The SCO Group is working on a deal with its lawyers to cap the costs of its legal battle over Linux although it claims to be "well positioned" to pursue its current litigation through to its conclusion.

This is despite unveiling its results for the third quarter, in which the company said its net loss was $7.4m (£4.1m), compared to net income of $3.1m (£1.7m) in the same quarter a year ago.

Revenue for the third quarter of its 2004 financial year was $11.2m, down from $20m in the same quarter in 2003.

SCO said the drop was due to a fall in SCOsource licensing revenue to $678,000 in the third quarter of 2004 from $7.3m in the third quarter of 2003.

SCOsource sells the licences which SCO claims Linux users must buy because its intellectual property has been contributed to the open source operating system without SCO's consent.

But, although down, the company's year-on-year sales are better than the mere $11,000 the division managed in the previous quarter this year. Last year's third-quarter figure was bolstered by a major agreement with Microsoft.

The company reported another customer win for SCOsource, but said it could not give the customer's name for confidentiality reasons.

SCO chief executive Darl McBride said several developments, including restoring profitability within its Unix business and the "nice uplift" in SCOsource licensing revenue, have strengthened the company's position.

Legal costs over the quarter amounted to $7.2m, but was "money well spent", said McBride, who is determined to continue the litigation.

"We will remain steadfastly focused on driving the dual path of success in both the market place and the courtroom," he said.

SCO has also entered into a "letter of intent" with its lawyers Boise, Schiller & Flexner to ensure that SCO's legal bills will not exceed $31m.

In exchange for the fee cap and a promise to complete the litigation against IBM, the law firm will receive a fee of 20 to 33 per cent of any legal settlement or judgement, depending on the amount awarded.

The previous arrangement awarded the lawyers a fixed cut of 20 per cent.

SCO also confirmed that it has closed a financial transaction with backer BayStar, regarding the retirement of BayStar's 40,000 shares of SCO's Series A-1 convertible preferred stock in exchange for $13m in cash and 2,105,263 shares of the company's common stock.