The SCO Group is cutting expenses, shutting down offices and capping its legal costs in order to afford its ongoing legal battle with IBM, the company has admitted during its quarterly financial conference.

With its cash reserves dwindling and losses continuing to mount, the SCO Group is going to have a hard time maintaining the numerous lawsuits it has launched against technology giants in its bid to prove its owns the copyright of part of open source OS Linux.

The company reported a loss of $7.4 million on revenue of $11.2 million for the third quarter - due almost entirely to the $7.2 million in legal expenses the company incurred during that time.

CEO Darl McBride referred to the legal expenses as a "high water mark" for the company and said that SCO has now worked out a deal with its law firm - Boies, Schiller & Flexner - to cap its legal costs at $31 million.

Following the recent resolution of an investor dispute with Baystar, SCO now has $43 million in cash reserves, which is more than enough cash to cover the $31 million it may have to pay in connection with its legal disputes, McBride said. "The litigation business is now in control from a cost standpoint," he said.

In return for agreeing to cap its legal fees, Boise Schiller and Flexner is now entitled to a larger percentage of any legal settlement that may be reached in SCO's lawsuit with IBM over its contributions to the Linux operating system. The law firm will now be paid between 20 percent and 30 percent of any settlement, depending on the amount awarded, McBride said.

In a further effort to reduce costs, SCO will close offices in Spain, Italy and Ireland and plans to move its 30 Santa Cruz, California, workers into smaller buildings over the next three months, said Bert Young, SCO's chief financial officer. SCO currently has 230 employees worldwide, Young said.

SCO saw a large increase in revenue for its SCOsource division, which licenses SCO's Unix System V source code. SCOsource had taken in a mere $31,000 during the first two quarters of 2004, but revenue jumped to $678,000 during the third quarter, Young said. This revenue jump came from two companies, Young admitted, but refused to say which.

Though SCOsource may have increased revenue during the quarter, it was far from solvent. SCO's $7.2 million in legal fees added to total expenses of $8.1 million for the division during the period, Young said.

McBride blamed his company's ongoing litigation with Novell for the SCOsource division's poor performance during 2004. "We continue to believe that Novell's claims have greatly impacted our ability to achieve traction in this business," he said. Novell claims to own the copyright to the Unix System V source code that is licensed by SCOsource. The System V code is also at the center of SCO's lawsuit with IBM.

In an apparent response to industry rumours that SCO may become the target of a hostile takeover bid, SCO's Board of Directors has implemented a "shareholders rights plan" designed to deter unsolicited takeover attempts, McBride said. "We believe that this will basically keep any outside offers or potential takeovers that are not in the best interest of the shareholders at bay," he said.

The plan, which was adopted by the board in August, gives SCO's board the right to determine the "fair value" of the company in the event of a takeover attempt, McBride said.

SCO's stock, which was trading in the $20 range in September 2003, has dropped below $4 in recent weeks. "We are very concerned about the current price of the stock vis-a-vis what we think the long-term value of the company is," McBride said. "The disparity between these two is definitely at the core of what we put in place."