SCO Group, Inc. (Pink Sheet-SCOXQ), formerly "SCOX," has filed its annual report.  After you have seen the history of this company through the years, it is almost impossible not to wonder if this is likely the end of the road for the company.  Very few companies this small are involved in this much litigation.  The stock was booted from trading on the NASDAQ at the end of December and it is now traded on the Pink Sheets.  It is under bankruptcy protection.  Its revenues appear to be racing faster and faster to zero.  Its balance sheet is in the same boat.

It turned out that having a business model of suing everyone under the sun wasn’t a good one.  Go figure.  All of these are excepts from the 10-K, and we have focused on the more pressing issues with comments from the company:

Sales of our UNIX-based products and services have been declining over the last several years. This decline in revenue has been primarily attributable to significant competition from alternative operating systems, particularly Linux. Our expectation is that this trend will continue as a result of continued competition, the negative ruling received from our litigation with Novell, and our Chapter 11 filing.

We do not have a history of profitable operations and our cash resources are limited.
     Our year ended October 31, 2003 was the first and only full year we were profitable in our operating history. Our profitability for the year ended October 31, 2003 resulted primarily from our SCOsource business. For the years ended October 31, 2007, 2006 and 2005, we incurred net losses of $6,826,000, $16,598,000 and $10,726,000, respectively. As of October 31, 2007, our accumulated deficit was $258,366,000. 
We have suffered a significant setback in our lawsuit with Novell that has significantly limited our claims and raises substantial doubt about our ability to continue as a going concern and we may not prevail in our lawsuits with IBM, Novell and others.

     On August 10, 2007, the federal judge overseeing our lawsuit with Novell ruled in favor of Novell on several of the summary judgment motions that were before the Court. 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.

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 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.

IBM Corporation
     On or about March 6, 2003, we filed a civil complaint against IBM…As a result of the Court’s order of August 10, 2007, in the SCO v. Novell case, several of our claims against IBM may be dismissed….IBM has taken the position that the Court’s ruling of August 10, 2007 in the Novell case resolves all of our claims against IBM in IBM’s favor, but we dispute this position.

Novell, Inc.
     On January 20, 2004, we filed suit in Utah state court against Novell, Inc. for slander of title seeking relief for its alleged bad faith effort to interfere with our ownership of copyrights related to our UNIX source code and derivative works and our UnixWare product…On August 10, 2007, the federal judge ruled in favor of Novell on several of the summary judgment motions that were before the Court. 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.

IPO Class Action Matter
     We are an issuer defendant in a series of class action lawsuits involving over 300 issuers that have been consolidated under In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The consolidated complaint alleges, among other things, certain improprieties regarding the underwriters’ conduct during our initial public offering and the failure to disclose such conduct in the registration statement in violation of the Securities Act of 1933, as amended. Class standing was certified for all of these cases by the district court. .. In the event the stay is lifted, including the bankruptcy stay, and Red Hat is allowed to pursue its claims, we will likely assert counterclaims against Red Hat.

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

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 under the caption entitled “Developments in the SCO Litigation, our bankruptcy filing, delisting from the Nasdaq Capital Market 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” as well as from changing public perceptions concerning the strength of the SCO Litigation 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. 

We have yet to find a single soul (who is objective without a dog in the fight) that thinks this company has a chance of making a comeback.  Miracles have happened before.  We’d just be looking elsewhere for miracles.  Outside of this, the rule of thumb about "if you can’t say anything nice, don’t say it at all" sure comes to mind.  Things have gotten so bad that the stock is now a true penny stock that trades under $0.08.  If you are reading this, you probably remember how high this stock used to be.

Jon C. Ogg
January 30, 2008 

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