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Trouble is piling up for SCO Group Inc., the little software firm best known for its exceedingly large lawsuit against IBM Corp. Lindon, Utah-based SCO Group faces potential delisting from Nasdaq after failing to file its annual report. Meanwhile, Canopy Group, the company’s largest shareholder, remains embroiled in a legal fight with SCO Group chairman of the board Ralph Yarro. The Lindon-based venture firm, which owns roughly 30 percent of SCO Group, in December fired Yarro, who at the time was chief executive at Canopy, amid allegations he and two other executives diverted nearly $25 million in Canopy funds for their own use. Yarro is challenging his ouster in court. The dispute, which involves a tangled web of suits and countersuits, will be fought over four days of hearings that began Monday in the 4th District Court in Provo, Utah. A separate hearing is on tap the following week, beginning March 17, with SCO Group hoping to persuade Nasdaq not to drop its stock from the high-tech exchange for failing to file its annual report on time. “Our goal is to have our 10-K form and other filings completed and turned in before the hearing,” said SCO Group spokesman Blake Stowell. SCO Group attributed its filing troubles to having to restate financial results for the first three quarters of its 2004 fiscal year, which ended in October. The company is now waiting for its auditors to sign off on its filings. Meanwhile, SCO Group forges ahead with its 2-year-old case against Armonk, N.Y.-based IBM. Originally scheduled for a hearing this April, the case probably won’t begin until early next year. The dispute centers on SCO Group’s claims that IBM swiped code from Unix, the computer operating system commonly used in workstations and servers for which SCO holds some copyrights, and inserted it into Linux, an “open-source” computing platform that is distributed free of charge. SCO Group sued IBM in 2003 for $96.5 billion. It later sued AutoZone Inc. for allegedly using the company’s Unix patents in Linux products it was using. SCO Group is also involved in related legal feuds with Linux vendors Red Hat Inc. and Novell Inc. The case has stirred controversy in technology circles, with some critics accusing SCO Group of aligning with Microsoft Corp. in a plot to quash Linux, which many see as a rival to the Redmond, Wash., software giant’s Windows platform. Microsoft helped finance SCO Group’s legal challenge to IBM by paying the company $13 million for a Unix license. Microsoft has in the past said it bought the license to ensure Unix worked with Windows, not as a means of funding SCO Group’s lawsuit. Some SCO Group investors believe that the company’s “primary business is litigation and that the software business is a distraction,” said Rob Enderle, an analyst with the Enderle Group, a market research consultancy in San Jose, Calif. Although Enderle believes the IBM case will “make or break” SCO Group, Decateur Jones Equity Partner LLC’s Dion Cornett, the sole Wall Street analyst who covers the company, said the situation is not so simple. “The damages that SCO is likely to be awarded could be considerably smaller than what they are asking for,” Cornett said. Still, the analyst views SCO Group as at the point of no return. “They have embittered themselves to the IT community to such an extent that their business has continued to deteriorate; they would have very little cash to invest after the lawsuit.” Not surprisingly, SCO Group begs to differ. “Ninety-five percent of the company is focused on our core Unix business,” Stowell said. “The other 5 percent is focused on making sure we protect intellectual property.” SCO Group in January reported fourth-quarter losses at $6.5 million, compared with $1.6 million in the year-ago period, while its revenue fell more than 50 percent to $10.1 million, from $24.3 million in the final quarter of 2003. Since hitting $20.50 in October 2003, SCO Group shares have lost more than 80 percent of their value and now trade at roughly $4. On a positive note, SCO Group said it has reached an agreement with its attorneys on the IBM case to cap its legal fees at $2 million a quarter through 2005, at which point the meter effectively stops. The company agreed that Boies, Schiller & Flexner, the New York law firm representing SCO Group in the litigation, would get a higher contingency fee of any settlement in the suit. Copyright �2005 TDD, LLC. All rights reserved.

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