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 certain of 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.
As a result of this order from the Court, we have accrued $3,473,000 for this contingent 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.
We intend 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. However, in the event that our assets are further depleted or frozen, we may not be in a financial position to appeal those rulings.
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 a significant cash payment to Novell being required by the final resolution for this matter, we believe that the undiscounted future cash flows generated by us will be sufficient to recover the carrying values of our long-lived assets over their expected remaining useful lives. However, if a significant cash payment is required the carrying amount of our long-lived assets may not be recovered (which totaled $184,000 as of July 31, 2008).
We intend to maintain business operations throughout the reorganization process. Subject to the Bankruptcy Court's approval, we intend to use our cash, restricted cash and subsequent cash inflows to meet our working capital needs throughout the reorganization process.
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 18, 2007, the Bankruptcy Court granted our motions to maintain our 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.
On February 13, 2008, we entered into a Memorandum of Understanding (the "MOU") with Stephen Norris Capital Partners, LLC, a Delaware limited liability company ("SNCP"), whereby SNCP agreed to provide financing to fund our plan of reorganization filed on February 29, 2008. On the same day, we filed our 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, our plan of reorganization and the transactions they contemplate are subject to various changes and conditions precedent, including: (1) SNCP's due diligence and
(2) the Bankruptcy Court's approval. On February 29, 2008, we filed the Plan and 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 our progress towards a new MOU with SNCP. 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 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. We 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 will be heard on September 16, 2008. 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, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements, in the ordinary course of business, or, if outside the ordinary course of business, subject to Bankruptcy Court approval. In addition, 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 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 types or amounts of distributions, if any, they would receive, or as to the timing of any such distributions. A plan of reorganization could result in holders of our 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. Accordingly, we urge that the appropriate caution be exercised with respect to existing and future investments in any of these securities as the value and prospects are highly speculative. 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 software technology for distributed, embedded and network-based systems. Our UNIX business 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 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 31, 2008 and 2007:

                                                  Three Months Ended July 31,                Nine months Ended July 31,
                                                  2008                  2007                 2008                  2007
                                                                              (In thousands)
Revenue                                       $      3,739         $        4,686        $      12,272         $      16,692
Cost of revenue                                        473                    777                1,661                 2,594

Gross margin                                         3,266                  3,909               10,611                14,098

Sales and marketing                                  1,765                  2,463                6,630                 7,296
General and administrative                             889                  1,377                3,086                 4,051
Research and development                               708                  1,424                2,912                 4,737

Total operating expenses                             3,362                  5,264               12,628                16,084

Loss from operations                          $        (96 )       $       (1,355 )      $      (2,017 )       $      (1,986 )

Revenue from the UNIX business decreased by $947,000, or 20%, for the three months ended July 31, 2008 compared to the three months ended July 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. 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 $5,264,000 for the three months ended July 31, 2007 to $3,362,000 for the three months ended July 31, 2008 and operating costs for the UNIX business decreased from $16,084,000 for the nine months ended July 31, 2007 to $12,628,000 for the nine months ended July 31, 2008. These decreases were primarily attributable to reduced headcount and related costs.
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 will continue to be significant.

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 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 July 31, 2007 and July 31, 2008. Revenue decreased from $23,000 for the nine months ended July 31, 2007 to $0 for the nine months ended July 31, 2008. Revenue in the nine month period ended July 31, 2007 was primarily attributable to sales of our SCOsource IP agreements.
Cost of revenue, which primarily includes legal and professional fees incurred in connection with defending our UNIX intellectual property rights in the SCO Litigation, increased from $1,156,000 for the three months ended July 31, 2007 to $2,876,000 for the three months ended July 31, 2008 and increased from $2,876,000 for the nine months ended July 31, 2007 to $3,476,000 for the nine months ended July 31, 2008. These increases were due to the $2,548,000 judgment in the Novell litigation for an unauthorized amendment 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. 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 . . .