Contrary to denials, executives from Microsoft did introduce SCO to an investment fund that provided the company with a $50 million investment last October, a spokesman for the fund has confirmed.

BayStar Capital was advised by Microsoft executives that it should look into SCO as an investment opportunity, said Bob McGrath, a BayStar spokesman. "BayStar was introduced to SCO by executives at Microsoft," he stated. "We talk to individuals all the time about investment."

However, this is in direct contrast to what SCO said last week when a leaked e-mail drew a financial connection between Microsoft and SCO - which has embarked on an extensive legal battle against a rival to Microsoft's operating system.

At the time, an SCO spokesman stated: "Microsoft did not orchestrate or participate in the BayStar transaction." The company accused the author of the leaked e-mail of "misunderstanding" the situation.

Microsoft has also been wrong-footed it would seem, with a UK spokeswoman telling us that "Microsoft has no direct or indirect relationship with Baystar". But this statement, produced by Microsoft in the US, came before BayStar openly admitted such a relationship. What the software giant will say once the US wakes up on Friday morning is anyone's guess.

SCO claims that the open-source operating system Linux contains code that violates its intellectual property rights, and has launched lawsuits against IBM, Novell, RedHat, AutoZone and DaimlerChrysler for infringement, as well as threatened to sue individual users of the operating system.

Microsoft has paid SCO in the past. A 2003 Unix licensing deal between the two companies earned SCO $16.6 million last year, according to stock exchange filings. The software giant's role in the BayStar financing, however, had been unknown until recently.

It first came to light when open-source advocate Eric Raymond published an e-mail written by Mike Anderer, a consultant with SCO contractor S2 Strategic Consulting, that suggested Microsoft had funneled as much as $86 million into the company.

"Microsoft also indicated there was a lot more money out there and they would clearly rather use BayStar 'like' entities to help us get signifigantly [sic] more money if we want to grow further or do acquisitions," the e-mail said.SCO confirmed the authenticity of the e-mail, but dismissed its contents.

"We believe the e-mail was simply a misunderstanding of the facts by an outside consultant who was working on a specific, unrelated project to the BayStar transaction. He was told at the time of his misunderstanding," a SCO spokesman said.

While he did not find it surprising that Microsoft had not made a direct investment in BayStar, Raymond speculated that the SCO investment probably involved "an unspoken quid pro quo that would be difficult to verify", on the part of Microsoft.

"They're admitting the most innocuous parts of the truth in the hopes that no one will press them to disclose the really juicy stuff," Raymond said after BayStar had admitted Microsoft's involvement, suggesting that more disclosures on the relationship between Microsoft and SCO could emerge should SCO be investigated by the SEC.

So far Microsoft's investment tip has not proved to be a good one. BayStar purchased stock in SCO for $16.93. With SCO's stock trading at $9.66 on Thursday, that means BayStar's initial $50 million investment is now worth $28.5 million. Microsoft and SCO have so far failed to comment.