comprising the interests of our equity security holders. Therefore, an investment in our common stock is highly speculative.

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

Under the Bankruptcy Code, all debtors must obtain Bankruptcy Court approval to, among other things:

	•		sell assets outside the ordinary course of business;

	•		consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

	•		obtain financing secured by the Company’s assets.

In addition, if a trustee is appointed to operate the Debtors in Chapter 11 (or the case is converted to a case under Chapter 7), the trustee would assume control of our assets, including the SCO Litigation.

~~We have suffered a significant setback in our lawsuit with Novell that has significantly~~38 ~~limited our claims and raises substantial doubt about our ability to continue as a going concern and we may not prevail in our lawsuits with IBM, Novell and others.~~

OnTable August 10, 2007, the Court ruled in favor of Novell on several of the summary judgment motions that were pending. The effect of these rulings was to significantly reduce or to eliminate certain of our claims in both the Novell and IBM cases, and possibly others. The Court ruled that Novell was the owner of the UNIX and UnixWare copyrights that existed at the time of the APA and that Novell retained broad rights to waive our contract claims against IBM. The Court ruled that we own the copyrights to post-APA UnixWare derivatives and that we have certain other ownership rights in the UNIX technology. We were directed to accept Novell’s waiver of its UNIX contract claims against IBM. In addition, the Court determined that certain SCOsource licensing agreements that we executed in fiscal year 2003 and thereafter included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September 17, 2007, and the federal judge was to determine what portion, if any, of the proceeds of the SCOsource agreements is attributable to such SVRx licenses and should be remitted to Novell, as well as whether we had authority to enter into such SVRx licenses. The potential payment to Novell for those SVRx licenses ranged from a de minimis amount to in excess of $30,000,000, the latter amount being the amount claimed by Novell, plus interest. Contents

~~The~~We ~~trial~~suffered ~~of these issues, however, was automatically stayed as~~ a ~~result~~significant ofsetback in our ~~filing~~lawsuit ~~a voluntary~~with ~~petition for relief under Chapter 11 of the Bankruptcy Code on September 14, 2007. On October 4, 2007,~~ Novell ~~filed~~that ahas ~~Motion~~significantly ~~for~~limited ~~Relief from Automatic Stay. On November 27, 2007, the~~our ~~Bankruptcy~~claims ~~Court~~and ~~lifted~~raises ~~the~~substantial ~~stay~~doubt toabout ~~permit~~our ~~Novell~~ability to ~~pursue~~continue ~~the~~as ~~trial~~a ~~scheduled~~going inconcern ~~the Court in Utah on the allocation of proceeds from the SCOsource agreements~~ and ~~the~~we ~~question~~may ~~of SCO’s alleged~~not ~~lack~~prevail ofin ~~authority~~our tolawsuits ~~enter~~with ~~into them~~IBM, ~~but~~Novell ~~the~~and ~~Bankruptcy Court retained jurisdiction to determine whether to impose a constructive trust on any amounts found to be payable to Novell~~others.

On ~~April~~August 2910, ~~through May 2~~2007, ~~2008~~the federal judge overseeing our lawsuit with Novell, Inc. (“Novell”) ruled in favor of Novell on several of the summary judgment motions that were before the United States District Court ~~held~~in aUtah ~~bench~~(the ~~trial~~“Court”). onThe ~~Novell’s~~effect ~~monetary~~of ~~claim~~these ~~for~~rulings was to significantly ~~certain~~reduce ~~portions~~or eliminate certain of ~~fees~~our weclaims ~~received~~in ~~from~~both the ~~SCOsource~~Novell ~~agreements~~case (the “Novell Litigation” and ~~whether~~the IBM wecase, ~~had~~and possibly others (collectively, the ~~authority~~“SCO Litigation”). The Court ruled that Novell was tothe ~~enter~~owner ~~into~~of ~~those~~the ~~agreements.~~UNIX ~~Prior~~and toUnixWare copyrights that existed at the ~~commencement~~time of the ~~trial~~1995 Asset Purchase Agreement between Novell and The Santa Cruz Operations (the “APA”), and that Novell ~~conceded~~retained broad rights to waive our contract claims against IBM. The Court ruled that itwe own the copyrights to post ~~would~~APA ~~not~~UnixWare becode ~~making~~and aderivatives ~~claim~~and that we have certain other ownership rights in the UNIX technology. We were directed to aaccept ~~portion~~Novell’s waiver of our UNIX contract claims against IBM. In addition, the ~~fees~~Court ~~paid~~determined tothat uscertain bySCOsource ~~Microsoft~~licensing agreements that we executed in fiscal year 2003 included older SVRx licenses and that we were possibly required to remit some portion of the proceeds to Novell. Over our objection, a bench trial was set to begin on September ~~therefore~~17, ~~reduced~~2007, and the ~~principal~~federal ~~amount~~judge ofwas ~~its~~to ~~claim~~determine towhat ~~$19~~portion,~~979~~ if any,~~561.~~ ~~The~~of ~~Court~~the ~~also~~proceeds ~~held~~of ~~oral~~the ~~argument~~SCOsource onagreements ~~the~~were ~~motions~~attributable ~~filed~~to bysuch usSVRx licenses and should be remitted to Novell, as well as whether we had authority to enter into such SVRx licenses. ~~After~~Based on Novell’s allegations, the ~~trial~~potential ~~and~~payment ~~arguments~~to ~~the~~Novell ~~Court~~for ~~took~~those ~~all matters~~SVRx ~~under~~licenses ~~advisement~~ranged ~~and~~from ~~stated~~a itde ~~would~~minimis ~~attempt~~amount to ~~issue~~in excess aof ~~ruling~~$30,000,000, ~~without~~the ~~undue~~latter ~~delay~~amount being the amount claimed by Novell, plus interest.

OnThe ~~July 16,~~trial ~~2008,~~of ~~the~~these ~~Court~~issues, ~~entered~~however, ~~its~~was ~~Findings~~automatically ofstayed ~~Fact,~~as ~~Conclusions~~a result of ~~Law,~~our ~~and~~filing ~~Order,~~a ~~ruling~~voluntary ~~that~~petition ~~(1) the~~for ~~SCOsource~~relief ~~agreements~~under ~~with~~Chapter 11 ~~Linux~~of ~~end-users~~the ~~were~~United ~~not~~States ~~SVRx~~Bankruptcy ~~licenses~~Code ~~and~~in ~~therefore~~the United ~~Novell~~States isBankruptcy ~~not~~Court ~~entitled~~for tothe ~~revenue~~District ~~from~~of ~~those~~Delaware ~~agreements;~~ (2) the ~~2003~~“Bankruptcy ~~SCOsource~~Court”) ~~agreement~~on ~~with~~September 14, ~~Microsoft~~2007. ~~contained~~On anOctober 4, ~~SVRx~~2007, ~~license~~Novell ~~that~~filed ~~was~~a ~~incidental~~Motion tofor ~~the~~Relief ~~UnixWare~~from ~~license~~Automatic inStay. ~~the~~On ~~agreement~~November 27, ~~and~~2007, ~~therefore~~the weBankruptcy ~~were~~Court ~~authorized~~modified tothe ~~enter~~automatic ~~into~~stay ~~the~~to ~~license~~permit ~~and~~ Novell ~~is not entitled~~ to ~~revenue from~~pursue the ~~agreement;~~trial scheduled ~~(3)~~ in the ~~2003~~Court ~~SCOsource~~on ~~agreement~~the ~~with~~allocation ~~Sun~~of ~~also~~proceeds ~~contained~~from anthe ~~authorized incidental~~SCOsource ~~SVRx~~agreements ~~license~~ and ~~Novell~~the isquestion of ~~not~~our ~~entitled~~alleged tolack ~~revenue~~of ~~attributable~~authority to ~~that~~enter ~~license;~~into ~~and~~them, ~~(4)~~ but the ~~same~~Bankruptcy ~~Sun~~Court ~~agreement~~retained ~~contained~~jurisdiction to andetermine ~~unauthorized~~whether ~~amendment~~to ofimpose a ~~prior~~constructive ~~UNIX~~trust ~~agreement,~~on ~~and Novell~~any isamounts ~~entitled~~found to ~~$2,547,817~~be ofpayable ~~the revenue from the Sun agreement as attributable~~ to ~~that amendment~~Novell. The Bankruptcy Court ~~directed~~also ~~Novell~~ruled tothat ~~file~~the abankruptcy ~~brief~~automatic ~~identifying~~stay ~~the~~applies ~~amount~~to ofthe ~~prejudgment~~SuSE arbitration ~~interest~~proceeding itpending ~~seeks~~in ~~based on this award~~Europe. OnUpon ~~August 29,~~the ~~2008,~~modification ~~Novell~~of ~~filed~~the ~~an Unopposed~~automatic ~~Submission Regarding Prejudgment Interest~~stay, ~~informing~~ the Court ~~that~~scheduled ~~the~~a four-day ~~parties~~trial ~~agree~~on ~~that~~those ~~Novell~~matters isfor ~~entitled to~~which ~~$918,122~~the inBankruptcy ~~prejudgment~~Court ~~interest~~modified ~~through~~the ~~that~~automatic ~~date~~stay, ~~plus~~which started ~~$489~~on ~~per~~April 29, ~~day~~2008 ~~until~~and ~~the~~concluded ~~entry of final judgment, based~~ on ~~the Court’s $~~May 2,~~547,817~~ ~~award~~2008.

From April 29 through May 2, 2008, the Court held a bench trial on Novell’s monetary claim for certain portions of fees we received from the SCOsource agreements and on whether we had the authority to enter into those agreements. Prior to the commencement of the trial, Novell conceded that it would not be making a claim to a portion of the fees paid to us by Microsoft in 2003 and Novell therefore reduced the principal amount of its claim to $19,979,561. After the trial and arguments, the Court took all matters under advisement and stated that it would attempt to issue a ruling without undue delay.

On July 16, 2008, the Court entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements and that we had the authority to enter into such agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into that SVRx license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun contained an unauthorized amendment of a prior UNIX buy out agreement, and Novell was entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it sought based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties had agreed that Novell was entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

~~In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary~~ judgment ~~orders.~~could Innot ~~its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot~~ be entered because our claims ~~are~~were stayed pending arbitration and the imposition of a constructive trust ~~remains~~remained an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under ~~the~~ its 2003 SCOsource agreement, Novell agreed that only $625,487 of ~~SCO’s~~our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2007. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.

AsOn November 20, 2008, after further negotiations between the parties, the Court entered a Final ~~result~~Judgment, ofincorporating ~~this~~the ~~order~~material rulings from the ~~Court~~August 10, we2007 ~~have~~and ~~accrued~~July 16, $32008 rulings as explained above. On November 25,~~473~~ 2008,~~000~~ ~~for~~we ~~this~~filed ~~contingent~~a notice of appeal of that Final ~~liability~~Judgment, ~~and~~including ~~related~~the ~~interest~~Court’s summary judgment order of August 10, 2007. ~~However~~On January 23, 2009, we filed ~~continue~~an tounopposed ~~contest~~motion ~~this~~for ~~liability.~~an Weexpedited ~~believe~~appeal ~~that~~with the United States Court of Appeals for the ~~this~~Tenth ~~order~~Circuit is(the in“Tenth ~~error~~Circuit Court”) which was granted by the Tenth Circuit Court on January 29, ~~and~~2009. ~~that~~On March 4, 2009, we ~~have~~filed ~~strong~~our ~~grounds~~brief tofor ~~overturn~~our itappeal ~~and~~with the ~~August~~Tenth Circuit Court. The Tenth Circuit Court has placed the case on the calendar for oral argument on May 106, ~~2007~~2009. With the ~~summary~~expedited ~~judgment~~appeal, ~~upon~~and early hearing date, we are hopeful a decision on the appeal could be forthcoming in the next five to eight months, but it could be several months beyond that time frame.

WeOn ~~intend~~March 13, 2009, the Court denied our motion to ~~appeal~~stay the ~~adverse~~taxation ~~August 10,~~of ~~2007~~costs ~~summary~~relating ~~judgment~~to ~~ruling~~the trial and ~~the~~final ~~July 16,~~judgment. ~~2008 order~~These ascosts ~~soon~~total as$127,432, ~~Final~~and ~~Judgment~~relate isto ~~entered~~such ~~upon~~things ~~those~~as ~~orders~~transcription charges and deposition expenses. ~~However,~~According into the ~~event~~Court’s ~~that~~order ~~our~~these ~~assets are~~costs ~~further~~will ~~depleted~~be oradded ~~frozen,~~to wethe issues ~~may~~that ~~not~~are beon inappeal awith ~~financial~~the ~~position~~Tenth toCircuit ~~appeal~~Court ~~those~~and ~~rulings~~resolved through that appeal.

As a result of this Final Judgment of July 16, 2008 against us, as of January 31, 2009, we have accrued $3,562,000, including the related interest. However, we continue to contest this liability. In the event that our assets are further depleted or encumbered, we may not be in a financial position to see the appeal of those rulings through to a conclusion or continue the litigation.

Our management and board of directors determined that filing for relief under Chapter 11 of the United States Bankruptcy Code on September 14, 2007 was appropriate and necessary. As a result of both the Court’s August 10, 2007 order and our entry into Chapter 11, among other factors, there is substantial doubt about our ability to continue as a going concern including continuing the SCO Litigation or appealing the adverse ruling of August 10, 2007 and the July 16, 2008 order.

~~Absent~~The alawsuits ~~significant~~with ~~cash~~IBM ~~payment~~and to Novell ~~being~~will ~~required~~continue byto ~~the~~be ~~final~~costly. ~~resolution~~In ~~for~~ the ~~aforementioned~~ ~~court~~event ~~order,~~that we ~~believe~~are ~~that the undiscounted future cash flows generated by us will~~not besuccessful ~~sufficient~~with ~~to recover~~ the ~~carrying~~IBM ~~values~~or ofNovell ~~our~~cases, ~~long-lived~~or ~~assets~~the ~~over~~continuing ~~their~~litigation ~~expected~~requires ~~remaining useful~~more ~~lives.~~cash ~~However~~than expected, ~~if a significant cash payment is required the carrying amount of~~ our ~~long-lived~~ ~~assets~~business ~~may~~and ~~not~~operations would be ~~recovered~~materially harmed.

~~The~~We ~~lawsuits~~must ~~with~~continue ~~IBM~~to ~~and~~pay ~~Novell~~for ~~will~~expert, ~~continue~~consulting toand beother ~~costly.~~expenses Inthrough the ~~event~~conclusion ~~that we are not~~of ~~successful~~our litigation with ~~the~~ IBM orand Novell. ~~motions,~~As orwe continue with the ~~continuing~~appeals and litigation, ~~requires~~we ~~more~~may ~~cash than~~be ~~expected,~~required ~~our~~to ~~business~~place ~~and~~additional ~~operations~~amounts ~~would~~into bethe ~~materially~~escrow ~~harmed~~account, which could further reduce our liquidity position.

We must continue to pay for expert, consulting and other expenses through the conclusion of our litigation with IBM and Novell. As we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could further reduce our liquidity position.

If the Court imposes a constructive trust on proceeds of the fiscal year 2003 SCOsource agreements, we may not be able to continue in business.

On July 16, 2008, the Court overseeing our lawsuit with Novell entered its Findings of Fact, Conclusions of Law, and Order, ruling that (1) the SCOsource agreements with Linux end-users were not SVRx licenses and therefore Novell is not entitled to revenue from those agreements; (2) the 2003 SCOsource agreement with Microsoft contained an SVRx license that was incidental to the UnixWare license in the agreement, and therefore we were authorized to enter into the license and Novell is not entitled to revenue from the agreement; (3) the 2003 SCOsource agreement with Sun also contained an authorized incidental SVRx license and Novell is not entitled to revenue attributable to that license; and (4) the same Sun agreement contained an unauthorized amendment of a prior UNIX agreement, and Novell is entitled to $2,547,817 of the revenue from the Sun agreement as attributable to that amendment. The Court directed Novell to file a brief identifying the amount of prejudgment interest it seeks based on this award. On August 29, 2008, Novell filed an Unopposed Submission Regarding Prejudgment Interest, informing the Court that the parties agree that Novell is entitled to $918,122 in prejudgment interest through that date, plus $489 per day until the entry of final judgment, based on the Court’s $2,547,817 award.

In its ruling of July 16, 2008, the Court also directed Novell to file a proposed Final Judgment consistent with the Court’s trial and summary judgment orders. In its proposed submission to the Court in compliance with this order, Novell took the position that final judgment cannot be entered because our claims are stayed pending arbitration and the imposition of a constructive trust remains an open question in the Bankruptcy Court. Subsequently, in order to expedite the entry of final judgment, we sought to resolve these issues with Novell and agreed to an extension of Novell’s deadline for filing its submission. Based on our tracing of Sun’s payments under its 2003 SCOsource agreement, Novell agreed that only $625,487 of our current assets were traceable as trust funds. We also proposed dismissing our stayed claims with prejudice on the basis of the Court’s ruling that Novell owns the pre-APA UNIX copyrights in the Court’s summary judgment order of August 10, 2008. On August 29, 2008, in its Submission Regarding the Entry of Final Judgment, Novell informed the Court of the parties’ agreement as to the trust amount, but Novell stood by its position that final judgment could not be entered in light of the stayed claims. On September 15, 2008, we filed papers arguing for the entry of final judgment.

If the Bankruptcy Court imposes a constructive trust in an amount that exceeds our cash and restricted cash, or if the amounts subject to the constructive trust are otherwise significant, we may not be able to continue to operate our business absent confirmation of the Plan.

Our claims relating to our UNIX intellectual property may subject us to additional legal proceedings.

In August 2003, Red Hat brought a lawsuit against us asserting that the Linux operating system does not infringe our UNIX intellectual property rights and seeking a declaratory judgment for non-infringement of copyrights and non-misappropriation of trade secrets. In addition, Red Hat claims that we have engaged in false advertising in violation of the Lanham Act, deceptive trade practices, unfair competition, tortious interference with prospective business opportunities, and trade libel and disparagement. This case is currently stayed pending the resolution of our suit against IBM and because of the bankruptcy ~~proceedings~~cases. If Red Hat is successful in its claim against us, our business and results of operations could be materially harmed.

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.

On October 31, 2004, we entered into an engagement agreement (the “Engagement Agreement”) with Boies, Schiller & Flexner LLP, Kevin McBride and Berger Singerman P.A. (the “Law Firms”). This Engagement Agreement ~~supersedes~~superseded and ~~replaces~~replaced the original engagement agreement that was entered into in February 2003. The Engagement Agreement governs the relationship between the Law Firms and us in connection with the Law Firms’ representation of us in the SCO Litigation. Berger Singerman P.A. was a ~~member of this group of Law Firms. With our consent, the engagement of this firm was~~ mutually terminated. The last payment received by Berger Singerman P.A. was on November 24, 2004. Further, Berger Singerman P.A. waived its rights under the Engagement Agreement upon the parties’ agreement for Berger Singerman P.A. to represent the Debtors in their bankruptcy cases.

~~We must pay one or more contingency fees upon certain amounts that we or our stockholders may~~40 receive as a result of a settlement, judgment or a sale of the company. The contingency fee amounts payable to the Law Firms (which no longer includes Berger Singerman P.A.) will be, subject to certain credits and adjustments, as follows:

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

The Engagement Agreement specifically provides that, except for the compensation obligations specifically described above, we will not be obligated to pay any legal fees, whether hourly, contingent or otherwise, to the Law Firms, or any other law firms that may be engaged by the Law Firms, in connection with our SCO Litigation through the end of the current litigation between us and IBM, including any appeals.

~~expert, consulting~~member ~~and~~of ~~other~~this ~~expenses~~group ~~through the conclusion~~ of ~~our~~Law ~~litigation with IBM~~Firms. AsWith ~~we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could further reduce~~ our ~~liquidity position. As of July 31~~consent, ~~2008, we had a total of $2,117,000 in cash and an additional $2,680,000 of restricted cash of which $1,639,000 is to be used to pursue~~ the ~~SCO~~engagement ~~Litigation. From October 31, 2004 through July 31, 2008, we have spent a total~~ of ~~$13,361,000~~this ~~for~~firm ~~expert,~~was ~~consulting and other costs and fees as agreed to in the~~mutually ~~Engagement Agreement with the Law Firms in the SCO Litigation~~terminated. InThe ~~light~~last ~~of the Chapter 11 filings, the~~ payment ofreceived ~~fees~~by ~~under the Engagement Agreement to the Law Firms (other than~~ Berger Singerman P.A.) iswith ~~subject~~regard to ~~Bankruptcy~~that ~~Court~~representation was ~~approval~~on November 24, 2004.

We must pay one or more contingency fees upon any amount that we or our stockholders may receive as a result of a settlement, judgment or a sale of the company. The contingency fee amounts payable to the Law Firms will be, subject to certain credits and adjustments, as follows:

	•		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.

On June 5, 2006, we entered into an amendment to the Engagement Agreement and agreed with the Law Firms to deposit an additional $5,000,000 into the escrow account to cover additional expert, consulting and other expenses. During October 2006, we deposited an additional $5,000,000 into the escrow account. In the event that we exhaust these funds, we must continue to pay for expert, consulting and other expenses through the conclusion of our litigation with IBM. As we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could further reduce our liquidity position. As of January 31, 2009, we had a total of $1,836,000 in cash and an additional $1,500,000 of restricted cash to be used to pursue the SCO Litigation and to cover any amounts required to be put into constructive trust under the Novell judgment. Since October 31, 2004, we have spent a total of $13,499,000 for expert, consulting and other costs and fees as agreed to in the Engagement Agreement with the Law Firms in the SCO Litigation. In light of the Chapter 11 filings, these arrangements are subject to Bankruptcy Court approval.

Developments in the SCO Litigation and fluctuations in our operating results or the failure of our operating results to meet the expectations of public market analysts and investors may negatively impact our stock price and our ability to continue in business.

Developments in the SCO Litigation and fluctuations in our operating results or our failure to meet the expectations of analysts or investors, even in the short-term, could cause our stock price to decline significantly. Because of the potential for fluctuations in our expenses related to the SCO Litigation in any particular period, you should not rely on ~~comparisons of~~ our results of operations as an indication of future performance.

Factors that may affect our results include:

• our ability to operate effectively under Chapter 11 protection and changes in business attitudes toward UNIX as a viable operating system compared to other competing operating systems, especially Linux, as well as the possibility that the automatic stay triggered by our Chapter 11 filing will be lifted or modified, ~~and~~or aour ~~constructive~~reorganization ~~trust~~plan will not be ~~imposed~~confirmed ~~upon~~by ~~our cash in a significant amount or~~ the ~~failure~~Bankruptcy ~~to confirm our reorganization plan~~Court; • the outcome of pending litigation with Novell, including the appeal and pending motions for summary judgment in our lawsuit with IBM ~~and Novell~~, adverse rulings relating to IBM’s ~~and Novell’s~~ counterclaims, and results of, developments in, or costs of the SCO Litigation as well as adverse publicity regarding our business and the SCO Litigation; • changes in general economic conditions, such as recessions, that could affect capital expenditures in the software industry; • the interest level of resellers in recommending our UNIX business solutions to end users and the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors; • the contingency and other costs we may pay to the Law Firms representing us in our efforts to establish and defend our intellectual property rights; • changes in attitudes of customers and partners due to the decline in our UNIX business and our position against the inclusion of our UNIX code and derivative works in Linux; and • the activities of short sellers.

~~We also experience fluctuations in operating results in interim periods in Europe and the Asia~~41 ~~Pacific regions due to seasonal slowdowns and economic conditions in these areas. Seasonal slowdowns in these regions typically occur during the summer months.~~

As a result of the factors listed above and elsewhere, it is possible that our results of operations may be below the expectations of public market analysts and investors in any particular period. This could cause our stock price to decline. If revenue falls below our expectations, and we are unable to quickly reduce our spending in response, our operating results will be lower than expected. Our stock price may fall in response to these events. Our common stock may be worthless unless our confirmed plan of reorganization results in full payment of all creditor claims, of which there can be no assurance.

For a further description of recent developments in our litigation with Novell, see Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments, Novell, Inc. Ruling. For a further description of the risks we face as a result of filing for Chapter 11, see A long period of operating under Chapter 11 may harm our business, We may not be able to obtain confirmation of our Chapter 11 plan, A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock, and Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.

	•		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 also experience fluctuations in operating results in interim periods in Europe and the Asia Pacific region due to seasonal slowdowns and economic conditions in these areas. Seasonal slowdowns in these regions typically occur during the summer months.

For a further description of recent developments in our litigation with Novell, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments, Novell, Inc. Ruling”. For a further description of the risks we face as a result of filing for Chapter 11, see A long period of operating under Chapter 11 may harm our business, We may not be able to obtain confirmation of our Chapter 11 plan, A plan of reorganization may result in holders of our common stock receiving no distribution on account of their interests and cancellation of their common stock, and Operating under the U.S. Bankruptcy Code may restrict our ability to pursue our business strategies.

If we are unable to retain key personnel in an intensely competitive environment, our operations could be adversely affected.

We need to retain our key management, technical and support personnel. Competition for qualified professionals in the software industry is intense, and departures of existing personnel could be disruptive to our business and might result in the departure of other employees. During ~~October~~January ~~2006,~~2009 and ~~in January~~ 2008, we were required to reduce our operating expenses and eliminated ~~certain~~ certain positions within our worldwide workforce in an effort to reduce operating costs. The loss or or departure of any officers or key employees could harm our ability to implement our business plan and could adversely affect our operations. Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Darl C. McBride, our Chief Executive Officer, and Ryan E. Tibbitts, our General Counsel. For a discussion of the risks we we face in attracting and retaining employees due to our Chapter 11 filing, see “A long period of operating under Chapter 11 may harm our business.”

We operate in a highly competitive market and face significant competition from a variety of current and potential sources; many of our current and potential competitors have greater financial and technical resources than we do; thus, we may fail to compete effectively.

In the operating system market, our competitors include IBM, Red Hat, Novell, Sun, Microsoft, and other UNIX and Linux distributors. These and other competitors are aggressively pursuing the current UNIX operating system market. Many of these competitors have access to substantially greater resources than we do. The major competitive alternative to our UNIX products is Linux. The expansion of our competitors’ offerings may restrict the overall market available for our UNIX products, including some markets where we have been successful in the past.

Our future success may depend in part on our ability to continue to meet the increasing needs of our customers by supporting existing and emerging technologies. If we do not have the resources to enhance our products to meet these evolving needs, we may not remain competitive and be able to sustain our business. Additionally, because technological advancement in the UNIX operating system market and alternative operating system markets is progressing at an advanced pace, we will have to develop and introduce enhancements to our existing products and any new products on a timely basis to keep pace with these developments, evolving industry standards, changing customer requirements and keeping current on certifications. Our failure to meet any of these and other competitive pressures may render our existing products and services obsolete, which would have an adverse impact on our ~~revenues~~revenue and operations.

The success of our UNIX business will depend on the level of commitment and certification we receive from industry partners and developers. In recent years, we have seen hardware and software vendors as well as software developers turn their certification and application development efforts toward Linux and elect not to continue to support or certify to our UNIX operating system products. If this trend continues, our competitive position will be adversely impacted and our future ~~revenues~~ revenue from our UNIX business ~~will decline. The decline in our UNIX business may be accelerated~~ ~~if industry partners withdraw their support from us for any reason, including our SCO Litigation.~~

~~If the market for UNIX continues to contract, our business will be harmed.~~42

Our revenues from the sale of UNIX products have declined over the last several years. This decrease in revenues has been attributable primarily to increased competition from other operating systems, particularly Linux, and from the negative publicity we have received from the SCO Litigation. Our sales of UNIX products and services are primarily to existing customers. If the demand for UNIX products continues to decline, and we are unable to develop UNIX products and services that successfully address a market demand, our UNIX revenues will continue to decline, industry participants may not certify to our operating system and products, we may not be able to attract new customers or retain existing customers and our business and results of operations will be adversely affected. Additionally, with the recent adverse summary judgment rulings in our lawsuit with Novell and our entry into Chapter 11, customers may likely determine to no longer buy our products and services. Because of the long adoption cycle for operating system purchases and the long sales cycle of our operating system products, we may not be able to reverse these revenue declines quickly.

We may lose the support of industry partners leading to an accelerated decline in our UNIX products and services revenues.

~~UNIX~~will ~~operating system products~~decline. ~~This would~~The ~~lead to an increased~~ decline in our UNIX ~~products~~business ~~and~~may ~~services~~be ~~revenues~~accelerated ~~and~~if ~~would~~industry ~~adversely~~partners ~~impact~~withdraw ~~our~~their ~~results~~support offrom ~~operations~~us ~~and~~for ~~liquidity~~any reason, including our SCO Litigation.

If the market for UNIX continues to contract, our business will be harmed.

Our revenue from the sale of UNIX products has declined over the last several years. This decrease in revenue has been attributable primarily to increased competition from other operating systems, particularly Linux, and from the negative publicity we have received from the SCO Litigation. Our sales of UNIX products and services are primarily to existing customers. If the demand for UNIX products continues to decline, and we are unable to develop UNIX products and services that successfully address a market demand, our UNIX revenue will continue to decline, industry participants may not certify to our operating system and products, we may not be able to attract new customers or retain existing customers and our business and results of operations will be adversely affected. Additionally, with the recent adverse summary judgment rulings in our lawsuit with Novell and our entry into Chapter 11, customers may likely determine to no longer buy our products and services. Because of the long adoption cycle for operating system purchases and the long sales cycle of our operating system products, we may not be able to reverse these revenue declines quickly.

We may lose the support of industry partners leading to an accelerated decline in our UNIX products and services revenue.

The decline in our UNIX business, the recent rulings in our lawsuit with Novell and our filing for protection under Chapter 11 may cause industry partners, developers, customers and hardware and software vendors to choose not to support or certify to our UNIX operating system products. This would lead to an increased decline in our UNIX products and services revenue and would adversely impact our results of operations and liquidity.

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.

We have a two-tiered distribution channel. The relationships we have developed with resellers allow us to offer our products and services to a much larger customer base than we would otherwise be able to reach through our own direct sales and marketing efforts. Some solution providers also purchase solutions through our resellers, and we anticipate they will continue to do so. Because we usually sell indirectly through resellers, we cannot control the relationships through which resellers, solution providers or equipment integrators purchase our products. In turn, we do not control the presentation of our products to end users. Therefore, our sales could be affected by disruptions in the relationships between us and our resellers, between our resellers and solution providers, or between solution providers and end users. Also, resellers and solution providers may choose not to emphasize our products to their customers. Any of these occurrences could diminish the effectiveness of our distribution channel and lead to decreased sales.

Our foreign-based operations and sales are subject to the imposition of governmental controls and taxes and fluctuations in currency exchange rates that could hurt our results.

We have employees or contractors in certain locations in Europe, the Middle East, Latin America, and Asia. These foreign operations are subject to certain inherent risks, including:

• 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 ~~reduction~~reductions in business activity~~; and • substantial wind down and severance expenses that local law may require be paid in connection with any termination of our overseas operations~~.

In addition, certain of our operating expenses are denominated in local currencies, creating risk of foreign currency translation losses that could reduce our financial results and cash flows. When we generate profits in foreign countries, our effective income tax rate is increased.

~~During the three months ended April 30, 2004, our India office was assessed withholding taxes~~43 by the Government of India Income Tax Department. The Tax Department assessed a 15% withholding tax on certain revenue transactions in India that the Tax Department deemed royalty revenues under the Income Tax Act. We have filed an appeal with the Tax Department and believe that revenue from our packaged software does not qualify for royalty treatment and therefore would not be subject to withholding tax. However, we may be unsuccessful in our appeal against the Tax Department and be obligated to pay the assessed taxable amounts. Because of our international operations, we may be subject to additional withholding or other taxes from other international jurisdictions.

We have lost our listing on the Nasdaq Capital Market as a result of our bankruptcy filing and the loss of our listing has made our stock significantly less liquid and has significantly reduced its value.

As a result of our having filed for protection under Chapter 11 of the U.S. Bankruptcy Code, Nasdaq has used its authority under Marketplace Rules 4300, 4450(f) and IM-4300 to delist our securities from The Nasdaq Capital Market.

~~otherwise~~ During bethe three months ended April 30, ~~and~~2004, ~~the~~our India office was assessed withholding taxes ~~value~~by the Government of ~~our~~India ~~stock~~Income ~~could~~Tax ~~decrease~~Department (“Tax Department”). InThe ~~addition,~~Tax ~~compliance~~Department ~~with~~assessed ~~the~~a 15% ~~rules~~withholding ~~and~~tax ~~regulations~~on ofcertain revenue transactions in India that the Tax Department deemed royalty ~~Exchange~~revenue under the Income Tax Act. ~~relating~~We tohave ~~“penny~~filed ~~stocks”~~an ~~may~~appeal ~~make~~with itthe ~~more~~Tax ~~difficult~~Department and believe that revenue from our packaged software does not qualify for ~~holders~~royalty oftreatment and therefore would not be subject to withholding tax. However, we may be unsuccessful in our ~~common~~appeal ~~stock~~against the Tax Department and be obligated to ~~resell~~pay ~~their~~the ~~shares~~assessed taxable amounts. Because of our international operations, we may be subject to ~~third~~additional ~~parties~~withholding or toother ~~otherwise~~taxes ~~dispose~~from ofother ~~them~~international jurisdictions.

As a result of our having filed for protection under Chapter 11 of the U.S. Bankruptcy Code, Nasdaq used its authority under Marketplace Rules 4300, 4450(f) and IM-4300 to de-list our securities from The Nasdaq Capital Market.

Upon delisting from the Nasdaq Capital Market, our stock is traded on the Pink Sheets. In order to trade on the Pink Sheets, there must be market makers for our stock. Without a number of market makers in our stock, our stock would be less liquid than it would otherwise be, and the value of our stock could decrease. In addition, compliance with the rules and regulations of the Exchange Act relating to “penny stock” may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them.

Our stock price is volatile.

The trading price for our common stock has been volatile during the last several years and our share price has changed dramatically over short periods. We believe that changes in our stock price are affected by the factors mentioned above as well as from changing public perceptions concerning the strength of the SCO Litigation, developments in our Bankruptcy proceedings and other factors beyond our control. Public perception can change quickly and without any change or development in our underlying business or litigation position. An investment in our stock is subject to such volatility and, consequently, is subject to significant risk.

There are risks associated with the potential exercise of our outstanding options.

As of ~~August~~January 31, ~~2008~~2009, we have issued outstanding options to purchase up to approximately 5,~~193~~079,000 shares of common stock with an average exercise price of $2.8281 per share. The existence of such rights to acquire common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock. Further, the holders of the outstanding stock options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

Our stock price could decline further because of the activities of short sellers.

Our stock has attracted significant interest from short sellers. The activities of short sellers could further reduce the price of our stock or inhibit increases in our stock price.

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 ~~board~~Board of ~~directors~~Directors currently has the right, with respect to the 5,000,000 shares of our preferred stock, to authorize the issuance of one or more additional series of our preferred stock with such voting, dividend and other rights as our directors determine. The ~~board~~Board of ~~directors~~Directors can designate new series of preferred stock without the approval of the holders of our common stock. The rights of holders of our common stock may be adversely affected by the rights of any holders of additional shares of preferred stock that may be issued in the future, including without limitation, further dilution of the equity ownership percentage of our holders of common stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting 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.

We have adopted a stockholder rights plan. The power given to the ~~board~~Board of ~~directors~~Directors by the stockholder rights plan may make it more difficult for a change of control of our Company to occur or for our Company to be acquired if the acquisition is opposed by our ~~board~~Board of ~~directors~~Directors.

ITEM 56. ~~OTHER INFORMATION~~EXHIBITS

The Company’s lease agreement for its Murray Hill, New Jersey facility with GRE Mountain Heights Property LLC was terminated by the landlord upon exercise of the early termination clause of the agreement. The termination is effective September 18, 2008. The Company is responsible to restore the facility to certain conditions as described in the lease. Management estimates those costs to be approximately $31,000.


(a)		Exhibits

3.1		Amended and Restated Certificate of Incorporation of Caldera International, Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).

3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding consolidation of outstanding shares (incorporated by reference to Exhibit 3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit 3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)).

3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).

3.5		Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCO’s Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).

31.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The Company has entered into lease agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for its New Jersey facility. This facility is located in Florham Park, New Jeresy and is for 9,416 square feet. The lease term is for sixty-one months with monthy base rents of $16,629 for months 1-12; $17,263 for month 13; $18,047 for months 14 -37, and $18,832 for months 38 -61.

ITEM 6. EXHIBITS

(a)		Exhibits
3.1		Amended and Restated Certificate of Incorporation of Caldera International, Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding consolidation of outstanding shares (incorporated by reference to Exhibit 3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit 3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)).
3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.5		Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCO’s Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).
3.6		Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
3.7		Certificate of Correction correcting the Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
10.1		Lease Agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for lease of Florham Park, New Jersey facility.
31.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: September 15, 2008	THE SCO GROUP, INC.
Date: March 23, 2009	THE SCO GROUP, INC.
	By:	/s/ Kenneth R. Nielsen
		Kenneth R. Nielsen
		Duly Authorized Officer and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number		Exhibit Description
3.1		Amended and Restated Certificate of Incorporation of Caldera International, Inc. (incorporated by reference to Exhibit 3.1 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding consolidation of outstanding shares (incorporated by reference to Exhibit 3.2 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation regarding change of name to The SCO Group, Inc. (incorporated by reference to Exhibit 3.3 to SCO’s Registration Statement on Form 8A12G/A (File No. 000-29911)).
3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to SCO’s Registration Statement on Form 8-A12G/A (File No. 000-29911)).
3.5		Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to SCO’s Current Report on Form 8-K filed on January 4, 2008 (File No. 000-29911)).
3.6		Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
3.7		Certificate of Correction correcting the Certificate of Designation for Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to SCO’s Current Report on Form 8-K filed on February 9, 2004 (File No. 000-29911)).
10.1		Lease Agreement with Vreeland Spvef Venture, LLC dated August 5, 2008 for lease of Florham Park, New Jersey facility.
31.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Darl C. McBride, President and Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Kenneth R. Nielsen, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4847

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