<PAGE>   1
                                                                      EXHIBIT 13

                    SELECTED FIVE YEAR FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                  Fiscal Year Ended September 30,   
(In thousands, except per share data)     1996       1995       1994       1993       1992
--------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>
Net revenues                            $207,890   $199,329   $184,068   $178,243   $163,720
Cost of revenues                          51,904     53,479     51,953     52,292     61,300
                                        ----------------------------------------------------
Gross margin                             155,986    145,850    132,115    125,951    102,420
Operating expenses                       179,567    152,342    113,490    108,559     91,042
                                        ----------------------------------------------------
Operating earnings (loss)                (23,581)    (6,492)    18,625     17,392     11,378
                                        ----------------------------------------------------
Other income (expense):
  Interest income (expense), net           2,302      2,703      1,829        381     (1,015)
  Other expense, net                        (394)      (363)      (561)      (427)    (1,169)
                                        ---------------------------------------------------- 
    Profit (loss) before income taxes    (21,673)    (4,152)    19,893     17,346      9,194
                                        ----------------------------------------------------
  Income taxes                               741      1,956      5,647      3,500        677
    Net profit (loss)                   $(22,414)  $ (6,108)  $ 14,246   $ 13,846   $  8,517
                                        ----------------------------------------------------
    Net profit (loss) per share         $  (0.62)  $  (0.20)  $   0.45   $   0.47   $   0.32
                                        ----------------------------------------------------
    Weighted average shares
      outstanding                         36,179     30,922     31,941     29,527     26,307
                                        ----------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

                                                            September 30,   
(In thousands                             1996       1995       1994       1993       1992
--------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>
Working capital                         $ 61,935   $ 60,539   $ 77,291   $ 60,072   $ 6,100
Total assets                             166,807    131,870    138,574    111,276    60,009
Long-term obligations                      9,332      7,521      1,084      1,898     2,073
Shareholders' equity                     101,581     82,182     89,644     70,531    16,899
                                        ----------------------------------------------------
</TABLE>
<PAGE>   2
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

SCO's mission is to be the leading supplier of UNIX System software for
business-critical environments. SCO is the world's leading supplier of UNIX
server and host systems, with a worldwide market share of over 37%, and a
worldwide market share of over 78% of UNIX Systems on the Intel platform
(source: IDC, 6/96). SCO sells and supports its products through a worldwide
network of distributors, resellers, system integrators and OEMs.

  SCO is committed to bringing The Internet Way of Computing to
business-critical environments, because it can dramatically lower the total cost
of computing and is ideal for supporting heterogeneous systems and networks. The
Internet Way of Computing was built on UNIX System Technologies, and as the
leading provider of UNIX servers, SCO will continue to enhance its product line
to support the new generation of network computers and Java based
business-critical applications.

  In addition to historical information contained herein, this Discussion and
Analysis may contain 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 analysis 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
<TABLE>
<CAPTION>
(in thousands)              1996        Change      1995      Change     1994
--------------------------------------------------------------------------------
<S>                       <C>             <C>     <C>           <C>    <C>     
Net revenues              $207,890        4%      $199,329      8%     $184,068
--------------------------------------------------------------------------------
</TABLE>

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

  Net revenues were $207.9 million in fiscal 1996 as compared to $199.3 million
in fiscal 1995 and $184.1 million in fiscal 1994, representing increases of 4%
and 8% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to fiscal 1995,
respectively. Beginning in fiscal 1996, net revenues included revenues derived
from UnixWare packaged product shipments and SVRX source license revenue related
to the acquisition of the UNIX business from Novell, Inc. which occurred in
December of 1995. Beginning in fiscal 1995, net revenues included revenues from
Visionware Limited (Visionware) which was acquired in December of 1994 and
complemented the Company's existing client integration product offerings.
Revenue is net of a provision for estimated future returns for stock balancing
and excess quantities above levels the Company deems appropriate in its
distribution channel partners.

LICENSE REVENUES License revenues were $189.0 million in fiscal 1996 as compared
to $177.5 million in fiscal 1995 and $163.7 million in fiscal 1994, representing
increases of 6% in fiscal 1996 over 1995 and 8% in fiscal 1995 over 1994.
License revenues were approximately 91% of total net revenues for fiscal 1996
and 89% of total net revenues for both fiscal 1995 and 1994. The fiscal 1995 to
1996 license revenue increase was primarily attributable to unit volume
increases (as opposed to price increases) of the Company's operating systems and
layered products. The fiscal 1994 to 1995 license revenue increase was primarily
attributable to unit volume increases of Visionware(R) products complementing 
the Company's client integration product offerings and, to a lesser extent,
increased unit volume of operating systems. For the fiscal years ended September
30, 1996, 1995 and 1994, no single customer accounted for greater than 10% of
the Company's license revenues.

SERVICE REVENUES Revenues from services were $18.9 million in fiscal 1996 as
compared to $21.8 million in fiscal 1995 and $20.3 million in fiscal 1994, and
represented a decrease of 13% in fiscal 1996 over fiscal 1995 and an increase of
7% in fiscal 1995 over 1994. The decrease in service revenues in fiscal 1996 was
primarily attributable to the Company's decision to transition responsibility
for the support and training of its product offerings to its channel partners in
the first half of fiscal 1996. As a result, support and training revenues
recognized by the Company decreased in 1996. The increase in service revenues in
fiscal 1995 was primarily attributable to increases in custom engineering
revenues and an increase in support services related to the Company's installed
base of products as well as the growth of this installed base.



                                                                              17

<PAGE>   3
                MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

COST OF REVENUES

<TABLE>
<CAPTION>
(In thousands)       1996      Change          1995    Change      1994
--------------------------------------------------------------------------------
<S>                   <C>       <C>          <C>         <C>     <C>    
Cost of revenues      $51,904   (3)%         $53,479     3%      $51,953
Percentage of
  net revenues          25%                     27%                 28%
--------------------------------------------------------------------------------
</TABLE>

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
licenses and services, mix changes in net revenue contribution between product
families, mix changes in net revenue contribution between geographic regions and
mix changes in net revenue contribution between channels of distribution, since
both price and cost characteristics associated with these revenue streams can
vary greatly. The Company can also experience fluctuations in cost of revenues 
as a percentage of revenues 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 include royalties paid to
certain software vendors, 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 decreased to 18% for fiscal 1996 from 19% in fiscal 1995 and 20% in
fiscal 1994. Reduced third party royalty payments associated with the purchase
of the UNIX business from Novell and the purchase of TCP/IP networking
technology (both of which occurred in the first half of fiscal 1996) were
primary factors in the reduced license costs in fiscal 1996. The balance of this
improvement, both in fiscal 1996 and fiscal 1995, resulted from improved
manufacturing overhead expense controls and a product mix shift from packaged
products to licensed products, which do not include the costs associated with
packaging, documentation and assembly.

COST OF SERVICE REVENUES Cost of service revenues include documentation,
consulting, personnel related costs, including travel and lodging, associated
with providing such services. Cost of service revenues as a percentage of
service revenues increased to 94% in fiscal 1996 as compared to 91% in both
fiscal 1995 and 1994. The fiscal 1996 increase in cost of services as a
percentage of service revenues resulted primarily from incremental support costs
for product offerings associated with the acquisition of the UNIX business from
Novell.


RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>
(in thousands)                    1996    Change      1995      Change    1994
--------------------------------------------------------------------------------
<S>                             <C>         <C>     <C>          <C>     <C>    
Research and development        $39,009     21%     $32,208      15%     $28,046
Percentage of net revenues         19%                 16%                 15%
--------------------------------------------------------------------------------
</TABLE>

The Company invests in research and development both for new products and to
provide continuing enhancements to current products. Research and development
expenses increased by 21% to $39.0 million in fiscal 1996 from $32.2 million in
fiscal 1995. In fiscal 1995, research and development expenses increased 15%
from the fiscal 1994 total expenditures of $28.0 million.

  Research and development expenses represented 19%, 16% and 15% of total net
revenues in fiscal 1996, 1995 and 1994, respectively. The fiscal 1995 to 1996
increase in research and development spending was primarily attributable to
increased personnel and facility costs associated with the acquisition of the
UNIX business acquired from Novell. In addition, increased spending levels
associated with the development and release of layered products (including SCO
Doctor, SCO ARCserve/Open from Cheyenne and SCO Internet Family) also
contributed to the fiscal 1996 increased product development spending. The
fiscal 1994 to fiscal 1995 increase in research and development spending was
primarily attributable to increased investment in new product releases including
SCO OpenServer Release 5 and SCO XVision Version 6, increased spending to
support the client integration products and localization efforts for the
Company's current products.

  To date, the Company has expensed all of its software development costs, as
incurred, in compliance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed."


SALES AND MARKETING
<TABLE>
<CAPTION>
(in thousands)                     1996     Change      1995   Change     1994
--------------------------------------------------------------------------------
<S>                               <C>        <C>      <C>        <C>     <C>    
Sales and marketing               $79,359    (4)%     $82,493    23%     $66,855
Percentage of net revenues          38%                 41%                36%
--------------------------------------------------------------------------------
</TABLE>

Sales and marketing expenses decreased by 4% to $79.4 million in fiscal 1996
from $82.5 million in fiscal 1995 and increased by 23% in fiscal 1995 from
fiscal 1994 expenses of $66.9 million. Sales and marketing expenses represented


18

<PAGE>   4
                MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

38%, 41% and 36% of total net revenues in fiscal 1996, 1995 and 1994,
respectively. The fiscal 1995 to fiscal 1996 decrease was primarily attributable
to decreased project spending in both corporate and channel marketing as well as
decreased sales personnel related costs in the United States and Europe. These
decreases were partially offset by increased cooperative advertising expenses
and by increased spending levels in Japan in order to support new products
associated with the acquisition of the UNIX business from Novell. The fiscal
1994 to fiscal 1995 increase was primarily attributable to increased sales and
marketing spending in support of the client integration product offerings and
incremental marketing spending in support of the Company's release of OpenServer
Release 5.


GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
(in thousands)                 1996       Change       1995    Change     1994
--------------------------------------------------------------------------------
<S>                           <C>           <C>      <C>         <C>     <C>    
General and administrative    $22,836       17%      $19,547     5%      $18,589
Percentage of net revenues      11%                    10%                 10%
--------------------------------------------------------------------------------
</TABLE>

General and administrative expenses increased by 17% to $22.8 million in fiscal
1996 from $19.5 million in fiscal 1995 and by 5% in fiscal 1995 from $18.6
million in fiscal 1994. General and administrative expenses represented 11% of
total net revenues for fiscal 1996 and 10% for both fiscal 1995 and 1994. The
increased spending in fiscal 1996 was primarily attributable to intangible
assets amortization and personnel related costs associated with the purchase
and assimilation of the UNIX business from Novell. See Note 13 of Notes to
Consolidated Financial Statements. The spending increase in fiscal 1995
compared to fiscal 1994 was primarily attributable to increased personnel
related costs to support the client integration product offerings and
intangible assets amortization associated with the purchase of Visionware. See
Note 13 of Notes to Consolidated Financial Statements.

NON-RECURRING CHARGES

<TABLE>
<CAPTION>
(in thousands)                 1996       Change       1995    Change     1994
--------------------------------------------------------------------------------
<S>                          <C>           <C>      <C>         <C>     <C>    
Non-recurring
  charges                    $38,363        112%    $18,094      -       - 

Percentage of 
  net revenues                 18%                     9%                -
--------------------------------------------------------------------------------
</TABLE>

Non-recurring charges were $38.4 million representing 18% of total revenues in
fiscal 1996. The charges, which primarily related to UnixWare products which had
not yet reached technological feasibility, were incurred in the first fiscal
quarter of 1996. Non-recurring charges of $14.1 million, which primarily related
to Visionware products which had not yet reached technological feasibility, were
incurred in the first fiscal quarter of 1995. Additional non-recurring costs of
$4.0 million were incurred in the fourth fiscal quarter of 1995 related to
severance and other personnel costs associated with the Company's restructuring
of certain segments of its business operations. This restructuring resulted in a
worldwide workforce reduction of approximately 8%.

OTHER INCOME (EXPENSE)


<TABLE>
<CAPTION>
(In thousands)           1996     Change     1995       Change         1994
--------------------------------------------------------------------------------
<S>                      <C>       <C>      <C>           <C>         <C>   
Interest income, net    $2,302              $2,703                   $ 1,829
Other expense, net        (394)               (363)                     (561)
--------------------------------------------------------------------------------
Total other income       $1,908    (18)%    $2,340        85%         $1,268
Percentage of net 
   revenues                1%                  1%                        1%
--------------------------------------------------------------------------------
</TABLE>

Other income and expense consists of interest income net of interest expense,
foreign exchange gains and losses and other miscellaneous items. Net interest
income was $2.3 million, $2.7 million and $1.8 million for fiscal 1996, 1995
and 1994, respectively. The net interest income decrease in fiscal 1996 was
primarily attributable to a decrease in the weighted average interest bearing
balances maintained throughout the year. The net interest income increase in
fiscal 1995 was primarily attributable to an increase in the weighted average
interest bearing balances maintained throughout the year. Other expense was $.4
million for fiscal 1996 and 1995, and $.6 million for fiscal 1994. The
fluctuation from period to period resulted primarily from intercompany
transactions settled with the Company's U.K. subsidiary resulting in
recognition of foreign exchange gains and losses.

INCOME TAXES

<TABLE>
<CAPTION>
(in thousands)                 1996       Change       1995    Change     1994
--------------------------------------------------------------------------------
<S>                          <C>           <C>      <C>         <C>     <C>    
Income taxes                 $741          (62)%    $1,956      (65)%   $5,647

Percentage of
  net revenues                                        1%                  3%

Effective income
  tax rate                    (3)%                   (47)%               28%  
--------------------------------------------------------------------------------
</TABLE>




                                                                              19

<PAGE>   5
                MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

In fiscal 1996, 1995 and 1994, the Company's effective income tax rates were
(3)%, (47)% and 28%, respectively. The fiscal 1996 rate reflects non-deductible,
non-recurring charges related to the acquisition of the UNIX business and a
change in the valuation allowance for deferred tax assets. The fiscal 1995 rate
reflects non-deductible, non-recurring charges related to the acquisition of
Visionware, while the fiscal 1994 effective income tax rate includes the change
in the valuation allowance for deferred tax assets. For an analysis of income
taxes, see Note 12 of Notes to Consolidated Financial Statements.

NET PROFIT (LOSS)

<TABLE>
<CAPTION>
(in thousands)             1996     Change       1995       Change        1994
--------------------------------------------------------------------------------
<S>                    <C>          <C>       <C>           <C>         <C>     
Net profit (loss)      $(22,414)    (267)%    $ (6,108)     (143)%      $ 14,246
Percentage of
  net revenues           (11)%                   (3)%                      8%
--------------------------------------------------------------------------------
</TABLE>

The Company reported a net loss of $22.4 million and $6.1 million in fiscal 1996
and 1995, respectively, and a net profit of $14.2 million or 8% of total net
revenues in fiscal 1994. The fiscal 1996 and fiscal 1995 net losses were
primarily attributable to absolute increases in operating expenses and
non-recurring charges which more than offset the increased gross margin levels
as compared to fiscal 1994.

Factors That May Affect Future Results

The Company's future operating results may be affected by various uncertain
trends and factors which are beyond the Company's control. These include adverse
changes in general economic conditions and rapid or unexpected changes in the
technologies affecting UNIX operating systems. The industry has become
increasingly competitive and, accordingly, the Company's results any 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 has 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 could be adversely affected, and such effect could be
substantial and could result in an operating loss.

  A substantial portion of the Company's revenues are derived from outside the
United States. Trade sales to international customers represented 53%, 60% and
56% of total revenues for fiscal 1996, 1995 and 1994, respectively. A
substantial portion of these international revenues are denominated in the U.K.
pound sterling, and operating results can vary with changes in the U.S. dollar
exchange rate for such currency. The Company's revenues can also be affected by
general economic conditions in the United States, Europe and other international
markets.

  The Company experiences seasonality of revenues for both 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 budget year. Additionally,
net revenues for the first quarter of the fiscal year are typically lower than
net revenues of the prior quarter.

  The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 60 days, such credits to be applied against future
purchases. Distributors may not return products for a refund.



20

<PAGE>   6
                MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

  The Company's effective tax rate is subject to change based on the Company's
ability to realize deferred tax assets and as new tax legislation is enacted.

  The Company continually evaluates potential candidates for acquisition. Such
candidates are selected based on products or markets which are complementary to
those of the Company's. The Company's operations and financial results could be
significantly affected by such an acquisition.

  The Company's operations and financial results could be significantly affected
by international factors such as changes in foreign currency exchange rates. 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 including the period being reported on. Due to competitive pressures, it
is 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.

Liquidity and Capital Resources

  The Company has financed its operations through combinations of net proceeds
from the Company's initial public offering, bank borrowings, equipment lease
lines and cash flow generated from operations. As of September 30, 1996, the
Company's principal sources of liquidity included cash and short-term
investments of $54.8 million and an available $15 million bank line of credit
under which the Company had no outstanding borrowings. The Company does not
believe it will require borrowing capacity greater than the amount available
under this line of credit for at least the next twelve months. See Notes 2, 3
and 7 of Notes to Consolidated Financial Statements.

  Working capital has been used to acquire capital equipment, products and
technology, and to make facilities improvements. The Company's operating
activities provided cash of $27.6 million for fiscal 1996, $3.3 million in
fiscal 1995 and $27.9 million in fiscal 1994. Cash provided by (used for)
investing activity during fiscal 1996, 1995 and 1994 was $(21.4) million, $6.4
million and $(58.5) million, respectively. In fiscal 1996, cash provided by
operations was used to fund purchases of technology, property and equipment, and
short-term investments. In fiscal 1995, proceeds from short-term investments
were used to fund the purchase of Visionware, as well as the purchase of
property and equipment. In fiscal 1994, proceeds from the Company's 1993 initial
public offering and cash provided by operating activities funded short-term
investments and the purchase of property and equipment. Cash provided by (used
for) financing activities was $(5.9) million, $(5.6) million and $.7 million for
fiscal 1996, 1995 and 1994, respectively. In fiscal 1996 and fiscal 1995,
proceeds from the sale of Common Stock were more than offset by the Company's
stock repurchases and payments on capital lease obligations. In fiscal 1994,
proceeds from the sale of Common Stock exceeded payments on capital lease
obligations and its bank line of credit.

  The Company believes that 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 at
least fiscal 1997.



                                                                              21

<PAGE>   7
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
(In thousands, except per share data)                        1996          1995             1994
---------------------------------------------------------------------------------------------------

<S>                                                       <C>             <C>             <C>      
Net revenues:

  Licenses                                                $ 189,032       $ 177,534       $ 163,744

  Services                                                   18,858          21,795          20,324
                                                          -----------------------------------------
     Net revenues                                           207,890         199,329         184,068
                                                          -----------------------------------------

Cost of revenues:

  Licenses                                                   34,135          33,688          33,542

  Services                                                   17,769          19,791          18,411
                                                          -----------------------------------------
     Total cost of revenues                                  51,904          53,479          51,953
                                                          -----------------------------------------
     Gross margin                                           155,986         145,850         132,115
                                                          -----------------------------------------
Operating expenses:

  Research and development                                   39,009          32,208          28,046

  Sales and marketing                                        79,359          82,493          66,855

  General and administrative                                 22,836          19,547          18,589

  Non-recurring charges                                      38,363          18,094             -
                                                          -----------------------------------------
     Total operating expenses                               179,567         152,342         113,490
                                                          -----------------------------------------
     Operating earnings (loss)                              (23,581)         (6,492)         18,625

Other income (expense):

  Interest income, net                                        2,302           2,703           1,829

  Other expense, net                                           (394)           (363)           (561)
                                                          -----------------------------------------
     Profit (loss) before income taxes                      (21,673)         (4,152)         19,893
                                                          -----------------------------------------
  Income taxes                                                  741           1,956           5,647
                                                          -----------------------------------------
     Net profit (loss)                                    $ (22,414)      $  (6,108)      $  14,246
                                                          -----------------------------------------
     Net profit (loss) per share                          $   (0.62)      $   (0.20)      $    0.45
                                                          -----------------------------------------
     Common and common equivalents used in computing
       net profit (loss) per share                           36,179          30,922          31,941
                                                          -----------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.



22

<PAGE>   8
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                  September 30,
(In thousands, except for share data)                                          1996          1995
-----------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>      
ASSETS
Current assets:
   Cash and cash equivalents                                                $  32,065       $  32,074
   Short-term investments                                                      22,766          14,816
   Receivables, net                                                            47,176          45,009
   Deferred tax assets                                                          6,152           3,896
   Other current assets                                                         9,670           6,911
                                                                            ---------       ---------
     Total current assets                                                     117,829         102,706
                                                                            ---------       ---------
Property and equipment, net                                                    15,546          14,991
Purchased software and technology licenses                                     19,908           5,640
Other assets                                                                   13,524           8,533
                                                                            ---------       ---------
       Total assets                                                         $ 166,807       $ 131,870
                                                                            ---------       ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Royalties payable                                                        $  10,644       $   6,852
   Trade accounts payable                                                      12,755          10,207
   Income taxes payable                                                         3,369              31
   Accrued expenses and other current liabilities                              22,288          18,991
   Deferred revenues                                                            6,838           6,086
                                                                            ---------       ---------
     Total current liabilities                                                 55,894          42,167
                                                                            ---------       ---------
Other long-term liabilities                                                     9,332           7,521
                                                                            ---------       ---------
Shareholders' equity:
  Common stock, net of notes receivable, authorized 100,000,000 shares
     Issued and outstanding 37,105,892 and 30,844,003 shares                  125,172          83,146
  Cumulative translation adjustment                                              (297)            (84)
  Accumulated deficit                                                         (23,294)           (880)
                                                                            ---------       ---------
     Total shareholders' equity                                               101,581          82,182
                                                                            ---------       ---------
       Total liabilities and shareholders' equity                           $ 166,807       $ 131,870
                                                                            ---------       ---------
</TABLE>


See accompanying notes to consolidated financial statements.



                                                                              23

<PAGE>   9
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                            Common Stock             Cumulative       Retained         Total
                                        ---------------------        Translation      Earnings      Shareholders'
         (In thousands)                 Shares         Amount        Adjustment      (Deficit)        Equity
----------------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>             <C>             <C>             <C>
BALANCES, SEPTEMBER 30, 1993            29,457       $  81,388       $  (1,839)      $  (9,018)      $  70,531

Issuance under stock option

  and purchase plans                     1,129           2,876             -               -             2,876

Stock option income tax benefit            -               500             -               -               500

Translation adjustment                     -               -             1,491             -             1,491

Net profit                                 -               -               -            14,246          14,246
--------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1994            30,586       $  84,764       $    (348)      $   5,228       $  89,644

Issuance under stock option

  and purchase plans                       904           3,263             -               -             3,263

Common stock repurchases                  (760)         (7,489)            -               -            (7,489)

Visionware purchase                        114           1,075             -               -             1,075

Stock option income tax benefit            -             1,533             -               -             1,533

Translation adjustment                     -               -               264            --               264

Net loss                                   -               -               -            (6,108)         (6,108)
--------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1995            30,844       $  83,146       $     (84)      $    (880)      $  82,182

Issuance under stock option

  and purchase plans                       823           2,734             -               -             2,734

Common stock repurchases                  (689)         (4,744)            -               -            (4,744)

UNIX business purchase                   6,128          43,773             -               -            43,773

Stock option income tax benefit            -               263             -               -               263

Translation adjustment                     -               -              (213)            -              (213)

Net loss                                   -               -               -           (22,414)        (22,414)
--------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996            37,106       $ 125,172       $    (297)      $ (23,294)      $ 101,581
--------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.


24

<PAGE>   10
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Year Ended September 30,
(in thousands)                                                                       1996             1995            1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>             <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss)                                                                  $ (22,414)      $  (6,108)      $  14,246
Adjustments to reconcile net profit (loss) to net cash
  provided by operating activities -
    Depreciation and amortization                                                     16,151          10,369           6,485
    Fixed assets received in lieu of payment                                             -              (467)           (145)
    Charge for purchased research and development                                     38,363          11,177             -
    Changes in operating assets and liabilities, net of acquisitions -
      Receivables                                                                     (2,167)         (5,176)           (522)
      Deferred tax assets                                                             (1,842)         (4,673)         (1,650)
      Other current assets                                                              (336)           (226)           (795)
      Royalties payable                                                                5,002            (543)            976
      Trade accounts payable                                                           2,548             176             543
      Income taxes payable                                                               423          (4,350)          5,241
      Accrued expenses and other current liabilities                                  (7,333)          1,318           1,969
      Deferred revenue                                                                (1,673)           (272)            839
      Other long-term liabilities                                                        588             575             233
      Stock option income tax benefit                                                    263           1,533             500
                                                                                   -----------------------------------------
      Net cash provided by operating activities                                       27,573           3,333          27,920
                                                                                   -----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:

    Purchases of property and equipment                                               (4,874)         (9,940)         (4,998)
    Purchases of software and technology licenses                                     (5,953)         (4,868)           (584)
    Proceeds from short-term investments                                              15,514          57,647          89,300
    Purchases of short-term investments                                              (23,464)        (20,851)       (140,913)
    Purchase of Visionware                                                               -           (13,675)            -
    Changes in other assets                                                           (2,658)         (1,960)         (1,314)
                                                                                   -----------------------------------------
      Net cash provided by (used for) investing activities                           (21,435)          6,353         (58,509)
                                                                                   -----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:

    Payments on capital leases, notes payable, and line of credit obligations         (3,924)         (1,353)         (2,141)
    Net proceeds from sale of common stock                                             2,742           3,263           2,876
    Repurchases of common stock                                                       (4,752)         (7,489)            -
                                                                                   -----------------------------------------
      Net cash provided by (used for) financing activities                            (5,934)         (5,579)            735
                                                                                   -----------------------------------------
Effects of exchange rate changes on cash and cash equivalents                           (213)            264           1,491
                                                                                   -----------------------------------------
Change in cash and cash equivalents                                                       (9)          4,371         (28,363)

Cash and cash equivalents at beginning of year                                        32,074          27,703          56,066
                                                                                   -----------------------------------------
Cash and cash equivalents at end of year                                           $  32,065       $  32,074       $  27,703
                                                                                   -----------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

  Cash paid during the period:
    Income tax payments                                                            $   1,955       $   8,545       $   1,200
    Interest payments                                                                    147             254             452
  Non-cash transactions:
    Capital lease agreement                                                        $   2,676       $      29       $     525
    Networking technology buyout                                                       8,205             -               -
    Purchase of UNIX business                                                         43,773             -               -
----------------------------------------------------------------------------------------------------------------------------
</TABLE>



See accompanying notes to consolidated financial statements.


                                                                              25

<PAGE>   11
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary Of Significant Accounting Policies

THE COMPANY SCO is a leading provider of UNIX system-based, open system software
and has the largest installed base of such software for Intel processor-based
computer systems. The Company's range of products enables 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 value-added distribution and development infrastructure
to address and support the business needs of organizations implementing these
solutions.

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
Company and its wholly and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
companies less than 20% owned are carried at cost.

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. Actual results could differ from those estimates.

RECLASSIFICATIONS Certain reclassifications have been made for consistent
presentation.

CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid
investments purchased with an original maturity of 90 days or less to be cash
equivalents. Short-term investments include instruments with lives ranging from
91 days to three years. Until fiscal 1995, short-term investments were stated at
cost which approximates market. In 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under the provision of SFAS 
No. 115, the Company classified its investments in certain debt and equity 
securities as available-for-sale. Such investments are recorded at fair market 
value, and unrealized gains and losses are reported as a separate component of
shareholders' equity. As of September 30, 1996, unrealized gains or losses on
such investments were not significant.

CONCENTRATIONS OF CREDIT RISK The Company generates a significant portion of its
revenues through distributors of personal computer software in North America,
Europe 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 the fiscal year ended September 30,
1996, no one customer's balance exceeded 10% of trade receivables.

INVENTORIES Inventories consist primarily of software documentation and storage
media, which are stated at the lower of cost (first-in, first-out) or market.
Inventories are included in other assets in the accompanying consolidated
balance sheets.

PROPERTY AND EQUIPMENT Property and equipment are stated at cost and, except for
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 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.

PURCHASED SOFTWARE AND TECHNOLOGY LICENSES Purchased software consists of core
intellectual property rights which the Company owns. Amounts capitalized are
amortized using the straight-line method over the estimated lives of the
products into which the software was incorporated. The estimated lives range
from three to six years. Technology licenses represent payment streams for the
rights to use and integrate third party technology into the Company's product
offerings. Amounts capitalized are amortized pro ratably over the term of the
contractual rights for the use of this technology, not exceeding five years.


26

<PAGE>   12
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standard 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, 1996, 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 Revenue from sales of software and software documentation
products is generally recognized upon product shipment provided that no
significant vendor obligations remain and collection of the resulting receivable
is deemed probable. For those agreements which provide the customer the right to
multiple copies in exchange for a non-refundable fixed fee, revenue is
recognized at delivery of the product master of the first copy. Revenue is
deferred for estimated future returns for stock balancing and excess quantities
above levels the Company deems appropriate in the distribution channels. Revenue
from support contracts, including support bundled with software licenses, is
recognized ratably over the term of the contract.

The Company has entered into agreements whereby it licenses products to original
equipment manufacturers. These agreements generally provide for nonrefundable
commitment fees which are recognized upon contract signing and product
acceptance. Such commitment fees received prior to product acceptance are
deferred

The Company also provides contract engineering services, including the porting
of system software, consulting, design and product review. Revenues from these
services are recognized on the percentage-of-completion method unless
refundable. If payments we refundable, revenues are deferred until customer
acceptance.

The Company's existing revenue recognition policies comply with the provisions
of the American Institute of Certified Public Accountants Statement of Position
91-1, "Software Revenue Recognition."

COOPERATIVE ADVERTISING 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 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.

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 or rates are considered.

NET PROFIT (LOSS) PER SHARE Net profit (loss) per share is computed based on
weighted average number of common shares outstanding and dilutive common
equivalent shares from the assumed exercise of stock options using the treasury
stock method.

RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." SFAS No. 121 will be effective for fiscal
years beginning after December 15, 1995, and requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company will
adopt SFAS No. 121 in fiscal 1997 and does not expect its adoption to have a
material impact on the Company's financial condition or on its consolidated
statements of operations.

TRANSLATION ADJUSTMENTS All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, cons and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.


                                                                              27

<PAGE>   13
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 2 - CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                        September 30,
                                     -----------------
(in thousands)                         1996       1995
-------------------------------------------------------
<S>                                  <C>        <C>    
Bank demand deposits                 $ 4,160    $ 6,044
Certificates of deposit                  676      2,091
Money market accounts                 23,652     16,257
U.S. Treasury bills                        -        496
Government agency bonds                    -      1,738
Corporate bonds                        3,577      5,448
-------------------------------------------------------
                                     $32,065    $32,074
=======================================================
</TABLE>

Note 3 - SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                        September 30,
                                     -----------------
(in thousands)                         1996       1995
-------------------------------------------------------
<S>                                  <C>        <C>    
U.S. Treasury bills                  $   119    $   734
U.S. Treasury notes                    3,462      1,899
Certificates of deposit                1,136          -
Government agency bonds               10,450      7,514
Corporate bonds                        7,599      4,669
-------------------------------------------------------
                                     $22,766    $14,816
=======================================================
</TABLE>

At September 30, 1996, investments with maturity dates ranging from 91 days to 1
year totaled $5.8 million, and investments with maturity dates ranging from 1
year to 3 years totaled $16.9 million.

Note 4 - RECEIVABLES

<TABLE>
<CAPTION>
                                            September 30,
                                       ----------------------
(in thousands)                             1996     1995
-------------------------------------------------------------
<S>                                    <C>           <C>     
Trade accounts receivable              $ 58,306      $ 58,404
Less allowance for returns and
  doubtful accounts                     (11,130)      (13,395)
-------------------------------------------------------------
                                       $ 47,176      $ 45,009
=============================================================
</TABLE>

Note 5 - PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                         September 30,
                                     -------------------
(In thousands)                           1996       1995
--------------------------------------------------------
<S>                                  <C>         <C>    
Computer and office equipment        $ 34,284    $31,478
Furniture and fixtures                  7,245      6,883
Leasehold improvements                  6,719      6,322
--------------------------------------------------------
                                     $ 48,248   $ 44,683

Less accumulated depreciation and
 amortization                         (32,702)   (29,692)
--------------------------------------------------------
                                     $ 15,546    $14,991
========================================================
</TABLE>

Note 6 - PURCHASED SOFTWARE

<TABLE>
<CAPTION>
                                            September 30,
                                       ---------------------
                                          1996         1995
------------------------------------------------------------
(In thousands)
<S>                                    <C>           <C>    
Purchased software and technology
 licenses, at cost                     $ 23,128      $ 7,792
Less accumulated amortization            (3,220)      (2,152)
------------------------------------------------------------
                                       $ 19,908      $ 5,640
============================================================
</TABLE>

In March of 1996, the Company purchased a fully paid up license enabling it to
integrate and distribute certain networking technology in perpetuity. Under the
terms of the purchase agreement, consideration of $9.0 million is due in three
equal installments with the final payment due in March of 1998. One installment
payment of $3 million was made during fiscal 1996. The net present value of the
remaining payments is included in purchased software and technology licenses in
the Company's consolidated balance sheets and is being amortized over five
years. Amortization expense of $1.0 million is included in cost of license
revenues in the Company's Consolidated Statements of Operations.

Note 7 - BANK LINE OF CREDIT

At September 30, 1996, the Company had $15 million available under a domestic
bank line of credit. The credit agreement provides that the Company may borrow
an amount equal to 75% of eligible accounts receivable, subject to a total of
$15 million. The interest rate on the line of credit is the prime rate and
borrowings against the line of credit are unsecured. The line of credit requires
that the Company maintain certain financial ratios, all of which the Company was
in compliance with as of September 30, 1996. The weighted average interest rate
on borrowings made against the line of credit during fiscal 1996 was 8.5%.

Note 8 - ROYALTIES PAYABLE

Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. In 1996, two corporate shareholders
accounted for $7.6 million of the royalties payable balance and $4.1 million of
royalty expense. One of the aforementioned shareholders accounted for $2.9
million of


28

<PAGE>   14
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


the royalties payable balance as of September 30, 1995 and $7.4 million and $7.5
million of royalty expense for fiscal 1995 and fiscal 1994, respectively.

Note 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
                                         September 30,
                                      ------------------
(in thousands)                           1996       1995
--------------------------------------------------------
<S>                                   <C>        <C>    
Accrued wages, commission, bonuses    $ 6,211    $ 6,166
Accrued advertising                     4,030      2,944
Accrued fringe benefits                 2,075      1,947
Other accrued expenses                  9,972      7,934
--------------------------------------------------------
                                      $22,288    $18,991
========================================================
</TABLE>

Note 10 - COMMITMENTS

OPERATING LEASES The Company leases its facilities and certain equipment under
non-cancelable operating leases that expire on various dates through fiscal
2020. The future minimum lease payments under operating leases are summarized as
follows (in thousands):


<TABLE>
<CAPTION>
Fiscal Year                   As of September 30, 1996
------------------------------------------------------
<C>                                            <C>    
1997                                           $ 8,123
1998                                             6,506
1999                                             5,496
2000                                             5,377
2001                                             5,203
Thereafter                                      34,275
------------------------------------------------------
                                               $64,980
------------------------------------------------------
</TABLE>

Rent expense amounted to approximately $8.2 million, $7.4 million and $6.9
million in fiscal 1996, 1995 and 1994, respectively.

  Included in the Company's operating lease commitments are facilities leased
from Encinal Partners, a partnership which includes both a Company Executive 
Vice President and a principal stockholder. 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 conducted on an "arms-length" basis.
The lease term of these facilities is between two and nine years. Rent expense
for these facilities amounted to approximately $1.4 million in both fiscal 1996
and 1995, and $1.5 million in fiscal 1994.

CAPITAL LEASES The Company leases certain equipment under agreements which have
been classified as capital leases. At September 30, 1996, the cost of such
leased equipment was $3.6 million and the accumulated amortization was $1.4
million. The present value of the minimum lease payments as of September 30,
1996 was $2.6 million, of which $1.0 million represents a current liability and
$1.6 million represents a long-term liability. Future minimum lease payments,
including interest of $.2 million, are $1.1 million, $.9 million, and $.8
million for the fiscal years ending September 30, 1997, 1998 and 1999,
respectively.

SAVINGS PLANS The Company has a savings plan, which qualifies under section 
401(k) of the Internal Revenue Code. Under the plan, participating U.S. 
employees may defer up to 25% of their pre-tax salary, but not more than the
statutory limits. Beginning January 1995, the Company began a contribution
matching program which is to be phased-in over the next three years. Under the
terms of this program, the Company will match 50% of employee's contribution up
to $1,000 or 2% of employee's annual salary for 1995; up to $2,000 or 4% of
employee's annual salary for 1996; and up to $3,000 or 6% of employee's annual
salary for 1997 and thereafter. For the year ended September 30, 1996, the
Company's total contribution towards the 401(k) plan amounted to $.5 million.

  The Company also has a non-qualified executive deferred compensation plan
which started in October of 1995. Under the terms of the plan, eligible
officers and directors are permitted to defer a portion of their compensation.
The liability for executive deferred compensation at September 30, 1996 was $.2
million.

  In December 1995, the Company agreed to take responsibility for an employee
pension plan as part of their UNIX business acquisition. Under the terms of the
acquisition, the Company agreed to assume the liability associated with the
pension plan for employees they retained. At September 30, 1996, the Company's
liability under the pension plan was $.4 million.


                                                                              29

<PAGE>   15
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 11 - SHAREHOLDER'S EQUITY

PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock, of which 930,000, 1,950,000, 5,500,000 and 850,000 were
designated Series A, Series B, Series C and Series C-1 Preferred Stock,
respectively. As of September 30, 1996, 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 1996, 1995 and 1994, employees purchased 317,722, 376,047 and
351,116 shares at an average per share price of $5.47, $5.67 and $5.28,
respectively. The number of shares reserved for issuance under the Purchase Plan
increased by 500,000 shares in February 1996. As of September 30, 1996, 699,115
shares were reserved for future issuance.

1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1996 and 1995, the Company
had authorized 10,013,665 shares of Common Stock for issuance under the 1994
Incentive Stock Option Plan (the "Option Plan"), respectively. 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
Company's stock committee 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.

  As of September 30, 1996 and 1995, 2,322,538 and 1,923,144 options were
exercisable, respectively, under the Option Plan. The activity under the Option
Plan for fiscal 1994, 1995 and 1996 is as follows: 


<TABLE>
<CAPTION>
                                                                     Shares
(In thousands                                                       Available
except per                   Options             Per Share         for Future
share price)                Outstanding            Price             Grants
--------------------------------------------------------------------------
<S>                            <C>            <C>                   <C>
OUTSTANDING AS OF
SEPTEMBER 30, 1993             4,340          $ .04 - $12.00           872
Additional shares
  authorized                     -                                   1,000
Granted                        2,525           5.12 -   9.12        (2,525)
Exercised                       (772)           .04 -   4.92            -
Cancelled                     (1,819)          1.25 - 12.00          1,819
--------------------------------------------------------------------------
OUTSTANDING AS OF
SEPTEMBER 30, 1994             4,274          $ .04 - $12.00         1,166
Additional shares  
  authorized                      -                                  3,000
Granted                        2,700           6.19 -  13.94        (2,700)
Exercised                       (527)           .04 -  12.00            -
Cancelled                       (432)          1.25 -  13.63           432
--------------------------------------------------------------------------
OUTSTANDING AS OF
SEPTEMBER 30, 1995             6,015          $ .04 - $13.94         1,898
Additional shares
  authorized                      -
Granted                        1,235           5.63 -   8.25        (1,235)
Exercised                       (500)           .04 -   6.63            -
Cancelled                       (719)          1.25 -  13.63           719
--------------------------------------------------------------------------
OUTSTANDING AS OF
SEPTEMBER 30, 1996             6,031          $ .04 - $13.94         1,382
==========================================================================
</TABLE>

1993 DIRECTOR OPTION PLAN The Company's 1993 Director Option Plan (the "Director
Plan") provides for the granting of nonstatutory stock options to nonemployee
directors of the Company and is administered by the Board of Directors. In
February of 1996, the number of shares available for issuance under the Director
Plan was increased by 150,000 shares from 400,000 shares to 550,000 shares. As
of September 30, 1996, there were 188,000 shares available for grant under the
plan and options outstanding were 356,000 of which 145,000 were vested. During
the fiscal year ended September 30, 1996, 6,000 options were exercised at a
price of $5.50. No options were exercised in prior periods.


30

<PAGE>   16
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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, 1996 and 1995, the
purchase and retirement of common stock under the systematic plan was 601,000
shares and 760,000 shares, respectively. Under the non-systematic repurchase
plan, the Company may repurchase up to 2,000,000 shares of its common stock.
During the fiscal year ended September 30, 1996, 88,000 shares were repurchased
and retired under the non-systematic plan. Both the systematic and
non-systematic plans have been approved for continuance into fiscal 1997.

Note 12 - INCOME TAXES

Profit (loss) before income taxes for fiscal 1996, 1995 and 1994 include foreign
pretax profit (loss) of approximately $2.2 million, $(.9) million and $9.5
million, respectively. The components of income taxes are as follows:

   
<TABLE>
<CAPTION>
                                Fiscal Year Ended September 30,
                              -----------------------------------
(in thousands)                  1996         1995          1994
-----------------------------------------------------------------
<S>                           <C>           <C>           <C>    
Current:
  Federal                     $   301       $ 4,352       $ 1,972
  State                           814          (390)          687
  Foreign                       1,205         1,134         4,138
-----------------------------------------------------------------
     Total current              2,320         5,096         6,797
-----------------------------------------------------------------
Deferred:
  Federal                      (1,684)       (3,751)       (1,000)
  State                          (568)         (928)          -
  Foreign                         410             6          (650)
-----------------------------------------------------------------
    Total deferred             (1,842)       (4,673)       (1,650)
-----------------------------------------------------------------
Charge in lieu of income
  tax expense related to
  employee stock options          263         1,533           500
-----------------------------------------------------------------
                              $   741       $ 1,956       $ 5,647
=================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                     Fiscal Year Ended September 30,
                                  -----------------------------------
(In thousands)                       1996         1995          1994
---------------------------------------------------------------------
<S>                               <C>           <C>           <C>    
Statutory federal income tax
  (benefit) at 34%                $(7,369)      $(1,412)      $ 6,764
State income tax (benefit),
  net of federal effect               162          (870)          794

Non-deductible purchased
  research and development          2,239         4,022           -

Foreign income taxed at
  different rates                     577           778           938
Research credit                      (258)         (400)          -
FSC benefit                          (150)          (84)          -
Non-deductible expenses               121            96           -
Change in the total
  valuation allowance               5,398          (173)       (2,880)
Other, net                             21            (1)           31
---------------------------------------------------------------------
                                  $   741       $ 1,956       $ 5,647
=====================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                          Fiscal Year Ended September 30,
                                     --------------------------------------
(In thousands)                        1996           1995              1994
---------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>
Deferred tax assets:
Accruals and reserve
  accounts                          $  7,685       $  4,822       $  4,186

Property and equipment                   142            988            -
Purchased software                     8,117            -              -
Research credit                        1,481          4,030          1,882
Other credits                             -             683            287
---------------------------------------------------------------------------
Total gross deferred tax assets       17,425         10,523          6,355
Less valuation allowance              (9,598)        (4,200)        (4,373)
---------------------------------------------------------------------------
Net deferred tax assets                7,827          6,323          1,982
---------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment                   -              -              332
Purchased software                       815          1,153            -
---------------------------------------------------------------------------
Total deferred tax liabilities           815          1,153            332
---------------------------------------------------------------------------
Net tax assets and liabilities      $  7,012       $  5,170       $  1,650
==========================================================================
</TABLE>

The net change in the total valuation allowance for the years ended September
30, 1996, 1995 and 1994 was an increase (decrease) of approximately $5.4
million, $(.2) million and $(2.9) million, respectively.


                                                                              31

<PAGE>   17
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



  The Company's management believes the uncertainty regarding the timing of the
realization of net deferred tax assets requires a valuation allowance.

  The Company has unused research credit carry-forwards of approximately $1.5
million for federal tax purposes as of September 30, 1996, which expire in
fiscal years 2008 through 2011.

  At September 30, 1996, the foreign subsidiaries of the Company had cumulative
unremitted foreign earnings of approximately $7.8 million. Had these earnings
been repatriated during fiscal 1996, the incremental U.S. tax liability would
not have been material after taking into account underlying foreign taxes and
tax credit carry-forwards. The management intends to reinvest these earnings
indefinitely.

Note 13 - ACQUISITIONS

VISIONWARE LIMITED In December 1994, the Company completed the acquisition of
Visionware Limited ("Visionware") for $13.7 million in cash and 114,342 shares
of common stock. Non-recurring charges of $14.1 million were incurred in fiscal
1995 for costs associated with the acquisition. Of the nonrecurring charges,
$11.2 million was related to non-tax deductible purchased research and
development for Visionware products which had not yet reached technological
feasibility, The remaining $2.9 million related to redundant facilities and
other one-time acquisition related charges. Intangibles of $5.2 million, arising
from the business acquisition, are amortized on the straight-line basis over
estimated useful lives ranging from three to seven years. Amortization expense
amounted to $.9 million in fiscal 1996 and $.7 million in fiscal 1995 and is
included in general and administrative expenses in the Company's Consolidated
Statements of Operations. The results of operations of Visionware have been
included in the consolidated financial statements since December 1994.
Visionware is engaged in the business of the development and distribution of PC
connectivity software integrating PCs running Microsoft Windows with servers
running UNIX applications.

UNIX BUSINESS In December 1995, the Company acquired certain assets related to
the UNIX business including the core intellectual property from Novell. The
consideration consisted of 6,127,500 newly issued shares of non-registered
common stock and assumed liabilities totaling approximately $9.3 million.
Additionally, cash payments to Novell with a present value of $84 million will
be paid periodically by SCO to Novell provided certain unit volumes of UNIX
system distribution is achieved. To date, distribution unit volume of UNIX
systems has not reached levels which have required the Company to make cash
payments to Novell. Such payments terminate at the end of the calendar year 
2002. The acquisition has been accounted for using the purchase method of 
accounting and, therefore, the accompanying financial statements include 
the UNIX


32

<PAGE>   18
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



business since the date of the acquisition. Non-recurring charges of $38.4
million were incurred in fiscal 1996 for costs associated with the acquisition.
The Company also purchased core intellectual property totaling $5.8 million,
software technology licenses totaling $5.5 million and intangibles of $1.7
million. Software technology licenses and intangibles are amortized as general
and administrative expenses on the straight-line basis over their estimated
useful lives, generally five years.

Note 14 - RELATED PARTY

In January 1995, the Company purchased 10% of one of its domestic distribution
channel partner's preferred series stock in exchange for cash, product and
equipment valued at $1.0 million. In addition, the Company has loaned $1.0
million to this partner. The loan matures on July 1, 1998, but may be converted
at any time prior to maturity for an additional 10% of either the partner's
preferred series stock or common stock. Interest on the outstanding borrowing 
is due and payable at the loan's maturity.

  At September 30, 1996 and 1995, the Company had accounts receivable
outstanding with the related party of $1.6 million and $1.7 million,
respectively. Sales to the related party for fiscal years 1996 and 1995 were
$7.7 million and $4.6 million, respectively.


Note 15 - INFORMATION BY GEOGRAPHIC AREA

<TABLE>
<CAPTION>
                                                Fiscal Year Ended September 30,
                                         -----------------------------------------
(in thousands)                              1996            1995             1994
----------------------------------------------------------------------------------
NET REVENUES:
<S>                                      <C>             <C>             <C> 
United States                            $ 125,759       $ 111,530       $ 109,542
Europe                                      80,603          87,799          74,526
Other international
  operations                                 1,528             -               -
----------------------------------------------------------------------------------
Total net revenues                       $ 207,890       $ 199,329       $ 184,068
==================================================================================
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States                            $  16,894       $  23,807       $  18,772
Europe                                         916             945           5,798
----------------------------------------------------------------------------------
Total transfers                          $  17,810       $  24,752       $  24,570
==================================================================================
OPERATING EARNINGS (LOSS):
United States                            $ (29,017)      $  (5,111)      $   8,119
Europe                                       2,864             121           8,360
Other international
  operations                                   120          (1,052)          1,977
Eliminations                                 2,452            (450)            169
----------------------------------------------------------------------------------
Operating earnings (loss)                $ (23,581)      $  (6,492)      $  18,625
==================================================================================
IDENTIFIABLE ASSETS:
United States                            $ 135,040       $ 108,078       $ 107,163
Europe                                      31,930          33,280          34,689
Other international
  operations                                 3,860           5,310           4,499
Eliminations                                (4,023)        (14,798)         (7,777)
----------------------------------------------------------------------------------
Total assets                             $ 166,807       $ 131,870       $ 138,574
==================================================================================
</TABLE>

Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions. "Other international
operations" includes the Company's subsidiary in Japan.


                                                                              33

<PAGE>   19
                         REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of The Santa Cruz
Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended September 30 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Santa Cruz
Operation, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick, LLP
San Jose, California

October 25, 1996



34
<PAGE>   20
                        QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                         ----------------------------------------------------------------------------------------
                                         Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,   
(In thousands, except per share data)      1996        1996       1996       1995       1995        1995       1995       1994  
---------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>        <C>        <C>          <C>        <C>        <C>        <C> 
Net revenues:
  Licenses                                $50,162    $49,404    $46,291    $ 43,175     $41,935    $45,856    $47,115    $42,628
  Services                                  5,052      4,623      4,444       4,739       5,217      5,065      6,159      5,354
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Net revenues                           55,214     54,027     50,735      47,914      47,152     50,921     53,274     47,982
                                          -------    -------    -------    --------     -------    -------    -------    -------
Cost of revenues:
  Licenses                                  9,152      9,506      7,770       7,707       8,318      9,300      8,106      7,964
  Services                                  4,333      4,491      4,374       4,571       5,006      4,819      5,137      4,829
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Total cost of revenues                 13,485     13,997     12,144      12,278      13,324     14,119     13,243     12,793
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Gross margin                           41,729     40,030     38,591      35,636      33,828     36,802     40,031     35,189
                                          -------    -------    -------    --------     -------    -------    -------    -------
Operating expenses:
  Research and development                 11,071     10,617      9,376       7,945       8,051      8,406      8,300      7,451
  Sales and marketing                      20,386     19,575     19,676      19,722      20,609     22,386     20,665     18,833
  General and administrative                5,901      5,961      6,044       4,930       5,097      4,915      5,168      4,367
  Non-recurring charges                        --         --         --      38,363       3,999         --         --     14,095
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Total operating expenses               37,358     36,153     35,096      70,960      37,756     35,707     34,133     44,746
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Operating earnings (loss)               4,371      3,877      3,495     (35,324)     (3,928)     1,095      5,898     (9,557)

Other income (expense):
  Interest income, net                        646        547        480         629         527        673        604        899 
  Other income (expense), net                 (90)       (16)       (94)       (194)       (207)       (82)      (143)        69
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Profit (loss) before income taxes       4,927      4,408      3,881     (34,889)     (3,608)     1,686      6,359     (8,589)
                                          -------    -------    -------    --------     -------    -------    -------    -------
  Income taxes                                855      1,102        970      (2,186)     (1,028)       481      1,764        739
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Net profit (loss)                     $ 4,072    $ 3,306    $ 2,911    $(32,703)    $(2,580)   $ 1,205    $ 4,595    $(9,328)
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Net profit (loss) per share           $  0.11    $  0.09    $  0.08    $  (0.99)    $ (0.08)   $ (0.04)   $  0.14    $ (0.30)
                                          -------    -------    -------    --------     -------    -------    -------    -------
    Weighted average shares outstanding    38,150     38,502     38,164      32,968      30,896     33,489     33,744     30,754
                                          -------    -------    -------    --------     -------    -------    -------    -------
                                         ------------------------------------------
</TABLE>
<PAGE>   21


                             DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
  Directors               Corporate Officers                                     Divisional Officers

<S>                       <C>                                                    <C>
  Ninian Eadie            Alok Mohan*+                                           Mick Adamson
                          President, Chief Executive Officer and acting          Regional Vice President, Pacific Rim
  Jean-Francois Heitz     Chief Financial Officer                                  Jeff Ait
  Ronald Lachman          Ed Adams+                                              Vice President, Volume Solutions Business
                          Senior Vice President and General Manager,
  Robert McClure          The Americas                                           Sheila Baker
                                                                                 Vice President, Segment Marketing
  Doug Michels            Ray Anderson+
                          Senior Vice President, Client Integration Division     Edmundo Costa
  Alok Mohan                                                                     Vice President, Channel Sales
                          Jim Clark+
  R. Duff Thompson        Senior Vice President, Asia/Pacific Operations         Gary Daniels
                                                                                 Vice President, Platform Products Division
  Enzo Torresi            Gary Horning
                          Vice President, Strategic Marketing                    Chris Flynn
  Gil Williamson                                                                 Regional Vice President, International and UK
                          John Jarvis
                          Senior Vice President, International Planning          Nimer Maabadi
                          and Business Development                               Vice President, The Americas, Western Area

                          Helene Mann-Bouchard                                   Mark Overgaard
                          Vice President, Worldwide Customer Delivery            Vice President, Embedded Systems Division
                          Systems
                                                                                 Antonio Privitera
                          David McCrabb                                          Regional Vice President, Italy
                          Vice President, Marketing and Channel Sales
                                                                                 Charlie Sciorra
                          Scott McGregor+                                        Vice President, The Americas, Eastern Area
                          Senior Vice President, Products
                                                                                 Craig Scobie
                          Doug Michels*+                                         Vice President, Project Region
                          Executive Vice President and
                          Chief Technical Officer                                Mike Shelton
                                                                                 Vice President, Enterprise Solutions Business
                          Jack Moyer+
                          Vice President, Human Resources                        Stefan Sjostrom
                                                                                 Regional Vice President, Central & Southern
                          Steve Sabbath*+                                        Europe and France
                          Vice President, Law and Corporate Affairs
                          and Secretary                                          Richard Treadway
                                                                                 Vice President, Layered Server Products
                          Geoff Seabrook+
                          Senior Vice President, EMEA

                          Mike Tilson
                          Chief Information Officer

                          James Wilt
                          Vice President, Business Development
</TABLE>

*Elected by Board of Directors
+Executive Officer subject to the provisions of Section 16(b) of the
 Securities Exchange Act of 1934




36