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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ---------------------

                                  FORM 10-K/A


                               (AMENDMENT NO. 1)


     [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

     [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM           TO

                             ---------------------

                         COMMISSION FILE NUMBER 0-21484
                         THE SANTA CRUZ OPERATION, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     94-2549086
        (State or other jurisdiction                         (I.R.S. Employer
      of incorporation or organization)                     Identification No.)

             400 ENCINAL STREET,
           SANTA CRUZ, CALIFORNIA                                  95060
  (Address of principal executive offices)                      (Zip Code)
</TABLE>

       Registrant's telephone number, including area code (831) 425-7222

        Securities Registered Pursuant to Section 12(b) of the Act: NONE

          Securities Registered Pursuant to Section 12(g) of the Act:
           Preferred Share Purchase Rights Common Stock, No Par Value

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Registrant became subject to such filing requirements on May 25, 1993 as a
result of its initial public offering.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
November 1, 2000 as reported on the Nasdaq National Market was approximately
$4.0938 Shares of Common Stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

     As of November 1, 2000, registrant had 39,441,763 shares of Common Stock
outstanding.
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                         THE SANTA CRUZ OPERATION, INC.

                                   FORM 10-K
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

                               TABLE OF CONTENTS


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                                                                             PAGE
                                                                            NUMBER
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<S>          <C>                                                            <C>
Part I
  Item 1.    Business....................................................      1
  Item 2.    Properties..................................................     16
  Item 3.    Legal Proceedings...........................................     16
  Item 4.    Submission of Matters to a Vote of Security Holders.........     16
             Executive Officers of the Registrant........................     16
Part II
  Item 5.    Market for Registrant's Common Stock and Related Stockholder
             Matters.....................................................     18
  Item 6.    Selected Financial Data.....................................     19
  Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................     20
  Item 8.    Financial Statements and Supplementary Data.................     32
  Item 9.    Changes in and Disagreement with Accountants on Accounting
             and Financial Disclosures...................................     58
Part III
  Item 10.   Directors and Executive Officers of the Registrant..........     58
  Item 11.   Executive Compensation......................................     60
  Item 12.   Security Ownership of Certain Beneficial Owners and
             Management..................................................     67
  Item 13.   Certain Relationships and Related Transactions..............     68
Part IV
  Item 14.   Exhibits, Financial Statement Schedule and Reports on Form
             8-K.........................................................     69
             Signatures..................................................     71
</TABLE>


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                                     PART I

ITEM 1. BUSINESS

     NOTE: This report contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's expectations only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

  Introduction

     Founded in 1979, The Santa Cruz Operation, Inc. (SCO), or the Company, went
public on the Nasdaq Stock Exchange (Nasdaq: SCOC) in 1993. SCO is a global
developer and provider of server software for networked business computing. The
Company is the world's leading provider of UNIX(R) server operating systems, and
creator of the award-winning Tarantella(R) software, which provides users with
instant web-browser access to applications running on a wide range of networked
servers, including mainframes, minicomputers, Windows(R) NT(TM), and UNIX System
servers. SCO also provides a full range of Professional Consulting and
Engineering Services for audits, deployment, and maintenance. SCO Professional
Services are available for SCO OpenServer, UnixWare, Tarantella, Linux and Open
Source systems.

     SCO has 20 years of experience developing UNIX system, open system, and
open source software. SCO owns the intellectual property for UNIX system
technology and Tarantella web-enabling software. Headquartered in Santa Cruz,
California, SCO has sales representatives in more than 80 countries. SCO
products are sold and distributed worldwide by more than 15,000 resellers,
distributors, systems integrators and computer manufacturers.

     In August, 2000, SCO and Caldera Systems, Inc., (Nasdaq: CALD), entered
into an agreement in which Caldera Systems would acquire assets from the SCO
Server Software and Professional Services Divisions. The agreement is subject to
the approval of regulatory agencies and The Santa Cruz Operation, Inc. and
Caldera Systems, Inc. stockholders, and is expected to close in January 2001.

     SCO will receive 28.6% ownership interest of Caldera, Inc., which is
estimated to be an aggregate of approximately 18.4 million shares of Caldera
stock and $7 million in cash. SCO will retain its Tarantella Division, and the
SCO OpenServer revenue stream and intellectual properties.

     Caldera will have exclusive distribution rights to SCO OpenServer and has
agreed to service and support the SCO OpenServer customer base. Caldera will
receive a sales commission and reimbursement for SCO OpenServer engineering and
marketing expenses. SCO's operating profit for the SCO OpenServer products will
be approximately 55% of future SCO OpenServer revenues.

  Vision and Mission: Server-Based Network Computing

     SCO's vision is that server-based network computing powers all enterprises.
SCO's mission is to create, market, and support the server software that system
builders choose for networked business computing.

  Importance of Server-based Network Computing

     A major drawback of today's PC-centric client/server model is the high cost
of system administration, maintenance, and software updates. When businesses
move to a server-based network computing model, they can administer and update
client software from the server, saving inordinate amounts of time and money.
Companies that adopt a server-based computing model can understand their
customers better, reach wider potential markets, bring products to market
faster, and improve their overall customer satisfaction levels.

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  Company Strategy

     SCO's business strategy is threefold: 1) to provide the leading UNIX server
software for high-volume Intel processor based servers; 2) to web-enable
existing and new applications with server-based software across multiple
platforms; and 3) to provide technical expertise to companies via its
Professional Services organization.

  Advantages of SCO Server Systems

     Business-critical servers running SCO system software combine the best
qualities of stand-alone PCs (personal productivity, ease of use and
price-performance value) with the traditional strengths of UNIX System servers
(business-critical applications, data management, security, and network
administration). SCO servers feature the following performance characteristics
to meet customer requirements: 1) support for business-critical,
transaction-based applications, 2) capabilities for providing a permanent,
auditable history of operations, 3) top performance and scalability at low cost,
4) support for multiple users performing multiple tasks, 5) high-level security,
6) reliability and manageability, 7) support for a wide range of client devices,
including not only Microsoft Windows PC desktops and laptops, but also UNIX
workstations, thin clients, and the browser-based network computers known as
NCs, and 8) expert service and support.

  Benefits to Customers

     SCO products deliver four key advantages to customers:

     - Server-based Computing -- SCO server software makes it easier to deploy,
       secure, manage, and grow applications and information systems.

     - Client Independence -- SCO server software supports many kinds of client
       devices, so that businesses can choose the device that best suits a task.

     - Evolutionary Systems -- SCO server software protects current hardware and
       software investments while enabling businesses to adopt the latest
       technological advances.

     - Global Services -- SCO delivers the expert consulting, training, and
       technical support services that businesses worldwide require.

  Importance of Intel Processors

     SCO has focused primarily on Intel processor based servers because of
Intel's dominant position in the microprocessor-based computer market and the
potential of Intel processor based servers in the growing market for
server-based network computing. Intel processor based servers offer
price-performance value that derives from their high volume, relatively low
cost, and global availability from numerous competing system vendors. Industry
analysts generally agree that, as Intel processor based servers continue to
provide increasingly greater performance at an affordable price, they will
increasingly displace the more costly RISC processor based servers that
currently dominate high-end server environments.

     SCO has supported each successive generation of Intel processors, beginning
in 1983, delivering an extensive line of highly reliable and stable UNIX
operating system products over the past 17 years. During that period, SCO has
also developed optional layered and internet software products for the Intel
platform, as well as new Tarantella web-enabling software that runs on many
different kinds of servers, including not only Intel processor based servers,
but also RISC processor based servers.

     The Company's extensive engineering capabilities and product enhancement
programs support complex, networked business critical servers across the full
range of Intel microprocessors, including the most recent Pentium, Pentium II
and Pentium Pro(R) processors. Looking to the future, SCO and IBM are
cooperatively developing a new high-volume enterprise UNIX System for Intel's
next generation of 64-bit processors, the first of which is called Itanium(TM).
SCO software is compatible with Intel processor based servers offered by
virtually all of the major hardware vendors. Because SCO products support
multiple processors and can

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execute multiple applications simultaneously, they are especially well suited
for business critical servers that provide data access and business-critical
applications to users throughout the enterprise.

  Importance of UNIX Operating Systems

     SCO bases its server operating system software on the UNIX System, which
has been in use since the 1970s. The UNIX System is a native multi-user,
multi-tasking technology that allows application programs to be separated from
operating system tasks such as control of peripheral devices, communications,
memory management and file management. This provides a standardized, protected
environment in which the applications operate. This results in much higher
reliability, because multiple applications and users cannot interfere with each
other. It also simplifies application development because the operating system
handles many complex functions that might otherwise have to be delegated to the
application.

     UNIX Systems are well known for their reliability, availability,
scalability, and security features. Reliability and availability refer to the
extremely high mean time between failures on UNIX Systems, and to the UNIX
System's ability to "failover" to a backup system without shutting down
operations. Scalability refers to the UNIX operating system's ability to scale
easily up from uni-processor to multi-processor systems, including clustered
systems of multiple processors each. Security refers to the UNIX System's
ability to resist access by unauthorized persons over a network, or over the
internet, for example. UNIX Systems from SCO meet US government-level C2 and B2
security requirements.

     SCO believes that UNIX System technology is only the beginning of the
solution, and that considerable value must be added to the basic technology to
create a family of products that solve complex customer requirements for
business critical servers. Business and government organizations are
increasingly demanding adherence to standards-based open systems to protect
their computing investment and avoid reliance on a single vendor's hardware or
software. For such customers, the proprietary implementations of UNIX Systems
that have in the past dominated the technical and scientific workstation market
are unacceptable.

     These proprietary versions of UNIX systems run on proprietary, RISC
processor-based, hardware architectures that are more expensive than Intel
processor based architectures. Because these versions of the UNIX System are
tied to particular hardware vendors, they can lock customers into a long-term
business relationship with a single vendor. Vendor lock-in can make it difficult
for customers to introduce new technology from other vendors into their
information systems without disrupting their current operations and having to
replace hardware and software at great cost. Applications that run on these
proprietary UNIX Systems usually come from the same vendor as well, or must be
developed specifically for these proprietary systems. Business and government
organizations require broad availability of third-party application software so
that they can use predefined solutions and, to the extent possible, avoid having
to develop custom applications. When custom applications are required, these
customers need a development environment and tools that make it easier to
produce and deploy these applications across multiple hardware architectures. In
addition, these customers require a high level of support, including consulting
services and training, as well as continual product enhancements to incorporate
new technology and industry standards.

     This is why SCO has committed itself to building its systems on open system
technologies (standards-based technologies that support multiple hardware and
software systems in a networked environment) that run on Intel processor based
servers. SCO has a long tradition of integrating leading-edge technologies from
other vendors into its own UNIX operating systems, providing customers with
best-of-breed solutions. In addition, SCO acquired ownership of UNIX System
technology in fiscal year 1996 from Novell Corporation, which had earlier
acquired it from AT&T's UNIX System Laboratories, the original developer. SCO
therefore now controls the source UNIX system technology, enabling the Company
to continue developing new versions of the UNIX System for high-volume Intel
processor based systems that compete successfully against proprietary RISC-based
systems on performance and price. Because these Intel processor based servers
are available from multiple hardware vendors around the world, customers
preserve their freedom to choose their system providers.

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  Target Markets

     The Company targets three major market segments: (1) primary information
systems for small and medium-sized businesses, (2) replicated systems for use in
distributed information systems in medium-sized and large organizations,
including Fortune 1000 Corporations, and (3) business-critical enterprise
servers for large and medium-sized businesses. Key targeted industries include
retail and telecommunications.

     The Company continues to drive the Small and Medium Business (SMB) market
forward with new products, such as SCO OpenServer Release 5.0.5, which
incorporates the latest internet and multimedia technologies, and the new
UnixWare 7 Business Edition. Many of today's largest retail chains, with
numerous replicated sites, depend on SCO OpenServer to run their day-to-day
operations.

     For enterprise environments, SCO delivers high-end editions of UnixWare 7
and UnixWare 7 NonStop Clusters.

     Meanwhile, SCO is also accelerating its growth into the enterprise
computing market with Tarantella. Tarantella provides virtually any client
device on the network with secure, Web browser access to any server application
on the network.

  Integrating Windows PCs and Diverse Clients with Unix Servers

     SCO intends to provide the best server for Network Computing, which means
providing the best server for a wide range of client devices, including not only
Microsoft Windows PC desktops and laptops, but also UNIX workstations,
Xterminals, character-based terminals, and network computers or NCs. The goal of
this strategy is to enable organizations to take full advantage of
cost-effective client devices that can run the new Java-based applications and
exchange information across the Internet and corporate intranets.

     SCO continues to support its Windows Integration strategy. The four
cornerstones of this strategy are solutions for: connectivity between SCO
servers and Windows desktops; manageability of Windows desktops from SCO
servers; the ability to take advantage of users' Windows skills by making SCO
UNIX System applications appear and behave like those on Windows; and
interoperability between Windows and UNIX System applications. SCO provides a
full line of Windows Integration Products, called the SCO Vision 2K Suite.

     In addition, SCO offers Tarantella, the Company's web-enabling software.
Tarantella enables customers to deliver both new and existing applications to
any Java technology-enabled client. These applications include Windows, UNIX
system, and mainframe applications. The clients can be palmtop devices, Web TV,
a mobile phone, a NC, a character terminal or a PC.

  Supporting a Wide Range of Applications

     Because purchase decisions are often driven by the availability of
applications, SCO has positioned its products as a strategic platform for
developers of business applications. Developers write software compatible with
SCO's products because of SCO's leadership in the UNIX market for Intel
processor-based computers and its support for a wide range of hardware vendors.
Applications written for the SCO environment run on over 2,700 types of
computers and peripherals, and can be readily ported to proprietary or other
RISC-based UNIX systems, thus expanding the market opportunity for the
developer. SCO places particular emphasis on ensuring that SCO business critical
servers provide optimal support for the leading client/server applications, the
new Java system-based applications, and the leading relational database
management systems. Major software vendors that offer application software for
the SCO environment include Banyan, Computer Associates, Informix, Lotus,
Microsoft, Oracle, Novell, Progress, and Sybase. In total, over 15,000
independent software vendors (ISVs), representing over 15,000 business-critical
applications support SCO UNIX Systems.

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  Delivering Comprehensive Support Services

     SCO continues to expand its delivery of support services to meet the needs
of customers using complex, multivendor computer systems. The Professional
Services division of SCO offers a series of Linux-related services to help
enterprise customers evaluate and manage the cost, benefits and risk of Open
Source technologies. These new services are part of SCO's ongoing strategy to
fully support the increasingly popular network computing model, which favors
heterogeneous client devices and application environments from multiple vendors.

     SCO also works closely with resellers and OEMs to offer channel-delivered
support programs to meet the needs of customers in its target markets. SCO
Services offerings include a range of telephone support options, a CD-based SCO
Support Library, on-line services, and high-level consulting and engineering
services. These flexible services give customers a choice of support plans and
pricing models. In addition, comprehensive education and training programs for
resellers and end users are available though the Company's Advanced Education
Centers. Information on these programs is available on the Services and Support
page of the SCO web site (www.sco.com).

  Providing True Open Systems Products

     Because customers are increasingly reluctant to be restricted to a single
computer vendor, the Company has designed its software products to support
industry-accepted open systems standards. Open systems are those systems which
conform to established industry standards such as I20, XPG-4, Spec 1170, DCE and
OSF/Motif(R) from The Open Group, POSIX(R) from IEEE, Federal Information
Processing Standard (FIPS) from the National Institute of Standards (NIST), and
internet standards. SCO continuously works with standards organizations such as
The Open Group to assure continued conformance to open systems standards.
Industry standards may be established by organizations composed of vendors, by
government agencies, by academic institutions, or by market acceptance. Industry
standards typically are based on specifications that allow competing
implementations. Because these standards are open, competitors can readily
access the technology to include in their products. Industry standards offer the
customer a cost-effective computing solution by providing a high degree of
compatibility and interoperability among hardware, software, network and
peripheral products. Based on published directories listing vendors and
applications, the Company believes there are currently over 15,000
business-critical software solutions compatible with SCO's products.

  Distributing Products Worldwide

     In contrast to operating system software for stand-alone PCs and small
networks, system software for business critical servers requires sophisticated
distribution and support. Over the past 16 years, SCO has developed a highly
trained, multi-tiered, value-added distribution and support infrastructure. This
worldwide network includes over 15,000 resellers and distributors. These parties
implement and support specific solutions for corporate, government and smaller
business customers by integrating SCO's products with those of other vendors.
SCO and its distribution network work together to provide comprehensive support
services ranging from engineering and consulting services to technical support
and training and education.

  Evangelizing to Developers and Educational Institutions

     SCO maintains developer and reseller programs to assist independent
software developers (ISVs) and channel partners in both the development and
marketing of SCO business critical servers. SCO developer and reseller programs
include joint marketing campaigns, information exchange, and special access to
product updates, enhancements, and new releases. The Company has established a
program to focus on the use of SCO products at schools and universities, and
makes free copies of its UNIX server licenses available to non-commercial
organizations.

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  Executing Global Strategy

     The Company's products are designed to support customers throughout the
world, with local language versions available for Europe, Asia, and Latin
America. SCO maintains sales, distribution and representative offices throughout
the world including those in the U.K., France, Germany, Italy, Denmark, India,
Australia, Singapore, Japan, Canada, Hong Kong, China, Mexico, and throughout
the U.S. In addition, the Company has established design and development centers
in the U.K. and the U.S. to meet company-wide and local product development
requirements.

  Brief History of SCO Products

     - 1983 -- SCO(R) XENIX(R) System V, a packaged version of the UNIX(R)
       operating system.

     - 1985 -- SCO XENIX 286, its first operating system for the 32-bit Intel(R)
       microprocessor environment.

     - 1987 -- SCO XENIX 386.

     - 1989 -- SCO UNIX System V/386, its first UNIX trademarked commercial
       product for Intel processor based platforms.

     - 1990 -- SCO Open Desktop(R), a graphical version of SCO UNIX System
       V/386.

     - 1993 -- SCO OpenServer(TM) software family, a complete line of advanced
       server.

     - 1993 -- SCO Open Desktop family, a complete line of advanced workstation
       (client) operating systems.

     - 1995 -- SCO OpenServer family, which integrated SCO OpenServer and SCO
       Open Desktop product lines.

     - 1995 -- SCO Vision family of client-integration products, which integrate
       Windows(R) PCs with UNIX servers from all major UNIX system vendors.

     - 1995 -- SCO created an Optional Services Products division which provides
       middleware to enhance the capabilities of SCO OpenServer Systems, as well
       as UNIX Servers from other vendors.

     - 1995 -- SCO acquired the UnixWare(R) product line and UNIX system
       technology from Novell, Inc.

     - 1997 -- Tarantella web-enabling software.

     - 1998 -- UnixWare 7 Operating System.

     - 1998 -- SCO joined with IBM to begin developing new high-volume
       enterprise UNIX System for 64-bit processor servers, called "Project
       Monterey." This product line is designed to run on Intel IA-32, Intel
       IA-64 and IBM microprocessor systems that range from entry-level servers
       to large enterprise environments.

     - 1999 -- UnixWare 7 Release 7.1 Operating System, featuring SCO's new
       Webtop technology based on Tarantella software.

     - 1999 -- New series of Linux-related Professional Services offerings to
       assist enterprise customers evaluate and manage the cost, benefits and
       risk of Open Source technologies.

     - 2000 -- SCO entered into an agreement in which Caldera Systems would
       acquire assets from the SCO Server Software and Professional Services
       Divisions, including a highly skilled products and channel resources.

     - 2000 -- SCO announced that the company intends to change its name to
       Tarantella, Inc.

  Current Products

     The Company offers three categories of products: (1) UNIX server operating
system products, which include optional server products, (2) Tarantella
software, and (3) SCO Vision 2K Suite.
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  Unix Server Operating System Products

  UNIXWARE 7

     UnixWare(R) 7 has been built from the ground up to support distributed
network computing on cost-efficient Intel(R) processor-based servers. Running on
the new generation of "enterprise-class" Intel processors, UnixWare 7 delivers a
new level of power, value and versatility to businesses of all sizes. Now
customers can dramatically simplify and increase their business operations and
better understand their customers' to gain a powerful competitive advantage in
their markets. UnixWare 7 is supported by leading enterprise application
vendors, and backed by more enterprise hardware manufacturers than any other
UNIX server environment. As an applications server, UnixWare 7 provides all of
the facets of business critical computing, including built-in security,
reliability, and fault tolerance on a standard, cost-effective, and
high-performance Intel single- or multi-processor hardware platform.

     UnixWare 7 features the industry's first integrated Webtop, based on the
award-winning SCO(R) Tarantella(TM) technology. Now applications can be
instantly Web-enabled, taking businesses swiftly into the internet age.

     UnixWare 7 NonStop Clusters greatly extends the record-breaking
availability and scalability of the UnixWare 7 operating system by creating a
computing environment made up of nodes (individual servers) that communicate via
a high-speed interconnect. These "clusters" of nodes enable massive scaling of
applications and provide a reliable fail-over environment should one of the
nodes become disabled.

  UNIXWARE 7 EDITIONS

     UnixWare 7 Base Edition -- Base-line services for building dedicated or
specialized server environments, such as telecommunications equipment and other
embedded systems. It also excels as a powerful graphical workstation.

     UnixWare 7 Business Edition -- For small businesses or workgroups requiring
file and print services, reliable access to diverse applications, and the
ability to expand system capability as the organization grows.

     UnixWare 7 Departmental Edition -- For departmental servers in medium or
large organizations to run applications and reliably share business critical
information with any client including PCs, NCs, terminals and any Java-enabled
browser client.

     UnixWare 7 Enterprise Edition -- For medium-to-high-end enterprise servers
to run large-scale business applications and databases for decision support and
on-line transaction processing.

     UnixWare 7 Data Center Edition -- For the highest-end multi-purpose servers
demanding 24x7x365 availability, supporting hundreds or thousands of end-users
by supplying access to a wide range of applications from a variety of clients.

  UNIXWARE 7 NONSTOP CLUSTERS RELEASE 7.1

     UnixWare 7 NonStop Clusters provide totally dependable access to your
business-critical data and applications. UnixWare 7 NonStop Clusters software
links individual "nodes" -- whole computers, each running its own copy of the
operating system -- such that they act and appear as a single system. If one
node goes down, or if an application fails on a particular node, processes are
actively migrated and resumed. If a node needs to be taken off-line, for
maintenance or upgrading, the rest of the cluster continues to service its
users. Other nodes in the cluster take care of new connections or instances of
applications. In this way, downtime, planned or unplanned, is eliminated.

  UNIXWARE 7 RELIANTHA 1.1

     UnixWare 7 ReliantHA extends the high performance, Reliability,
Availability and Scalability (RAS) characteristics of the UnixWare 7 server
operating system editions to provide continuous monitoring

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and fault detection of applications, resources and entire nodes. In the event of
a failure, automated recovery scripts are initiated to enable rapid or
transparent restoration of services, depending on the application.

  Project Monterey -- the High-Volume Enterprise UNIX Platform

     SCO has joined with IBM, with support from Intel, to deliver the leading
high-volume, enterprise UNIX system for the 21st century. With more OEM backing
than any other commercial UNIX system being developed for Intel's forthcoming
Itanium(TM) 64-bit processor, Project Monterey continues to gain ISV support and
customer acceptance as the next UNIX system standard. As part of Project
Monterey, IBM supports UnixWare 7 as its standard commercial UNIX for Intel
IA-32 environments, further enhancing SCO's overall market visibility (see
www.projectmonterey.com).

  SCO OpenServer

     The SCO OpenServer system is today's leading UNIX server operating system
for Intel processor-based platforms. Businesses use SCO OpenServer systems to
simplify and speed business operations, better understand and respond to their
customers' needs, and achieve a competitive advantage. SCO OpenServer systems
are exceptional at running multi-user, transaction-based DBMS and business
applications, communications gateways, mail and messaging servers in both host
and client/server environments. SCO OpenServer Release 5 combines
minicomputer-level reliability and availability with the Intel platform's
exceptional price/performance, value and flexibility. Unlike other advanced
operating systems, SCO OpenServer Systems revolutionize business productivity
without obsoleting existing business critical systems, applications or data.
Designed expressly for business critical computing, SCO OpenServer systems
deliver what today's organizations are seeking -- exceptional value and
price/performance, extensive networking with existing LANs and WANs, easy
integration with Windows desktops, built-in internet access and services,
simplified administration and management, and outstanding scalability for long
term growth.

  BASE SCO OPENSERVER OPERATING SYSTEMS

     SCO OpenServer Enterprise System -- In addition to the critical business
applications, SCO OpenServer Enterprise System reliably provides a variety of
network services including file and print services for both UNIX(R) and Windows
systems, E-Mail services, web services, Internet connectivity, and calendar
services.

     SCO OpenServer Host System -- The SCO OpenServer Host System is an
excellent platform for delivering highly reliable, non-networked multi-user
solutions.

     SCO OpenServer Development System -- The SCO OpenServer Development System
is comprised of a core set of development tools that can be easily augmented
with over 200 third-party products to create the most robust and efficient
development environment.

     SCO OpenServer Desktop System -- The Desktop System excels at running
client-side, transaction-based applications, accessing databases and networked
information, and providing file/resource sharing and communications across a
range of peer, server and host environments.

  SCO OPTIONAL SERVICES PRODUCTS

     SCO Optional Services Products provide enhancements to extend the SCO
OpenServer or UnixWare 7 product standard configurations with services that
support customers' unique environment and needs.

  SCO OPTIONAL SERVICES PRODUCTS FOR UNIXWARE 7

     Netware Services 4.10 -- With NetWare Services a UnixWare application
server can easily and transparently be accessed by NetWare clients, enabling
seamless integration into existing Novell environments.

                                        8
<PAGE>   11

     SCO Advanced File and Print Services -- SCO Advanced File and Print Server
4.0 enables enterprise-wide, scalable file and printer sharing with PCs running
Microsoft Windows 95, Windows 98, Windows NT, Windows 3.x, OS/2 and MS-DOS.

     SCO Merge -- SCO Merge runs Windows and DOS applications on SCO OpenServer
and UnixWare 7 systems. Windows 95, Windows 3.1, and DOS applications run
simultaneously with business critical UNIX applications. A common filesystem
allows Windows, DOS, and UNIX users to share data. Windows, DOS, and UNIX users
simultaneously share printers and other standard PC peripherals.

     SCO VisionFS -- SCO VisionFS for UnixWare 7 and SCO OpenServer provides
high-performance robust SMB file and printer sharing from UNIX(R) Systems to PC
clients running Windows, and provides basic access to server applications.

     SCO ARCserveIT6.6 from Computer Associates -- A comprehensive, network
backup, restore and data management system for enterprise networks. It is an
ideal system for managing the backup of large servers and heterogeneous
networks.

     UnixWare 7 Online Data Manager -- This is a cost-effective,
enterprise-class storage management solution for high availability and online
volume management. It provides software RAID Levels 0, 1, 5, 10 (striping,
mirroring, striping distributed parity and striped mirroring) as well as disk
spanning capabilities.

     UnixWare 7 Disk Mirroring -- UnixWare 7 Disk Mirroring provides increased
data availability by providing fault tolerance against failures and faster
access via software RAID Level 1 (simple disk mirroring).

  SCO OPTIONAL SERVICES PRODUCTS FOR SCO OPENSERVER 5

     SCO Advanced File and Print Server -- Seamless Integration of UNIX Servers
and Windows. The SCO Advanced File and Print Server, when used with SCO
OpenServer Release 5, creates a UNIX system based network operating system that
allows file and printer access to PCs running Microsoft Windows 95, Windows NT,
Windows 3.x, OS/2(R), and MS-DOS.

     SCO ARCserve/Open from Cheyenne -- Multi-platform Network Backup and
Restore. -- ARCserve/ Open is an easy-to-use, high-performance, comprehensive
data management tool for enterprise networks. ARCserve/Open provides the robust
feature set that administrators require and the simplicity necessary for
end-users to do their own backups.

     SCO Doctor and SCO Doctor for Networks(TM) -- The SCO Doctor and SCO Doctor
for Networks are advanced systems management tools that address the many UNIX
system configurations in use today. SCO Doctor incorporates advanced process
monitoring, accurate diagnosis and automatic problem correction. Notification of
alerts can be communicated to the administrator via pop-ups on the Doctor
console, the built-in pager support, or by e-mail notices. Alerts, in turn,
invoke intelligent action programs to automatically correct the problem or
notify the system administrator that intervention is required.

     SCO Merge -- SCO Merge runs Windows and DOS applications on SCO OpenServer
and UnixWare 7 systems. Windows 98, Windows 3.1, and DOS applications run
simultaneously with business critical UNIX applications. A common file system
allows Windows, DOS, and UNIX users to share data. Windows, DOS, and UNIX users
simultaneously share printers and other standard PC peripherals.

     SCO VisionFS -- SCO VisionFS for UnixWare 7 and SCO OpenServer provides
high-performance robust SMB file and printer sharing from UNIX(R) Systems to PC
clients running Windows, and provides basic access to server applications.

     SCO Virtual Disk Manager -- SCO Virtual Disk Manager is disk management
software that improves system performance and reliability.

  Tarantella

     Tarantella provides a range of web-enabling software technologies that give
immediate internet access to server-based applications, without any alteration
to the application code. It is designed for IT professionals
                                        9
<PAGE>   12

who need to provide users with instant access to applications and services, and
provides centralized deployment and management of server-based applications. Its
family of enterprise software products gives instant web access to applications
running on all leading servers, enabling businesses to deploy, access and manage
information anywhere anytime. Tarantella products give instant access to
existing mainframe, AS/400(R), Microsoft Windows(R), Linux(R) and UNIX(R)
applications, as well answer web applications, and are available today for all
popular RISC and Intel processor-based UNIX servers and selected Linux servers.

     The Tarantella solution has a unique three-tier architecture, in which
software resides on the middle tier between an enterprise's application servers
and internet client devices, deploying server-based applications over the
network, via a web interface. This makes Tarantella solutions non-invasive, and
applications can be deployed without any need for modification of the
application or extra load on the application server.

     Tarantella dramatically lowers the total cost of ownership by supporting
hardware and software already in use, by eliminating the cost of installing
software on clients, and by providing centralized system administration.
Tarantella makes use of the existing protocols associated with each server type,
allowing for a truly non-invasive solution, while insuring that application
software incompatibilities do not arise. This also means that there is no need
to take any application servers offline to install Tarantella and overheads
associated with adding extra software are minimized. The Tarantella drop-in
approach drastically reduces the time to deliver applications and moves the
management of users and applications back centrally located servers. With
Tarantella, organizations can move their current applications onto the network
without rewriting code or disrupting their current operations.

     The Tarantella product line includes Tarantella Enterprise 3(TM) for large
companies and organizations, Tarantella Enterprise 3 ASP Edition(TM) for
Application Service Providers, and Tarantella Express(TM), for workgroup and
departmental environments. (see www.tarantella.com)

     Tarantella Enterprise III -- Designed to meet the demands of the large
enterprise, this product offers the sealability, stability and reliability
demanded by large organizations. Multiple Tarantella servers can be linked
together to form an array which can support thousands of users. Optimal network
performance is assured at all times, whatever the connection.

     Tarantella Express -- Specially designed for workgroup and departmental
environments, this product provides a rich sub-set of Tarantella Enterprise III
features.

     Tarantella Enterprise III, ASP Edition -- Specially designed for workgroup
and departmental environments, this special ASP Edition includes all of the
features of Tarantella Enterprise III packaged within a flexible purchase or
rental plan that includes training, enhanced support and services. Features
specifically designed for ASPs allow sophisticated integration with customer
account systems.

  SCO Vision2K Suite

     The SCO Vision2K Suite includes powerful and extensible Windows to UNIX
Systems integration products, providing a "best of both worlds" solution -- the
reliability and scalability of UNIX Systems and the plug-and-play ease of
Microsoft Windows. These products are available and optimized for all Windows
platforms, including 3.1, NT, Windows 95, and Windows 98. It's also available on
many UNIX platforms, including Sun Solaris, HP-UX, IBM AIX, UnixWare and SCO
OpenServer.

     SCO Vision2K -- Bringing together Windows, UNIX and the internet -- SCO
Vision2K is a new generation of best of breed Windows to UNIX integration
products. Going beyond simply accessing UNIX applications, SCO Vision2K adopts
the principles of centralized management, server deployment and internet
integration and cuts the cost of ownership of your existing PC networks.
Individual products offer Windows access to X applications (SCO XVision Eclipse)
and character-based applications (SCO TermVision) server-based file and print
sharing (SCO VisionFS) and database connectivity (SCO SQL-Retriever). Together
they form a tightly integrated suite that meets all your Windows to UNIX
connectivity needs.

     SCO SuperVision -- Remote Management of Windows Desktops -- SCO(R)
SuperVision(TM) is supplied with SCO Xvision Eclipse, SCO TermVision and SCO
SQL-Retriever. It provides centralized management

                                        10
<PAGE>   13

functionality. From a central location, system administrators can make
configuration changes or control which applications users have access to and
then distribute updates from a UNIX server to a large community of PCs in a
single stroke. These changes can be made immediately, on demand or the next time
the PC is connected to the network. SCO SuperVision also works over modem links
allowing administrators to manage remote users just as easily as those on the
LAN.

     SCO VisionFS -- Server-Based File and Print Services -- SCO VisionFS(TM)
provides Microsoft file and print services from any UNIX server (HP, Sun, IBM,
Digital, SCO, etc.) to Windows PCs. It makes a UNIX server appear like any other
Windows machine on the network. No software has to be installed on the PC to
allow access to files and printers on the UNIX server. Using the SCO VisionFS
smart server approach delivers dramatic cost savings in installation,
administration and maintenance of PCs, compared to NFS client solutions.

     SCO TermVision -- The Business Critical Terminal Emulator -- SCO(R)
TermVision(TM) is a powerful 32-bit terminal emulation package which presents
UNIX character-based applications, files and services in Windows terms for
Windows users. SCO TermVision increases efficiencies, flattens the learning
curve and reduces administration overhead with a combination of highly
configurable emulators, secure and intelligent communications, and facilities
for remote administration.

     SCO XVision -- The Transparent PC X Server for Microsoft Windows -- SCO(R)
XVision(R) Eclipse is a proven 32-bit PC X server that exploits the strengths of
Windows(R) and the UNIX(R) system to give fast, intuitive access to X
applications. It is internet ready and delivers X applications across the
enterprise via the intranet. SCO(R) XVision(R) Eclipse 3D is used for displaying
3D imaging applications on a Windows PC.

     SCO SQL-Retriever -- ODBC Middleware for Simultaneous Access to Multiple
Databases -- SCO(R) SQL-Retriever(TM) is an Open Database Connectivity (ODBC)
middleware product designed to provide simultaneous access to a range of UNIX
databases. SCO SQL-Retriever also supports the Java Database Base Connectivity
(JDBC) protocol, for full access to databases across internet/intranet networks.
With SCO SQL-Retriever users can link Windows spreadsheets, development tools,
report writers or Windows databases with all popular UNIX databases. PC users
can take advantage of Windows productivity tools to present their text-based
databases with all popular UNIX databases. PC users can take advantage of
Windows productivity tools to present their text-based database information in a
more flexible way. Developers can use SCO SQL-Retriever to create distributed
applications working with multiple hosts and databases without needing to buy
proprietary database tools for each.

     Premier Motif -- The Business Critical Motif -- Premier Motif, which
provides Windows management technology, is a complete service for Motif
developers including software and support. SCO ensures that users invest their
time in developing applications rather than debugging or developing Motif
itself. Premier Motif has developed from over four years' experience as the
world's leading third party Motif supplier. Premier Motif focuses on providing
the highest quality Motif libraries, refining and enhancing OSF/Motif and
ensuring a robust and portable development base. SCO has taken OSF/Motif and
added numerous enhancements, many not found in any other vendor's Motif
implementation.

  Sales and Distribution

     SCO has developed a highly trained and diverse sales and distribution
channel of over 15,000 resellers and distributors. These channel partners are
selected for their expertise and experience. In some cases, the contractual
arrangements require minimum purchases and are generally terminable by either
party. The Company permits selected resellers to return a limited amount of
product for stock balancing, provided a new equivalent order is received. In the
event the Company reduced product prices, the Company's standard terms for these
resellers provide credit for inventory ordered in the previous 180 days, which
can be applied against future purchases. The Company, as a matter of policy,
does not allow product returns for a refund. In the third fiscal quarter of
1998, the Company made a decision to eliminate channel inventories and record a
reserve for the return of remaining channel stock in connection with its
preparations for electronic licensing and distribution. This decision adversely
affected the Company's operating results for fiscal 1998. There can be no

                                        11
<PAGE>   14

assurance that stock balancing and exchanges in the future will not adversely
affect the Company's operating results. The SCO sales and distribution channels
focus on three major customer groups.

     Small and Medium-Sized Businesses (SMB).  SCO works with VARs and
authorized resellers, which develop and/or sell business solutions to small and
medium-sized businesses.

     Corporate Customers.  In the U.S., and for selected customers across
Europe, SCO has developed a major account team that builds and manages the
relationships with customers in targeted industries as well as with the
Company's channel partners who support these customers. In smaller markets this
role is filled by major distributors. SCO provides direct support to major
corporate customers. In addition, support is provided by OEMs who market SCO
solutions on their hardware, systems integrators who develop project-specific
solutions integrating SCO products with other vendors' products, and VARs who
provide industry-specific, ready-to-use solutions.

     Government Customers.  SCO also has a dedicated account team that manages
the relationships with government agencies in the U.S., while Government sales
outside the U.S. are managed by SCO regional management or by OEMs, major
distributors or major resellers.

  Customer Support and Service

     Because of the business-critical use of SCO's products, customer support
and services have become essential to achieve a high level of customer
satisfaction. The Company's services are designed to support its wide range of
customers, from small and medium-sized businesses to large enterprises, both at
the end user and reseller levels. The Company, through its worldwide customer
support and service staff and its authorized third-party education, support and
channel partners, offers a variety of support and services:

     Technical Support -- includes a variety of support offerings including
online support through the World Wide Web, a dial-up bulletin board and varying
levels of telephone support for channel partners and corporate accounts;

     Educational Services -- includes courseware and instruction guides provided
to approximately 140 Authorized Education Centers, which in turn provide
training and education materials to both end users and resellers in local
languages;

     Consulting Services -- consists of direct assistance, including on-site
technical personnel for extended assignment, and integration, implementation and
deployment of applications on SCO platforms for branch automation and other
large business environments;

     Developer Services -- includes technical advisory and support services as
well as access to early product releases for application developers; and

     Engineering Services -- consists of engineering personnel who assist OEMs
to port and support SCO products on their hardware platforms.

     The Company sells support services to end users on an annual contract or
as-needed basis. Options are available so that customers can tailor the support
solution to meet their specific needs. Electronic access is available through
the World Wide Web, remote or local bulletin boards and through discussion
groups on CompuServe and the internet. Software updates, enhancements, and bug
fixes are also available electronically. SCO also supports end users via
Authorized Support Centers and Premier Service Centers. The Company also
provides its support services to distributors, VARs, OEMs and integrators.

  Product Development

     Since its inception, the Company has focused considerable resources on the
development and integration of UNIX systems and open systems software
technologies and standards for Intel processor-based computers. SCO has
developed skills in operating systems, user interfaces, networking, porting and
applications software support. The Company's development strategy is based upon
utilizing and building upon technologies it owns, such as UNIX Systems
technologies as well as products already available in the marketplace. In
December of

                                        12
<PAGE>   15

1995, SCO purchased the UNIX Systems technologies from Novell Inc. and is now a
primary driving force behind this open systems platform.

     SCO devotes considerable resources to ongoing product testing and quality
assurance to support product reliability. The Company believes that its
abilities to integrate product technologies, to incorporate a wide variety of
standards into its products, and to continue to offer enhancements to its
existing products are essential to maintaining its competitiveness in the
marketplace. SCO has introduced development tools, which allow developers to
write applications which take advantage of the increased power of the ongoing
Intel family of processors, including the Pentium, Pentium II, Pentium Pro(R)
and the forthcoming 64-bit Itanium processor. In addition, the Company now
offers localized versions of its core business critical servers, including SCO
UnixWare products in English, French, Italian, German, Spanish, and Japanese,
and SCO Open Server products in French, German, Chinese and Japanese.

     SCO product development is comprised of one integrated organization that
implements SCO's two product strategies -- UNIX servers and Client Integration
products.

     The UNIX server development teams are responsible for the core operating
systems and services including SCO OpenServer, SCO UnixWare, and the forthcoming
64-bit UNIX system, code-named Monterey64. They are also responsible for
additional OS services such as SCO(R) Merge(TM), Virtual Disk Manager and On
Line Data Manager (RAID subsystems), Development Systems, and new technology
development projects that are UNIX kernel-related such as clustering and NUMA
support. In addition, they are responsible for many layered server functions
that extend the capabilities of the core operating systems. These services
include file and print services, system management and backup services, and,
most important, internet services.

     The client integration development teams are responsible for SCO's "Windows
integration" and "any-client integration" products and services. SCO's strategy
is to integrate almost any client with almost any UNIX server. The teams build
the SCO Vision2K Suite of products, and develop Tarantella products, which
extend SCO's "any-client" proposition to server-centric environments.

     The market for the Company's products is characterized by rapidly changing
technology, evolution of new industry standards, and frequent introductions of
new products and product enhancements. The Company's success will depend upon
its continued ability to enhance its existing products, to introduce new
products on a timely and cost-effective basis to meet evolving customer
requirements, to achieve market acceptance for new product offerings, and to
respond to emerging industry standards and other technological changes. There
can be no assurance that the Company will be successful in developing new
products or enhancing its existing products or that such new or enhanced
products will receive market acceptance. The Company's success also depends upon
its ability to license from third parties and to incorporate into its products
new technologies that become industry standards. There can be no assurance that
the Company will continue to obtain such licenses on favorable terms or that it
will successfully incorporate such third-party technologies into its own
products.

     The Company anticipates new releases of products in the fiscal year ending
September 30, 2001. There can be no assurance that such new releases will not be
affected by technical problems or "bugs," as is common in the software industry.
Furthermore, there can be no assurance that these or other future product
introductions will not be delayed. Delays in the availability, or a lack of
market acceptance, of new or enhanced products could have an adverse effect on
the Company's business. There can be no assurance that product introductions in
the future will not disrupt product revenues and adversely affect operating
results.

  Competition

     The market for operating systems is very competitive and rapidly changing.
The Company encounters significant competition from a limited number of direct
competitors including Microsoft, Novell, IBM and Sun Microsystems, which offer
hardware-independent multi-user operating systems for Intel platforms, and from
OEMs such as Hewlett-Packard, IBM, Olivetti and Sun Microsystems, which offer
their own versions of the UNIX System on a variety of RISC and Intel CPU-based
hardware. Competition from companies selling

                                        13
<PAGE>   16

versions of the Linux Operating System has also increased. Many hardware
competitors also offer SCO's system software products, either through direct OEM
agreements or indirectly through the various distribution channels used by the
Company.

     Competitive systems not based on Intel microprocessors are offered by
Hewlett-Packard, IBM, and Sun Microsystems, among others. These systems are sold
with operating system software which is based upon the UNIX System and offer
many of the benefits of the Company's products. The Company also expects to
receive increasing direct competition on the Intel platform from OEM versions of
the UNIX System and from such hardware-independent operating systems as
Microsoft Windows NT and SunSoft's Solaris for Intel. The Company expects
Microsoft Windows NT (server and workstation) to continue to offer significant
and increasing competition to UNIX System products, including SCO products. Many
of these competitors and potential competitors have significantly greater
financial resources, more technical personnel and more extensive marketing and
distribution capabilities than the Company. The major factors that affect the
competitive market for the Company's products include product reliability,
availability of user applications, compliance with industry standards, ease of
use, networking capability, breadth of hardware compatibility, quality of
support and customer services, product performance and price.

     Over recent years, operating systems such as GNU, Linux, FreeBSD and others
developed using collaborative and "open source" techniques have gained
popularity with highly technical users, and some integrators. Some of SCO's
competitors may exploit this technology to build competitive products, or the
market for SCO's products may be reduced by either technical users using these
products or the products becoming easier to use and more stable.

     In addition, certain competitive products may have advantages compared to
certain SCO products. Microsoft Windows NT has greater name recognition than the
Company's products and is being designed to run on a greater range of
processors. The Company's focus on system software may be a competitive
disadvantage to those competitors which offer a wider range of products. The
Company may also be at a disadvantage relative to those competitors who have
greater financial resources, larger technical staffs, and more extensive
marketing and distribution capabilities. There can be no assurance that either
existing or new competitors will not develop products that are superior to the
Company's products for basic desktop and certain server applications for the
UNIX System. If competition were to cause the Company to reduce its prices
significantly, the Company's results of operations could be adversely affected.
The Company's future success will depend in large part on the following
conditions: the continued growth of the UNIX market for business and
governmental organizations, the Company's ability to continue to license
additional products and product enhancements to existing customers, and the
ability to identify and market its products to new markets and customers. There
can be no assurance that future competition will not have a material adverse
effect on the Company's results of operations.

     The Company's strategy is to offer products that conform to industry
standards. Industry standards may be established by organizations composed of
vendors, by government agencies, by academic institutions, or by market
acceptance. Industry standards typically are based on specifications for which
there can be competing implementations. Because standards are open (not
proprietary), competitors can readily access the technology to include in their
products, and SCO does not believe that offering products conforming to industry
standards will provide SCO with a competitive advantage.

     The Company's products are offered primarily for multi-user computer
environments on Intel servers. The market for Microsoft Windows on personal
computers for personal productivity is substantially larger than the market for
UNIX Systems on Intel computers. Because the Company competes in a smaller
market than the personal productivity market addressed by Windows, the Company's
potential for future growth will depend in part on the extent to which the UNIX
market continues to grow. The existence of a number of different versions of
UNIX operating systems may have adversely affected the growth of the UNIX market
compared to alternative operating systems. However, the emergence of such
technologies as the internet, the world wide web, Java, network computers and
the TCP/IP networking protocol as de facto industry standards has helped
strengthen the position of UNIX system as an operating system that functions
consistently across a broad range of hardware platforms and computing
architectures such as Host, Client/Server and the server-

                                        14
<PAGE>   17

centric model. In addition, SCO is working with The Open Group, a major
international standards group, to support the implementation of standard
application programming interfaces (APIs) that will support applications
compatibility across different versions of UNIX systems. To date, SCO and other
major UNIX vendors have adopted varying schedules for compliance with these API
specifications, and there can be no assurance this effort will be successful.
SCO's Tarantella product faces competition from products using technologies to
deploy applications, such as terminal emulation, compression systems, virtual
private networks, and also faces competition from products taking a similar
approach to web-enabling applications. These include offerings from companies
such as WRQ, Hummingbird and Graphon. In addition, products that deploy Windows
applications only can be configured with additional functions such as terminal
emulators to provide functional behavior similar to that of Tarantella. These
products include CITRIX, NCD WinCenter, and Microsoft Windows Terminal Server.
SCO is targeting Tarantella products and services into the enterprise market
where SCO does not have a strong range of partners and where the SCO brand is
little known, making alternative suppliers a competitive threat. SCO's
Tarantella products run on Solaris, AIX, Linux, HP/UX and other UNIX operating
systems, and therefore are dependent on continued use of these products in the
target markets. Tarantella aims to support many different server types and
client types. However, it is possible that client or server vendors could
"close" access to their products to prevent customers from using Tarantella.
Accordingly, SCO announced an agreement this year to license Microsoft Remote
Desktop Protocol (RDP) technologies.

  Proprietary Rights

     The Company attempts to protect its software with a combination of
copyright, trademark, and trade secret laws, employee and third party
nondisclosure agreements, license agreements, and other methods of protection.
Despite these precautions, it may be possible for unauthorized third parties to
copy certain portions of the Company's products or reverse engineer or obtain
and use information the Company regards as proprietary. While the Company's
competitive position may be affected by its ability to protect its intellectual
property rights, the Company believes that trademark and copyright protections
are less significant to the Company's success than other factors, such as the
knowledge, ability, and experience of the Company's personnel, name recognition,
and ongoing product development and support.

     The Company's software products are generally licensed to end users on a
"right-to-use" basis pursuant to a perpetual license. The Company licenses its
products to end users primarily under "shrink-wrap" license (i.e., licenses
included as part of the product packaging). Shrink-wrap licenses, which are not
negotiated with or signed by individual end-user licensees, are intended to take
effect upon opening of the product package. Certain provisions of such licenses,
including provisions protecting against unauthorized use, copying, transfer, and
disclosure of the licensed product, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the U.S.

     As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software products will increasingly become subject to infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company and/or against the Company's suppliers of technology. In
general, the Company's suppliers have agreed to indemnify the Company in the
event any such claim involves supplier-provided software or technology, but any
such claim, whether or not involving a supplier, could require the Company to
enter into royalty arrangements or result in costly litigation.

     The Company depends on the availability of technology from third parties.
Most of the software licensed by the Company is written to comply with industry
standards and because the licensor is seeking to broaden its market it is made
widely available on a non-exclusive basis by the licensor. As a result, this
software is also readily available to competitors of the Company which want to
incorporate such software into their products. The loss of any significant
third-party license or the inability to license additional technology as
required, could have a materially adverse effect on the Company's results of
operations until such time as the Company could replace such technology.

                                        15
<PAGE>   18

  Employees

     As of September 30, 2000, the Company had 901 employees, including 189 in
product development, 370 in sales and marketing, 116 in customer support
services, and 226 in finance, manufacturing and distribution services and
administration.

     The Company's success depends in part on its executive officers, none of
which are subject to long-term employment contracts. The loss of any current
executive officer could adversely affect the Company's business. The success of
the Company also depends in part on its ability to attract and retain qualified
technical, managerial, and marketing personnel. Competition for such personnel
is intense in the software industry and there can be no assurance that the
Company will be successful in attracting and retaining such personnel.

ITEM 2. PROPERTIES

     The Company is headquartered in Santa Cruz, California, where it leases
administrative, sales and marketing, product development and distribution
facilities. The Company leases additional facilities for administration, sales
and marketing and product development in Murray Hill, New Jersey and Watford,
England. The leases for the Company's facilities expire at various dates through
2020. The Company has renewal options, at fair market value, under many of these
leases and believes that in any event additional or alternative space adequate
to serve the Company's foreseeable needs would be available on commercially
reasonable terms.

     The Company's field operations occupy leased facilities in 12 locations in
the United States. In addition, the Company's subsidiaries and sales and
representative offices in France, Germany, Italy, Spain, Sweden, Denmark,
Singapore, Australia, China, India, Canada, Brazil and Mexico lease space for
their operations. Worldwide, the Company leases property in 38 locations
consisting of an aggregate of approximately 370,000 square feet. The Company
believes that these facilities are adequate for its needs in the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

     No material legal proceedings are pending to which the Company is a party
or to which any property of the Company is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during the
fourth fiscal quarter of 2000.

  Executive Officers of the Registrant

     The executive officers of the Company as of September 30, 2000 were as
follows:

<TABLE>
<CAPTION>
NAME                                   AGE              POSITION WITH THE COMPANY
----                                   ---              -------------------------
<S>                                    <C>   <C>
Douglas L. Michels...................  46    President and Chief Executive Officer
Randall Bresee.......................  52    Senior Vice President and Chief Financial
                                             Officer
David McCrabb........................  52    President Server Division
Jack Moyer...........................  51    Senior Vice President, Human Resources
Mike Orr.............................  49    President, Tarantella Division
Steve Sabbath........................  53    Senior Vice President, Law and Corporate
                                             Affairs, and Secretary
Geoff Seabrook.......................  52    Senior Vice President, Corporate Development
James Wilt...........................  54    President, Professional Services
</TABLE>

                                        16
<PAGE>   19

     Mr. Michels was named President and Chief Executive Officer in April 1998.
Mr. Michels is the principal architect of the Company's technology strategy and
served as the head of product development between June 1997 and April 1998 and
as Chief Technical Officer between February 1993 and June 1997. Mr. Michels has
been a director of the Company since 1979 and served as the Company's Executive
Vice President between 1979, when he co-founded the Company, and April 1998. Mr.
Michels is one of the founders of Uniforum, a UNIX(R) user consortium, and
served as its President from 1989 to 1990.

     Mr. Bresee was named Senior Vice President and Chief Financial Officer in
April of 2000. Prior to that he was Chief Financial Officer at bamboo.com,
serving in the capacity from April 1999 to April 2000. Between January 1998 and
April 1999 he was Vice President and Corporate Controller for SCO and between
May 1997 and January 1998 he served as Americas Controller for SCO. Prior to
joining SCO, Mr. Bresee served as Director of Finance for the Customer Support
Division at Silicon Graphics Incorporated from May 1988 to May 1997.

     Mr. McCrabb was named President, Server Division in April 2000. He has
served as Executive vice President, Worldwide Sales and Field Operations since
April 1998. Between January 1995 and June 1997, he served as Vice President,
Marketing and Channel Sales, then as Senior Vice President, Market Planning
between July 1997 and April 1998. Prior to joining the Company, Mr. McCrabb
served as Vice President and General Manager for Applied Digital Data Systems, a
wholly owned subsidiary of NCR, since February 1994. From November 1989 to
February 1992, he served as Vice President, Sales and Marketing for Primary
Access Corporation.

     Mr. Moyer was named Senior Vice President, Human Resources in January 1998.
He has served as Vice President, Human Resources since August 1995. Prior to
joining the Company, Mr. Moyer served as Vice President, Human Resources for the
following companies: Ore Ida Foods from 1992 to August 1995; Maspar Computer
Corporation from November 1991 until November 1992; Businessland from January
1985 until November 1991. Mr. Moyer's senior human resources management
experience also includes positions at National Mirconetics, Inc. and National
Semiconductor Corp.

     Mr. Orr was named President, Tarantella Division, in April 2000. Between
April 2000 and July 1999, he served as Senior Vice President, Worldwide
Marketing. Prior to joining the Company, between June 1998 and June 1999, Mr.
Orr served as Vice President, Sales and Marketing at Splash Technology. From
August 1988 to June 1998, Mr. Orr served in various senior management positions
at Amdahl. From August 1974 to August 1988, Mr. Orr served in various management
positions at IBM.

     Mr. Sabbath was named Senior Vice President, Law and Corporate Affairs, and
Secretary in January 1998. Between 1993 and 1997, he served as Vice President,
Law and Corporate Affairs, and Secretary and served as Vice President, Legal
Affairs between 1991 and 1993. Prior to joining the Company, between February
1988 and January 1991, Mr. Sabbath was the Deputy General Counsel for Sun
Microsystems, Inc., a manufacturer of UNIX system-based hardware and software.

     Mr. Seabrook was named Senior Vice President, Corporate Development in
April 1998. Since joining the Company in 1989, Mr. Seabrook has held a number of
strategic positions, including Senior Vice President and General Manager, EMEIA.
Prior to joining the Company, Mr. Seabrook served as Vice President
International Operations at Century Data Inc.

     Mr. Wilt was named President, Professional Services in April 2000. Between
April 2000 and April 1998, he served as Senior Vice President, Products. Since
joining the Company in 1983, Mr. Wilt has held a number of strategic positions
both in the U.S. and in Europe including those of Vice President, Business
Development and Vice President, International. Mr. Wilt formerly held management
positions in sales, marketing, and planning at Xerox, Honeywell and Amdahl.

                                        17
<PAGE>   20

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The following required information is filed as a part of the report:

     The Company has not paid cash dividends on its common stock. The Company's
common stock is traded over-the-counter and is quoted on the Nasdaq National
Market under the symbol "SCOC." The following table sets forth the range of high
and low closing sale prices for the Common Stock:

<TABLE>
<CAPTION>
                                                           LOW SALE PRICE   HIGH SALE PRICE
                                                           --------------   ---------------
<S>                                                        <C>              <C>
Fiscal 1999:
  First Quarter..........................................       3.25              5.59
  Second Quarter.........................................       4.00              5.88
  Third Quarter..........................................       5.38              7.06
  Fourth Quarter.........................................       6.44             14.13
Fiscal 2000:
  First Quarter..........................................      11.25             34.63
  Second Quarter.........................................       9.38             31.25
  Third Quarter..........................................       4.19              8.94
  Fourth Quarter.........................................       2.78              6.13
</TABLE>

     On November 1, 2000, there were approximately 23,000 holders of the
Company's Common Stock.

                                        18
<PAGE>   21

ITEM 6. SELECTED FINANCIAL DATA

                         THE SANTA CRUZ OPERATION, INC.

                    SELECTED FIVE YEAR FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                    FISCAL YEAR ENDED SEPTEMBER 30,
                                          ----------------------------------------------------
                                            2000       1999       1998       1997       1996
                                          --------   --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
Net revenues............................  $148,923   $223,624   $171,900   $193,660   $207,890
Cost of revenues........................    41,796     49,778     47,096     55,315     54,402
                                          --------   --------   --------   --------   --------
Gross margin............................   107,127    173,846    124,804    138,345    153,488
Operating expenses......................   158,360    157,473    138,397    154,939    177,069
                                          --------   --------   --------   --------   --------
Operating income (loss).................   (51,233)    16,373    (13,593)   (16,594)   (23,581)
Other income (expense):
  Interest income, net..................     1,679      1,942      2,261      2,291      2,302
  Other income (expense), net...........       819      1,939        226       (866)      (394)
                                          --------   --------   --------   --------   --------
          Income (loss) before income
            taxes.......................   (48,735)    20,254    (11,106)   (15,169)   (21,673)
  Income taxes..........................     8,218      3,396      3,559          1        741
                                          --------   --------   --------   --------   --------
          Net income (loss).............   (56,953)    16,858    (14,665)   (15,170)   (22,414)
Other comprehensive income (loss), net
  of tax
  Unrealized gain on available-for-sale
     equity securities..................     5,617         --         --         --         --
  Foreign currency translation
     adjustment.........................      (539)      (884)       653        936       (213)
                                          --------   --------   --------   --------   --------
          Comprehensive income (loss)...  $(51,875)  $ 15,974   $(14,012)  $(14,234)  $(22,627)
                                          --------   --------   --------   --------   --------
  Earnings (loss) per share -- basic....  $  (1.59)  $   0.49   $  (0.41)  $  (0.41)  $  (0.62)
  Earnings (loss) per
     share -- diluted...................  $  (1.59)  $   0.46   $  (0.41)  $  (0.41)  $  (0.62)
                                          --------   --------   --------   --------   --------
  Shares used in per share calculation--
     basic..............................    35,720     34,232     35,817     36,628     36,179
  Shares used in per share
     calculation -- diluted.............    35,720     36,402     35,817     36,628     36,179
                                          --------   --------   --------   --------   --------
</TABLE>

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,
                                       -------------------------------------------------------
                                        2000        1999        1998        1997        1996
                                       -------    --------    --------    --------    --------
                                                           (IN THOUSANDS)
<S>                                    <C>        <C>         <C>         <C>         <C>
Cash, equivalents and short-term
  investments.......................   $26,446    $ 62,844    $ 51,076    $ 51,711    $ 54,831
Working capital.....................    16,654      44,813      32,221      46,164      61,935
Total assets........................    82,202     139,284     131,189     146,665     166,807
Long-term liabilities...............     5,462      11,094      12,027       9,545       9,332
Shareholders' equity................    31,202      70,338      60,135      81,462     101,581
                                       -------    --------    --------    --------    --------
</TABLE>

                                        19
<PAGE>   22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

  Overview

     SCO is a global leader in server software for networked business computing,
and the world's leading provider of UNIX(R) server operating systems. SCO is
also the creator of the award-winning Tarantella(R) software, which provides
instant web-browser access to applications running on a wide range of networked
servers. SCO sells and supports its products through a worldwide network of more
than 15,000 distributors, resellers, system integrators and OEMs.

     SCO's mission is to create, market and support the server software that
system builders choose for networked business computing. SCO believes that
server-based network computing, which is based on internet and web technologies,
enables businesses to dramatically improve their customer information flow and
business transaction efficiencies. Companies that adopt a server-based network
computing model can understand their customers better, reach wider potential
markets, bring products to market faster and improve their overall customer
satisfaction levels. With server-based computing and SCO products and services,
IT professionals can immediately leverage their existing investments, deploy
applications faster and dramatically cut the cost of systems administration and
management.

     In addition to historical information contained herein, this Discussion and
Analysis contains forward-looking statements. These statements involve risks and
uncertainties and can be identified by the use of forward-looking terminology
such as "estimates," "projects," "anticipates," "plans," "future," "may,"
"will," "should," "predicts," "potential," "continue," "expects," "intends,"
"believes," and similar expressions. Examples of forward looking statements
include those relating, financial risk management activities and the adequacy of
financial resources for operations. These and other forward-looking statements
are only estimates and predictions. While the Company believes that the
expectations reflected in the forward-looking statements are reasonable, the
Company's actual results could differ materially. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's expectations only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revision to these forward-
looking statements, which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.

  Results of Operations

  NET REVENUES

     The Company's net revenues are derived from software licenses and fees for
services, which include engineering services, consulting, custom engineering,
support and training.

     Net revenues were $148.9 million in fiscal 2000, a decrease of 33% from
$223.6 million in fiscal 1999. In fiscal 1999, net revenues increased by 30%
from $171.9 million in fiscal 1998. The fiscal 2000 decline in revenue
performance was worldwide across most geographies and is attributable to delays
in large project deals as well as customer delays due to Year 2000 issues as
well as other market factors. The recovery of the customer channel from the
impact of Year 2000 has been slower than expected. The fiscal 1998 to 1999
revenue increase was due to stronger revenue performance across all geographies
attributable to several factors including the ease of electronic licensing,
increased customer contacts as a result of added sales resources and Y2K upgrade
sales. For the fiscal years ended September 30, 2000, 1999 and 1998, no single
customer accounted for greater than 10% of the Company's net revenues.

     International revenues continue to be a significant portion of net
revenues, comprising 54% of the revenues for fiscal 2000 and 56% and 51% for
1999 and 1998, respectively.

     License Revenues.  License revenues were $133.5 million in fiscal 2000 as
compared to $208.5 million in fiscal 1999 and $156.7 million in fiscal 1998,
representing a decrease of 36% in fiscal 2000 over 1999 and an increase of 33%
in fiscal 1999 over 1998. License revenues were approximately 90% of total net
revenues for fiscal 2000 and 93% and 91% of total net revenues for fiscal 1999
and 1998, respectively. The fiscal 2000 decline in license revenues resulted
from customer delays due to Year 2000 issues and a slower than expected recovery
of the customer channel from the impact of Y2K. The fiscal 1998 to 1999 license
revenue increase
                                        20
<PAGE>   23

was due to several factors including the ease of electronic licensing, increased
customer contacts due to larger sales resources and Y2K upgrade sales. The
fiscal 1999 increase was across all geographies.

     Service Revenues.  Revenue from services remained relatively constant in
fiscal 2000 at $15.4 million, a 2% increase over the $15.2 million level of
fiscal 1999 and the $15.2 million in service revenues in fiscal 1998.

  Cost of Revenues

     The Company's overall cost of revenues as a percentage of net revenues can
be affected by mix changes in net revenue contribution between product families,
geographic regions and channels of distribution, since both price and cost
characteristics associated with these revenue streams can vary greatly. The
Company can also experience fluctuations in gross margin as net revenues
increase or decrease since certain costs of revenues including technology,
service, product assembly and distribution act as fixed costs within certain
volume ranges.

     Cost of License Revenues.  Cost of license revenues includes royalties paid
to certain software vendors, amortization of acquired technologies, product
packaging, documentation and all costs associated with the acquisition of
components, assembling of finished products, warehousing and shipping. Cost of
license revenues as a percentage of license revenues increased to 17% in fiscal
2000 from 15% in fiscal 1999, which in turn was a decrease from 19% in fiscal
1998. The 2% increase from 1999 to 2000 was due to the impact of fixed costs
over lower unit sale volume. These fixed costs include technology and overhead
costs. This impact is partially offset by declining material costs resulting
from the continuing growth of e-commerce business. The 4% decline from 1998 to
1999 resulted from the effects of royalty dispute settlement negotiated with a
technology provider during fiscal 1998 and reduced technology costs together
with the impact of stable fixed costs over higher unit sales volume. In
addition, material costs declined as a result of increasing e-commerce trade, or
business conducted over the internet. During the year ended September 30, 1998,
the Company reached a settlement of a royalty dispute with one of its technology
providers which resulted in an element of past royalties being forgiven and an
additional retroactive refund being received. In total, approximately $2.6
million was credited to royalty expense during the year ended September 30,
1998. In addition, the Company received a reduction in both the ongoing royalty
rate and in the number of the Company's products, which are subject to payment
of royalties.

     Cost of Service Revenues.  Cost of service revenues includes documentation,
consulting and personnel related expenses associated with providing such
services. Costs of service revenues as a percentage of service revenues
decreased to 126% in fiscal 2000 from 128% in fiscal 1999, which in turn was an
increase from 115% in fiscal 1998. The decrease in fiscal 2000 resulted from
relatively constant costs as a percentage of higher fiscal 2000 revenues. The
increase from fiscal 1998 to fiscal 1999 was a result of increased staffing
levels in the professional services area. The higher staffing levels were part
of an effort by the Company to increase the visibility of the professional
services group to customers.

  Research and Development

     The Company invests in research and development both for new products and
to provide continuing enhancements to current products. Research and development
expenses decreased 6% to $39.7 million in fiscal 2000 from $42.4 million in
fiscal 1999, which was a decrease of 1% from fiscal 1998 spending of $43.0
million. Research and development expenses represented 27% of net revenues for
fiscal 2000, 19% of net revenues for fiscal 1999 and 25% of net revenues for
fiscal 1998. The spending decrease in fiscal 2000 is primarily the result of
lower labor costs driven by lower headcount as a result of a planned reduction
in force. The decrease in research and development expenses during fiscal 1999
can be attributed to lower depreciation and hardware expenses.

  Sales and Marketing

     Sales and marketing expenses decreased 9% to $89.3 million for fiscal 2000,
compared to $98.5 million in fiscal 1999 and $80.5 million in fiscal 1998. Sales
and marketing expenses represented 60%, 44% and 47% of total net revenues in
fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal 2000 is due to
a decline in
                                        21
<PAGE>   24

sales program costs that vary directly with revenue, including commissions and
cooperative advertising. The fiscal 1999 increase was due principally to an
increase in the size of our direct sales force and commissions as well as sales
program costs that vary directly with increased sales.

  General and Administrative

     General and administrative expenses increased 13% in fiscal 2000 to $18.7
million compared to $16.6 million in fiscal 1999. In fiscal 1999, general and
administrative expenses increased by 11% from $15.0 million in fiscal 1998.
General and administrative expenses represented 13% of total net revenues for
fiscal 2000, 7% of total net revenues for fiscal 1999 and 9% of total net
revenues for fiscal 1998. The transfer of certain staff from other functions due
to the creation of the Company's divisions drove the increase in fiscal 2000.
The fiscal 1999 increase was due to increased corporate bonuses as a result of
exceeding Company performance goals.


  Restructuring Charges



     During fiscal 2000, the Company recorded $10.7 million in restructuring
charges, including $7.3 million of severance and benefits, $1.9 million of
facilities charges, $0.7 million of technology charges and $0.8 million of fixed
asset disposals.



 Second Quarter Restructuring Plan



     During the second quarter of fiscal 2000, the Company announced and
completed a restructuring plan, which resulted in a one-time charge of $5.9
million. The Company restructured its business operations into three independent
divisions, each with a separate management team and dedicated development,
marketing and sales organizations -- the Server Software Division, the
Tarantella Division and the Professional Services Division. The Company believes
this reorganization, which was effective April 1, 2000, has created independent
focused teams that can pursue revenue in their respective markets. The Company
believes that as a result of creating these independent, focused organizations
the Company will be better able to control and measure the success of these
businesses. The charge included a reduction in personnel of 70 employees, write-
offs of certain acquired technologies, write-offs of certain fixed assets, and
elimination of non-essential facilities. Of the $5.9 million charge, $4.6
million related to cash expenditures and $1.3 million related to non-cash
charges. The restructuring charge related to cash expenditures included $3.6
million for severance costs and $1.0 million for facilities costs. Included in
the non-cash charges were technology write-offs of $667,000 relating to
technology associated with the Unixware 7 product. This technology had
previously been capitalized as it had alternative future use. However, in
conjunction with the restructuring, certain personnel associated with product
development of Unixware 7 were terminated and future development related to this
technology was terminated. As a result the technology had no other use and was
written off. The disposal of fixed assets was comprised of computer equipment
that will no longer be in use due to the reduction in development personnel. The
computer equipment was taken out of service and disposed of during the third and
fourth quarters of fiscal 2000. The disposals correspond to the time of employee
terminations, and the computer equipment was not written off until it was no
longer in use. Depreciation, where applicable, continued on these assets until
disposal. The computer equipment was scrapped or sold to the terminated
employees. Proceeds from the sale of these assets were not significant.
Additionally, the disposal of fixed assets includes writeoffs of leasehold
improvements relating to the abandonment of certain leased space at the
Company's Watford, United Kingdom facility. All fixed asset disposals were
related to the Server Software Division. Included in the facilities charge are
amounts relating to the abandonment of certain leased space at the Company's
Watford, United Kingdom facility. The space is being reconfigured in preparation
for subletting. The restructuring provision includes the estimated costs
associated with the reconfiguring and the rent associated with the unoccupied
space prior to sublet. The facility closure affected the Server Software
Division. The Company expects to recognize total annual savings of $9.4 million
from this reorganization beginning in the next fiscal year. The Company believes
it will be better able to control costs and measure the success of the Company's
divisions as a result of this reorganization.


                                        22
<PAGE>   25


     The second quarter restructuring charges affected the Server Software
Division and the Professional Services Division. The Professional Services
Division had $0.1 million of severance costs accrued for the restructuring. The
balance of the second quarter restructuring charge of $5.8 million related to
the Server Software Division. The majority of the reduction in force was in
product development for the Server Software Division. As of September 30, 2000,
a total of 70 positions were eliminated including 66 in the Server Software
Division and 4 in the Professional Services Division.



     The Company recorded an adjustment to the fiscal 2000 second quarter
restructuring provision of $0.9 million in severance costs in the fourth quarter
of fiscal 2000. The severance costs were adjusted to reflect changes to the
estimated expenses as actual payments were made.



 Fourth Quarter Restructuring Plan



     In the fourth quarter of fiscal 2000, in connection with management's plan
to reduce operating expenses, the Company announced a further restructuring
plan, which resulted in a one-time charge of $5.7 million. The Company believes
this plan will bring the Company's operating expenses to a level that is
sustainable based on the Company's revenues. The restructuring included the
elimination of various regional offices in the United States, United Kingdom,
Latin America and Asia Pacific. The charge included a reduction in personnel of
157 employees, write-offs of certain fixed assets and the elimination of
nonessential facilities. The restructuring charges affect the Server Software
Division of the Company as well as corporate general and administrative areas.
Of the $5.7 million charge, $5.5 million related to cash expenditures and $0.2
related to non-cash charges. The restructuring charge related to cash
expenditures included $4.7 million for severance costs and $0.8 million for
facilities costs.



     The severance charges include elimination of 65 positions in the U.S., 63
positions in the United Kingdom, 16 positions in Europe, 9 positions in Latin
America and 4 position in the Asia Pacific region.



     The United States regional facilities and the Watford, United Kingdom
leases have been or will be vacated and restored, and subsequently sub-let or
terminated by the second quarter of 2001. The remaining international offices
are expected to be vacated immediately. The majority of the facility closures
relate to the Server Division. A minor portion of the facility closure relates
to the Corporate Division and is comprised primarily of the finance and general
and administrative functions of the Company's United Kingdom subsidiary. The
Company anticipates that all of the payments, with the exception of the facility
lease payment, will be made by the end of fiscal 2001.



     The non-cash charges were made up of fixed asset disposal costs at both
U.S. and the Company's Watford, U.K. location. The fixed assets being disposed
are made up of computer equipment that will no longer be in use due to the
reduction in personnel. The computer equipment will be taken out of service and
disposed. Depreciation, where applicable, will continue on these assets until
disposal. These assets will be scrapped or sold to the terminated employees. Any
gain realized on the sale of these assets will be recorded as other income in
the statement of operations. The disposal of fixed assets affects both the
Server Software Division and the Corporate Division. As of September 30, 2000 a
total of 70 positions have been eliminated: 48 positions in the Server Software
Division, 21 in the Corporate Division, and 1 in the Tarantella Division. The
Corporate Division is allocated to the three primary Company divisions for
segment reporting purposes. The Company expects to recognize total annual
savings of $14.5 million from this cost saving measure beginning in the next
fiscal year. The Company believes this will bring the Company's operating
expenses to a level that is sustainable based on the Company's revenues.



 Other Income (Expense)



     Other income and expense consists of interest income net of interest
expense, foreign exchange gains and losses, and realized gains and losses on
investments, as well as other miscellaneous income and expense items. Net
interest income decreased in fiscal 2000 to $1.7 million compared to $1.9
million for fiscal 1999 and $2.3 million for fiscal 1998. Other income was $0.8
million for fiscal 2000, $1.9 million for fiscal 1999 and $0.2 million in fiscal
1998. Other income in fiscal 2000 included a gain on the sale of an equity
security investment of $1.9 million net of an other than temporary decline in
another investment position of


                                        23
<PAGE>   26


$0.7 million. The increase in other income in fiscal 1999 was due to gains from
the partial liquidation of converted debentures of a domestic distribution
channel partner of $3.3 million, net of an other than temporary decline in
another investment position of $1.0 million.


  Income Taxes

     In fiscal 2000, 1999 and 1998, the Company's effective income tax rates
were (17)%, 17% and (32)%, respectively. The fiscal 2000 tax reflects the
recognition of a valuation allowance against deferred tax assets of $7.8 million
and foreign income taxes of $0.4 million. The fiscal 1999 tax provision
primarily reflects foreign income taxes, while the fiscal 1998 tax provision
reflects losses and expenses without tax benefit for which a valuation allowance
has been established. For an analysis of income taxes, see Note 13 of Notes to
Consolidated Financial Statements.

  Net Income (Loss)

     The Company reported a net loss of $57.0 million in fiscal 2000 compared to
net income of $16.9 million in fiscal 1999 and net losses of $14.7 million in
fiscal 1998. The net loss in fiscal 2000 is primarily due to lower revenues,
restructuring charges and the reduction of net deferred tax assets. The net
income in fiscal 1999 was driven by strong revenue performance, which was
directly related to the increasing importance of server-based computing as well
as customers upgrading in preparation for Year 2000.


  Segment Information



     The Company began reviewing its performance on the basis of its three
divisions during the third quarter of fiscal 2000. Prior year financial
information has been revised for divisional comparison purposes and is disclosed
in Note 17.



 Server Software Division



     Net revenues for the server division were $135.4 million in fiscal 2000, a
decrease of 36% when compared to the fiscal 1999 revenues of $211.0 million. In
fiscal 1999, net revenues increased by 34% from $157.2 million in fiscal 1998.
The fiscal 2000 decline in revenue performance can be attributed to delays in
large project deals and customer delays due to Year 2000 issues. The slower than
expected recovery of the customer channel from the impact of Year 2000 also
impacted the fiscal 2000 revenues for the server division. The fiscal 2000
decline was seen across most geographies worldwide. The increase in revenue
performance in fiscal 1999 as compared to fiscal 1998 was attributable to Y2K
upgrade sales, increased customer contacts as a result of added sales resources
and the ease of electronic licensing. The fiscal 1999 increase was in all
geographies.



     Gross margin for the server division declined 40% to $100.1 million for
fiscal 2000 from $168.1 million in fiscal 1999. The fiscal 1999 gross margin for
the server division was an increase of 43% compared to the fiscal 1998 gross
margin of $117.6 million. The fiscal 2000 decline in gross margin is largely due
to the lower revenues and stable fixed costs including technology and overhead
costs. The positive gross margin growth in fiscal 1999 can be attributed to the
impact of stable fixed costs over higher unit sales volumes. In both fiscal 2000
and 1999, material costs declined as a result of increasing e-commerce trade.



     The server division's operating loss for fiscal 2000 was $28.2 million, a
decline of $55.2 million from the operating income of $27.0 million in fiscal
1999. The server division's operating loss for fiscal 1998 was $8.5 million. The
fiscal 2000 loss is a result of reduced revenue levels in fiscal 2000.



 Tarantella Division



     Net revenues for the Tarantella division were $12.8 million in fiscal 2000,
an increase of 21% from $10.6 million in fiscal 1999, which was an increase of
16% from $9.2 million in fiscal 1998. The growth in revenues can be attributed
to the increasing customer base for Tarantella product, and continued
development


                                        24
<PAGE>   27


and releases of new versions of the Tarantella products. Fiscal 2000 also
brought an increase in enterprise customers to Tarantella.



     Gross margin for the Tarantella division was $9.9 million for fiscal 2000,
an increase of 19% when compared to fiscal 1999 gross margin of $8.3 million.
The fiscal 1998 gross margin was $6.6 million. The positive trend in gross
margin for the Tarantella division can be attributed to the increased revenue
coupled with stable fixed costs.



     The operating losses for the Tarantella division were $18.7 million in
fiscal 2000, $6.9 million in fiscal 1999 and $4.6 million in fiscal 1998. The
increase in the operating losses is due to growth in Tarantella staffing levels
and dedicated Tarantella resources. In fiscal 2000, the Company created a
Tarantella management team and separate development, marketing and sales
organizations dedicated to Tarantella.



 Professional Services Division



     Net revenues for the professional services division were $4.2 million in
fiscal 2000, an increase of 34% compared to net revenues of $3.1 million in
fiscal 1999. Fiscal 1998 net revenues were $5.5 million for the professional
services division. The growth in professional services revenue can be attributed
to the dedicated professional services organization created in fiscal 2000.



     Gross loss for the profession services division was $1.9 million in fiscal
2000 compared with a loss of $2.5 million in fiscal 1999. The gross margin for
the professional services division was $0.6 million in fiscal 1998. The
reduction in gross loss in fiscal 2000 can be attributed to the relatively
constant costs spread over improved revenues. The decline in fiscal 1999 is due
to the decreased fiscal 1999 revenues.



     Operating loss for the professional services division was $4.4 million,
compared with $3.7 million in fiscal 1999 and $0.5 million in fiscal 1998. The
creation of the professional services organization in fiscal 2000 increased the
operating expenses of the division. While the revenue also increased, it did not
proportionally offset the increased expenses.



 Factors That May Affect Future Results



     The Company's future operating results may be affected by various uncertain
trends and factors that are beyond the Company's control. These include adverse
changes in general economic conditions and rapid or unexpected changes in the
technologies affecting the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.



     The Company participates in a highly dynamic industry and future results
could be subject to significant volatility, particularly on a quarterly basis.
The Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues have been booked and shipped in
the third month of the quarter, with a concentration of these revenues in the
latter half of that third month. In addition, the timing of closing of large
license contracts and the release of new products and product upgrades increase
the risk of quarter to quarter fluctuations and the uncertainty of quarterly
operating results. The Company's staffing and operating expense levels are based
on an operating plan and are relatively fixed throughout the quarter. As a
result, if revenues are not realized in the quarter as expected, the Company's
expected operating results and cash balances could be adversely affected, and
such effect could be substantial and could result in an operating loss and
depletion of the Company's cash balances. In such event, it may not be possible
for the Company to secure sources of cash to maintain operations.


                                        25
<PAGE>   28


     The Company experiences seasonality of revenues for both the European and
the U.S. federal government markets. European revenues during the quarter ending
June 30 are historically lower or relatively flat compared to the prior quarter.
This reflects a reduction of customer purchases in anticipation of reduced
selling activity during the summer months. Sales to the U.S. federal government
generally increase during the quarter ending September 30. This seasonal
increase is primarily attributable to increased purchasing activity by the U.S.
federal government prior to the close of its fiscal year. Additionally, net
revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.


     The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the costs associated with
these revenues may have substantially different characteristics. The Company may
also experience a change in margin as net revenues increase or decrease since
technology costs, service costs and production costs are fixed within certain
volume ranges.

     The Company depends on information received from external sources in
evaluating the inventory levels at distribution partners in the determination of
reserves for the return of materials not sold, stock rotation and price
protection. Significant effort has gone into developing systems and procedures
for determining the appropriate reserve level.

     As of September 30, 1999 the Company established a partial valuation
allowance against its gross deferred tax assets to reduce such asset to the
amount that was deemed, more likely than not, to be recoverable prior to
expiration. The Company considered, amongst other factors, the historical
profitability, prior to one off charges, of the Company, projections for future
profits and the ability of the Company deferred tax assets against these future
profits prior to expiration of these assets, the ability of the Company's
foreign subsidiaries to utilize their deferred tax assets, and the tax effects
of one time charges.

     As at September 30, 2000 the Company reassessed the recoverability of its
net deferred tax assets. This analysis was based on revised earnings
projections, the substantial net operating losses incurred during fiscal 2000
and the effects of the restructurings undertaken during the year upon the
group's tax structure. As a result of this analysis management determined that
it was more likely than not that the net deferred tax asset recorded as of
September 30, 1999 would not be recoverable against future earnings prior to
expiration. Accordingly the Company has established a full valuation allowance
against gross deferred tax assets as of September 30, 2000. This resulted in a
charge of $7.8 million to the statement of operations during the year ended
September 30, 2000.

     Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 54%, 56% and 51% of total revenues for fiscal 2000, 1999 and 1998,
respectively. A substantial portion of the international revenues of the
Company's United Kingdom subsidiary are denominated in the U.S. dollar, and
operating results can vary with changes in the U.S. dollar exchange rate to the
U.K. pound sterling. The Company's revenues can also be affected by general
economic conditions in the United States, Europe and other international
markets. The Company's operating strategy and pricing take into account changes
in exchange rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.

     The Company's policy is to amortize purchased software and technology
licenses using the straight-line method over the remaining estimated economic
life of the product, or on the ratio of current revenues to total projected
product revenues, whichever is greater. Due to competitive pressures, it is
reasonably possible that those estimates of anticipated future gross revenues,
the remaining estimated economic life of the product, or both will be reduced
significantly in the near future. As a result, the carrying amount of the
Company's purchased software and technology licenses may be reduced materially
in the near future and, therefore, could create an adverse impact on the
Company's future reported earnings.

     On August 1, 2000, the Company entered into an agreement with Caldera
Systems, Inc. ("Caldera") in which Caldera will acquire the Company's Server
Software Division and its Professional Services Division. This transaction
involves a number of risks, including but not limited to i) the potential
disruption of the Company's business that might result from employee or customer
uncertainty, and lack of focus following

                                        26
<PAGE>   29

announcement of the transaction in connection with integrating the operations of
Caldera and the Company; ii) the risk that the announcement of the transaction
could result in decisions by customers to defer purchases of products; iii) the
substantial charges to be incurred due to the transaction; iv) the difficulties
of managing geographically dispersed operations; and v) the possibility that the
transactions contemplated in the agreement with Caldera might not be
consummated.

     Further, once this transaction is consummated, the ongoing operations of
the company will be significantly altered. The Company's revenues will be
derived from only two product lines -- Tarantella products, which have only been
recently introduced by the Company, and OpenServer products, which are mature
products to be distributed on the Company's behalf by Caldera. While the Company
believes that the current level of staffing together with future recruitment
plans will be different for the period following the consummation of the
transaction, there can be no assurance that the company will be able to retain
current employees or recruit the additional employees necessary to meet the
company's ongoing plans. In addition the company may not generate revenues at
the levels forecasted and as a result could find itself in a position of being
overstaffed. As a result the Company may need significant restructuring costs to
reduce staffing levels. Following the close of the transaction, the Company will
hold in its treasury a significant investment in Caldera, the value of which may
be subject to significant fluctuations.

     The Company continually evaluates potential acquisition candidates. Such
candidates are selected based on products or markets that are complementary to
those of the Company's. Acquisitions involve a number of special risks,
including the successful combination of the companies in an efficient and timely
manner, the coordination of research and development and sales efforts, the
retention of key personnel, the integration of the acquired products, the
diversion of management's attention to assimilation of the operations and
personnel of the acquired companies, and the difficulty of presenting a unified
corporate image. The Company's operations and financial results could be
significantly affected by such an acquisition.

     The Company is exposed to equity price risk regarding the marketable
portion of equity securities in its portfolio of investments entered into for
the promotion of business and strategic objectives. This risk will increase
significantly after the consummation of the transaction with Caldera. The
Company is exposed to fluctuations in the market values of our portfolio
investments. The Company maintains investment portfolio holdings of various
issuers, types and maturities. These securities are generally classified as
available for sale and consequently, are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income, net of tax. Part of this portfolio
includes minority equity investments in several publicly traded companies, the
values of which are subject to market price volatility. The Company has also
invested in several privately held companies, many of which can still be
considered in the startup or development stages. These investments are
inherently risky as the market for the technologies or products they have under
development are typically in the early stages and may never materialize. The
Company could lose its entire initial investment in these companies. The Company
typically does not attempt to reduce or eliminate its market exposure pertaining
to these equity securities.

     The Company's continued success depends to a significant extent on senior
management and other key employees. None of these individuals is subject to a
long-term employment contract or a non-competition agreement. Competition for
qualified people in the software industry is intense. The loss of one or more
key employees or the Company's inability to attract and retain other key
employees could have a material adverse effect on the Company.

     The stock market in general, and the market for shares of technology
companies in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of the affected companies. In
addition, factors such as new product introductions by the Company or its
competitors may have a significant impact on the market price of the Company's
Common Stock. Furthermore, quarter-to-quarter fluctuations in the Company's
results of operations caused by changes in customer demand may have a
significant impact on the market price of the Company's stock. These conditions,
as well as factors which generally affect the market for stocks of high
technology companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.

                                        27
<PAGE>   30

     The Company is aware of the issues associated with the new European
economic and monetary union (the "EMU"). One of the changes resulting from this
union required EMU member states to irrevocably fix their respective currencies
to a new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the next two years,
business in the EMU member states will be conducted in both the 25 existing
national currencies, such as the Franc or Deutsche Mark, and the Euro. As a
result, companies operating in or conducting business in EMU member states will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling these currencies, including the
Euro. The Company has done a preliminary assessment of the impact the EMU
formation will have on both its internal systems and the products it sells and
has commenced appropriate actions. The Company has not yet determined all of the
cost related to addressing this issue, and there can be no assurance that this
issue and its related costs will not have a materially adverse affect on the
Company's business, operating results and financial condition.

  Liquidity and Capital Resources

     Cash, cash equivalents and short-term investments were $26.4 million at
September 30, 2000, a decrease of $36.4 million from September 30, 1999. The
decrease in fiscal 2000 is due to operating losses, lower revenues and a
decrease in sales linearity, which resulted in lower cash collections. The
Company's operating activities used cash of $40.3 million in fiscal 2000,
compared to cash provided by operating activities of $28.5 million in fiscal
1999 and $13.4 million in fiscal 1998. Cash provided by investing activities
during fiscal 2000 was $18.3 million, compared to cash used for investing
activities during fiscal 1999 and 1998 of $7.2 million and $3.2 million,
respectively. In fiscal 2000, 1999 and 1998, cash was used to fund purchases of
technology, property and equipment, common stock repurchases and short-term
investments. The sales of short-term investments contributed to the cash
provided by investing activities for fiscal 2000. Cash provided by financing
activities was $9.7 million in fiscal 2000, compared to cash used for financing
activities of $10.6 million and $10.1 million for fiscal 1999 and 1998,
respectively. In fiscal 2000, cash provided by financing activities included a
private placement of the Company's stock. In fiscal 1999 and 1998, proceeds from
the issuance of common stock were more than offset by the Company's stock
repurchases and payments on capital lease obligations.


     At September 30, 2000, the Company's principal sources of liquidity
included cash and short-term investments and available bank lines of credit of
approximately $0.9 million against which the Company had $0.7 million in
outstanding borrowings. The Company does not believe it will require borrowing
capacity greater than the amount available under these lines of credit through
fiscal 2001, however additional financing may be required thereafter. See Notes
1, 2, 3 and 8 of Notes to the Consolidated Financial Statements.



     The Company has incurred losses from operations of approximately $51.2
million in the twelve months ended September 30, 2000, revenues have declined
from $223.6 million for fiscal 1999 to $148.9 million for fiscal 2000 and the
Company has an accumulated deficit as of September 30, 2000. These factors have
caused management to evaluate the Company's liquidity and to establish plans to
reduce costs, increase revenues and improve margins. The Company recently
implemented cost reduction plans in order to reduce operating expenses to levels
consistent with current revenues and is investigating financing alternatives.
There can be no assurance that such financing will be available, if at all, on
terms acceptable to the Company.



     On August 1, 2000, the Company entered into an agreement with Caldera
Systems, Inc. in which Caldera Systems, Inc. will acquire the Company's Server
Software and Professional Services Divisions. Caldera Systems, Inc. will form a
new holding company, Caldera, Inc., to acquire assets from the Company's Server
Software Division and the Company's Professional Services Division, including
its employees, products and channel resources. Caldera, Inc. will have exclusive
distribution rights for the SCO OpenServer product line. SCO will receive a
28.6% ownership interest in Caldera, Inc., which is estimated to be an aggregate
of approximately 18.4 million shares of Caldera stock (including approximately 2
million shares reserved for employee options assumed by Caldera, Inc. for
options currently held by SCO employees joining Caldera, Inc.), and $7.0 million
in cash. In conjunction with the acquisition, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan $18.0 million to the
Company. This loan commitment is not contingent on the closing of Caldera's
acquisition of SCO's Server Software and

                                        28
<PAGE>   31


Professional Services Divisions. Further, Caldera Systems, Inc. has agreed to
loan $7.0 million to the Company in the form of a short-term note repayable at
the consummation of the transaction between SCO and Caldera Systems, Inc. SCO
will retain its Tarantella Division and the SCO OpenServer revenue stream and
intellectual properties. The boards of directors of both companies have
unanimously approved the acquisition which is subject to the approval of Caldera
Systems, Inc. and The Santa Cruz Operation, Inc. stockholders, and regulatory
agencies, as well as meeting certain other closing conditions. The companies
anticipate closing the transaction during the first calendar quarter of 2001.


     There can be no assurance that the transaction with Caldera Systems will be
completed. If the transaction with Caldera Systems is not completed the Company
will need to evaluate ways to further reduce costs in order to generate positive
cash flows in the future or obtain additional financing until cash flows
generated from the sale of the Company's products are sufficient to meet
expenses. These cost reductions could include restructuring the Company to
reduce operating expenses to levels that could be financed by revenues
generated. Such reductions in expenditures may include actions similar or
greater in scope to the cost reduction exercises undertaken in fiscal 2000.
There can be no assurance that such cost reduction measures would be successful
in completely eliminating the difference between expenditures and revenues or
that such actions would not have a harmful effect on the Company's business and
results of operations. In addition, there can be no assurance that if the
Company were to seek additional financing that it would be available at all or
on terms which are acceptable to the Company.


     Under the financing commitment with The Canopy Group, the Company entered
into a Loan Agreement and a Secured Convertible Promissory Note effective
January 8, 2001 for borrowings up to $18.0 million. Drawings on this financing
agreement are repayable on December 31, 2001 and bear interest at a rate per
annum of 10%. Drawings are collateralized by the Company's tangible and
intangible assets and are convertible into common stock at the option of the
lender at the closing price of SCO common stock on the date of issuance subject
to certain limitations. The unconverted principal is repayable in cash. Further,
Caldera Systems, Inc., has agreed to loan $7.0 million to the Company in the
form of a short-term note repayable at the consummation of the transaction
between the Company and Caldera Systems, Inc.



     The Company believes that, based on its current plans, which include the
completion of the transaction with Caldera discussed above, its existing cash
and cash equivalents, short-term investments, funds generated from operations
and available borrowing capabilities will be sufficient to meet its operating
requirements through fiscal 2001, however additional financing may be required
thereafter. The Company's current financing under the $18.0 million line of
credit agreement with The Canopy Group is repayable on December 31, 2001, at
which time the Company expects to generate positive cash flows from operations
or to obtain alternative sources of financing to meet its working capital needs.
There can be no assurance that the Company will generate positive cash flows or
arrange alternative financing sufficient to repay amounts borrowed under the
credit agreement as they become due.


  Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments -- Deferral of the Effective Date of SFAS Statements No.
133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133
and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect that the adoption of
this standard will have a material impact on its financial position and results
of operations.

     In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative
Instruments -- an amendment of FAS 133, Accounting for Derivative Instruments
and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of
all fiscal

                                        29
<PAGE>   32

years beginning after June 15, 2000. The Company does not expect this to have a
material impact on its financial position and results of operations.

     In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of
the provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.

  Quantitative Disclosures About Market Risk

  MARKET-RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

     The following discussion about the Company's risk-management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.

     The following tables summarize the financial instruments and derivative
commodity instruments held by the Company at September 30, 2000, which are
sensitive to changes in interest rates and foreign exchange rates. The Company
uses forward foreign exchange contracts to manage these foreign exchange
exposures associated with underlying assets, liabilities and anticipated
transactions. The Company uses these instruments to reduce risk by essentially
creating offsetting market exposures. The instruments held by the Company are
not leveraged and are held for purposes other than trading.

     In the normal course of business, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include
technology risk, country risk, credit risk and legal risk, and are not
represented in the following tables.

  Interest-rate Risk

     This table presents descriptions of the financial instruments that are held
by the Company at September 30, 2000 and which are sensitive to changes in
interest rates. Such securities are anticipated to be used for current
operations and are, therefore, classified as current assets, even though
maturities may extend beyond one year. The fair value of these instruments
approximates the carrying costs.

                    MATURITY DATE FOR SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                               2001     2002    2003   TOTAL
                                                              ------   ------   ----   ------
                                                                      (IN THOUSANDS)
<S>                                                           <C>      <C>      <C>    <C>
Government agency bonds.....................................     971       --     --      971
Corporate bonds.............................................   1,496    3,100           4,596
                                                              ------   ------   ----   ------
                                                              $2,467   $3,100   $ --   $5,567
Average interest rate.......................................    6.14%    5.15%
</TABLE>

                                        30
<PAGE>   33

  Foreign-Exchange Risk

     The table below provides information about derivative financial instruments
that are sensitive to foreign currency exchange rates. The information is
presented in U.S. dollar equivalents, the reporting currency of the Company. The
Company purchases foreign-exchange contracts to hedge foreign currency exposure
for underlying assets, liabilities and other obligations. The purpose of the
Company's foreign-currency hedging activities is to protect the Company from the
risk that the eventual net cash resulting from foreign denominated transactions
will be adversely affected by changes in exchange rates. The table below
presents the contract amounts, foreign exchange strike rate and the contract
term as of September 30, 2000 and 1999.

                               FORWARD CONTRACTS
                               SEPTEMBER 30, 2000


<TABLE>
<CAPTION>
                             PREMIUM PAID/      CONTRACT                                         TERM OF
                          (DISCOUNT RECEIVED)    AMOUNT           FORWARD STRIKE RATE            CONTRACT
                          -------------------   --------   ----------------------------------   ----------
                                                           (IN THOUSANDS)
<S>                       <C>                   <C>        <C>           <C>                    <C>
Contract 1...............           2           $ 1,250     1.50255      (GB Pound/US Dollar)   2 months
Contract 2...............           3           $ 1,250     1.503025     (GB Pound/US Dollar)   2.5 months
Contract 3...............           5           $ 1,000     1.4568       (GB Pound/US Dollar)   2 months
Contract 4...............           5           $ 1,000     1.45705      (GB Pound/US Dollar)   2.5 months
Contract 5...............           5           $ 1,000     1.4574       (GB Pound/US Dollar)   3 months
Contract 6...............         (27)          $ 3,500     1.4391       (GB Pound/US Dollar)   2 months
Contract 7...............         (38)          $(3,500)    1.46598      (US Dollar/GB Pound)   2.5 months
</TABLE>


                               FORWARD CONTRACTS
                               SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
                                             CONTRACT                                           TERM OF
                              PREMIUM PAID    AMOUNT             FORWARD STRIKE RATE            CONTRACT
                              ------------   --------   -------------------------------------   --------
                                                            (IN THOUSANDS)
<S>                           <C>            <C>        <C>           <C>                       <C>
Contract 1..................       30         $2,000      1.6140         (US Dollar/GB Pound)   2 months
Contract 2..................       31         $2,000      1.6150         (US Dollar/GB Pound)   3 months
Contract 3..................        5         $2,206       2,938      (Italian Lira/GB Pound)   3 months
</TABLE>

                                        31
<PAGE>   34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         THE SANTA CRUZ OPERATION, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------------
                                                                 2000          1999          1998
                                                              -----------   -----------   -----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>           <C>
Net revenues
  License, third parties....................................    $118,877      $186,838      $140,504
  License, related parties..................................      14,633        21,628        16,203
  Service, third parties....................................      12,680        11,976        12,558
  Service, related parties..................................       2,733         3,182         2,635
                                                                --------      --------      --------
          Total net revenues................................     148,923       223,624       171,900
                                                                --------      --------      --------
Cost of revenues
  License, third parties....................................      19,915        27,291        26,528
  License, related parties..................................       2,451         3,159         3,059
  Service, third parties....................................      15,985        15,271        14,472
  Service, related parties..................................       3,445         4,057         3,037
                                                                --------      --------      --------
          Total cost of revenues............................      41,796        49,778        47,096
                                                                --------      --------      --------
          Gross margin......................................     107,127       173,846       124,804
                                                                --------      --------      --------
Operating expenses:
  Research and development..................................      39,673        42,376        42,957
  Sales and marketing.......................................      89,313        98,525        80,468
  General and administrative................................      18,691        16,572        14,972
  Restructuring charge......................................      10,683            --            --
                                                                --------      --------      --------
          Total operating expenses..........................     158,360       157,473       138,397
                                                                --------      --------      --------
          Operating income (loss)...........................     (51,233)       16,373       (13,593)
Other income (expense):
  Interest income, net......................................       1,679         1,942         2,261
  Other income (expense), net...............................         819         1,939           226
                                                                --------      --------      --------
          Income (loss) before income taxes.................     (48,735)       20,254       (11,106)
  Income taxes..............................................       8,218         3,396         3,559
                                                                --------      --------      --------
          Net income (loss).................................     (56,953)       16,858       (14,665)
Other comprehensive income (loss), net of tax
  Unrealized gain on available-for-sale securities..........       5,617            --            --
  Foreign currency translation adjustment...................        (539)         (884)          653
                                                                --------      --------      --------
          Comprehensive income (loss).......................    $(51,875)     $ 15,974      $(14,012)
                                                                --------      --------      --------
Earnings (loss) per share:
  Basic.....................................................    $  (1.59)     $   0.49      $  (0.41)
  Diluted...................................................    $  (1.59)     $   0.46      $  (0.41)
                                                                --------      --------      --------
Shares used in earnings (loss) per share calculation:
  Basic.....................................................      35,720        34,232        35,817
  Diluted...................................................      35,720        36,402        35,817
                                                                --------      --------      --------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                        32
<PAGE>   35

                         THE SANTA CRUZ OPERATION, INC.

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
                                     ASSETS

Current assets:
  Cash and cash equivalents.................................  $ 20,879   $ 33,683
  Short-term investments....................................     5,567     29,161
  Receivables, third parties, net...........................    22,917     29,112
  Receivables, related parties..............................     1,352      3,197
  Available-for-sale equity securities......................     7,119         --
  Deferred tax assets.......................................        --      1,202
  Other current assets......................................     4,358      6,310
                                                              --------   --------
          Total current assets..............................    62,192    102,665
                                                              --------   --------
Property and equipment, net.................................     9,012     12,234
Purchased software and technology licenses, net.............     5,830     10,431
Long-term deferred tax assets...............................        --      6,622
Other assets................................................     5,168      7,332
                                                              --------   --------
          Total assets......................................  $ 82,202   $139,284
                                                              --------   --------

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable....................................  $  5,521   $  7,482
  Royalties payable.........................................     4,530      7,217
  Income taxes payable......................................     1,964      1,983
  Accrued restructuring charges.............................     5,964         --
  Accrued expenses and other current liabilities............    20,225     32,314
  Deferred revenues.........................................     7,334      8,856
                                                              --------   --------
          Total current liabilities.........................    45,538     57,852
                                                              --------   --------
Long-term lease obligations.................................       545      2,332
Long-term deferred revenues.................................     1,397      2,571
Other long-term liabilities.................................     3,520      6,191
                                                              --------   --------
          Total long-term liabilities.......................     5,462     11,094
                                                              --------   --------
Commitments and contingencies (Note 11)
Shareholders' equity:
  Common stock, no par value, authorized 100,000 shares;
     Issued and outstanding 39,436 and 34,346 shares in 2000
     and 1999, respectively.................................   118,940    106,201
  Accumulated other comprehensive income....................     5,486        408
  Accumulated deficit.......................................   (93,224)   (36,271)
                                                              --------   --------
          Total shareholders' equity........................    31,202     70,338
                                                              --------   --------
          Total liabilities and shareholders' equity........  $ 82,202   $139,284
                                                              --------   --------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                        33
<PAGE>   36

                         THE SANTA CRUZ OPERATION, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                    ACCUMULATED
                                                                       OTHER
                                  COMMON STOCK          NOTE       COMPREHENSIVE                     TOTAL
                                -----------------    RECEIVABLE       INCOME       ACCUMULATED   SHAREHOLDERS'
                                SHARES    AMOUNT    FROM OFFICER      (LOSS)         DEFICIT        EQUITY
                                ------   --------   ------------   -------------   -----------   -------------
                                                                (IN THOUSANDS)
<S>                             <C>      <C>        <C>            <C>             <C>           <C>
BALANCES, SEPTEMBER 30,
  1997........................  36,450   $119,375       $(88)         $  639        $(38,464)      $ 81,462
Issuance under stock option
  and purchase plans..........     659      1,960         --              --              --          1,960
Common stock repurchases......  (2,060)    (9,271)        --              --              --         (9,271)
Interest on note..............      --         --         (4)             --              --             (4)
Foreign currency
  translation.................      --         --         --             653              --            653
Net loss......................      --         --         --              --         (14,665)       (14,665)
                                ------   --------       ----          ------        --------       --------
BALANCES, SEPTEMBER 30,
  1998........................  35,049   $112,064       $(92)         $1,292        $(53,129)      $ 60,135
Issuance under stock option
  and purchase plans..........   1,721      7,107         --              --              --          7,107
Common stock repurchases......  (2,424)   (14,034)        --              --              --        (14,034)
Interest on note..............      --         --         (5)             --              --             (5)
Stock option income tax
  benefit.....................      --      1,161         --              --              --          1,161
Foreign currency
  translation.................      --         --         --            (884)             --           (884)
Net income....................      --         --         --              --          16,858         16,858
                                ------   --------       ----          ------        --------       --------
BALANCES, SEPTEMBER 30,
  1999........................  34,346   $106,298       $(97)         $  408        $(36,271)      $ 70,338
Issuance under stock option
  and purchase plans..........   2,574     12,523         --              --              --         12,523
Common stock repurchases......    (759)   (12,786)        --              --              --        (12,786)
Issuance of common stock in
  private placement, net of
  issuance costs..............   3,275     12,769         --              --              --         12,769
Unrealized gain on
  investment..................      --         --         --           5,617              --          5,617
Repayment of note
  receivable..................      --         --         97              --              --             97
Stock compensation expense....      --        136         --              --              --            136
Foreign currency
  translation.................      --         --         --            (539)             --           (539)
Net loss......................      --         --         --              --         (56,953)       (56,953)
                                ------   --------       ----          ------        --------       --------
BALANCES, SEPTEMBER 30,
  2000........................  39,436   $118,940       $ --          $5,486        $(93,224)      $ 31,202
                                ------   --------       ----          ------        --------       --------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        34
<PAGE>   37

                         THE SANTA CRUZ OPERATION, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................  $(56,953)   $ 16,858    $(14,665)
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities --
  Depreciation and amortization.............................    11,302      12,140      14,363
  Deferred taxes............................................     7,821          --         205
  Foreign currency exchange (gain) loss.....................      (342)         20        (605)
  Stock option income tax benefit...........................        --       1,161          --
  Changes in operating assets and liabilities --
     Receivables............................................     7,309      (4,971)      8,147
     Other current assets...................................     1,959       2,545      (2,024)
     Other assets...........................................     1,893         502       2,362
     Trade accounts payable.................................    (1,846)        (15)        608
     Royalties payable......................................    (2,695)      2,135      (6,197)
     Income taxes payable...................................       171         176         703
     Accrued restructuring charges..........................     5,964          --          --
     Accrued expenses and other current liabilities.........   (10,679)      4,158      (1,977)
     Deferred revenues......................................    (2,489)     (6,409)      8,555
     Cash flows from other long-term liabilities............    (1,701)        158       3,883
                                                              --------    --------    --------
          Net cash provided by (used for) operating
            activities......................................   (40,286)     28,458      13,358
                                                              --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (2,077)     (3,816)     (1,410)
  Purchases of software and technology licenses.............      (999)     (2,633)     (2,995)
  Sales of short-term investments...........................    35,682      26,811      31,514
  Purchases of short-term investments.......................   (12,088)    (28,654)    (30,346)
  Cash flows from other assets..............................    (2,268)      1,058          25
                                                              --------    --------    --------
          Net cash provided by (used for) investing
            activities......................................    18,250      (7,234)     (3,212)
                                                              --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease obligations.....................    (2,917)     (3,626)     (2,759)
  Net proceeds from issuance of common stock................    25,428       7,107       1,960
  Repurchases of common stock...............................   (12,786)    (14,034)     (9,271)
                                                              --------    --------    --------
          Net cash provided by (used for) financing
            activities......................................     9,725     (10,553)    (10,070)
                                                              --------    --------    --------
Effects of exchange rate changes on cash and cash
  equivalents...............................................      (493)       (746)        457
                                                              --------    --------    --------
Change in cash and cash equivalents.........................   (12,804)      9,925         533
Cash and cash equivalents at beginning of year..............    33,683      23,758      23,225
                                                              --------    --------    --------
Cash and cash equivalents at end of year....................  $ 20,879    $ 33,683    $ 23,758
                                                              --------    --------    --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid --
     Income taxes...........................................  $    218    $  3,319    $  2,192
     Interest...............................................       344         544         766
  Non-cash financing and investing activities --
     Unrealized gain on available-for-sale equity
       securities...........................................  $  5,617    $     --    $     --
     Assets acquired under capital leases...................        20       1,978       4,701
     Assets written off against restructuring reserve.......       923          --         568
                                                              --------    --------    --------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        35
<PAGE>   38

                         THE SANTA CRUZ OPERATION, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION

     THE COMPANY  The Santa Cruz Operation, Inc. (SCO), or the Company, is a
global leader in server software for networked business computing, and the
world's leading provider of UNIX(R) server operating systems. The Company's
products enable business and government organizations of all sizes to integrate
technologies and products from different vendors to create cost-effective,
powerful, networked information systems that perform highly complex,
mission-critical business functions. SCO has built an experienced distribution
and development infrastructure to support its products.


     These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has generated significant losses and negative cash flows from operations
in the most recent fiscal year and has an accumulated deficit. These factors
have caused management to evaluate the Company's liquidity and to establish
plans to reverse the recent trend of losses by increasing revenues and gross
margins while controlling costs. In addition, the Company has announced a
proposed transaction with Caldera Systems, Inc. ("Caldera") (see Note 14) and
has received a commitment for credit financing of up to $18 million from one of
the stockholders of Caldera as discussed in the following paragraph. The
availability of this financing, combined with existing working capital resources
and expected operating results have mitigated management's liquidity concerns
for fiscal 2001. If the Company is unable to generate adequate cash flows from
operations, the Company may need to seek additional sources of capital or draw
upon the line of credit available discussed above. There can be no assurance
that the Company will be able to obtain additional funding, if necessary, on
acceptable terms or at all.



     As discussed above, effective January 8, 2001, SCO entered into a Loan
Agreement and a Secured Convertible Promissory Note with The Canopy Group
("Lender") under which SCO can borrow up to $18 million. Drawings on this line
of credit are immediately convertible into common stock at the option of the
Lender at the closing price of SCO common stock on the date of issuance. The
unconverted principal is repayable in cash. Drawings on the line of credit are
collateralized by SCO's tangible and intangible assets. Amounts borrowed under
this line of credit are repayable by the Company in December 2001, at which time
the Company will be required to generate positive cash flows from operations or
will be required to obtain alternative sources of financing to meet its working
capital needs. There can be no assurance that the Company will generate positive
cash flows or arrange alternative financing sufficient to repay amounts borrowed
under this credit agreement as they become due.


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BUSINESS RISKS AND UNCERTAINTIES  The Company operates in the software
industry, which is characterized by intense competition, rapid technological
advances and evolving industry standards. Factors that could affect the
Company's future operating results and cause actual results to vary materially
from expectations include, but are not limited to, dependence on an industry
that is characterized by rapid technological changes, fluctuations in end-user
demands, evolving industry standards, competition, and risks associated with
foreign currencies. Failure by the Company to anticipate or respond adequately
to technological developments in its industry, changes in customer or supplier
requirements or changes in industry standards could have a material adverse
effect on the Company's business and operating results.

     PRINCIPLES OF CONSOLIDATION  The consolidated financial statements include
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.

     USE OF ESTIMATES  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include the allowances for bad debt,
product returns, certain accrued expenses and liabilities, and the valuation
allowance for deferred tax assets. Actual results could differ from those
estimates.
                                        36
<PAGE>   39
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     RECLASSIFICATIONS  Certain reclassifications have been made for consistent
presentation.

     CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS  The Company considers all
highly liquid investments with an original remaining maturity of 90 days or less
at the date of acquisition to be cash equivalents. Investments include
instruments with lives ranging from 91 days to no greater than 1 year must be
long term. The Company classifies its investments in certain debt and equity
securities as available-for-sale. Such investments are recorded at fair market
value, based on quoted market prices and unrealized gains and losses are
included in other comprehensive income. As of September 30, 2000 and 1999,
unrealized gains or losses on such investments were not significant. Realized
gains and losses, which are calculated based on the specific identification
method, are recorded in operations as incurred. Investments in companies with
less than 20% ownership are carried at the lower of cost or net realizable
value.

     PROPERTY AND EQUIPMENT  Property and equipment are stated at cost and,
except for assets recorded under capital lease and leasehold improvements, are
depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from three to five years. Leasehold improvements and assets
recorded under capitalized leases are amortized using the straight-line method
over the lesser of the remaining term of the lease or the estimated economic
life of the asset, ranging from one to ten years.

     PURCHASED SOFTWARE AND TECHNOLOGY LICENSES  Purchased software consists of
core intellectual property rights owned by the Company. Technology licenses
represent payments for the rights to use and integrate third party technology
into the Company's product offerings. Amounts capitalized are amortized on a
straight-line basis over the estimated product life, ranging from three to ten
years, or on the ratio of current revenues to total projected product revenues,
whichever results in greater amortization.


     ACCOUNTING FOR LONG-LIVED ASSETS  The Company reviews property and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of its carrying amount to estimated future net cash flows
the assets are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying value of the asset exceeds the projected discounted future operating
cash flows.



     At each balance sheet date the Company compares the unamortized balance of
purchased software and technology with its net realizable value. Any amount by
which the unamortized balance exceeds the net realizable value is written off.
The net realizable value is calculated as the estimated future gross revenues
from that product reduced by the estimated future costs of completing and
disposing of that product, including the costs of performing maintenance and
customer support required to satisfy the Company's responsibility set forth at
the time of sale.


     SOFTWARE DEVELOPMENT COSTS  Statement of Financial Accounting Standards No.
86 provides for the capitalization of certain software development costs once
technological feasibility is established. Capitalized costs are then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater.
Through September 30, 2000, the Company believes its process for developing
software was essentially completed concurrent with the establishment of
technological feasibility, and accordingly, no software development costs have
been capitalized to date.

     REVENUE RECOGNITION  The Company's revenue is derived primarily from two
sources, across many industries: (i) products license revenue, derived primarily
from product sales to resellers and end users, including large scale enterprises
and royalty revenue, derived primarily from initial license fees and ongoing
royalties from product sales by source code OEMs; and (ii) service and support
revenue, derived primarily from providing software updates, support and
education and consulting services to end users.

     The Company adopted the provisions of Statement of Position 97-2, or SOP
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
October 1, 1998. SOP 97-2 supercedes Statement of Position 91-1, Software
Revenue

                                        37
<PAGE>   40
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Recognition, and delineates the accounting for software product and maintenance
revenue. Under SOP 97-2, the Company recognizes product revenue upon shipment if
a signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable,
except for sales to distributors, which are recognized upon sale by the
distributor to resellers or end users. In 1998 the Company's revenue recognition
policy was the same as set forth above.

     The Company currently sells two types of software product -- its UNIX based
operating system software, which is sold under the Unixware and OpenServer
names, and its application broker software sold under the Tarantella name.

     The Company has sold Unixware and OpenServer products separately and as a
result for contracts involving the sale of Unixware and OpenServer which contain
multiple obligations (e.g. deliverable and undeliverable products, maintenance
and other services), the Company allocates revenue to each component of the
contract based on objective evidence of its fair value, which is specific to the
Company. The fair value of each element is based on the price sold separately.
The Company recognizes revenue allocated to undelivered products when the
criteria for product revenue set forth above are met.

     For multiple element contracts involving the sale of its Tarantella product
the Company uses the residual value method to allocate revenue to each
component. The fair value of services and post contract support is determined
based upon separate sales and renewal rates set forth in the contract,
respectively.

     The Company recognizes revenue from maintenance fees for ongoing customer
support and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to education and consulting services or
derived from the separate sale of such services, the Company recognizes revenue
as the related services are performed. In 1998 the revenue recognition policy
for maintenance, education and consulting services was the same as set forth
above.

     The Company recognizes product revenue from royalty payments upon receipt
of quarterly royalty reports from OEMs (original equipment manufacturer) related
to their product sales.

     The Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral. The Company maintains allowances for
potential credit losses and such losses have been within management's
expectations.

     COOPERATIVE ADVERTISING  The Company expenses advertising costs as
incurred. The Company reimburses certain qualified customers for a portion of
the advertising costs related to their promotion of the Company's products. The
Company's maximum liability for reimbursement is accrued at the time revenue is
recognized as a percentage of the qualified customer's net revenue derived from
the Company's products. For 2000, 1999 and 1998, cooperative advertising expense
totaled approximately $7.8 million, $10.5 million and $9.2 million,
respectively.

     INCOME TAXES  The Company records income taxes using an asset and liability
approach that results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactment of
changes in tax laws are considered. When necessary, a valuation allowance is
recorded to reduce tax assets to an amount whose realization is more likely than
not. The provision for income taxes represents taxes payable for the current
period, plus the net change in deferred tax amounts.

     COMPUTATION OF EARNINGS PER SHARE  The Company has adopted the provisions
of Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share. SFAS 128 requires the presentation of basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted
                                        38
<PAGE>   41
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EPS is computed by giving effect to all dilutive potential common shares that
were outstanding during the period. For the Company, dilutive potential common
shares consist of the incremental common shares issuable upon the exercise of
stock options and warrants for all periods. In accordance with SFAS 128, all
prior period earnings per share amounts have been restated to reflect this
method of calculation. A reconciliation of the numerator and denominator used in
the calculation of basic and diluted earnings per share is provided as follows
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                                        --------------------------------------
                                                           2000          1999         1998
                                                        -----------   ----------   -----------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>           <C>          <C>
Basic:
  Weighted average shares.............................      35,720       34,232        35,817
                                                          ========      =======      ========
  Net income (loss)...................................    $(56,953)     $16,858      $(14,665)
                                                          ========      =======      ========
  Earnings (loss) per share...........................    $  (1.59)     $  0.49      $  (0.41)
                                                          ========      =======      ========
Diluted:
  Weighted average shares.............................      35,720       34,232        35,817
  Common equivalent shares from stock options and
     warrants.........................................          --        2,170            --
                                                          --------      -------      --------
  Shares used in per share calculation................      35,720       36,402        35,817
                                                          ========      =======      ========
  Net income (loss)...................................    $(56,953)     $16,858      $(14,665)
                                                          ========      =======      ========
  Earnings (loss) per share...........................    $  (1.59)     $  0.46      $  (0.41)
                                                          ========      =======      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                              -----------------------
                                                               2000    1999     1998
                                                              ------   -----   ------
<S>                                                           <C>      <C>     <C>
Options outstanding not included in computation of diluted
  EPS because the exercise price was greater than the
  average market price......................................      --   3,190       --
Options outstanding not included in computation of diluted
  EPS because their inclusion would have an anti-dilutive
  effect....................................................  11,866      --   10,349
Warrants outstanding not included in computation of diluted
  EPS because their inclusion would have an anti-dilutive
  effect....................................................  12,769      --       --
</TABLE>

     COMPREHENSIVE INCOME  In the first quarter of fiscal 1999, the Company
adopted SFAS No. 130, Reporting Comprehensive Income. Under SFAS 130 the Company
is required to report comprehensive income, which includes the Company's net
income, as well as changes in equity from other sources. The components of other
comprehensive income are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED SEPTEMBER 30,
                                                        --------------------------------
                                                          2000        1999       1998
                                                        ---------   --------   ---------
<S>                                                     <C>         <C>        <C>
Net income (loss).....................................  $(56,953)   $16,858    $(14,665)
Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustment.............      (539)      (884)        653
  Unrealized gain on available for sale securities net
     of tax of $2,119.................................  $  3,498         --          --
  Reversal of valuation allowance on deferred tax
     assets...........................................     2,119         --          --
                                                        --------    -------    --------
          Total comprehensive income (loss)...........  $(51,875)   $15,974    $(14,012)
                                                        ========    =======    ========
</TABLE>

                                        39
<PAGE>   42
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has established a partial valuation allowance against its gross
deferred tax assets and has recorded a deferred tax liability to the extent of
estimated tax on the unrealized gain on its investments. The valuation allowance
has been reduced to the extent of the deferred tax liability with this reduction
being recorded in accumulated other comprehensive income.

     SEGMENT INFORMATION  In 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 supercedes SFAS 14, Financial Reporting for
Segments of a Business Enterprise. Under the new standard the Company is
required to use the "management" approach to reporting its segments. The
management approach designates the internal organization used by management for
making operating decisions and assessing performance as the source of the
Company's segments. The adoption of SFAS 131 had no impact on the Company's net
income, balance sheet or shareholders' equity.

     RECENT ACCOUNTING PRONOUNCEMENTS  In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments -- Deferral of the Effective
Date of SFAS Statement No. 133 and in June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments -- an amendment of SFAS 133,
Accounting for Derivative instruments and Hedging Activities. As a result of
SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of this standard will have a material impact on its
financial position and results of operations.

     In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative
Instruments -- an amendment of FAS 133, Accounting for Derivative instruments
and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company does not expect this
to have a material impact on its financial position and results of operations.

     In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of
the provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.

     STOCK-BASED COMPENSATION  The Company accounts for its employee stock-based
compensation plans using the intrinsic value method. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price.

                                        40
<PAGE>   43
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     FOREIGN CURRENCY TRANSLATION  The functional currency of the Company's
foreign subsidiaries is the local foreign currency. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate prevailing on the balance sheet date. Revenues, costs and expenses
are translated at average rates of exchange prevailing during the period.
Translation adjustments resulting from translation of the subsidiaries' accounts
are accumulated in accumulated comprehensive income/(loss). Gains and losses
resulting from foreign currency transactions are included in the consolidated
statements of operations and have not been significant.

     HEDGING OF FOREIGN CURRENCY TRANSACTIONS  The Company utilizes foreign
currency forward exchange contracts to hedge foreign currency market exposures
of underlying assets, liabilities and other obligations. The Company does not
use forward exchange contracts for speculative or trading purposes. The
Company's accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and one-to-one matching of forward exchange
contracts to underlying transactions. Gains and losses on currency forward
contracts that are designated and effective as hedges of firm commitments are
deferred and recognized in income in the same period that the underlying
transactions are settled. Gains and losses on currency forward contracts that
are designated and effective as hedges of existing transactions are recognized
in income in the same period as losses and gains on the underlying transactions
are recognized and generally offset. Gains and losses on any instruments not
meeting the above criteria would be recognized in income in the current period.
The Company transacts business in various foreign currencies. At September 30,
2000 and 1999, the Company had foreign exchange contracts, all having maturities
of 90 days or less, to sell approximately $9.0 million and $6.2 million in U.S.
dollars, respectively.

     The fair value of these contracts at September 30, 2000 is not significant.
The counterparties to these contracts are substantial and credit worthy
multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be significant. As of
September 30, 2000 and 1999 the following contracts were outstanding.

                               FORWARD CONTRACTS
                               SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
                        PREMIUM PAID/
                          (DISCOUNT     CONTRACT                                            TERM OF
                          RECEIVED)      AMOUNT             FORWARD STRIKE RATE             CONTRACT
                        -------------   --------   -------------------------------------   ----------
                                                       (IN THOUSANDS)
<S>                     <C>             <C>        <C>           <C>                       <C>
Contract 1............         2        $ 1,250    1.50255       (GB Pound/US Dollar)      2 months
Contract 2............         3        $ 1,250    1.503025      (GB Pound/US Dollar)      2.5 months
Contract 3............         5        $ 1,000    1.4568        (GB Pound/US Dollar)      2 months
Contract 4............         5        $ 1,000    1.45705       (GB Pound/US Dollar)      2.5 months
Contract 5............         5        $ 1,000    1.4574        (GB Pound/US Dollar)      3 months
Contract 6............       (27)       $ 3,500    1.4391        (GB Pound/US Dollar)      2 months
Contract 7............       (38)       $(3,500)   1.46598       (US Dollar/GB Pound)      2.5 months
</TABLE>

                               FORWARD CONTRACTS
                               SEPTEMBER 30, 1999

<TABLE>
                                          CONTRACT                                           TERM OF
                          PREMIUM PAID    AMOUNT              FORWARD STRIKE RATE            CONTRACT
                          -------------   --------   -------------------------------------   --------
                                                        (IN THOUSANDS)
<S>                       <C>             <C>        <C>           <C>                       <C>
Contract 1..............        30        $ 2,000    1.6140        (US Dollar/GB Pound)      2 months
Contract 2..............        31        $ 2,000    1.6150        (US Dollar/GB Pound)      3 months
Contract 3..............         5        $ 2,206    2,938         (Italian Lira/GB Pound)   3 months
</TABLE>

                                        41
<PAGE>   44
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Fair Value of Financial Instruments  Carrying amounts of certain of the
Company's financial instruments, including cash and cash equivalents,
receivables, accounts payable, accrued payroll and other accrued liabilities,
approximate fair value because of their short maturities. The fair values of
investments are determined using quoted market prices for those securities or
similar financial instruments. The fair value of other long-term liabilities
approximates the carrying value due to the market interest rates that these
obligations bear.

NOTE 3 -- CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Bank demand deposits........................................  $ 1,819   $ 6,859
Money market accounts.......................................   19,060    26,524
Corporate bonds.............................................       --       300
                                                              -------   -------
                                                              $20,879   $33,683
                                                              -------   -------
</TABLE>

NOTE 4 -- SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                              ----------------
                                                               2000     1999
                                                              ------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
U.S. Treasury notes.........................................  $   --   $ 3,038
Government agency bonds.....................................     971     2,204
Corporate bonds.............................................   4,596    23,919
                                                              ------   -------
                                                              $5,567   $29,161
                                                              ------   -------
</TABLE>

     At September 30, 2000, investments with maturity dates ranging from 91 days
to one year totaled $2.5 million, and investments with maturity dates ranging
from one year to three years totaled $3.1 million.

NOTE 5 -- RECEIVABLES

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Trade accounts receivable...................................  $27,461   $40,531
Less allowance for returns and doubtful accounts............   (3,192)   (8,222)
                                                              -------   -------
                                                              $24,269   $32,309
                                                              -------   -------
</TABLE>

     The Company generates a significant portion of its revenues through
distributors of computer software in North America, Europe, South America and
the Pacific Rim. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses. For fiscal 2000, one customer's balance
accounted for 15% of trade receivables. For fiscal 1999 and 1998, no one
customer's balance exceeded 10% of trade receivables. For fiscal 2000, 1999 and
1998, no one customer accounted for greater than 10% of the Company's revenues.

                                        42
<PAGE>   45
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Computer and office equipment...............................  $ 20,703   $ 41,146
Furniture and fixtures......................................     5,883      8,516
Leasehold improvements......................................     8,143      8,472
                                                              --------   --------
                                                                34,729     58,134
Less accumulated depreciation and amortization..............   (25,717)   (45,900)
                                                              --------   --------
                                                              $  9,012   $ 12,234
                                                              --------   --------
</TABLE>

     Depreciation and amortization expense was $5.6 million, $6.4 million and
$6.9 million during fiscal 2000, 1999 and 1998, respectively.

NOTE 7 -- PURCHASED SOFTWARE AND TECHNOLOGY LICENSES

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Purchased software and technology licenses, at cost.........  $ 31,588   $ 35,429
Less accumulated amortization...............................   (25,758)   (24,998)
                                                              --------   --------
                                                              $  5,830   $ 10,431
                                                              --------   --------
</TABLE>

     Amortization expense was $4.3 million, $5.3 million and $6.6 million during
fiscal 2000, 1999 and 1998, respectively.

NOTE 8 -- LINES OF CREDIT

     At September 30, 2000, the Company had available a $0.9 million line of
credit internationally with a bank under which the Company had $0.7 million in
outstanding borrowings at September 30, 2000. The interest rate on borrowings
made against this line of credit during fiscal 2000 was 2.7%. The line of credit
is secured by a standby letter of credit issued by the Company's domestic bank.

NOTE 9 -- ROYALTIES PAYABLE

     Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$0.4 million of the royalties payable balance at September 30, 1999 and $0.6
million, $1.2 million and $(2.1) million of royalty expense (income) for fiscal
2000, 1999 and 1998, respectively. At September 30, 2000 no royalties were
payable to corporate shareholders.

                                        43
<PAGE>   46
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Accrued wages, commissions, bonuses.........................  $ 6,519   $12,664
Accrued advertising.........................................    3,147     6,016
Accrued fringe benefits.....................................    1,374     1,898
Capital lease obligations...................................    1,803     2,952
Other accrued expenses......................................    7,382     8,784
                                                              -------   -------
                                                              $20,225   $32,314
                                                              -------   -------
</TABLE>

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

     LEASE COMMITMENTS  Future minimum lease payments under noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
and future minimum capital lease payments as of September 30, 2000 were as
follows:

<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                                                              LEASES     LEASES
                                                              -------   ---------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
Year Ending September 30,
  2001......................................................  $1,921     $ 6,928
  2002......................................................     499       6,133
  2003......................................................       2       5,035
  2004......................................................      --       4,928
  2005......................................................      --       4,231
  Later years, through 2020.................................      --       8,808
                                                              ------     -------
          Total minimum lease payments......................   2,422     $36,063
                                                                         =======
Less amount representing interest...........................      74
                                                              ------
Present value of net minimum capital lease payments.........   2,348
Less current installments of obligations under capital
  leases....................................................   1,803
                                                              ------
Obligations under capital leases, excluding current
  installments..............................................  $  545
                                                              ======
</TABLE>

     The cost of assets recorded under capital leases was $8.2 million and $13.0
million at September 30, 2000 and 1999, respectively. Accumulated amortization
on those dates was $6.1 million and $7.9 million, respectively.

     Rent expense amounted to approximately $7.7 million, $8.0 million and $8.1
million in fiscal 2000, 1999 and 1998, respectively.

     Included in the Company's operating lease commitments are facilities leased
from Encinal Partners, a partnership which includes the Company President and
Chief Executive Officer. The Company's Board of Directors has reviewed and
approved the lease agreements and determined that the lease agreements entered
into by the Company are equivalent to agreements that would be negotiated with
independent third parties on an "arms-length" basis. The remaining lease term of
these facilities is between one and six years. Rent expense for these facilities
amounted to approximately $1.5 million in fiscal 2000, and $1.4 million in
fiscal 1999 and 1998.


     STRATEGIC BUSINESS AGREEMENT WITH CALDERA SYSTEMS, INC.  On February 1,
2000, the Company and Caldera Systems, Inc. ("Caldera") entered into a strategic
business agreement. The agreement provides for


                                        44
<PAGE>   47
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


certain joint marketing activities between the parties, including, but not
limited to, participation in tradeshows, cross recruiting and cross matching of
partners, cross-referencing each other's websites and product solutions, and
discussing certain channel initiatives. In addition, the Company agreed to
provide three copies of its Tarantella Express product to Caldera for its
internal use and Caldera agreed to provide ten copies of OpenLinux to the
Company for internal use. The Company recorded the fair value of the Tarantella
Express products provided to Caldera as a development expense since the products
received were used for internal development purposes. The Company will record
the costs of any joint initiatives as either marketing or development expenses
depending on the nature of the activities conducted.


     CONTINGENCIES  In December 1995, the Company acquired from Novell certain
assets related to UnixWare. As consideration, the Company may be required to
make cash payments periodically to Novell provided certain unit volumes of UNIX
distribution are achieved. To date, distribution unit volume of UNIX has not
reached levels which would have required the Company to make cash payments to
Novell. Such payment obligation will terminate at the end of calendar year 2002.

     From time to time, the Company and its subsidiaries may experience claims
in the ordinary course of business, including among others employee legal
actions and alleged trademark infringements. Due to the nature of these matters,
it is not possible to either determine the range of loss that may result from
them or their ultimate resolution.

NOTE 12 -- SHAREHOLDERS' EQUITY

     PREFERRED STOCK  The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 2000, there were no shares of Preferred
Series stock either issued or outstanding.

     1993 EMPLOYEE STOCK PURCHASE PLAN  The Company has an Employee Stock
Purchase Plan ("ESPP") for all eligible employees which is administered by the
Board of Directors. Under the ESPP, shares of the Company's ESPP stock may be
purchased at six-month intervals at 85% of the fair market value on the first or
last day of each six-month period whichever is lower. Employees may purchase
shares through payroll deductions of up to 10% of gross compensation during an
offering period. During 2000, 1999 and 1998, employees purchased 493,092,
589,968 and 567,647 shares at an average per share price of $4.31, $3.52 and
$3.07, respectively. The number of shares reserved for issuance under the ESPP
was increased by 750,000 shares in February 2000. As of September 30, 2000,
1,617,057 shares were reserved for future issuance.

     1994 INCENTIVE STOCK OPTION PLAN  As of September 30, 2000, the Company had
authorized 20,013,665 shares of Common Stock for issuance under the 1994
Incentive Stock Option Plan (the "Option Plan"). The Company's Board of
Directors administers the Option Plan and determines the terms of the options
granted under the Option Plan, including the exercise price, number of shares
subject to each option and the exercisability thereof. In addition, the stock
option committee of the Company's Board of Directors is authorized to grant up
to 20,000 shares to an individual employee or consultant under the terms of the
Option Plan.

     The exercise price of all incentive options granted under the Option Plan
must be at least equal to the fair market value. Options granted under the
Option Plan prior to January 31, 1996 generally become exercisable over a five
year period. Effective January 31, 1996, the vesting period for subsequent
grants was changed to four years. The term of each option is ten years.

     1993 DIRECTOR OPTION PLAN  The Company's 1993 Director Option Plan (the
"Director Plan") provides for the granting of nonstatutory stock options to
non-employee directors of the Company and is administered by the Board of
Directors. In February 2000, the number of shares available for issuance under
the Director Plan was increased by 250,000 shares from 1,150,000 shares to
1,400,000 shares.

                                        45
<PAGE>   48
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of the Company's stock option plans as of September
30, 2000, 1999 and 1998, and changes during the years then ended is presented
below:

<TABLE>
<CAPTION>
                                              2000                 1999                 1998
                                       ------------------   ------------------   ------------------
                                                WEIGHTED-            WEIGHTED-            WEIGHTED-
                                                 AVERAGE              AVERAGE              AVERAGE
                                                EXERCISE             EXERCISE             EXERCISE
OPTION AND DIRECTOR PLANS              SHARES     PRICE     SHARES     PRICE     SHARES     PRICE
-------------------------              ------   ---------   ------   ---------   ------   ---------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>      <C>         <C>      <C>         <C>      <C>
Outstanding at beginning of year.....  11,491    $ 5.25     10,349     $4.80      8,558     $5.25
Granted..............................   4,164     10.10      3,009      6.50      3,102      3.87
Exercised............................  (2,081)     4.99     (1,131)     4.44        (91)     2.37
Cancelled............................  (1,708)     7.89       (736)     5.25     (1,220)     5.80
                                       ------               ------               ------
Outstanding at end of year...........  11,866      6.60     11,491      5.25     10,349      4.80
                                       ======               ======               ======
Options exercisable at end of year...   4,821    $ 5.24      4,480     $5.08      3,484     $5.17
Weighted-average fair value of
  options granted during the year....            $ 6.18                $3.61                $2.19
</TABLE>

     The following table summarizes information about stock options outstanding
at September 30, 2000:

<TABLE>
<CAPTION>
                                                 WEIGHTED-AVG     WEIGHTED-AVG                 WEIGHTED-AVG
RANGE OF                                          REMAINING         EXERCISE                     EXERCISE
EXERCISE PRICE                   OUTSTANDING   CONTRACTUAL LIFE      PRICE       EXERCISABLE      PRICE
--------------                   -----------   ----------------   ------------   -----------   ------------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>           <C>                <C>            <C>           <C>
$1.50-2.00.....................        32      1.1 years             $ 1.76            32         $ 1.76
2.56-3.75......................     1,452      8.4                     3.16           446           3.21
3.97-5.94......................     6,241      7.3                     4.54         3,146           4.70
6.00-9.00......................     1,847      7.2                     6.77           936           6.66
9.06-13.19.....................       855      8.7                     9.74           247          10.12
14.94-20.75....................     1,424      9.2                    16.90            14          17.26
25.31-32.00....................        15      9.3                    29.80             0             --
                                   ------                                           -----
$1.50-32.00....................    11,866      7.7 years             $ 6.60         4,821         $ 5.24
                                   ======                                           =====
</TABLE>

     PRO FORMA FAIR VALUE ACCOUNTING FOR STOCK-BASED COMPENSATION  SFAS No. 123,
Accounting for Stock-Based Compensation, requires pro forma information
regarding net income and earnings per share as if the Company had accounted for
its employee stock options and other stock-based compensation under the fair
value method. The fair value of the options granted under the Option Plan and
the Director Plan was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2000,
1999 and 1998: risk-free interest rate of 6.31% for 2000, 5.27% for 1999, and
5.45% for 1998; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of 75% for 2000 and 65% for 1999 and 1998;
an average turnover rate of 15% and a four year and five year expected life for
options granted to employees and executives, respectively.

                                        46
<PAGE>   49
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The fair value for the Employee Stock Purchase Plan rights were also
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions for 2000, 1999 and 1998: risk-free interest rates of
5.07%, 4.91% and 5.31%, respectively; dividend yield of 0%; volatility factor of
75% for 2000 and 65% for 1999 and 1998; and six month expected life. The
weighted average fair value of the ESPP rights granted in 2000, 1999 and 1998
was $2.86, $1.31 and $1.27, respectively.

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED PER
                                                                   SEPTEMBER 30,
                                                        -----------------------------------
                                                           2000        1999         1998
                                                        ----------   ---------   ----------
                                                        (IN THOUSANDS, EXCEPT SHARE PRICE)
<S>                                                     <C>          <C>         <C>
Pro forma net income (loss)...........................   $(67,423)    $10,464     $(20,664)
Pro forma earnings (loss) per share
  Basic...............................................   $  (1.89)    $  0.31     $  (0.58)
  Diluted.............................................   $  (1.89)    $  0.29     $  (0.58)
</TABLE>

     The pro forma effects of applying SFAS No. 123 for recognizing compensation
expense may not be representative of the effects on the reported net income or
loss for future years because the options granted by the Company vest over
several years and additional awards may be made in the future.

     COMMON STOCK REPURCHASES  The Company repurchases its common stock on the
open market, both systematically and non-systematically. Under the systematic
stock repurchase plan, shares of common stock are repurchased to help negate the
dilutive effects of the Incentive Stock Option Plan and the Employee Stock
Purchase Plan. For the fiscal years ended September 30, 2000, 1999 and 1998, the
purchases and retirements of common stock under the systematic plan were 758,578
shares, 1,038,000 shares and 1,115,000 shares, respectively. Under the
non-systematic repurchase plan, the Company may repurchase up to 6,000,000
shares of its common stock. During the fiscal years ended September 30, 2000,
the company did not repurchase any shares under the non-systematic plan, while
in fiscal years ended September 30, 1999 and 1998, 1,386,000 and 945,050 shares,
respectively, were repurchased and retired under the non-systematic plan. Both
the systematic and non-systematic plans have been approved for continuance into
fiscal 2001.

     SHAREHOLDER RIGHTS  In September 1997, the Company adopted a Shareholder
Rights Plan which provides existing shareholders with the right to purchase a
partial share of preferred stock for each share of common stock owned by the
shareholder in the event of certain changes in the Company's ownership. These
rights may serve as a deterrent to certain takeover attempts not approved by the
Company's Board of Directors. The rights expire in September 2007.

     WARRANTS  On September 22, 2000 the Company entered into a private
placement agreement where the investors have subscribed for a total of 409,375
units at $32 per unit. Each unit consists of 8 shares of common stock of the
Company and a warrant to purchase either 2 additional shares of the Company's
common stock at $4 per share or 1 share Caldera common stock at $8 per share.
The total fair value of the SCO common stock plus either of the warrants was in
excess of the $32.00 received. The warrants for the Caldera shares can be
exercised only if the agreement between the Company and Caldera is consummated.
In the event that the transaction is not completed, the investors will only be
able to exercise the warrant for SCO stock. The warrants have a two-year life.
Total proceeds from the private placement, net of issuance costs of $331 were
$12,769.

     When the transaction with Caldera is consummated, SCO will assess the fair
value of the warrant in Caldera stock and will reclassify an amount equal to
this fair value from equity to liabilities at that date. In addition, SCO will
continue to reassess the fair value of this liability for every reporting period
until the warrants are exercised. Any change in the fair value of this liability
will be recorded into the statement of operations.

                                        47
<PAGE>   50
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Upon the initial issuance, SCO has determined the fair value of the
warrants using the Black-Scholes option pricing model. As of the date of
issuance, the warrants can only be exercised for SCO stock and do not meet any
of the requirements of EITF's 96-13 or 00-07 "Accounting for Derivative
Instruments Indexed to and Potentially Settled in a Company's Own Stock" for
classification as a liability and the value of these warrants have been
classified within equity. On an ongoing basis, upon completion of the
transaction, the fair value of the Caldera warrants will be determined using the
Black-Scholes model and the following assumptions: a two-year exercise period, a
100% volatility rate for Caldera which is consistent with the rate disclosed in
their financial statements, and a dividend rate of zero. Based on the
assumptions above, the fair value of the warrants to purchase 439,375 shares as
of September 30, 2000 was approximately $697,000.

NOTE 13 -- INCOME TAXES


     Income (loss) before income taxes for fiscal 2000, 1999, and 1998 include
domestic pretax profits (losses) of approximately $(51.9) million, $13.6 million
and $(8.1) million, respectively, and foreign pretax profits (losses) of
approximately $3.2 million, $6.6 million and $(3.0) million, respectively. The
components of income taxes are as follows:


<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED
                                                                  SEPTEMBER 30,
                                                             ------------------------
                                                              2000     1999     1998
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Current:
  Federal..................................................  $ (147)  $  500   $   --
  State....................................................      20       20       20
  Foreign..................................................     521    2,876    3,334
                                                             ------   ------   ------
          Total current....................................     394    3,396    3,354
                                                             ------   ------   ------
Deferred:
  Federal..................................................   6,289       --       --
  State....................................................     139       --       --
  Foreign..................................................   1,396       --      205
                                                             ------   ------   ------
          Total deferred...................................   7,824       --      205
                                                             ------   ------   ------
                                                             $8,218   $3,396   $3,559
                                                             ------   ------   ------
</TABLE>

     Income taxes differ from the amount computed by applying the statutory
federal income tax rate to income (loss) before income taxes as follows:

<TABLE>
<CAPTION>
                                                         FISCAL YEAR ENDED SEPTEMBER 30,
                                                         -------------------------------
                                                           2000        1999       1998
                                                         ---------   --------   --------
                                                                 (IN THOUSANDS)
<S>                                                      <C>         <C>        <C>
Statutory federal income tax (benefit) at 34%..........  $(16,570)   $ 6,887    $(3,776)
State income tax (benefit), net of federal effect......       159        247       (338)
Foreign taxes less related tax benefit, if any.........      (229)       669      3,659
Losses and expenses without tax benefit................    17,034         --      4,014
Current utilization of losses..........................        --     (4,407)        --
Net deferred tax asset charge..........................     7,824         --         --
                                                         --------    -------    -------
                                                         $  8,218    $ 3,396    $ 3,559
                                                         --------    -------    -------
</TABLE>


     The tax effect of losses and expenses without tax benefit mainly relates to
current year net operating loss and research and development credit
carryforwards for which no tax benefit was recorded as the Company considers it
more likely than not that the related deferred tax asset would not be
recoverable.


                                        48
<PAGE>   51
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Deferred tax assets:
  Accruals and reserve accounts.............................  $  7,005   $  7,613   $  9,732
  Property and equipment....................................       931      1,641      1,477
  Net operating loss carryforward...........................    35,580      7,032     18,550
  Research credit...........................................     9,299      7,602      7,105
  Other credits.............................................     2,105     12,346      1,020
                                                              --------   --------   --------
          Total gross deferred tax assets...................    54,920     36,234     37,884
          Less valuation allowance..........................   (52,801)   (26,885)   (26,330)
                                                              --------   --------   --------
          Net deferred tax assets...........................     2,119      9,349     11,554
                                                              --------   --------   --------
Deferred tax liabilities:
  Unrealized investment gain................................     2,119         --         --
  Amortization..............................................        --      1,525      3,730
                                                              --------   --------   --------
          Total deferred tax liabilities....................     2,119      1,525      3,730
                                                              --------   --------   --------
          Net tax assets and liabilities....................  $     --   $  7,824   $  7,824
                                                              --------   --------   --------
</TABLE>

     The net change in the total valuation allowance for the years ended
September 30, 2000, 1999 and 1998, was an increase of approximately $25.9
million, $0.6 million and $8.9 million, respectively. Subsequently recognized
tax benefits relating to the valuation allowance for deferred tax assets at
September 30, 2000 will be allocated to income tax benefit and additional paid
in capital in the amounts of $48.8 million and $6.1 million, respectively.

     As of September 30, 1999 the Company established a partial valuation
allowance against its gross deferred tax assets to reduce such asset to the
amount that was deemed, more likely than not, to be recoverable prior to
expiration. The Company considered, amongst other factors, the historical
profitability, prior to one off charges, of the Company, projections for future
profits and the ability of the Company deferred tax assets against these future
profits prior to expiration of these assets, the ability of the Company's
foreign subsidiaries to utilize their deferred tax assets, and the tax effects
of one time charges.

     As at September 30, 2000 the Company reassessed the recoverability of its
net deferred tax assets. This analysis was based on revised earnings
projections, the substantial net operating losses incurred during fiscal 2000
and the effects of the restructurings undertaken during the year upon the
group's tax structure. As a result of this analysis management determined that
it was more likely than not that the net deferred tax asset recorded as of
September 30, 1999 would not be recoverable against future earnings prior to
expiration. Accordingly the Company has established a full valuation allowance
against gross deferred tax assets as of September 30, 2000. This resulted in a
charge of $7.8 million to the statement of operations during the year ended
September 30, 2000.

     At September 30, 2000, the Company has net operating loss carryforwards of
approximately $101.7 million which expire in fiscal years 2012 through 2020, and
foreign tax credit and research credit carryforwards of approximately $1.2
million and $9.3 million, respectively, which expire in fiscal years 2001
through 2013. Additionally, the Company has other tax credits of approximately
$0.9 million that have no expiration date.

     At September 30, 2000, the cumulative unremitted foreign earnings of the
Company were not material. The Company intends to reinvest these earnings
indefinitely.

                                        49
<PAGE>   52
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- PROPOSED TRANSACTIONS WITH CALDERA SYSTEMS

     On August 1, 2000, the Company entered into an agreement with Caldera
Systems, Inc. in which Caldera Systems, Inc. will acquire the Company's Server
Software and Professional Services Divisions. Caldera Systems, Inc. will form a
new holding company, Caldera, Inc., to acquire assets from the Company's Server
Software Division and the Company's Professional Services Division, including
its employees, products and channel resources. Caldera, Inc. will have exclusive
distribution rights for the SCO OpenServer product line. SCO will receive a
28.6% ownership interest in Caldera, Inc., which is estimated to be an aggregate
of approximately 18.4 million shares of Caldera stock (including approximately 2
million shares reserved for employee options assumed by Caldera, Inc. for
options currently held by SCO employees joining Caldera, Inc.), and $7.0 million
in cash. In conjunction with the acquisition, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan $18.0 million to the
Company. The terms of this loan are still to be negotiated but both parties have
agreed the terms will be reasonable and customary.

     Further, Caldera Systems, Inc. has agreed to loan $7.0 million to the
Company in the form of a short-term note repayable at the consummation of the
transaction between SCO and Caldera Systems, Inc. SCO will retain its Tarantella
Division and the SCO OpenServer revenue stream and intellectual properties. The
boards of directors of both companies have unanimously approved the acquisition
which is subject to the approval of Caldera Systems, Inc. and The Santa Cruz
Operation, Inc. stockholders, and regulatory agencies, as well as meeting
certain other closing conditions. The companies anticipate closing the
transaction during the first calendar quarter of 2001.

NOTE 15 -- RESTRUCTURING CHARGE


     During fiscal 2000, the Company recorded $10.7 million in restructuring
charges, including $7.3 million of severance and benefits, $1.9 million of
facilities charges, $0.7 million of technology charges and $0.8 million of fixed
asset disposals.



 Second Quarter Restructuring Plan



     During the second quarter of fiscal 2000, the Company announced and
completed a restructuring plan, which resulted in a one-time charge of $5.9
million. The Company restructured its business operations into three independent
divisions, each with a separate management team and dedicated development,
marketing and sales organizations -- the Server Software Division, the
Tarantella Division and the Professional Services Division. The charge included
a reduction in personnel of 70 employees, write-offs of certain acquired
technologies, write-offs of certain fixed assets, and elimination of
non-essential facilities. Of the $5.9 million charge, $4.6 million related to
cash expenditures and $1.3 million related to non-cash charges. The
restructuring charge related to cash expenditures included $3.6 million for
severance costs and $1.0 million for facilities costs. Included in the non-cash
charges were technology write-offs of $667,000 relating to technology associated
with the Unixware 7 product. This technology had previously been capitalized as
it had alternative future use. However, in conjunction with the restructuring,
certain personnel associated with product development of Unixware 7 were
terminated and future development related to this technology was terminated. As
a result the technology had no other use and was written off. The disposal of
fixed assets was comprised of computer equipment that will no longer be in use
due to the reduction in development personnel. The computer equipment was taken
out of service and disposed of during the third and fourth quarters of fiscal
2000. The disposals correspond to the time of employee terminations, and the
computer equipment was not written off until it was no longer in use.
Depreciation, where applicable, continued on these assets until disposal. The
computer equipment was scrapped or sold to the terminated employees. Proceeds
from the sale of these assets were not significant. Additionally, the disposal
of fixed assets includes writeoffs of leasehold improvements relating to the
abandonment of certain leased space at the Company's Watford, United Kingdom
facility. All fixed asset disposals were related to the Server Software
Division. Included in the


                                        50
<PAGE>   53
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


facilities charge are amounts relating to the abandonment of certain leased
space at the Company's Watford, United Kingdom facility. The space is being
reconfigured in preparation for subletting. The restructuring provision includes
the estimated costs associated with the reconfiguring and the rent associated
with the unoccupied space prior to sublet. The facility closure affected the
Server Software Division.



     The second quarter restructuring charges affected the Server Software
Division and the Professional Services Division. The Professional Services
Division had $0.1 million of severance costs accrued for the restructuring. The
balance of the second quarter restructuring charge of $5.8 million related to
the Server Software Division. The majority of the reduction in force was in
product development for the Server Software Division. As of September 30, 2000,
a total of 70 positions were eliminated including 66 in the Server Software
Division and 4 in the Professional Services Division.



     The Company recorded an adjustment to the fiscal 2000 second quarter
restructuring provision of $0.9 million in severance costs in the fourth quarter
of fiscal 2000. The severance costs were adjusted to reflect changes to the
estimated expenses as actual payments were made.



     The second quarter restructuring charge is summarized as follows:



                      SECOND QUARTER RESTRUCTURING ACCRUAL



<TABLE>
<CAPTION>
                                            REDUCTION                             DISPOSAL OF
                                            IN FORCE    FACILITIES   TECHNOLOGY   FIXED ASSETS    TOTAL
                                            ---------   ----------   ----------   ------------   -------
                                                                   (IN THOUSANDS)
<S>                                         <C>         <C>          <C>          <C>            <C>
Restructuring charge accrued..............   $ 3,574      $1,052       $ 667         $ 594       $ 5,887
Payments/utilization of the accrual.......    (2,660)        (94)       (667)         (256)       (3,677)
Provision adjustment......................      (914)         --          --            --          (914)
                                             -------      ------       -----         -----       -------
Accrual at September 30, 2000.............        --         958          --           338         1,296
                                             =======      ======       =====         =====       =======
</TABLE>



FOURTH QUARTER RESTRUCTURING PLAN



     In the fourth quarter of fiscal 2000, in connection with management's plan
to reduce operating expenses, the Company announced a further restructuring
plan, which resulted in a one-time charge of $5.7 million. The restructuring
included the elimination of various regional offices in the United States,
United Kingdom, Latin America and Asia Pacific. The charge included a reduction
in personnel of 157 employees, write-offs of certain fixed assets and the
elimination of nonessential facilities. The restructuring charges affect the
Server Software Division of the Company as well as corporate general and
administrative areas. Of the $5.7 million charge, $5.5 million related to cash
expenditures and $0.2 related to non-cash charges. The restructuring charge
related to cash expenditures included $4.7 million for severance costs and $0.8
million for facilities costs.



     The severance charges include elimination of 65 positions in the U.S., 63
positions in the United Kingdom, 16 positions in Europe, 9 positions in Latin
America and 4 positions in the Asia Pacific region.



     The United States regional facilities and the Watford, United Kingdom
leases have been or will be vacated and restored, and subsequently sub-let or
terminated by the second quarter of 2001. The remaining international offices
are expected to be vacated immediately. The majority of the facility closures
relate to the Server Division. A minor portion of the facility closures relate
to the Corporate Division and is comprised primarily of the finance and general
and administrative functions of the Company's United Kingdom subsidiary. The
Company anticipates that all of the payments, with the exception of the facility
lease payment, will be made by the end of fiscal 2001.



     The non-cash charges were made up of fixed asset disposal costs at both
U.S. and the Company's Watford, U.K. location. The fixed assets being disposed
are made up of computer equipment that will no


                                        51
<PAGE>   54
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


longer be in use due to the reduction in personnel. The computer equipment will
be taken out of service and disposed. Depreciation, where applicable, will
continue on these assets until disposal. These assets will be scrapped or sold
to the terminated employees. Any gain realized on the sale of these assets will
be recorded as other income in the statement of operations. The disposal of
fixed assets affects both the Server Software and Corporate Divisions. As of
September 30, 2000 a total of 70 positions have been eliminated: 48 positions in
the Server Software Division, 21 in the Corporate Division, and 1 in the
Tarantella Division. The Corporate Division is allocated to the three primary
Company divisions for segment reporting purposes.



     The fourth quarter restructuring charge is summarized as follows:



                      FOURTH QUARTER RESTRUCTURING ACCRUAL



<TABLE>
<CAPTION>
                                                      REDUCTION                DISPOSAL OF
                                                      IN FORCE    FACILITIES   FIXED ASSETS    TOTAL
                                                      ---------   ----------   ------------   -------
                                                                      (IN THOUSANDS)
<S>                                                   <C>         <C>          <C>            <C>
Restructuring charge accrued........................   $ 4,658       $804          $248       $ 5,710
Payments/utilization of the accrual.................    (1,042)        --            --        (1,042)
                                                       -------       ----          ----       -------
Accrual at September 30, 2000.......................     3,616        804           248         4,668
                                                       =======       ====          ====       =======
</TABLE>


NOTE 16 -- INVESTMENTS


     In November 1996, the Company purchased $2.0 million of convertible
debentures of a domestic distribution channel partner. In February 1999, the
Company elected to convert, in its entirety, the debenture into shares of
preferred stock. In the event the partner has not consummated an underwritten
public offering or other liquidity event by March 2001 which returns to the
Company its entire $2.0 million investment, the Company shall be entitled to
redeem the preferred shares for $2.0 million plus 6% per annum per year on such
amount commencing March 1999. Redemptions may be paid immediately or may be paid
in up to six equal quarterly installments of principal plus interest, at an
interest rate equal to the prime rate, adjusted quarterly. The Company's
ownership of preferred stock in the distribution partner represents
approximately 17% of the distribution company's equity, and the Company has the
right to have one Board member who has observation rights only. The Company
accounts for the investment using the cost method as it is not deemed to exert
significant influence. The distribution partner has incurred substantial losses
in the past two financial years and as a result, the Company recorded charges of
$0.7 million and $1.0 million, respectively, representing other than temporary
declines in the value of its investment in the distribution partner. The
declines were calculated as the difference between the carrying value of the
Company's investment and its share, on an as converted basis, of the
distribution partner's equity.


     At September 30, 2000 and 1999, the Company had accounts receivable
outstanding with this domestic distribution channel partner of $1.0 million and
$1.1 million, respectively. Sales to this related party was $5.3 million for
fiscal 2000, $8.0 million for fiscal 1999 and $4.7 million for fiscal 1998.

  Available-for-sale equity securities

     In January 1995, the Company purchased 10% of the preferred stock of
Rainmaker Systems, Inc. ("Rainmaker"), another of the Company's domestic
distribution partners, in exchange for cash, product and equipment valued at
$1.0 million. In addition, the Company loaned $1.0 million to Rainmaker in
exchange for convertible debentures. In February 1999, the Company exchanged the
preferred stock and debentures for shares of Series D Convertible Participating
Preferred Stock (the "Series D Preferred"). During fiscal year 1999, the Company
sold approximately 1,704,011 shares of Series D for $2.26 per share and received
cash proceeds of $3.8 million. The cost basis of the sale was $0.6 million, and
resulted in a realized gain of $3.2 million. The Company's interest of ownership
of Rainmaker before and after the sale was 15.3% and

                                        52
<PAGE>   55
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.3% respectively. On November 17, 1999, Rainmaker completed an initial public
offering of its common stock. At which time, the shares of Series D Preferred
held by the Company automatically converted into shares of Rainmaker's common
stock on a one-for-one basis. At September 30, 2000, the Company held 3,705,767
shares of Rainmaker's common stock. The Company accounts for these shares as
available for sale securities and records them at fair market value, based on
quoted market prices with any unrealized gains or losses included as part of
accumulated other comprehensive income. During fiscal 2000, the Company sold
307,692 shares of Rainmaker stock for $6.50 per share, and received cash
proceeds of $2.0 million. The cost basis of the sale was $0.1 million, and the
Company realized a gain of $1.9 million. As of September 30, 2000, the Company
owns 9.5% of Rainmaker's common stock.

     At September 30, 2000 and 1999, the Company had accounts receivable
outstanding with Rainmaker for $0.4 million and $2.1 million, respectively.
Sales to this related party was $12.0 million for fiscal 2000, $16.8 million for
fiscal 1999 and $13.9 million for fiscal 1998.

     Unrealized gains and losses on available for sale investments as of
September 30, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              GROSS UNREALIZED
                                                 FAIR MARKET VALUE    COST      GAIN (LOSS)
                                                 -----------------   ------   ----------------
                                                                (IN THOUSANDS)
<S>                                              <C>                 <C>      <C>
Rainmaker......................................       $6,948         $1,251        $5,697
Corporate entity investments...................          171            251           (80)
                                                      ------         ------        ------
                                                      $7,119         $1,502        $5,617
                                                      ------         ------        ------
</TABLE>

     Rainmaker's common stock is traded on the Nasdaq National Market under the
symbol "RMKR." The Company does not have a position on the Board of Directors.

NOTE 17 -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

     The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures
about Segments of an Enterprise and Related Information, effective for fiscal
years beginning after December 31, 1997. SFAS 131 supercedes SFAS 14, Financial
Reporting for Segments of a Business Enterprise. SFAS 131 changes current
practice under SFAS 14 by establishing a new framework on which to base segment
reporting and also requires interim reporting of segment information.

     Beginning in fiscal 2000, the Company reviewed performance on the basis of
its three divisions -- the Server Software Division, the Tarantella Division,
and the Professional Services Division. Prior to fiscal 2000, the Company
reviewed performance on the basis of geographical segments. The Company uses
analysis of segment revenues and gross margin in order to make preliminary
decisions of resource allocation. No information on total assets by segment is
reviewed. The accounting policies used by each segment comply with the policies
used in the consolidated financial statements.

     Each segment markets the Company's software products to companies in a
number of industries including telecommunications, manufacturing and government
bodies. These products are either sold directly by each segment's sales force or
are sold to end users through distributors or OEMs.

                                        53
<PAGE>   56
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table presents information about reportable segments as well
as information on long-lived assets by geography. Revenue is allocated to
segments based on the location from which the sale is satisfied and long-lived
asset information is based on the physical location of the asset.


<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Net revenues:
  Server software division..................................  $135,433    $210,954    $157,223
  Tarantella division.......................................    12,834      10,617       9,180
  Professional services division............................     4,199       3,129       5,497
  Corporate adjustments.....................................    (3,543)     (1,076)         --
                                                              --------    --------    --------
          Total net revenues................................  $148,923    $223,624    $171,900
                                                              ========    ========    ========
Gross margin:
  Server software division..................................  $100,120    $168,091    $117,615
  Tarantella division.......................................     9,893       8,288       6,565
  Professional services division............................    (1,899)     (2,533)        624
  Corporate adjustments.....................................      (987)         --          --
                                                              --------    --------    --------
          Total gross margin................................  $107,127    $173,846    $124,804
                                                              ========    ========    ========
Restructuring charge:
  Server software division..................................  $  9,763
  Tarantella division.......................................       801
  Professional services division............................       119
                                                              --------
          Total restructuring charge........................  $ 10,683
                                                              ========
Operating income (loss):
  Server software division..................................  $(28,196)   $ 26,987    $ (8,512)
  Tarantella division.......................................   (18,656)     (6,889)     (4,577)
  Professional services division............................    (4,381)     (3,725)       (504)
                                                              --------    --------    --------
          Total operating income (loss).....................  $(51,233)   $ 16,373    $(13,593)
                                                              ========    ========    ========
</TABLE>


<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Net revenues:
  United States.............................................  $ 65,194    $ 96,809    $ 83,037
  Canada and Latin America..................................     7,770      12,606       9,801
  EMEIA(2)..................................................    62,834      95,270      63,379
  Asia Pacific..............................................     9,697      18,161      14,471
  Corporate Adjustments.....................................     3,428         778       1,212
                                                              --------    --------    --------
          Total net revenues................................  $148,923    $223,624    $171,900
                                                              ========    ========    ========
</TABLE>

                                        54
<PAGE>   57
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Gross margin:(1)
  United States.............................................  $ 42,737    $ 72,401
  Canada and Latin America..................................     5,805       9,276
  EMEIA(2)..................................................    50,049      76,943
  Asia Pacific..............................................     7,295      14,615
  Corporate Adjustments.....................................     1,241         611
                                                              --------    --------
          Total gross margin................................  $107,127    $173,846
                                                              ========    ========
Restructuring charge:
  United States.............................................  $  3,908
  Canada and Latin America..................................       211
  EMEIA(2)..................................................     6,417
  Asia Pacific..............................................       147
                                                              --------
          Total restructuring charge........................  $ 10,683
                                                              ========
Long-lived assets:
  United States.............................................  $ 16,367    $ 31,058    $ 34,779
  Canada and Latin America..................................     3,234         122          15
  EMEIA(2)..................................................       168       5,234       4,897
  Asia Pacific..............................................       241         155         200
  Other international operations............................        --          50          50
                                                              --------    --------    --------
          Total long-lived assets...........................  $ 20,010    $ 36,619    $ 39,941
                                                              ========    ========    ========
</TABLE>


---------------

(1) Gross margin by geography was not tracked by the Company prior to fiscal
    year 1999.

(2) Europe, Middle East, India and Africa

NOTE 18 -- EMPLOYEE BENEFIT PLAN

     The Company maintains an employee savings plan, which qualifies under
section 401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 20% of their pre-tax salary, up to certain statutory
limits. The Company matches 50% of employee contributions up to the lower of 6%
of the employee's annual salary or $3,000. For fiscal 2000, 1999 and 1998, the
Company's total contributions towards the 401(k) plan amounted to $1.1 million,
$1.0 million and $0.9 million, respectively.

NOTE 19 -- SUBSEQUENT EVENTS (UNAUDITED)

     In December 1999, the Company loaned to LinuxMall.com ("LinuxMall"), a
strategic partner, $1.0 million in exchange for convertible debentures and
warrants. In March 2000, the Company loaned LinuxMall an additional $1.0 million
in exchange for convertible debentures and warrants. In October 2000, LinuxMall
consummated a merger with EBIZ Enterprises, Inc. ("EBIZ"), a public company; at
which time, some of the convertible debentures held by the Company automatically
converted into 1,601,533 shares of EBIZ's common stock with the remaining
debentures to convert into 766,466 shares of common stock in January 2001.
Further, the Company has warrants to purchase 1,575,757 shares of EBIZ's common
stock at $1.10; however, said shares may not be sold by Company until October
2002 unless the price for EBIZ's shares is above $4.00.


     In January 2001, EBIZ acquired all the outstanding shares in one of the
Company's domestic distribution channel partners referred to in Note 16. In
exchange for its shares in the distribution partner, the Company


                                        55
<PAGE>   58
                         THE SANTA CRUZ OPERATION, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


received a 6.6% direct ownership in EBIZ, resulting in a total direct ownership
of 13.7%. Should the proposed transaction with Caldera Systems discussed in Note
14 be completed, the Company will indirectly own an additional 3.5% in EBIZ
through its investment in Caldera.



     The Company will account for its direct investment in EBIZ as an
available-for-sale-security at its' fair value based on quoted market prices,
with unrealized gains or losses included in other comprehensive income.



     In connection with the Reorganization discussed in Note 14, SCO entered
into a Loan Agreement and a Secured Convertible Promissory Note effective
January 8, 2001, with The Canopy Group ("Lender") under which SCO can borrow up
to $18.0 million. Drawings on this line of credit are repayable on December 31,
2001 and bear interest at a rate per annum of 10%. Drawings on the line of
credit are immediately convertible into common stock at the option of the lender
at the closing price of SCO common stock on the date of issuance. The
unconverted principal is repayable in cash. Drawings on the line of credit are
collateralized by SCO's tangible and intangible assets.



     The number of shares that can be converted under the Secured Convertible
Promissory Note is limited so that the aggregate of shares converted under the
Promissory Note and under the warrants described below must not exceed 14% of
the total outstanding shares of SCO's outstanding common stock as of January 8,
2001.



     In connection with the loan agreement, SCO issued warrants to purchase
1,440,000 shares of common stock at an exercise price of $1.5625, which equals
the closing price on the date of issuance on January 8, 2001.



     SCO is obligated to issue additional warrants to purchase shares in SCO
common stock at an exercise price of $1.5625 to the extent advances on the line
of credit exceed $9.0 million. The number of shares that may be purchased under
these additional warrants equals the product of the amounts advanced in excess
of $9.0 million multiplied by 0.25 and divided by the exercise price. The
exercise price amounts to $1.5625; the term of the warrants is 2 years. SCO has
not made any drawings on this line of credit.


                                        56
<PAGE>   59

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:

     In our opinion, the consolidated financial statements listed in the
accompanying index(2) present fairly, in all material respects, the financial
position of The Santa Cruz Operation, Inc. and its subsidiaries at September 30,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing on page 76 present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


     As discussed in Note 1, the Company has an accumulated deficit through
September 30, 2000 and has incurred operating losses and generated negative cash
flow from operations during the year then ended. The Company's current financing
under an $18 million line of credit agreement is repayable in December 2001, at
which time the Company expects to generate positive cash flows from operations
or to obtain alternative sources of financing to meet its working capital needs.
There can be no assurance that the Company will generate positive cash flows or
arrange alternative financing sufficient to repay amounts borrowed under the
credit agreement as they become due.


                                            /s/ PRICEWATERHOUSECOOPERS LLP
                                          --------------------------------------
                                                PricewaterhouseCoopers LLP

San Jose, California

October 23, 2000, except for the last


  paragraph of Note 1, which is as of January 8, 2001


                                        57
<PAGE>   60

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

     On December 30, 1997, the Company changed its independent auditors from
KPMG LLP to PricewaterhouseCoopers LLP as previously reported on Form 8-K filed
with the Securities and Exchange Commission on January 7, 1998 (File No
0-21484). There were no disagreements with any of the Company's independent
accountants during the fiscal years ended September 30, 2000, 1999 and 1998.

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information with respect to Executive Officers and Officers may be found on
pages 17 and 18 hereof, under the caption "Executive Officers and Officers of
the Registrant."

  Directors and Executive Officers

     The names of the Company's directors and executive officers and certain
information about them are set forth below:

<TABLE>
<CAPTION>
                                                                                       DIRECTOR
NAME                                    AGE         POSITION WITH THE COMPANY           SINCE
----                                    ---         -------------------------          --------
<S>                                     <C>   <C>                                      <C>
Alok Mohan(1).........................  52    Chairman                                   1994
Douglas L. Michels....................  46    President, Chief Executive Officer and     1979
                                                Director
Robert M. McClure(2)..................  65    Director                                   1993
Gilbert P. Williamson(1)..............  63    Director                                   1993
R. Duff Thompson(2)...................  50    Director                                   1995
Ronald Lachman(1).....................  44    Director                                   1996
Ninian Eadie(2).......................  63    Director                                   1996
</TABLE>

---------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

     Mr. Mohan became Chairman of the Board of Directors in April 1998. Prior to
this appointment, he served as President since December 1994 and as Chief
Executive Officer since July 1995 until April 1998. In December 1994, he was
elected as a director and assumed the position of President and Chief Operating
Officer. Prior to this appointment, beginning in May 1994, Mr. Mohan served as
Senior Vice President, Operations and Chief Financial Officer. Prior to joining
the Company, Mr. Mohan was employed with NCR Corporation, where he served as
Vice President and General Manager of the Workstation Products Division, from
January 1990 until July 1993 before assuming the position of Vice President of
Strategic Planning and Controller, with responsibility for financial planning
and analysis as well as worldwide reporting from July 1993 to May 1994. Mr.
Mohan serves as a director of Rainmaker Systems, Inc. and eBiz. He also serves
on the Board of Directors of the following private companies: Jones Business
Systems, Inc., Crystal Graphics, Metering Technology Corporation, Alpine
Microsystems, and Clickguide.

     Mr. Michels was named President and Chief Executive Officer in April 1998.
Mr. Michels was the principal architect of the Company's technology strategy and
served as the head of product development between June 1997 and April 1998 and
as Chief Technical Officer between February 1993 and June 1997. Mr. Michels has
served as a director of the Company since 1979 and served as the Company's
Executive Vice President between 1979, when he co-founded the Company, and April
1998. Mr. Michels is one of the founders of Uniforum, a UNIX(R) system user
consortium, and served as its President from 1989 to 1990. Mr. Michels serves on
the Board of Directors of FastNet and Arete, Inc.

     Dr. McClure became a director of the Company in May 1993. Since 1978 he has
served as President of Unidot, Inc., which he founded to specialize in the
design of sophisticated computer software and hardware for

                                        58
<PAGE>   61

equipment manufacturers worldwide. Dr. McClure serves as a director of General
Automation, Inc., IPT Corporation and Arete, Inc.

     Mr. Williamson became a director of the Company in May 1993. From September
1991 until May 1993, he served as Chairman of the Board and Chief Executive
Officer of NCR Corporation, and also served as a member of the Board of
Directors of AT&T. He retired from NCR and the AT&T board of directors in May
1993. From January 1989 until September 1991, he served as President of NCR and
as a director, and prior to that time served as Executive Vice President for
marketing at NCR for three years. Mr. Williamson is also a director of Fifth
Third Bank (formerly Citizens Federal Bank, F.S.B.) headquartered in Dayton,
Ohio. He also serves on the Board of Directors of two other private companies:
Dean Investments and French Oil Mill Machinery.

     Mr. Thompson was appointed as a director of the Company in December 1995.
Mr. Thompson is Managing General Partner of EsNet, Ltd., an investment group
which is active in both technology and real estate ventures. From June 1994 to
January 1996, he served as Senior Vice President of the Corporate Development
Group of Novell, Inc. Prior to that time, he served as Executive Vice President
and General Counsel for WordPerfect Corporation, and before joining WordPerfect
Corporation in 1986, he was a partner with the Salt Lake City law firm of
Callister, Duncan & Nebeker. Mr. Thompson is a former Chairman of the Board of
the Business Software Alliance, the principal software industry association
dealing with software industry issues, including copyright protection and public
policy. He also serves on the board of Syzygy AG, a Neuer Markt company
(Frankfurt, Germany) and serves on the Board of O2 Exchange, Inc., a private
company.

     Mr. Lachman became a director of the Company in February 1996. He is a
partner of Lachman Goldman Ventures, a venture capital company that helps
co-found and invest in internet infrastructure technology ventures including
Sandpiper/Digital Island, Connected Corporation, UltraDNS, Concillience,
Everfile, Talarian, Nexiv, and a number of other companies. Mr. Lachman has
helped co-found or sits on the board of several of these companies. He founded
Lachman Associates in January 1975 and served as its President from January 1975
until June 1989. In January of 1993 he founded Lachman Technology, serving as
its President from January 1993 until May 1994. Both Lachman companies developed
networking software shipped with most UNIX servers. Mr. Lachman served as
Executive Vice President of Interactive Systems, a Kodak Company, from June 1989
through the end of 1992.

     Mr. Eadie became a director of the Company in April 1996. He retired from
International Computers Limited ("ICL") in April 1997. Mr. Eadie served as ICL's
Group Executive Director, Technology, from January 1994 until July 1996, where
he was responsible for research, development, manufacturing and third party
distribution of all ICL products. Prior to that he served as President of ICL
Europe from January 1990 until January 1994 and from May 1988 until January 1990
he served as President, ICL International. Mr. Eadie served on ICL's Board of
Directors from 1984 until 1997, and was a member of ICL's Executive Management
Committee from 1988 until 1997. He was a member of the SCO (UK) Advisory Board
from June 1994 until his appointment to SCO's Board in April 1996.

     There is no family relationship between any director or executive officer
of the Company.

  Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent (10%) of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received by the Company, or written representations from
certain reporting persons, the Company believes that all Section 16 filing
requirements applicable to its officer, directors and ten percent (10%)
shareholders during the fiscal year ended September 30, 2000 were complied with.

                                        59
<PAGE>   62

ITEM 11: EXECUTIVE COMPENSATION AND OTHER MATTERS

  Executive Compensation

                           SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation paid by the Company during
the three fiscal years to (i) the Company's Chief Executive Officer, and (ii)
each of the four other most highly compensated executive officers of the
Company, whose salary plus bonus exceeded $100,000 in fiscal year 2000:

<TABLE>
<CAPTION>
                                                                                        LONG-TERM
                                                                                       COMPENSATION
                                                                                       ------------
                                                    ANNUAL COMPENSATION                   AWARDS
                                        --------------------------------------------    SECURITIES     ALL OTHER
NAME AND                                                              OTHER ANNUAL      UNDERLYING    COMPENSATION
PRINCIPAL POSITION               YEAR   SALARY($)(1)   BONUS($)(2)   COMPENSATION($)    OPTIONS(#)       ($)(3)
------------------               ----   ------------   -----------   ---------------   ------------   ------------
<S>                              <C>    <C>            <C>           <C>               <C>            <C>
Douglas L. Michels.............  2000     $342,828      $166,599         $6,662(4)       175,000         $3,000
  President, Chief               1999      278,343       168,379            560(5)       175,000          3,000
  Executive Officer              1998      279,300        68,242          1,901(6)       413,027          4,585
John Moyer.....................  2000      200,230        61,774          2,926(7)            --          3,000
  Senior Vice President,         1999      214,365        88,900            260(5)        50,000          3,000
  Human Resources                1998      199,288        32,384             --           35,000             --
Michael Orr(8).................  2000      235,395        79,036             --          175,000          4,822
  Senior Vice President and      1999      102,067       100,000             --          175,000           1178
  President, Tarantella, Inc.
Steven M Sabbath...............  2000      213,856        72,195             --           50,000          3,000
  Senior Vice President,         1999      231,800       113,077          4,153(9)        50,000          3,000
  Law and Corporate              1998      203,277        48,064             --           35,000          7,153
  Affairs and Secretary
James Wilt.....................  2000      224,903        65,011             --               --             --
  Senior Vice President          1999      229,335       102,497             --           75,000             --
  and President,                 1998      213,311        44,910            288(10)      245,000             --
  Professional Services
    Division
</TABLE>

---------------

 (1) Includes salary earned in the applicable fiscal year but paid or to be paid
     in the following fiscal year.

 (2) The Company pays bonuses to executive officers as determined by the Board
     of Directors. The bonuses for each executive officer are based on the
     officer's base salary, the Company's financial performance, and individual
     performance during the fiscal year. Includes bonuses earned in the
     applicable fiscal year but paid or to be paid in the following fiscal year.

 (3) The dollar amounts in this column include premium payments made by the
     Company with respect to insurance policies for the Named Executive Officers
     for which the Company is not a beneficiary. In addition, the dollar amounts
     in this column include 401(k) contributions for the following persons in
     the amount of $3,000 for 2000, 1999, and 1998 paid by the Company on behalf
     of Mr. Michels, Mr. Moyer, and Mr. Sabbath; and 401(k) contributions in the
     amount of $4,822 for 2000 on behalf of Mr. Orr.

 (4) Includes annual airline club membership fees ($662) and estate planning
     services ($6,000).

 (5) Represents annual airline club membership fees.

 (6) Includes amounts reimbursed for car expenses ($1,676) and airline club
     membership ($225).

 (7) Represents estate planning services.

 (8) Mr. Orr joined the Company in July 1999.

 (9) Represents amounts reimbursed for tax consulting services.

(10) Represents amounts reimbursed for an annual Post Office box fee.

                                        60
<PAGE>   63

                       OPTION GRANTS IN FISCAL YEAR 2000

     The following table sets forth each grant of stock options during the
fiscal year ended September 30, 2000 to the Named Executive Officers:

<TABLE>
<CAPTION>
                                              INDIVIDUAL GRANTS
                             ----------------------------------------------------
                                              PERCENT OF                             POTENTIAL REALIZABLE
                                             TOTAL OPTION                           VALUE AT ASSUMED ANNUAL
                                                SHARES                               RATES OF STOCK PRICE
                                              GRANTED TO    EXERCISE                APPRECIATION FOR OPTION
                               NUMBER OF      EMPLOYEES     PRICE ($                        TERM(3)
                             OPTION SHARES    IN FISCAL       PER      EXPIRATION   -----------------------
NAME                          GRANTED(1)       YEAR(2)       SHARE)       DATE        5%($)        10%($)
----                         -------------   ------------   --------   ----------   ----------   ----------
<S>                          <C>             <C>            <C>        <C>          <C>          <C>
Douglas L. Michels..........     29,090           .71%      $3.4375    07/31/2005    $ 16,025     $ 46,409
                                145,910          3.55         3.125    07/31/2010     286,756      726,697
John Moyer..................         --            --%           --            --          --           --
Michael Orr.................     32,000           .78         3.125    07/31/2010      62,889      159,374
Steven M. Sabbath...........     13,626           .33         3.125    07/31/2010      26,779       67,864
                                 36,374           .89         3.125    07/31/2010      71,486      181,159
James Wilt..................         --            --            --            --          --           --
</TABLE>

---------------

(1) All options were granted under the Option Plan. The option exercise price of
    all stock options granted under the Option Plan is generally equal to the
    fair market value of the shares of Common Stock on the day prior to the date
    of grant. The options have a term of 10 years (5 years in the case of
    incentive stock options granted to Mr. Michels) and generally vest at the
    rate 25% of the shares subject to the option per year in which the optionee
    remains in continuous status as an employee or consultant.

(2) The Company granted options to purchase an aggregate of 4,104,447 shares to
    employees in fiscal year 2000.

(3) Potential realizable values are based on assumed annual rates of return
    specified by the Securities and Exchange Commission. The Company's
    management cautions shareholders and option holders that such increases in
    values are based on speculative assumptions and should not be the basis for
    expectations of the future value of their holdings.

                AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000
                       AND FISCAL YEAR-END OPTION VALUES

     The following table provides information on option exercises in fiscal year
2000 by the Named Executive Officers and the value of such officer's unexercised
options as of September 30, 2000.

<TABLE>
<CAPTION>
                                                   NUMBER OF UNEXERCISED       VALUE OF UNEXERCISED IN-THE-
                           SHARES                    OPTION SHARES ON             MONEY OPTION SHARES ON
                          ACQUIRED                  SEPTEMBER 30, 2000           SEPTEMBER 30, 2000($)(2)
                             ON       VALUE     ---------------------------   ------------------------------
NAME                      EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
----                      --------   --------   -----------   -------------   --------------   -------------
<S>                       <C>        <C>        <C>           <C>             <C>              <C>
Douglas L. Michels......        0    $      0     398,525        528,502         $18,750          $18,750
John Moyer..............   69,992     512,362      56,143         98,865           3,281            6,563
Michael Orr.............        0           0      43,750        306,250               0                0
Steven M. Sabbath.......   26,624     424,673     118,126        140,750           6,562            6,563
James Wilt..............        0           0     236,545        178,555          20,456           13,125
</TABLE>

---------------

(1) Market value of underlying securities based on the closing price of the
    Company's Common Stock on the NASDAQ National Market minus the exercise
    price.

(2) Market value of securities underlying unexercised in-the-money options based
    on the closing price of the Company's Common Stock on September 29, 2000
    (i.e., the last trading day of fiscal year 2000) on the NASDAQ National
    Market of $2.9375 per share, minus the exercise price.

                                        61
<PAGE>   64

  Employment Contracts and Change-in-Control Arrangements

     In March 1996, the Board of Directors approved a resolution providing that
prior to or after a change in control, as defined in the Option Plan, any
outstanding options held by corporate officers that were granted pursuant to the
Option Plan that are not at such time exercisable and vested shall become fully
exercisable and vested.

     The Company adopted a change in control plan in June 1997 and, accordingly,
has entered into change in control agreements with each of the Named Executive
Officers. Pursuant to these agreements, each such officer is eligible to
receive, in the event that his or her employment is involuntarily terminated
within one year following a change in control of the Company, an amount equal to
the product of twelve (12) times his or her total monthly compensation including
targeted bonuses at 100% attainment, continuation of health benefits, life
insurance, long-term disability and other fringe benefit plans available to him
or her prior to the involuntary termination of employment for twelve (12) months
thereafter and accelerated vesting on all options held. Pursuant to the terms of
these agreements, a change in control is as defined in the 1994 Incentive Stock
Option Plan described herein.

     Further, in the event the aforesaid transaction with Caldera is
consummated, an amendment to these change in control agreements with each of the
Named Executive Officers provides that all stock option grants held by such
officers prior to August 1, 2000 shall become fully vested and exercisable
through January 31, 2002 or the applicable expiration date of each such grant,
whichever shall be later. In addition, each such Officer shall be eligible to
receive an amount equal to the product of twelve (12) times his or her total
monthly compensation including targeted bonuses at 100% attainment provided that
such Officer remains in the employ of the Company or of Caldera for a period of
one year following the consummation of the transaction, unless released earlier
by the Company or Caldera upon completion of transition duties.

     There are no other employment contracts between the Company and any of the
executive officers named in the Summary Compensation Table above.

  Report of the Compensation Committee of the Board of Directors

     The Compensation Committee of the Board of Directors serves as an
administrative arm of the Board to make decisions regarding executive
compensation and to make recommendations to the Board on compensation matters
generally. The following is the report of the Compensation Committee describing
compensation policies and rationale applicable to the Company's executive
officers with respect to the compensation paid to such executive officers for
the fiscal year ended September 30, 2000. The information contained in such
report shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act or Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into such filing.

  GENERAL

     The Compensation Committee is a standing committee comprised of three
nonemployee directors. After evaluating management's performance, the
Compensation Committee recommends compensation and pay levels to the full Board
for approval. Employee directors do not vote on their own compensation. Stock
option grants to executive officers are approved by the Compensation Committee.

  OVERVIEW AND POLICIES FOR 2000

     The goals of the Compensation Committee are to attract, motivate, reward,
and retain the key executive talent necessary to achieve the Company's business
objectives and contribute to the long-term success of the Company. The
Compensation Committee currently uses salary, bonus, and stock options to meet
these goals.

     In fiscal year 2000, the Compensation Committee reviewed the compensation
of the Company's key executive officers by evaluating each executive's scope of
responsibility, prior experience, and salary history, and also took into account
the salaries for similar positions at comparable high technology companies. In

                                        62
<PAGE>   65

reviewing the compensation, the Compensation Committee focused on each
executive's prior performance with the Company and expected contribution to the
Company's future success.

     The Company provides long-term incentives to executive officers through the
Option Plan. The purposes of the Option Plan are to attract and retain the best
employee talent available and to create a direct link between compensation and
the long-term performance of the Company. In general, the Option Plan
incorporates four-year vesting periods to encourage employees to remain with the
Company. The size of each option grant is based on the recipient's position and
tenure with the Company, the recipient's past performance, and the size of
previous stock option grants, primarily weighted toward the recipient's
position. In fiscal year 2000, the Company continued its policy of granting
stock options to new employees and granted additional stock options to
employees, including executive officers, who had made and were expected to make
significant contributions to the Company's development. These stock option
grants were based primarily on the scope of the executive officer's
responsibilities at the Company and the remuneration to be paid to such officer.

     The compensation for Douglas L. Michels in fiscal year 2000 was approved by
the Board of Directors. The Compensation Committee made its recommendation and
the Board made its determination of the Chief Executive Officer's compensation
after considering the same factors used to determine the compensation of other
executive officers.

  SUMMARY

     The Compensation Committee believes that the Company's compensation has
been successful in attracting and retaining qualified employees and in linking
compensation directly to corporate performance relative to the Company's goals.
The Company's compensation policies will evolve over time as the Company moves
to attain the near-term goals it has set for itself while maintaining its focus
on building long-term shareholder value.

                     MEMBERS OF THE COMPENSATION COMMITTEE:

                                 Ronald Lachman
                                   Alok Mohan
                             Gilbert P. Williamson

                                        63
<PAGE>   66

  Performance Graph

     Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of the Company's Common Stock with the
cumulative return of the Nasdaq National Market Index and the Nasdaq Computer
and Data Processing Stocks Index for the period commencing September 29, 1995
and ending on September 29, 2000. The information contained in the performance
graph shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act or Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into such filing.

     The graph assumes that $100 was invested on September 30, 1995 in the
Company's Common Stock and in each index, and that all dividends were
reinvested. No dividends have been declared or paid on the Company's Common
Stock. Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns. The Company operates on a 52-week
fiscal year which ended on September 30, 2000.

                COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
                             PERFORMANCE GRAPH FOR
                         THE SANTA CRUZ OPERATION, INC.
              PRODUCED ON 11/22/2000 INCLUDING DATA TO 09/29/2000

                              [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                             Nasdaq Computer and Data
                                                   The Santa Cruz     Nasdaq Stock Market     Processing Stocks SIC
                                                   Operation, Inc.      (US Companies)        7370-7379 US & Foreign
---------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>                    <C>
 09/1995                                                100.0                100.0                    100.0
 09/1996                                                 79.1                118.7                    124.0
 09/1997                                                 66.4                162.9                    167.8
 09/1998                                                 52.2                165.5                    217.5
 09/1999                                                142.5                270.4                    369.3
 09/2000                                                 35.1                358.9                    464.3
</TABLE>

                                        64
<PAGE>   67

Notes:

A.   The lines represent monthly index levels derived from compounded daily
     returns that include all dividends.

B.   The indexes are reweighted daily, using the market capitalization on the
     previous trading day.

C.   If the monthly interval, based on the fiscal year-end, is not a trading
     day, the preceding trading day is used.

D.   The index level for all series was set to $100.0 on 09/29/1995.

  Compensation of Directors

     During fiscal year 2000 the Company made payments to the Outside Directors
in an aggregate amount of seventy-eight thousand, five hundred dollars ($78,500)
for attendance to Board meetings (including committee meetings) during the
fiscal year. The following payments were made to each outside director: Ninian
Eadie, eighteen thousand, two hundred and fifty dollars ($18,250); Ronald
Lachman, thirteen thousand dollars ($13,000); Robert McClure, nineteen thousand,
seven hundred and fifty dollars ($19,750); R. Duff Thompson, sixteen thousand,
seven hundred and fifty dollars ($16,750); and, Gilbert Williamson, ten
thousand, seven hundred and fifty dollars ($10,750). Pursuant to a consulting
agreement with director Williamson, the Company shall pay one thousand dollars
($1,000) a day, plus reasonable expenses, for consulting services rendered to
the Board of Directors and two thousand, five hundred dollars ($2,500) a day for
consulting services pertaining to the general business of the Company, to be
provided on an as-needed basis. During fiscal year 2000, the Company did not
retain Mr. Williamson for any consulting services and, therefore, no payments
were made in fiscal year 2000. The Company has a consulting agreement with
director McClure, pursuant to which the Company shall pay one thousand dollars
($1,000) per day, plus reasonable expenses, for consulting services pertaining
to the general business of the Company, to be provided on an as-needed basis. In
fiscal year 2000, the Company did not retain Mr. McClure for any consulting
services and, therefore, no payments were made in fiscal year 2000. Directors
are reimbursed for certain expenses in connection with attendance at board and
committee meetings.

     Outside Directors (i.e., nonemployee directors) receive compensation for
their service on the Board pursuant to the Director Plan. This compensation is
in the form of stock options, or in the case of the Annual Grant, which is
automatically granted on the first day of each fiscal year, cash for each
meeting attended, in lieu of a stock option. All current outside directors have
elected stock options for fiscal year 2000.

     The Company's Director Plan, which provides for the grant in nonstatutory
stock options to nonemployee directors of the Company, was adopted by the Board
of Directors in March 1993 and approved by the shareholders in May 1993. The
Company has reserved a total of 1,400,000 shares of Common Stock for issuance
pursuant to the Director Plan. The Director Plan is currently administered by
the Board of Directors. Under the Director Plan, each nonemployee director
automatically receives a nonstatutory option to purchase 40,000 shares of the
Company's Common Stock on the date upon which such person first becomes a
director (the "Initial Grant"). In addition, each nonemployee director who
remains in continuous status as a nonemployee director is automatically granted
a nonstatutory option (the "Annual Grant") to purchase 10,000 shares of Common
Stock on the first day of each fiscal year, 6,000 shares of which are pursuant
to the Director Option Plan and 4,000 of which are pursuant to the Incentive
Stock Option Plan.

     An Outside Director may elect to receive cash compensation in lieu of an
Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per each Board meeting payable at a rate determined by the
Board. In addition to the annual election of either cash compensation or stock
options grants, each Board member also receives the following payments for
meeting attendance: one thousand dollars ($1,000) per regularly scheduled Board
meeting attended in person, seven hundred fifty dollars ($750) per special
meeting, which may be attended telephonically, and seven hundred fifty dollars
($750) per committee meeting, which may be attended telephonically. Also, in the
event that the Director who elected to receive options in lieu of cash is unable
to attend a regularly scheduled Board meeting, he shall have deducted from his
next Annual Grant two thousand shares (2,000) for any such meeting not attended.

                                        65
<PAGE>   68

     Options granted under the Director Plan have a term of ten (10) years
unless terminated sooner upon termination of the optionee's status as a director
or otherwise pursuant to the Director Plan. Such options are not transferable by
the optionee other than by will or the laws of descent or distribution, and each
option is exercisable during the lifetime of the director only by such director.
The exercise price of each option granted under the Director Plan is equal to
the fair market value of the Common Stock on the date of grant. Initial Grant
options granted under the Director Plan vest cumulatively at the rate of
one-twentieth (1/20th) of the shares subject to the option for every three
months after the date of grant. Annual Grant options vest at a rate of
one-fourth (1/4th) of the shares subject to the option for every three months
after the date of grant.

     In the event of a merger of the Company with or into another corporation or
a consolidation, acquisition of assets of like transaction involving the Company
immediately prior to occurrence of a change in control, any outstanding option
shall become fully exercisable and vested.

     Unless terminated sooner, the Director Plan will terminate in 2003. The
Board has authority to amend or terminate the Director Plan provided no such
action may affect options already granted and such options shall remain in full
force and effect. As of the fiscal year end, options to purchase 324,000 shares
of Common Stock at a weighted average exercise price (per share) of
approximately $7.22 per share were outstanding and 894,000 shares remained
available for future option grants under the Director Plan.

  Compensation Committee Interlocks and Insider Participation

     The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for directors and officers of the
Company. Mr. Michels, who served as President and Chief Executive Officer of the
Company during fiscal year 2000, is not a member of the Compensation Committee
and cannot vote on matters decided by the Committee. Mr. Michels has also
participated in the discussions and decisions regarding salaries and incentive
compensation for all employees of and consultants to the Company, except that
Mr. Michels has also been excluded from discussions and decisions regarding his
own salary and incentive compensation. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officer serving as a member of the
Company's Board of Directors or compensation committee ("Interlock"). There are
no Interlocks between the Company's Board of Directors or Compensation Committee
and boards of directors or compensation committees of other companies.

                                        66
<PAGE>   69

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of November 1, 2000 as to (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the outstanding shares of its Common Stock, (ii) each director and each
nominee for director of the Company, (iii) each of the executive officers named
in the Summary Compensation Table below, and (iv) all directors and executive
officers as a group.

<TABLE>
<CAPTION>
                                                              COMMON STOCK   APPROXIMATE
FIVE PERCENT SHAREHOLDERS, DIRECTORS                          BENEFICIALLY   PERCENTAGE
AND CERTAIN EXECUTIVE OFFICERS                                   OWNED        OWNED(1)
------------------------------------                          ------------   -----------
<S>                                                           <C>            <C>
Douglas L. Michels(2).......................................   4,439,050        11.13
  c/o The Santa Cruz Operation, Inc.
  425 Encinal Street
  Santa Cruz, California 95061-1900
Ninian Eadie(3).............................................      97,000            *
Ronald Lachman(4)...........................................     151,000            *
Robert M. McClure(5)........................................     135,832            *
Alok Mohan(6)...............................................     631,083         1.58
Jack Moyer(7)...............................................      87,469            *
Michael Orr(8)..............................................      65,624            *
Steven M. Sabbath(9)........................................     155,725            *
R. Duff Thompson(10)........................................      24,000            *
Gilbert P. Williamson(11)...................................     130,500            *
James Wilt(12)..............................................     471,641         1.19
All directors and executive officers as a group (14
  persons)(13)..............................................   6,946,791        16.54%
</TABLE>

---------------

  *  Less than one percent

 (1) Applicable percentage of ownership is based on shares of Common Stock
     outstanding as of November 1, 2000 together with applicable options held by
     such shareholder. Beneficial ownership is determined in accordance with the
     rules of the Securities and Exchange Commission and includes voting and
     investment power with respect to shares. Shares of Common Stock subject to
     options currently exercisable or exercisable within sixty (60) days after
     November 1, 2000 are deemed outstanding for computing the percentage
     ownership of the person holding such options, but are not deemed
     outstanding for computing the percentage of any other person.

 (2) Includes 455,650 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000. Includes 75,000 shares gifted to the J3D Family
     Partnership, of which Douglas Michels is the general partner; and 355,000
     shares in a trust account established by Mr. Michels' late father, Lawrence
     Michels, of which Douglas Michels is a general partner.

 (3) Represents 97,000 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

 (4) Includes 79,000 shares issuable upon exercise of options to purchase shares
     of Common Stock that are exercisable within sixty (60) days after November
     1, 2000. Also includes 24,000 shares in trust accounts established for the
     benefit of his minor children of which Mr. Lachman is a trustee. In
     addition, 5,000 shares are also held by the Ronald and Mary Ann Lachman
     Foundation of which Mr. Lachman is a director; Mr. Lachman disclaims
     beneficial ownership of these shares.

 (5) Includes 132,500 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

 (6) Includes 571,248 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

                                        67
<PAGE>   70

 (7) Includes 72,496 shares issuable upon exercise of options to purchase shares
     of Common Stock that are exercisable within sixty (60) days after November
     1, 2000.

 (8) Represents 65,624 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

 (9) Includes 135,500 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

(10) Represents 24,000 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

(11) Represents 130,500 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

(12) Includes 259,965 shares issuable upon exercise of options to purchase
     shares of Common Stock that are exercisable within sixty (60) days after
     November 1, 2000.

(13) Includes 2,562,105 shares issuable upon exercise of options to purchase
     shares of Common Stock granted to executive officers and directors of the
     Company that are exercisable within sixty (60) days after November 1, 2000.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In April 1999, the Company entered into a consulting agreement with Mr.
Mohan, pursuant to which Mr. Mohan became an external consultant to the Company
and his status as an employee ceased. The term of the agreement was for one
year, commencing April 21, 1999, and was renewable by mutual agreement of both
parties with approval by the Compensation Committee. As compensation for Mr.
Mohan's consulting services to the Company he received a fee target of one
hundred and twenty-six thousand dollars ($126,000) per year, paid as follows:
ninety thousand dollars ($90,000) annually as a retainer; and thirty-six
thousand dollars ($36,000) annually as a target incentive. Incentive payments
were made solely based upon the Company's performance against its Revenue and
EPS measures, paid in accordance with the provisions of the Company's Management
Incentive Plan. Mr. Mohan received no incentive payments during fiscal year
2000. The consulting agreement expired April 21, 2000, and the Company entered
into a new consulting agreement, commencing on April 22, 2000 and continuing
through the completion of the Caldera acquisition of the Server and Professional
Services business. As compensation for Mr. Mohan's consulting services to the
Company he receives five thousand dollars ($5,000) per month, with no incentive
bonus. His stock options previously held continue to vest over the term of the
agreement and convert to nonstatutory options. He continues to be covered under
the Company's medical, dental, and vision plans. In addition, Mr. Mohan will
forego any compensation normally accorded to members of the Company's Board of
Directors for participation on the Board or for attendance at committee meetings
and/or board meetings and will not be entitled to additional stock options
granted to board members on an annual basis.

     The Douglas Michels Family Partnership and the Lawrence Michels Family
Limited Partnership are partners in Encinal Partnership No. 1 ("EP1"), which
leases to the Company certain office premises located in Santa Cruz, California
under two leases. The first lease commenced on January 1, 1989 and had a
ten-year term, with two options for the Company to renew for five-year periods.
The lease has been renewed through June 30, 2005. The lease covers approximately
56,230 square feet of building space at a current cost of approximately $88,010
per month, subject to an annual adjustment upward based on the Consumer Price
Index. The second lease commenced on July 1, 1991 and had a seven-year term,
with two options to renew for five-year periods. The second lease has been
renewed through June 30, 2005. The second lease covers approximately 26,055
square feet of building space at a current cost of approximately $31,268 per
month, subject to an annual adjustment based on the Consumer Price Index.

     The third partner in EP1 is Wave Crest Development, Inc. ("Wave Crest").
Wave Crest leases to the Company 61,500 square feet of office space in Santa
Cruz, California. From time to time, Douglas Michels engages in real estate
transactions with Wave Crest and its president.

                                        68
<PAGE>   71

     The Company believes that the transactions described above were on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties. All future transactions between the Company and any director or
executive officer are subject to approval by a majority of the disinterested
members of the Board of Directors.

     The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by California law.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

     (a) Documents filed as part of Form 10-K

  1. Financial Statement Schedule

<TABLE>
<CAPTION>
        SCHEDULE                                                    PAGE
         NUMBER                         DESCRIPTION                NUMBER
        --------                        -----------                ------
<S>                       <C>                                      <C>
           II                Valuation and Qualifying Accounts       26
</TABLE>

     The independent auditors' reports with respect to the above-listed
financial statement schedule appears on page 25 of this report on Form 10-K.
Financial statement schedules other than those listed above have been omitted
since they are either not required, not applicable, or the information is shown
in the financial statements or notes thereto.

  2. Exhibit Listing

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.0            -- Asset Purchase Agreement By and Between The Santa Cruz
                            Operation, Inc. and Novell, Inc.(4)
          3.1            -- Restated Articles of Incorporation of Registrant.(2)
          3.2            -- Bylaws of Registrant, as amended.(5)
          4.1            -- Specimen Common Stock Certificate of Registrant.(1)
         10.11           -- Software License Agreement with Locus Computing
                            Corporation effective January 11, 1989.(1)
         10.12           -- Lease with Encinal Partnership No. 1 commencing May 1,
                            1991 (100 Pioneer Street).(1)
         10.13           -- Lease with Encinal Partnership No. 1 commencing January
                            1, 1989 (425 Encinal Street).(1)
         10.14           -- Lease with Wave Crest Development, Inc. commencing August
                            1, 1987 (440 Encinal Street).(1)
         10.15           -- Lease with Wave Crest Development, Inc. commencing June
                            1, 1988 (400 Encinal Street).(1)
         10.16           -- Lease with Wave Crest Development, Inc. commencing July
                            1, 1988 (399 Encinal Street).(1)
         10.17           -- Form of Indemnification Agreement.(1)
         10.18           -- Master Registration Rights Agreement as amended.(1)
         10.19           -- 1993 Stock Purchase Plan and form of Stock Purchase
                            Agreement.(3)(8)
</TABLE>

                                        69
<PAGE>   72

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.20           -- 1994 Incentive Stock Option Plan and form of Incentive
                            Stock Option Agreement.(3)(8)
         10.21           -- 401(k) Plan, as amended.(1)(8)
         10.23           -- Revised 1993 Employee Stock Purchase Plan.(5)(8)
         10.24           -- 1993 Director Stock Option Plan.(1)(8)
         10.34           -- Shareholders' Rights Agreement.(6)
         10.35           -- Change-in-control agreement between the Company and
                            certain key management.(8)
         10.36           -- Employment Agreement with Alok Mohan.(7)
         21.1            -- Subsidiaries of Registrant.
         23.1            -- Consent of Independent Accountants.
         27.1            -- Financial Data Schedule.
</TABLE>

---------------

(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.

(2) Incorporated by reference to the Form 10-K filed on December 24, 1993.

(3) Incorporated by reference to the Form 10-K filed on December 23, 1994.

(4) Incorporated by reference to the Form 8-K filed on December 20, 1995.

(5) Incorporated by reference to the Form 10-K filed on December 22, 1995.

(6) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.

(7) Incorporated by reference to the Form 10-K filed on December 23, 1998.

(8) Designates management contracts or compensatory plans, contracts or
    arrangements.

     (b) Reports on Form 8-K.

     On September 22, 2000, the Company filed a Current Report on Form 8-K to
report that the Company had entered into an agreement to sell 409,375 units as
$32.00. A unit consists of eight shares of common stock of the Company and a
warrant to purchase either two additional shares of the Company's common stock
at $4.00 per share or one share of the common stock of Caldera held by the
Company at $8.00 per share. The warrants for the Caldera shares can be exercised
only if the Agreement between the Company and Caldera is consummated.

                                        70
<PAGE>   73

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                               THE SANTA CRUZ OPERATION, INC.


<TABLE>
<S>                                            <C>
           By: /s/ RANDALL BRESEE                        By: /s/ STEVEN M. SABBATH
---------------------------------------------  ---------------------------------------------
               Randall Bresee                                Steven M. Sabbath
           Senior Vice President,                         Senior Vice President,
           Chief Financial Officer                 Law and Corporate Affairs & Secretary

            Date: March 23, 2001                           Date: March 23, 2001
</TABLE>


     KNOW ALL PERSONS BY THEIR PRESENCE, that each person whose signature
appears below constitutes and appoints Steven M. Sabbath, his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:


<TABLE>
<CAPTION>
NAME                                                                TITLE                    DATE
----                                                                -----                    ----
<C>                                                      <S>                            <C>

               /s/ DOUGLAS L. MICHELS                    President, Chief Executive     March 23, 2001
-----------------------------------------------------      Officer and Director
                 Douglas L. Michels

                   /s/ ALOK MOHAN                        Chairman of the Board of       March 23, 2001
-----------------------------------------------------      Directors
                     Alok Mohan

              /s/ GILBERT P. WILLIAMSON                  Director                       March 23, 2001
-----------------------------------------------------
                Gilbert P. Williamson

                 /s/ RONALD LACHMAN                      Director                       March 23, 2001
-----------------------------------------------------
                   Ronald Lachman

                /s/ ROBERT M. MCCLURE                    Director                       March 23, 2001
-----------------------------------------------------
                  Robert M. McClure

                /s/ R. DUFF THOMPSON                     Director                       March 23, 2001
-----------------------------------------------------
                  R. Duff Thompson

                  /s/ NINIAN EADIE                       Director                       March 23, 2001
-----------------------------------------------------
                    Ninian Eadie
</TABLE>


                                        71
<PAGE>   74

                         THE SANTA CRUZ OPERATION, INC.

                             SCHEDULE II/RULE 5-04
                       VALUATION AND QUALIFYING ACCOUNTS
                 YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    BALANCE AT   CHARGED TO                  BALANCE
                                                    BEGINNING    REVENUES OR                AT END OF
DESCRIPTION                                          OF YEAR      EXPENSES     DEDUCTIONS     YEAR
-----------                                         ----------   -----------   ----------   ---------
<S>                                                 <C>          <C>           <C>          <C>
Year Ended September 30, 2000
  Allowance for returns...........................   $ 7,108       $  (269)     $ 4,509      $ 2,330
  Allowance for doubtful accounts.................     1,114           (19)         233          862
                                                     -------       -------      -------      -------
          Total allowance.........................   $ 8,222       $  (288)     $ 4,742      $ 3,192
                                                     =======       =======      =======      =======
Year Ended September 30, 1999
  Allowance for returns...........................   $10,637       $ 9,505      $13,034      $ 7,108
  Allowance for doubtful accounts.................     1,545           209          640        1,114
                                                     -------       -------      -------      -------
          Total allowance.........................   $12,182       $ 9,714      $13,674      $ 8,222
                                                     =======       =======      =======      =======
Year Ended September 30, 1998
  Allowance for returns...........................   $ 9,136       $18,200      $16,699      $10,637
  Allowance for doubtful accounts.................     1,743          (132)          66        1,545
                                                     -------       -------      -------      -------
          Total allowance.........................   $10,879       $18,068      $16,765      $12,182
                                                     =======       =======      =======      =======
</TABLE>

                                        72
<PAGE>   75

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.0            -- Asset Purchase Agreement By and Between The Santa Cruz
                            Operation, Inc. and Novell, Inc.(4)
          3.1            -- Restated Articles of Incorporation of Registrant.(2)
          3.2            -- Bylaws of Registrant, as amended.(5)
          4.1            -- Specimen Common Stock Certificate of Registrant.(1)
         10.11           -- Software License Agreement with Locus Computing
                            Corporation effective January 11, 1989.(1)
         10.12           -- Lease with Encinal Partnership No. 1 commencing May 1,
                            1991 (100 Pioneer Street).(1)
         10.13           -- Lease with Encinal Partnership No. 1 commencing January
                            1, 1989 (425 Encinal Street).(1)
         10.14           -- Lease with Wave Crest Development, Inc. commencing August
                            1, 1987 (440 Encinal Street).(1)
         10.15           -- Lease with Wave Crest Development, Inc. commencing June
                            1, 1988 (400 Encinal Street).(1)
         10.16           -- Lease with Wave Crest Development, Inc. commencing July
                            1, 1988 (399 Encinal Street).(1)
         10.17           -- Form of Indemnification Agreement.(1)
         10.18           -- Master Registration Rights Agreement as amended.(1)
         10.19           -- 1993 Stock Purchase Plan and form of Stock Purchase
                            Agreement.(3)(8)
         10.20           -- 1994 Incentive Stock Option Plan and form of Incentive
                            Stock Option Agreement.(3)(8)
         10.21           -- 401(k) Plan, as amended.(1)(8)
         10.23           -- Revised 1993 Employee Stock Purchase Plan.(5)(8)
         10.24           -- 1993 Director Stock Option Plan.(1)(8)
         10.34           -- Shareholders' Rights Agreement.(6)
         10.35           -- Change-in-control agreement between the Company and
                            certain key management.(8)
         10.36           -- Employment Agreement with Alok Mohan.(7)
         21.1            -- Subsidiaries of Registrant.
         23.1            -- Consent of Independent Accountants.
         27.1            -- Financial Data Schedule.
</TABLE>

---------------

(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.

(2) Incorporated by reference to the Form 10-K filed on December 24, 1993.

(3) Incorporated by reference to the Form 10-K filed on December 23, 1994.

(4) Incorporated by reference to the Form 8-K filed on December 20, 1995.

(5) Incorporated by reference to the Form 10-K filed on December 22, 1995.

(6) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.

(7) Incorporated by reference to the Form 10-K filed on December 23, 1998.

(8) Designates management contracts or compensatory plans, contracts or
    arrangements.