Santa Cruz (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 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 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 automatic stay applies to the SuSE arbritation 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.
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 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 was 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 the license and Novell was not entitled to revenue from the agreement; and (3) the 2003 SCOsource agreement with Sun was 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 certain of 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. The appeal before the United States Court of Appeals for the Tenth Circuit will proceed over the next several months with briefing and then argument before the Court. On January 23, 2009, we filed an unopposed motion for an expedited appeal. A decision on the appeal could be forthcoming in approximately the next ten to fourteen months, unless we are successful in our motion that the Court handle the appeal on an expedited basis.
As a result of the Court's judgment against us, as of October 31, 2008. we have accrued $3,518,000 for this contingent liability and related interest. However, we, continue to contest this liability. We believe that this judgment is in error, and that we have strong grounds to have the adverse rulings embodied in the Final Judgment overturned on appeal. 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.
Bankruptcy Filing
On September 14, 2007, The 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 States Bankruptcy Code in the Bankruptcy Court for the District of Delaware. The Debtors' Chapter 11 cases are being jointly administered under Case No. 07-11337(KG). The Debtors continue 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. 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 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, 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 a disclosure statement in connection with the plan of reorganization, under the terms contemplated by the MOU.
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 Memorandum of Understanding ("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 our exclusive periods to submit and solicit acceptance of a plan of reorganization to December 31, 2008.
On January 8, 2009, the Debtors filed its Amended Reorganization Plan and Disclosure statement. Under the proposed plan, the Debtors intend to hold an open auction to sell certain of their assets including their mobility business assets and their 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, we will scale back our operations and costs, and initiate other strategies to implement the plan of reorganization. In the event that certain company 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) deliver SCO UNIX Virtual product lines for VMware and Hyper-V to allow SCO legacy applications to run on modern hardware; (e) ship 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 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.
As a result of both the Court's August 10, 2007 and July 16, 2008 ruling and the uncertainties surrounding the confirmation of the Company's Amended Reorganization Plan, among other matters, there is substantial doubt about the Company's ability to continue as a going concern. In connection with these developments, management recorded an impairment of the carrying value of the Company's long-lived assets of $276,000 during the year ended October 31, 2008. Business Focus
UNIX Business. Our UNIX business serves the needs of small-to-medium 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 companies 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 as opposed to 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 and footnote shows the operating results of the UNIX business for the years ended October 31, 2008, 2007 and 2006:

                                               2008         2007         2006
                                                       (In thousands)
           Revenue                           $ 15,568     $ 21,623     $ 29,123
           Cost of revenue                      2,053        3,291        4,896

           Gross margin                        13,515       18,332       24,227


           Sales and marketing                  8,255        9,686       12,048
           Research and development             3,684        6,077        7,666
           General and administrative           3,657        5,527        6,669
           Impairment of long-lived assets        276            -            -
           Other (1)                                -            -        2,371

           Total operating expenses            15,872       21,290       28,754

           Loss from operations              $ (2,357 )   $ (2,958 )   $ (4,527 )

(1) Other expense for the year ended October 31, 2006 represented amortization of intangibles. The intangibles became fully amortized in October 2006.

Revenue from our UNIX business decreased by $6,055,000, or 28%, for the year ended October 31, 2008 compared to the year ended October 31, 2007. Revenue from our UNIX business decreased $7,500,000, or 26%, for the year ended October 31, 2007 compared to the year ended October 31, 2006. The revenue from our UNIX business has been declining over the last several years primarily as a result of continued competition from alternative operating systems, particularly Linux and from the negative publicity of the SCO Litigation. We believe that the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business revenue because users of Linux generally do not pay for the operating system itself, but 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 expenses for our UNIX business were $28,754,000 for the year ended October 31, 2006 and were $21,290,000 for the year ended October 31, 2007 and decreased to $15,872,000 for the year ended October 31, 2008. The decrease in operating expenses for the year ended October 31, 2008 was primarily attributable to cost reduction strategies implemented in January 2008 including staff reductions and related costs as a result of those reductions.
The decline in our UNIX business revenue may be accelerated if industry partners withdraw their support as a result of our SCO Litigation or Chapter 11 bankruptcy filing. The decline in our UNIX business, the SCO Litigation and our Chapter 11 bankruptcy filing 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 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 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 and subject to Bankruptcy Court approval, expect that costs and expenses for this business for the year ending October 31, 2008 will be significant.
The following table shows the results of operations for the SCOsource business for the years ended October 31, 2008, 2007 and 2006:

                                            2008         2007         2006
                                                    (In thousands)
             Revenue                      $      -     $     33     $     116
             Cost of revenue                 3,800        3,580        12,307

             Gross deficit                  (3,800 )     (3,547 )     (12,191 )


             Sales and marketing                 -            -             1
             Research and development            -            -           379
             General and administrative          -            -           259

             Total operating expenses            -            -           639

             Loss from operations         $ (3,800 )   $ (3,547 )   $ (12,830 )

Revenue from our SCOsource business for the years ended October 31, 2007 and 2006 was primarily attributable to sales of our SCOsource IP agreements.
Cost of revenue from the SCOsource business was $12,307,000 for the year ended October 31, 2006, $3,580,000 for the year ended October 31, 2007 and increased to $3,800,000 for the year ended October 31, 2008. Cost of revenues for 2008 was principally due to the Court's negative monetary judgment related to the Novell claims against the Company of $2,548,000 and legal fees and other costs of $1,252,000. Cost of revenue for 2006 and 2007 were primarily comprised of legal fees and other costs and expenses incurred in connection with the SCO Litigation. During the year ended October 31, 2006, we made the final quarterly payment of $2,000,000 to Boies, Schiller & Flexner LLP and Kevin McBride (the "Law Firms") (which quarterly payments ended during the three months ended January 31, 2006). Berger Singerman, P.A. ("Berger") was also a member of this group of Law Firms. With the consent of the Company, the engagement of this firm was mutually terminated. The last payment received by Berger was during November 2004. In addition to the expenses incurred above, 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 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, and it will be difficult to predict the total cost of revenue for the upcoming quarters.
The decrease in operating expenses was primarily attributable to decreased personnel and related costs.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 2 of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in preparation of our consolidated financial statements. We base our estimates on historical experience, current trends, future projections, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. We believe the following to

be our critical accounting estimates because they are important to the portrayal of our financial position and results of operations and they are based on matters that are inherently uncertain.
Our critical accounting policies and estimates include the following:
• Revenue recognition;

• Valuation allowances against deferred income tax assets;

• Litigation reserves;

• Useful lives and impairment of property and equipment; and

• Allowances for doubtful accounts receivable.

Revenue Recognition. 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 licensing.
We recognize 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 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 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. . . .