Current Rescission Offer, 424(b)

We are offering to rescind the sale of 148,875 shares of common stock purchased pursuant to our 2000 Employee Stock Purchase Plan, or ESPP, during the six-month periods ended November 30, 2004 and May 31, 2005 from our current and former employees who are residents of California, Connecticut, Illinois, New Jersey, Texas, Utah or Washington.

We are also offering to rescind the sale of 188,414 shares of common stock purchased pursuant to the ESPP during the six-month periods ended May 31, 2003, November 30, 2003 and May 31, 2004 from our current and certain former employees who were, at the time of issuance, residents of California and Utah and are now residents of Arizona, California, Massachusetts or Utah....

Q: Which shares of common stock are included in the rescission offer?

A: We are offering, upon the terms and conditions described in this offering circular, to rescind the sale of 148,875 shares of common stock purchased during the six-month purchase periods ended November 30, 2004 and May 31, 2005 pursuant to the ESPP from our current and certain former employees who reside in California, Connecticut, Illinois, New Jersey, Texas, Utah or Washington. These shares were purchased at prices ranging from $3.38 to $3.52 per share.

We are also offering, upon the terms and conditions described in this offering circular, to rescind the sale of 188,414 shares of common stock purchased during the six-month periods ended May 31, 2003, November 30, 2003 and May 31, 2004 pursuant to the ESPP from our current and certain former employees who, at the time of issuance, resided in California or Utah and are now residing in Arizona, California, Massachusetts or Utah. These shares were purchased at prices ranging from $0.65 to $5.21 per share. In addition, we are offering to rescind the offer to participate in the ESPP to employees residing in California who are participating in the ESPP for the period that began on June 1, 2005. All of these people are current and former employees.

July 28, 2005 S-1

We are offering to repurchase 137,219 shares of common stock purchased pursuant to our 2000 Employee Stock Purchase Plan, or ESPP, during the six-month periods ended November 30, 2004 and May 31, 2005 from our current and former employees who are residents of California, Connecticut, Illinois, New Jersey, Texas, Utah or Washington.

We are also offering to repurchase 175,587 shares of common stock purchased pursuant to the ESPP during the six-month periods ended May 31, 2003, November 30, 2003 and May 31, 2004 from our current and certain former employees who were, at the time of issuance, residents of California and Utah and are now residents of Arizona, California or Utah....

Q: Which shares of common stock are included in the rescission offer?

A: We are offering, upon the terms and conditions described in this offering circular, to rescind the sale of 137,219 shares of common stock purchased during the six-month purchase periods ended November 30, 2004 and May 31, 2005 pursuant to the ESPP from our current and certain former employees who reside in California, Connecticut, Illinois, New Jersey, Texas, Utah or Washington. These shares are held by 82 persons who purchased shares of our common stock pursuant to the ESPP at prices ranging from $3.38 to $3.52 per share who still retain their shares.

We are also offering, upon the terms and conditions described in this offering circular, to rescind the sale of 175,587 shares of common stock purchased during the six-month periods ended May 31, 2003, November 30, 2003 and May 31, 2004 pursuant to the ESPP from our current and certain former employees who, at the time of issuance, resided in California or Utah and are now residing in Arizona, California or Utah. These shares are held by 56 persons who purchased shares of our common stock pursuant to the ESPP at prices ranging from $0.65 to $5.21 per share. In addition, we are offering to rescind the offer to participate in the ESPP to employees residing in California who are participating in the ESPP for the period that began on June 1, 2005. All of these people are current and former employees who still retain their shares.

What does it mean? I have absolutely no idea. The stock market isn't my area of expertise. But comparing documents is, and that is what I notice has changed. Perhaps they'll explain it in Thursday's conference call.

What I see, with my inexpert eyes, is that they have enlarged their offer, having evidently found more folks and/or maybe more shares affected by the problem they are trying to fix. It's not clear, because while in July they told us how many people were affected, in the new prospectus, they are silent.

Also, perhaps some are accepting the offer, since the phrase about retaining the shares is missing, but that is just a guess. It's certainly possible to leave a phrase out without it meaning anything. But it's something else someone might want to ask them. They do state that no directors are affected, and the two officers that are affected are not accepting the offer. They say that in answer to the question, "Have any officers, directors or five percent stockholders advised SCO whether they will participate in the rescission offer?" and I don't see anything about 5% stockholders and what they are doing.

If you are one of those affected, the offer ends on January 20, 2006. If you live in California, I note the following sentence added to your section: "Any right of action you may have under Sections 25500, 25501 and 25502 of the California Corporate Securities Law, however, is not necessarily foreclosed by acceptance or rejection of the offer." That isn't all that's changed.

Here are some more changes I see, too many to highlight them all in red, but I am marking some things that particularly stand out. In July SCO described its business like this:

Unix Business

We own the UNIX operating system and are a provider of UNIX-based products and services. We generate revenue from sales of our UNIX-based products and services through our UNIX business and from sales of SCOsource intellectual property, or IP, licenses and agreements and vendor licenses of our UNIX technology through our SCOsource business. Our core business is to sell and service our UNIX software products to small-to-medium sized businesses and franchisees or branch offices of Fortune 1000 businesses. Our most significant products that drive the majority of our UNIX revenue are OpenServer and UnixWare. During fiscal year 2004, we released a new version of our UnixWare product, UnixWare 7.1.4, and we intend to continue to maintain our core UNIX business in fiscal year 2005 by continuing our research and development efforts. We released a major upgrade to our OpenServer product, OpenServer 6, in June 2005.

SCOsource Business

We initiated our SCOsource business as part of our ongoing efforts to establish and protect our intellectual property rights, particularly relating to our ownership of the UNIX source code. In reviewing our intellectual property rights in 2003, we became aware that parts of or modifications made to our proprietary UNIX source code and derivative works have been included in the Linux operating system without our authorization or appropriate copyright attribution. Our SCOsource business now includes seeking to enter into license agreements with UNIX vendors and offering SCOsource IP licenses or agreements to Linux and other end users allowing them to continue to use our UNIX source code and derivative works.

In addition to our other SCOsource initiatives, in March 2003, we filed a complaint against International Business Machines Corporation, alleging, in part, that IBM had breached its license agreement with us by, among other things, inappropriately contributing UNIX source code and derivative works to the open source community and seeking to use its knowledge and methods related to UNIX source code and derivative works and modifications licensed to it to decrease the value of the UNIX operating system in favor of promoting the Linux operating system, of which it has been a major backer. Based on these alleged breaches, we delivered to IBM notice of termination of our license agreement with IBM that permitted IBM’s use of our UNIX source code in developing its AIX operating system.

In addition to our action against IBM, we have filed other complaints against such companies as Novell, Inc., AutoZone Inc., and DaimlerChrysler Corporation. Red Hat, Inc. has also brought a lawsuit against us asserting that the Linux operating system does not infringe our UNIX intellectual property rights, among other things. We describe our legal actions against these parties and the procedural status of these cases in more detail under “Business—Legal Proceedings.” We generally refer to these cases in this offering circular as the SCO Litigation.

And here's how they describe themselves now:

Unix Business

Our UNIX business primarily serves the needs of small-to-medium sized businesses, including replicated site franchisees of Fortune 1000 companies, by providing reliable, cost effective UNIX software technology for distributed, embedded and network-based systems. 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, or 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, or OEMs. Our sales of UNIX products and services during the last several quarters have been primarily to pre-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.

SCOsource Business

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

In an effort to protect our UNIX intellectual property, we initiated our SCOsource business. The initiatives of this business include seeking to enter into license agreements with UNIX vendors and offering SCOsource IP agreements to Linux and other end users allowing them to continue to use our UNIX source code and derivative works found in Linux. We believe that our SCOsource revenue opportunities have been adversely impacted by our outstanding dispute with Novell over our UNIX copyright ownership, which may have caused many potential customers to delay or forego licensing until an outcome in this legal matter has been reached.

In addition to our other SCOsource initiatives, in March 2003, we filed a complaint against International Business Machines Corporation, alleging, in part, that IBM had breached its license agreement with us by, among other things, inappropriately contributing UNIX source code and derivative works to the open source community and seeking to use its knowledge and methods related to UNIX source code and derivative works and modifications licensed to it to decrease the value of the UNIX operating system in favor of promoting the Linux operating system, of which it has been a major backer. Based on these alleged breaches, we delivered to IBM notice of termination of our license agreement with IBM that permitted IBM’s use of our UNIX source code in developing its AIX operating system. Based on similar violations, we also sent termination letters to Sequent and Silicon Graphics. We have also commenced litigation against Novell and others to protect our intellectual property and contractual rights.

Note the mention of Silicon Graphics? If it were me, I'd call my lawyers. And they've dropped the ridiculous copyright attribution claim, and you'll see some subtle shadings in what they claim they noticed in Linux back in 2003.

Now about IBM using Unix know-how to destroy the Unix marketplace, by contributing that knowledge to Linux, SCO's theory on why SCO's UNIX business is in a nose dive, let's examine that theory a little bit. They say it's in decline because of Linux, because of the "fact" that "users of Linux generally do not pay for the operating system but pay fees for services, distribution and maintenance," and because IBM was deliberately trying to ruin the UNIX market in favor of Linux. Perhaps SCO can explain, if their theory is true, how it is possible that IBM, which actively promotes Linux, finds its version of UNIX, AIX, booming in the marketplace? Here's what IDC told us about Unix servers, as of August of 2005:

Unix servers experienced 2.5% revenue growth year over year; however, unit shipments declined 8.7% when compared with 1Q04. Worldwide Unix revenues of $4.3 billion for the quarter reflect continued IT investment in this server market segment with particular strength in the high-end of the market. ...

Linux Servers Surpass the $1 Billion Mark in Revenue for the Third Consecutive Quarter

Linux server revenue exceeded $1.4 billion in quarterly factory revenue in 2Q05 as Linux server revenues showed 45.1% growth, the fastest rate of growth since 2Q04. Linux servers represented 11.5% of overall quarterly server revenue – reaching an all-time high – as Linux servers continue to expand their presence in data centers around the world for an increasing variety of workloads. HP maintained its number 1 spot in the Linux server market, with 24.3% market share in terms of revenue, while IBM was second with 20.3%.

Unix Servers and Windows Servers Both Grow Revenue, Topping $4 Billion

Unix servers saw a resurgence in IT investment during 2Q05, with $4.3 billion in factory revenue, up nearly 3% from the previous sequential quarter, reflecting sales of richer configurations in the midrange enterprise and high-end enterprise categories. High-end Unix servers saw 19.2% growth in factory revenue, year over year, while midrange servers saw 15.6% growth year over year and volume Unix servers declined 19% year over year. "Unix servers continue to support mission-critical workloads, and IT managers are expanded capacity by investing in more scalable servers in Q2," said Jean S. Bozman, vice president of IDC's Enterprise Server Group. IBM was the leader in worldwide Unix server revenue with 31% share, while HP and Sun were statistically tied for the number two position, with 30.0% and 29.5% share, respectively.

Windows servers continued double-digit growth, with factory revenue increasing 14.5% year over year to $4.1 billion worldwide. Top vendors in this category included HP with 38.2% market share, Dell with 22.9% share, and IBM with 17.5% share. "Windows server growth outpaced the overall server market growth this quarter, increasing from 30.9% of quarterly server revenue in 2Q04 to 33.5% in 2Q05," Bozman said.

SCO had better come up with a different theory quick. This one holds no more water than all the previous theories. Unix is still making money. SCO isn't, maybe, but other companies, including IBM, are making money from Unix. It's obvious that IBM is not only not trying to destroy the UNIX market, it's number one worldwide in Unix server revenue. Duh. They just announced that they are opening a $200 million development center to support companies writing software for AIX.

So, how might SCO explain the fact that their business is in decline, while everyone else's Unix business is doing fine? Maybe they could sue Microsoft. Their server business is growing, and that has to be at somebody's expense, no? Only kidding. SCO is running out of theories, and I'm just trying to help out.

I'll throw another theory or two out there. Might it be that no one trusts SCO not to sue them, that they don't want to do business with the litigiously inclined? Or maybe it's that some folks are beginning to doubt their longevity as a company under current management? Or maybe it's that no one admires a bully? You think?

All I know is, I don't want them going out of business. I want them to face trial before a jury, and with enough money left to pay IBM and Red Hat and Novell and everyone else damages for saying some mighty untrue things about Linux and all those companies. In a perfect world, they'd have to throw some my way too to pay for the character assassination of me and all the unjust attacks on Groklaw. Hey, I can at least dream about justice, can't I?

One other major highlight is this statement:

If the operating trends for our UNIX or SCOsource businesses decline, we may be required to record an impairment charge in a future period related to the carrying value of our long-lived assets.

Some more highlights from the filing:

Risks Related to the Rescission Offer

We may continue to have potential liability even after this rescission offer is made.

The Securities Act of 1933 does not provide that a rescission offer will extinguish a holder’s right to rescind the issuance of shares that were not registered or exempt from the registration requirements under the Securities Act of 1933. Consequently, should any recipients of our rescission offer reject the offer, expressly or impliedly, we may remain liable under the Securities Act of 1933 for the purchase price of the shares issued under the ESPP during the six-month periods ended November 30, 2004 and May 31, 2005 that are subject to the rescission offer. Additionally, regulatory authorities may require us to pay fines or they may impose sanctions on us, and we may face other claims by participants other than rescission claims. ...

We may not prevail in our SCO Litigation, which may adversely affect our business.

We continue to pursue our SCO Litigation and believe in the merits of our cases. In our action against IBM, we seek damages for claims generally relating to our allegation that IBM has inappropriately used and distributed our UNIX source code and derivative works in connection with its efforts to promote the Linux operating system. IBM has responded to our claims and brought counterclaims against us asserting generally that we do not have the right to assert claims based on our ownership of UNIX intellectual property against IBM or others in the Linux market. Discovery is continuing in the case. If we do not prevail in our action against IBM, or if IBM is successful in its counterclaims against us, our business and results of operations would be materially harmed and we may not be able to continue in business. The litigation with IBM and others will be costly, and our costs for legal fees have been and will continue to be substantial and may exceed our capital resources. Additionally, the market price of our common stock may be negatively affected as a result of developments in our legal action against IBM that may be, or may be perceived to be, adverse to us.

As a result of our SCO Litigation and our other SCOsource initiatives, several participants in the Linux industry and others affiliated with IBM or sympathetic to the Linux movement have taken actions attempting to negatively affect our business and our SCOsource efforts. Linux proponents have taken a broad range of actions against us, including, for example, attempting to influence participants in the markets in which we sell our products to reduce or eliminate the amount of our products and services they purchase from us. We expect that similar efforts likely will continue. There is a risk that participants in our marketplace will negatively view our action against IBM, Novell, DaimlerChrysler and AutoZone and our other SCOsource initiatives, and we may lose support from such participants. Any of the foregoing could adversely affect our position in the marketplace, our results of operations and our stock price and our ability to stay in business.

As a further response to our SCOsource initiatives and claim that our UNIX source code and derivative works have inappropriately been included in Linux, Novell has publicly asserted its belief that it owns certain copyrights in our UNIX source code, and it has filed 15 copyright applications with the United States Copyright Office related to UNIX. Novell also claims that it has a license to UNIX from us and the right to authorize its customers to use UNIX technology in its internal business operations. Specifically, Novell has also claimed to have retained rights related to legacy UNIX SVRx licenses, including the license with IBM. Novell asserts it has the right to take action on behalf of SCO in connection with such licenses, including termination rights. Novell has purported to veto our termination of the IBM, Sequent and SGI licenses. We have asserted that we obtained the UNIX business, source code, claims and copyrights when we acquired the assets and operations of the server and professional services groups from The Santa Cruz Operation (now Tarantella, Inc.) in May 2001, which had previously acquired all such assets and rights from Novell in September 1995 pursuant to an asset purchase agreement, as amended. In January 2004, in response to Novell’s actions, we brought suit against Novell for slander of title seeking relief for Novell’s alleged bad faith effort to interfere with our copyrights and contract rights related to our UNIX source code and derivative works and our UnixWare products.

Notwithstanding our assertions of full ownership of UNIX-related intellectual property rights, as set forth above, including copyrights, and even if we are successful in our legal action against Novell and end users such as AutoZone and DaimlerChrysler, the efforts of Novell and the other Linux proponents described above may cause further damage to our business including our ability to monetize our UNIX assets. These efforts of Linux proponents also may increase the negative view some participants in our marketplace have regarding our SCO Litigation and regarding our SCOsource initiatives and may contribute to creating confusion in the marketplace about the validity of our claim that the unauthorized use of our UNIX source code and derivative works in Linux infringes on our copyrights. Increased negative perception and potential confusion about our claims in our marketplace could impede our continued pursuit of our SCOsource initiatives and negatively impact our business....

Our engagement agreement with the law firms representing us in the SCO Litigation will require us to spend a significant amount of cash during the year ending October 31, 2005 and could harm our liquidity position.

As of July 31, 2005, we had a total of $12,602,000 in cash and cash equivalents and available-for-sale securities and an additional $3,579,000 of restricted cash to be used in our operations and pursue the SCO Litigation. As a result of the engagement agreement between us and the law firms representing us in the SCO Litigation, including, among others, Boies, Schiller & Flexner LLP, for the three months ending October 31, 2005 we anticipate spending approximately $3,250,000 to fund our SCO Litigation costs. We expect that our UNIX business will generate sufficient cash for the year ending October 31, 2005 to cover our internal costs related to our SCOsource initiatives and SCO Litigation. However, if our UNIX business does not generate cash or we spend additional cash on the SCO Litigation or additional matters, our cash position would be negatively impacted, and our ability to pursue our UNIX business objectives and our SCO Litigation could be harmed....

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 on our UNIX intellectual property rights and seeking a declaratory judgment for non-infringement of copyrights and no 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. Although this case is currently stayed pending the resolution of our suit against IBM, we intend to vigorously defend this action. However, if Red Hat is successful in its claim against us, our business and results of operations could be materially harmed.

In addition, regulators or others in the Linux market and some foreign regulators have initiated or in the future may initiate legal actions against us, all of which may negatively impact our operations and future operating performance....

Our engagement agreement with the law firms representing us in our SCO Litigation may reduce our ability to raise additional financing.

Our engagement agreement with the law firms representing us in the SCO Litigation could inhibit our ability to raise additional funding if needed. Although under the engagement agreement our obligations to such law firms are limited to approximately $26,000,000 related to certain previously accrued and all future attorney fees and the escrow of $5,000,000 for the payment of any expert, consulting and other expenses to pursue the SCO Litigation, the engagement agreement provides that such law firms will receive a contingency fee that may range from 20 to 33 percent of the proceeds from specified events related to the protection of our intellectual property rights. Events triggering a contingency fee may include settlements or judgments related to the SCO Litigation, certain licensing fees, subject to certain exceptions, and a sale of our company. Future payments payable to the law firms under this arrangement will be significant. The law firms’ right to receive such contingent payments could cause prospective investors to choose not to invest in our company or limit the price at which new investors would be willing to provide additional funds to our company....

We have issued options under our equity compensation plans without complying with registration or qualification requirements under the securities laws of California, Georgia and possibly other states, and, as a result, we may incur rescission liability for such options and may face additional potential claims under state securities laws.

In addition to the shares issued under the ESPP that are subject to this rescission offer, we have granted options under our 1999 Omnibus Stock Incentive Plan and 2002 Omnibus Stock Incentive Plan without complying with the registration or qualification requirements under the securities laws of California, Georgia and possibly other states. We may face rescission liability to plan participants holding unexercised stock options in these states. Additionally, regulatory authorities may require us to pay fines or they may impose other sanctions upon us, and we may face other claims by plan participants other than rescission claims....

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

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

Impairment of Long-lived Assets. We review our long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. We evaluate, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. 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 value of the long-lived asset.

If the operating trends for our UNIX or SCOsource businesses decline, we may be required to record an impairment charge in a future period related to the carrying value of our long-lived assets.