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Updated from 1:39 p.m. EST

SCO Group

(SCOX)

said Monday that it narrowed its quarterly net loss and that it's stepping up its intellectual property fight against Linux.

SCO reported a net loss under generally accepted accounting principles of $1.6 million, or 12 cents a share, in the fourth quarter. That compared with a net loss of $2.7 million, or 26 cents a share, in the same period a year earlier.

Excluding $9 million in charges connected to legal fees related to SCO's intellectual property fight -- arguably a core part of its business -- SCO reported pro forma net income of $7.4 million, or 44 cents a share, in the second quarter, compared with a pro forma net loss of $2.7 million, or 26 cents a year, in the year-earlier period.

Revenue rose 57% from a year ago to $24.3 million. Of that, $14 million came from SCO's Unix business, while $10.3 million came from previously announced licensing agreements with

Microsoft

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and

Sun Microsystems

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. Wall Street analysts expected SCO to earn pro forma net income of 36 cents a share on $23.1 million in revenue in the second quarter, according to Thomson First Call.

The Lindon, Utah, company also said it is stepping up its battle against Linux and Linux users. SCO claims that Linux software is improperly using SCO's Unix code. Earlier this year, SCO filed a suit against

IBM

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, charging the company with misappropriating SCO's Unix code in IBM's Linux business. A trial is scheduled for April 2005. After filing that suit, SCO launched a campaign to convince users of Linux, an open-source software available free online, to pay SCO for licenses. Only a handful of companies have forked over license fees to SCO, including Microsoft and Sun Micro.

On Monday, the company said it has begun issuing notices to thousands of licensees requiring them to certify they are complying with their Unix source code agreements, including verification that they aren't using Unix code in Linux software. SCO also said it has begun sending letters charging copyright violations to select Fortune 1000 companies. Those letters outline legal options available to users, including buying licenses from SCO.

In an interview Monday, SCO Chief Executive Darl McBride said if the companies fail to certify their compliance, they could lose their rights to use Unix, which is particularly prevalent in the financial services industry.

SCO previously released 80 lines of Unix code that it believes have been improperly inserted into Linux. But on Monday, the company expanded the scope of its claims, saying 43 additional files from Unix are being improperly used in Linux. Those files touch virtually all applications written on Linux, McBride said in a conference call Monday.

McBride added that even those 43 files are not the only set of files violating SCO licenses. "Think of this as the tip of the iceberg," he said.

Looking ahead, SCO expects first-quarter revenue to range from $10 million to $14 million, with Unix products making up the majority of that revenue. SCO didn't offer earnings guidance. Analysts were expecting revenue of $17.6 million and earnings of 10 cents a share.

Investors appeared to be paying closer attention to the lower-than-expected guidance than SCO's legal maneuverings.

Shares of SCO, which have skyrocketed since the beginning of the year, were recently trading down $1.08, or 5.7%, at $17.72.

Decatur Jones analyst Dion Cornett said he was expecting $2 million in revenue from Linux licenses in the first quarter, but SCO said it wouldn't receive any license fees stemming from its Linux fight. The shortfall indicates that SCO has yet to offer enough evidence to convince companies they should pay SCO license fees for their use of Linux, Cornett said.

That's good news for Linux vendor

Red Hat,

(RHAT)

which has found itself in the cross hairs of the Linux dispute and has filed its own suit against SCO to clear it of infringement. Shares of Red Hat were enjoying a rally Monday on volume that was nearly three times average trading. Shares of Red Hat were up $1.40, or 8%, at $18.89 in recent trading.

The additional files that SCO said Monday were also included in Linux may not be enough to prompt companies to pay the company license fees either, Cornett said. Past court cases indicate it's not clear-cut whether the files can be legally copyrighted, he said. Cornett has an underperform rating on SCO and his firm hasn't done any banking with the company.

For the full fiscal year 2003, SCO reported net income of $5.3 million, or 34 cents a share, reversing a loss of $24.9 million, or $1.93 a share, a year earlier and marking SCO's first profitable year ever. Excluding the $9 million in legal charges, SCO would have reported net income for fiscal 2003 of $14.3 million, or 91 cents a share. Revenue rose 23% to $79.3 million in fiscal 2003.