<PAGE>   1
                                                                      EXHIBIT 13

THE SANTA CRUZ OPERATION, INC.
SELECTED FIVE YEAR FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                               Fiscal Year Ended September 30,
                                                             --------------------------------------------------------------------
(In thousands, except per share data)                            1998         1997          1996          1995         1994
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>          <C>           <C>
Net revenues                                                    $ 171,900     $ 193,660     $ 207,890    $ 199,329     $ 184,068
Cost of revenues                                                   45,898        55,315        54,402       54,133        51,953
---------------------------------------------------------------------------------------------------------------------------------

Gross margin                                                      126,002       138,345       153,488      145,196       132,115
Operating expenses                                                139,595       154,939       177,069      151,688       113,490
---------------------------------------------------------------------------------------------------------------------------------

Operating income (loss)                                           (13,593)      (16,594)      (23,581)      (6,492)       18,625
---------------------------------------------------------------------------------------------------------------------------------

Other income (expense):
     Interest income, net                                           2,261         2,291         2,302        2,703         1,829
     Other income (expense), net                                      226          (866)         (394)        (363)         (561)
---------------------------------------------------------------------------------------------------------------------------------

        Income (loss) before income taxes                         (11,106)      (15,169)      (21,673)      (4,152)       19,893
---------------------------------------------------------------------------------------------------------------------------------

     Income taxes                                                   3,559             1           741        1,956         5,647
---------------------------------------------------------------------------------------------------------------------------------

        Net income (loss)                                       $ (14,665)    $ (15,170)    $ (22,414)   $  (6,108)    $  14,246
---------------------------------------------------------------------------------------------------------------------------------

        Income (loss) per share-basic                           $   (0.41)    $   (0.41)    $   (0.62)   $   (0.20)    $    0.47
        Income (loss) per share-diluted                         $   (0.41)    $   (0.41)    $   (0.62)   $   (0.20)    $    0.45
---------------------------------------------------------------------------------------------------------------------------------

        Shares used in per share calculation-basic                 35,817        36,628        36,179       30,922        30,171
        Shares used in per share calculation-diluted               35,817        36,628        36,179       30,922        31,941
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                        September 30,
                                                             --------------------------------------------------------------------
(In thousands)                                                   1998         1997          1996          1995         1994
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>          <C>           <C>
     Working capital                                             $ 33,320      $ 46,164      $ 61,935     $ 60,539      $ 77,291
     Total assets                                                 132,683       146,665       166,807      131,870       138,574
     Long-term obligations                                         13,126         9,545         9,332        7,521         1,084
     Shareholders' equity                                          60,135        81,462       101,581       82,182        89,644
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

SCO's mission is to be the software provider that system builders choose for
Network Computing. SCO is the world's leading supplier of UNIX server and host
systems, with a worldwide market share of over 40%, and worldwide market share
of 80% for UNIX Systems on the Intel platform. SCO sells and supports its
products through a worldwide network of distributors, resellers, system
integrators and OEMs.

SCO is committed to bringing Network Computing to business-critical environments
because Network Computing can dramatically lower the total cost of computing and
is ideal for supporting heterogeneous systems and networks. Network Computing
was built on UNIX System technologies, and, as the leading provider of UNIX
servers, SCO continues 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 contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's expectations only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

RESULTS OF OPERATIONS

NET REVENUES

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 $171.9 million in fiscal 1998, an 11% decrease from $193.7
million in fiscal 1997, which in turn was a decrease of 7% from fiscal 1996
revenues of $207.9 million. Revenues are net of a provision for estimated future
returns for stock balancing and excess quantities above levels the Company
believes are appropriate in its distribution channels. The fiscal 1998 decline
was directly related to the Company's decision to eliminate channel inventories
and record a reserve for the return of remaining channel stock in connection
with its preparations for electronic licensing and distribution. The fiscal 1996
to 1997 license revenue decrease resulted from a planned reduction in channel
inventories across all product lines in the third quarter of that year. For the
fiscal years ended September 30, 1998, 1997 and 1996, no single customer
accounted for greater than 10% of the Company's license revenues.

International revenues continue to be a significant portion of net revenues,
comprising 51% of the revenues for fiscal 1998 and 55% and 53% for 1997 and 1996
respectively.

COST OF REVENUES

COST OF REVENUES The Company's overall cost of revenues as a percentage of net
revenues can be affected by mix changes in net revenue contribution between
product families, between geographic regions and 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 gross margin percentage 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 revenues as a percentage of net revenues decreased to 27% in fiscal 1998
from 29% in fiscal 1997 and increased from 26% in fiscal 1996. Reduced royalty
rates, including a significant retroactive royalty credit, coupled with reduced
technology costs were partially offset by stable fixed costs over lower unit

<PAGE>   3

sales volume to net to the 2% decline from 1997 to 1998, while stable fixed
costs over lower unit sales volume caused the 3% increase from 1996 to 1997.

Cost of license revenues includes royalties paid to certain software vendors,
amortization of acquired technologies, product packaging, documentation and all
costs associated with the acquisition of components, assembling of finished
products, warehousing and shipping. Cost of service revenues includes
documentation, consulting and personnel related expenses associated with
providing such services.

RESEARCH AND DEVELOPMENT

The Company invests in research and development both for new products and to
provide continuing enhancements to current products. Research and development
expenses decreased 10% to $41.4 million in fiscal 1998 from $46.1 million in
fiscal 1997. In fiscal 1997, research and development expenses increased 18%
from fiscal 1996 total expenditures of $39.0 million.

Research and development expenses represented 24% of net revenues for both
fiscal 1998 and 1997 and 19% in fiscal 1996. The 1998 decrease in research and
development expenses in absolute dollars was primarily attributable to reducing
staffing levels in conjunction with the restructuring of operations. The 1997
spending increase was primarily attributable to personnel costs relating to
accelerated development of next generation operating systems and technology
focused on Internet-enabled products.

SALES AND MARKETING

Sales and marketing expenses, at $79.6 million, remained relatively constant
with 1997 spending of $79.5 million and 1996 spending of $79.4 million. Sales
and marketing expenses represented 46%, 41% and 38% of total net revenues in
fiscal 1998, 1997 and 1996, respectively. While flat in absolute terms, the
Company retargeted 1998 and 1997 marketing spending towards reseller training,
independent software vendor recruitment and higher corporate brand awareness.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased by 11% to $18.6 million in fiscal
1998 from $20.9 million in fiscal 1997. In fiscal 1997, general and
administrative expenses increased by 3% from $20.3 million in fiscal 1996.
General and administrative expenses represented 11% of total net revenues for
fiscal 1998, fiscal 1997 and 10% for fiscal 1996. Reduced headcount, lower legal
expenses and lower discretionary spending resulted in the fiscal 1998 decline in
absolute dollars. The increased spending in fiscal 1997 was primarily
attributable to a one-time charge for settlement of litigation.

NON-RECURRING CHARGES

A worldwide restructuring during the third quarter of fiscal 1997 resulted in a
one-time charge of $8.4 million or 4% of 1997 revenues. The charge includes a
10% reduction in headcount of $3.4 million, elimination of lease obligations for
non-essential facilities of $1.9 million and a write-off of certain acquired
technologies of $1.4 million. Of the $8.4 million, $5.3 million related to cash
expenditures and $3.1 million related to non-cash charges. In fiscal 1996,
non-recurring charges were $38.4 million representing 18% of total revenues. The
charges related primarily to the writeoff of UnixWare products for which
technological feasibility had not been established and for which there was no
alternative future use.

OTHER INCOME (EXPENSE)

Other income and expense consists of interest income net of interest expense,
foreign exchange gains and losses, and other miscellaneous items. Net interest
income remained constant at $2.3 million for fiscal years 1998, 1997 and 1996.
Other income was $0.2 million for fiscal 1998, an expense of $0.9 million in
fiscal 1997, and an expense of $0.4 million in fiscal 1996. The change in 1998
was principally due to foreign exchange gains earned in the Company's European
subsidiaries, while 1997's expense was primarily due to a $0.6 million loss
associated with the settlement on an intercompany loan with the U.K.

<PAGE>   4
INCOME TAXES

In fiscal 1998, 1997 and 1996, the Company's effective income tax rates were
(32)%, 0% and (3)%, respectively, and primarily reflect losses and expenses
without tax benefit, and for which a valuation allowance has been established.
For an analysis of income taxes, see Note 12 of Notes to Consolidated Financial
Statements.

NET PROFIT (LOSS)

The Company reported net losses of $14.7 million, $15.2 million and $22.4
million in fiscal 1998, 1997 and 1996, respectively. The fiscal 1998, 1997 and
1996 net losses were primarily attributable to lower revenues, absolute
increases in operating expense and non-recurring charges.

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 the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.

The Company participates in a highly dynamic industry and future results could
be subject to significant volatility, particularly on a quarterly basis. The
Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues have been booked and shipped in
the third month of the quarter, with a concentration of these revenues in the
latter half of that third month. In addition, the timing of closing of large
license contracts and the release of new products and product upgrades increase
the risk of quarter to quarter fluctuations and the uncertainty of quarterly
operating results. The Company periodically may adjust the level of inventory
held in its distribution channels which may also cause quarter-to-quarter
fluctuations. 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.

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

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

<PAGE>   5
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 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowances for stock balancing and are
accompanied by compensating and offsetting orders. Revenues are net of a
provision for estimated future stock balancing and excess quantities above
levels the Company believes are appropriate in its distribution channels. The
Company monitors the quantity and mix of its product sales.

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

Realization of the net deferred tax assets is dependent upon generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that all of the net deferred tax assets will be realized. In the event
that the Company does not show profitability in the subsequent fiscal quarters,
the Company may be required to write off portions of the net deferred tax assets
previously recognized up to the entire amount of $7.8 million.

Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 51%, 55% and 53% of total revenues for fiscal 1998, 1997 and 1996,
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's operating strategy
and pricing take into account changes in exchange rates over time. However, the
Company's results of operations may be significantly affected in the short term
by fluctuations in foreign currency exchange rates.

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

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

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

<PAGE>   6
The stock market in general, and the market for shares of technology companies
in particular, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of the affected companies. In
addition, factors such as new product introductions by the Company or its
competitors may have a significant impact on the market price of the Company's
Common Stock. Furthermore, quarter-to-quarter fluctuations in the Company's
results of operations caused by changes in customer demand may have a
significant impact on the market price of the Company's stock. These conditions,
as well as factors which generally affect the market for stocks of high
technology companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.

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

YEAR 2000 ISSUES

Background. The approach of Year 2000 is causing a great deal of concern and
discussion in the computer industry. There are many varieties of Year 2000
problems. One major concern is the accurate dating of files and transactions
after January 1, 2000. For many years, software has represented dates using the
MM/DD/YY format (or some variant), which allows for the display of only the last
two digits of the year. With the upcoming transition from 99 to 00, dating
problems may occur on systems that interpret a YY value of 00 incorrectly. The
Company must address the millenium issues from a perspective of both developing
and selling software products and also maintaining internal Company operations.

Actions Taken. The Company has taken steps to mitigate operating system date
processing errors that might occur with the onset of the Year 2000 (Y2K). The
Company has:

-    issued a Year 2000 Date Processing Limited Warranty for Designated Software
     that defines how we expect our products to perform when processing dates in
     the Year 2000;

-    produced an SCO Year 2000 White Paper detailing how Year 2000 affects SCO
     products and what products are covered by the Year 2000 Date Processing
     Limited Warranty;

-    performed Year 2000 testing of all current SCO products;

-    issued fixes for Year 2000 problems that we have detected in current SCO
     supported products;

-    created a project team to maintain consistent Year 2000 policy for our
     customers and to coordinate cross functional activities;

-    created a Year 2000 committee to test, verify or upgrade internal systems
     and third party vendor software to insure continued operation of our
     infrastructure.

Software Sold to Customers. SCO believes that it has substantially identified
and resolved all potential Year 2000 problems in software products under
warranty that it develops and markets. However, management also believes that it
is not possible to determine with complete certainty that all Year 2000 problems
affecting the Company's software products have been identified or corrected due
to 1) the complexity of these products, 2) the fact that these products interact
with other third party vendor products and 3) the operation on computer systems
which are not under the Company's control.

<PAGE>   7
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced modifying, upgrading, and replacing
major systems that have been identified as adversely affected, and expects to
complete this process by mid 1999.

Suppliers. The Company has initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 problems with
these systems, there can be no assurance that these suppliers will resolve any
or all Year 2000 problems with these systems before the occurrence of a material
disruption to the business of the Company or any of its customers. Any failure
of these third parties to resolve Year 2000 problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.

Assessment of Consequences. The Company expects to identify and resolve all Year
2000 problems that could materially adversely affect its business operations and
products. The exposure on the product side is possible provision of free upgrade
software to a few customers. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company have been identified or corrected. The number of devices
and permutations are too numerous. The Company is prepared for the likelihood of
a few operational inconveniences and diversion of attention from ordinary
business. However, the Company feels confident that there will be no adverse
material effect on the Company's business or results of operations.

Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating the Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendor's ability to modify proprietary software, and unanticipated problems
identified in the ongoing review.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations through a combination 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, 1998, the
Company's principal sources of liquidity included cash and short-term
investments of $51.1 million and available bank lines of credit. The Company may
borrow an amount equal to 75% of eligible accounts receivable, subject to a
total of approximately $15.7 million against which the Company had $0.6 million
in outstanding borrowings. Effective December 11, 1998, the maximum available
credit lines were reduced by the Company to approximately $0.7 million. 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 the 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 $9.5 million in fiscal 1998, $15.0 million in fiscal
1997 and $25.3 million in fiscal 1996. Cash used for investing activity during
fiscal 1998, 1997 and 1996 was $3.2 million, $14.8 million and $19.7 million,
respectively. In fiscal 1998, 1997 and 1996, cash provided by operations was
used to fund purchases of technology, property and equipment, common stock
repurchases and short-term investments. Cash used for financing activities was
$6.2 million, $10.0 million and $5.3 million for fiscal 1998, 1997 and 1996,
respectively. In fiscal 1998, 1997 and 1996, proceeds from the sale of Common
Stock were more than offset by the Company's stock repurchases and payments on
capital lease obligations.

<PAGE>   8
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 1999.

QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET-RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

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

The following tables summarize the financial instruments and derivative
commodity instruments held by the Company at September 30, 1998, which are
sensitive to changes in interest rates and foreign exchange rates. The Company
uses forward foreign exchange contracts to manage these primary market exposures
associated with underlying assets, liabilities, and anticipated transactions.
The Company uses these instruments to reduce risk by essentially creating
offsetting market exposures. The instruments held by the Company are not
leveraged and are held for purposes other than trading.

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

INTEREST-RATE RISK

This table presents descriptions of the financial instruments that are held by
the Company at September 30, 1998 and which are sensitive to changes in interest
rates.

                    Maturity Date for Short-Term Investments
                            Year Ended September 30,

<TABLE>
<CAPTION>
                                                                           Fair
(In thousands)               1999        2000       2001       Total       Value
---------------------------------------------------------------------------------
<S>                         <C>         <C>        <C>        <C>         <C>    
U.S. Treasury notes         $ 1,753     $1,562     $  763     $ 4,078     $ 4,118
Government agency bonds       2,458      2,198      2,497       7,153       7,191
Corporate bonds               7,608      5,180      3,299      16,087      16,094
                          -------------------------------------------------------
                            $11,819     $8,940     $6,559     $27,318     $27,403
Average interest rate          5.67%      6.06%      5.81%
----------------------------------------------------------------------------------
</TABLE>

FOREIGN-EXCHANGE RISK

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

<PAGE>   9
                                Forward Contracts
                               September 30, 1998

<TABLE>
<CAPTION>
(In thousands)                                         Contract 1     Contract 2
--------------------------------------------------------------------------------
<S>                                                    <C>            <C>   
Purchased two forward contracts
    Premium paid:                                               2              1
    Contract amount:                                          500          1,000
    Forward strike rate (USD/GBP):                         1.6293         1.6757
    Term of contract:                                    4 months       2 months
--------------------------------------------------------------------------------
</TABLE>

<PAGE>   10
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 Year Ended September 30,
                                                        -----------------------------------------
(In thousands, except per share data)                      1998            1997            1996
-------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>      
Net revenues                                            $ 171,900       $ 193,660       $ 207,890
Cost of revenues                                           45,898          55,315          54,402
-------------------------------------------------------------------------------------------------
        Gross margin                                      126,002         138,345         153,488
-------------------------------------------------------------------------------------------------
Operating expenses:
     Research and development                              41,393          46,130          39,009
     Sales and marketing                                   79,644          79,536          79,359
     General and administrative                            18,558          20,900          20,338
     Non-recurring charges                                     --           8,373          38,363
-------------------------------------------------------------------------------------------------
        Total operating expenses                          139,595         154,939         177,069
-------------------------------------------------------------------------------------------------
        Operating loss                                    (13,593)        (16,594)        (23,581)
Other income (expense):
     Interest income, net                                   2,261           2,291           2,302
     Other income (expense), net                              226            (866)           (394)
-------------------------------------------------------------------------------------------------
        Loss before income taxes                          (11,106)        (15,169)        (21,673)
-------------------------------------------------------------------------------------------------
     Income taxes                                           3,559               1             741
-------------------------------------------------------------------------------------------------
        Net loss                                        $ (14,665)      $ (15,170)      $ (22,414)
-------------------------------------------------------------------------------------------------
        Net loss per share:
           Basic                                        $   (0.41)      $   (0.41)      $   (0.62)
           Diluted                                      $   (0.41)      $   (0.41)      $   (0.62)
-------------------------------------------------------------------------------------------------
        Shares used in loss per share calculation:
           Basic                                           35,817          36,628          36,179
           Diluted                                         35,817          36,628          36,179
-------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>   11


THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                             September 30,
                                                                                     -----------------------------
(In thousands, except for share data)                                                  1998                 1997
------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                  <C>     
ASSETS
Current assets:
     Cash and cash equivalents                                                       $ 23,758             $ 23,225
     Short-term investments                                                            27,318               28,486
     Receivables, net                                                                  29,038               36,546
     Deferred tax assets                                                                3,487                6,631
     Other current assets                                                               9,141                6,934
------------------------------------------------------------------------------------------------------------------
        Total current assets                                                           92,742              101,822
------------------------------------------------------------------------------------------------------------------
Property and equipment, net                                                            12,929               13,666
Purchased software and technology licenses, net                                        13,013               16,523
Other assets                                                                           13,999               14,654
------------------------------------------------------------------------------------------------------------------
           Total assets                                                              $132,683             $146,665
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Royalties payable                                                               $  5,062             $ 11,262
     Trade accounts payable                                                             9,450                8,600
     Income taxes payable                                                               1,876                1,101
     Accrued expenses and other current liabilities                                    26,796               27,230
     Deferred revenues                                                                 16,238                7,465
------------------------------------------------------------------------------------------------------------------
        Total current liabilities                                                      59,422               55,658
------------------------------------------------------------------------------------------------------------------
Other long-term liabilities                                                            13,126                9,545
------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 10) Shareholders' equity:
     Common stock, no par value, net of notes receivable of $92 and $88 from an
        officer of the Company, authorized 100,000,000 shares
        Issued and outstanding 35,048,916 and 36,450,115 shares                       111,972              119,287
     Cumulative translation adjustment                                                  1,292                  639
     Accumulated deficit                                                              (53,129)             (38,464)
------------------------------------------------------------------------------------------------------------------
        Total shareholders' equity                                                     60,135               81,462
------------------------------------------------------------------------------------------------------------------
           Total liabilities and shareholders' equity                                $132,683             $146,665
------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>   12
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                        Note
                                            Common Stock              Receivable    Cumulative                          Total
                                        -----------------------         from       Translation      Accumulated      Shareholders'
(In thousands)                          Shares          Amount         Officer      Adjustment        Deficit           Equity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>               <C>          <C>             <C>              <C>      
BALANCES, SEPTEMBER 30, 1995            30,844         $  83,225         $(79)        $   (84)        $   (880)        $  82,182
Issuance under stock option and
   purchase plans                          823             2,739           --              --               --             2,739
Common stock repurchases                  (689)           (4,744)          --              --               --            (4,744)
UNIX asset purchase                      6,128            43,773           --              --               --            43,773
Interest on loans                           --                --           (5)             --               --                (5)
Stock option income tax benefit             --               263           --              --               --               263
Translation adjustment                      --                --           --            (213)              --              (213)
Net loss                                    --                --           --              --          (22,414)          (22,414)
----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996            37,106         $ 125,256         $(84)        $  (297)        $(23,294)        $ 101,581
Issuance under stock option and
   purchase plans                          872             2,985           --              --               --             2,985
Common stock repurchases                (1,528)           (9,110)          --              --               --            (9,110)
Interest on loans                           --                --           (4)             --               --                (4)
Stock option income tax benefit             --               244           --              --               --               244
Translation adjustment                      --                --           --             936               --               936
Net loss                                    --                --           --              --          (15,170)          (15,170)
----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997            36,450         $ 119,375         $(88)        $   639         $(38,464)        $  81,462
Issuance under stock option and
   purchase plans                          659             1,960           --              --               --             1,960
Common stock repurchases                (2,060)           (9,271)          --              --               --            (9,271)
Interest on loans                           --                --           (4)             --               --                (4)
Translation adjustment                      --                --           --             653               --               653
Net loss                                    --                --           --              --          (14,665)          (14,665)
----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998            35,049         $ 112,064         $(92)        $ 1,292         $(53,129)        $  60,135
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>   13
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              Year Ended September 30,
                                                                     ------------------------------------------
(In thousands)                                                         1998             1997             1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>              <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                             $(14,665)        $(15,170)        $(22,414)
Adjustments to reconcile net loss to net cash
  provided by operating activities -
      Depreciation and amortization                                    14,363           17,084           16,840
      Charge for purchased research and development                        --               --           38,363
      Deferred tax assets                                                 205           (1,017)          (1,842)
      Exchange gain                                                      (605)              --               --
      Stock option income tax benefit                                      --              244              263
      Changes in operating assets and liabilities-
           Receivables                                                  8,147           10,630           (2,167)
           Other current assets                                        (2,024)           2,736             (336)
           Other assets                                                 2,362              857           (2,410)
           Royalties payable                                           (6,197)             618            5,002
           Trade accounts payable                                         608           (4,155)           2,548
           Income taxes payable                                           703           (1,132)             423
           Accrued expenses and other current liabilities              (1,977)           3,714           (7,333)
           Deferred revenues                                            8,555              627           (1,673)
---------------------------------------------------------------------------------------------------------------
               Net cash provided by operating activities                9,475           15,036           25,264
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property and equipment                              (1,410)          (1,796)          (4,874)
      Purchases of software and technology licenses                    (2,995)          (5,188)          (5,953)
      Sales of short-term investments                                  31,514           17,006           15,514
      Purchases of short-term investments                             (30,346)         (22,726)         (23,464)
      Changes in other assets                                              25           (2,128)            (937)
---------------------------------------------------------------------------------------------------------------
          Net cash used for investing activities                       (3,212)         (14,832)         (19,714)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Payments on capital leases                                       (2,759)          (1,627)          (3,924)
      Net proceeds from sale of common stock                            1,960            2,985            2,739
      Repurchases of common stock                                      (9,271)          (9,110)          (4,752)
      Changes in other long-term liabilities                            3,883           (2,224)             588
---------------------------------------------------------------------------------------------------------------
          Net cash used for financing activities                       (6,187)          (9,976)          (5,349)
---------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents             457              932             (210)
---------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents                                       533           (8,840)              (9)
Cash and cash equivalents at beginning of year                         23,225           32,065           32,074
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                             $ 23,758         $ 23,225         $ 32,065
---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Cash paid -
            Income taxes                                             $  2,192         $  2,168         $  1,955
            Interest                                                      766              643              147
      Non-cash financing and investing activities -
            Assets recorded under capital leases                     $  4,701         $  4,063         $  2,676
            Assets written off against restructuring reserve              568              125               --
            Networking technology buyout (see Note 6)                      --               --            8,205
            Purchase of UNIX assets with common stock                      --               --           43,773
---------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>   14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY SCO is a leading provider of UNIX-based, open system software. The
Company's products enable business and government organizations of all sizes to
integrate technologies and products from different vendors to create
cost-effective, powerful, networked information systems that perform highly
complex, mission-critical business functions. SCO has built an experienced
distribution and development infrastructure to support its products.

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 lower of cost or net realizable
value.

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 with an original maturity of 90 days or less at the date of
acquisition to be cash equivalents. Short-term investments include instruments
with lives ranging from 91 days to three years. The Company classifies its
investments in certain debt and equity securities as available-for-sale. Such
investments are recorded at fair market value, based on quoted market prices,
and unrealized gains and losses are reported as a separate component of
shareholders' equity. As of September 30, 1998 and 1997, unrealized gains or
losses on such investments were not significant. The cost of securities is based
on the specific identification method.

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

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

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

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

<PAGE>   15
of current revenues to total projected product revenues, whichever is greater.
Through September 30, 1998, 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 probable. For those agreements which provide the customer the right to
multiple copies in exchange for a nonrefundable 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 believes are 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 may provide for nonrefundable
commitment fees which are recognized upon contract signing, product acceptance
and delivery. 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 are 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 expenses advertising costs as incurred. The
Company reimburses certain qualified customers for a portion of the advertising
costs related to their promotion of the Company's products. The Company's
liability for reimbursement is accrued at the time revenue is recognized as a
percentage of the qualified customer's net revenue derived from the Company's
products. For 1998, 1997 and 1996 cooperative advertising expense totaled
approximately $9.2 million, $8.6 million and $8.2 million, respectively.

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

COMPUTATION OF NET LOSS PER SHARE The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS 128) effective
December 31, 1997. SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by giving effect to all dilutive potential
common shares that were outstanding during the period. For the Company, dilutive
potential common shares consist of the incremental common shares issuable upon
the exercise of stock options for all periods. In accordance with SFAS 128, all
prior period earnings per share amounts have been restated to reflect this
method of calculation.

RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
Management has not yet evaluated the effects of this change

<PAGE>   16
on its operations. The Company will adopt SFAS 133 as required for its first
quarterly filing of fiscal year 2000.

In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which supersedes SOP 91-1. It provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. Different interpretations of a provision of SOP 97-2 have arisen
with the result that the effective date of that provision of SOP 97-2 for
certain transactions has been deferred for one year. The Company will be
required to adopt SOP 97-2 prospectively for software transactions entered into
beginning October 1, 1998. The Company does not anticipate that the adoption of
SOP 97-2 will have a material impact on the Company's financial position or
results of operations.

In June 1997, the Financial Accounting Standards Board, (FASB), issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments or contributions by
shareholders. The Company does not expect this pronouncement to materially
impact the Company's results of operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14, Financial
Reporting for Segments of a Business Enterprise. The new standard becomes
effective for fiscal years beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not anticipate that the adoption
of SFAS 131 will significantly alter the Company's current reporting and
disclosures.

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

FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign
subsidiaries is the local foreign currency. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at average rates of exchange prevailing during the period.
Translation adjustments resulting from translation of intercompany accounts 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 and have not been significant.

HEDGING OF FOREIGN CURRENCY TRANSACTIONS The Company utilizes foreign currency
forward exchange contracts to hedge foreign currency market exposures of
underlying assets, liabilities and other obligations. The Company does not use
forward exchange contracts for speculative or trading purposes. The Company's
accounting policies for these instruments are based on the Company's designation
of such instruments as hedging transactions. The criteria the Company uses for
designating an instrument as a hedge include the instrument's effectiveness in
risk reduction and one-to-one matching of forward exchange contracts to
underlying transactions. Gains and losses on currency forward contracts that are
designated and effective as hedges of firm commitments are deferred and
recognized in income in the same period that the underlying transactions are
settled. Gains and losses on currency forward contracts that are designated and
effective as hedges of existing transactions are recognized in income in the
same period as losses and gains on the underlying transactions are recognized
and generally offset. Gains and losses on any instruments not meeting the above
criteria would be recognized in income in the current period. The Company
transacts business in various foreign currencies. During 1997, the Company
established hedging programs to protect against exposure on certain foreign
denominated transactions through the use of

<PAGE>   17

foreign currency forward exchange contracts. At September 30, 1998, the Company
had foreign exchange contracts, all having maturities of 90 days or less, to
sell approximately $1,500,000 in U.S. dollars.

The fair value of these contracts at September 30, 1998 is not significant. The
counterparties to these contracts are substantial and credit worthy
multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be significant.

NOTE 2 - CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                             September 30,
                                                      --------------------------
(In thousands)                                          1998               1997
--------------------------------------------------------------------------------
<S>                                                   <C>                <C>    
Bank demand deposits                                  $ 1,035            $    --
Certificates of deposit                                    --              2,173
Money market accounts                                  20,660             21,052
Corporate bonds                                         2,063                 --
--------------------------------------------------------------------------------
                                                      $23,758            $23,225
--------------------------------------------------------------------------------
</TABLE>

NOTE 3 - SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                                            September 30,
                                                      --------------------------
(In thousands)                                         1998               1997
--------------------------------------------------------------------------------
<S>                                                   <C>                <C>    
U.S. Treasury notes                                   $ 4,078            $ 4,643
Certificates of deposit                                    --              1,145
Government agency bonds                                 7,153             10,351
Corporate bonds                                        16,087             12,347
--------------------------------------------------------------------------------
                                                      $27,318            $28,486
--------------------------------------------------------------------------------
</TABLE>

At September 30, 1998, investments with maturity dates ranging from 91 days to
one year totaled $5.2 million, and investments with maturity dates ranging from
one year to three years totaled $22.1 million.

NOTE 4 - RECEIVABLES

<TABLE>
<CAPTION>
                                                           September 30,
                                                    ---------------------------
(In thousands)                                        1998               1997
--------------------------------------------------------------------------------
<S>                                                 <C>                <C>     
Trade accounts receivable                           $ 40,826           $ 47,425
Less allowance for returns and
    doubtful accounts                                (11,788)           (10,879)
--------------------------------------------------------------------------------
                                                    $ 29,038           $ 36,546
--------------------------------------------------------------------------------
</TABLE>

The Company generates a significant portion of its revenues through distributors
of 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 years ended September 30, 1998, 1997 and 1996, no one customer's
balance exceeded 10% of trade receivables or accounted for greater than 10% of
the Company's revenues.
<PAGE>   18
NOTE 5 - PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                            September 30,
                                                     ---------------------------
(In thousands)                                         1998              1997
--------------------------------------------------------------------------------
<S>                                                  <C>               <C>     
Computer and office equipment                        $ 43,218          $ 39,098
Furniture and fixtures                                  8,467             7,469
Leasehold improvements                                  8,001             7,540
--------------------------------------------------------------------------------
                                                       59,686            54,107
Less accumulated depreciation and
    amortization                                      (46,757)          (40,441)
--------------------------------------------------------------------------------
                                                     $ 12,929          $ 13,666
--------------------------------------------------------------------------------
</TABLE>

Depreciation and amortization expense was $6.9 million, $7.5 million, and $7.1
million during fiscal 1998, 1997 and 1996, respectively.

NOTE 6 - PURCHASED SOFTWARE AND TECHNOLOGY LICENSES


<TABLE>
<CAPTION>
                                                          September 30,
                                                    ----------------------------
(In thousands)                                        1998               1997
--------------------------------------------------------------------------------
<S>                                                 <C>                <C>     
Purchased software and
   technology licenses, at cost                     $ 33,791           $ 34,121
Less accumulated amortization                        (20,778)           (17,598)
--------------------------------------------------------------------------------
                                                    $ 13,013           $ 16,523
--------------------------------------------------------------------------------
</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 was paid in three
equal installments of $3.0 million in each of fiscal 1996, 1997 and 1998. The
present value of the license is included in purchased software and technology
licenses in the Company's consolidated balance sheet. Amortization expense for
this license of $1.4 million in 1998 and 1997 and $1.0 million in 1996 is
included in cost of license revenues in the Company's consolidated statements of
operations.

Amortization expense was $6.6 million, $7.8 million, and $5.6 million during
fiscal 1998, 1997 and 1996, respectively.

NOTE 7 - BANK LINE OF CREDIT

At September 30, 1998, the Company had available lines of credit of
approximately $15.7 million. The domestic credit agreement provided that the
Company may borrow an amount equal to 75% of eligible accounts receivable,
subject to a total of $15.0 million. The interest rate on the domestic line of
credit was the prime rate and borrowings were unsecured. The line of credit
required that the Company maintain certain financial ratios with which the
company was not in compliance as of September 30, 1998, and received a waiver
for the specific violation. However, this line of credit was not used during
fiscal 1998 and was terminated by the Company as of December 11, 1998. The
Company maintains a $0.7 million line of credit internationally under which the
Company had $0.6 million in outstanding borrowings at September 30, 1998. The
interest rate on borrowings made against this line of credit during fiscal 1998
was 2.125%.

<PAGE>   19
NOTE 8 - ROYALTIES PAYABLE

Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$0.6 million and $8.3 million of the royalties payable balance at September 30,
1998 and 1997 respectively, and $(2.1) million, $4.2 million and $4.1 million of
royalty (income) expense for fiscal 1998, 1997 and 1996, respectively.

NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
                                                             September 30,
                                                       -------------------------
(In thousands)                                            1998             1997
--------------------------------------------------------------------------------
<S>                                                     <C>              <C>    
Accrued wages, commissions, bonuses                     $ 8,153          $ 7,236
Accrued advertising                                       4,459            3,829
Accrued fringe benefits                                   2,489            2,488
Other accrued expenses                                   11,695           13,677
--------------------------------------------------------------------------------
                                                        $26,796          $27,230
--------------------------------------------------------------------------------
</TABLE>

NOTE 10 - COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of September 30, 1998 were as follows:


<TABLE>
<CAPTION>
                                                                Capital        Operating
(In thousands)                                                  Leases           Leases
----------------------------------------------------------------------------------------
<S>                                                             <C>            <C>
Year Ending September 30,
             1999                                                $3,917          $ 8,023
             2000                                                 2,510            7,160
             2001                                                 1,096            6,416
             2002                                                    27            5,846
             2003                                                    --            4,738
             Later years, through 2020                               --           20,799
                                                                 ------         --------
Total minimum lease payments                                      7,550         $ 52,982
                                                                                ========
Less amount representing interest                                   618
                                                                 ------
Present value of net minimum capital lease payments               6,932

Less current installments of
    obligations under capital leases                              3,427
----------------------------------------------------------------------------------------
Obligations under capital leases,
    excluding current installments                               $3,505
----------------------------------------------------------------------------------------
</TABLE>

The cost of assets recorded under capital leases was $11.5 million and $7.4
million at September 30, 1998 and 1997, respectively. Accumulated amortization
on those dates was $4.5 million and $2.2 million, respectively.

<PAGE>   20
Rent expense amounted to approximately $8.1 million, $8.6 million and $8.2
million in fiscal 1998, 1997 and 1996, respectively.

Included in the Company's operating lease commitments are facilities leased from
Encinal Partners, a partnership which includes both the Company President and
Chief Executive Officer and a principal shareholder. The Company's Board of
Directors has reviewed and approved the lease agreements and determined that the
lease agreements entered into by the Company are equivalent to agreements that
would be negotiated with independent third parties on an "arms-length" basis.
The remaining lease term of these facilities is between one and seven years.
Rent expense for these facilities amounted to approximately $1.4 million in each
of fiscal 1998, 1997 and 1996.

NOTE 11 - SHAREHOLDERS' EQUITY

PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 1998, 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 1998, 1997 and 1996, employees purchased 567,647, 431,351 and
317,722 shares at an average per share price of $3.07, $4.81 and $5.47,
respectively. The number of shares reserved for issuance under the Purchase Plan
increased by 750,000 shares in February 1998. As of September 30, 1998,
1,200,117 shares were reserved for future issuance.

1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1998, the Company had
authorized 15,013,665 shares of Common Stock for issuance under the 1994
Incentive Stock Option Plan (the "Option Plan"). The Company's Board of
Directors administers the Option Plan and determines the terms of the options
granted under the Option Plan, including the exercise price, number of shares
subject to each option and the exercisability thereof. In addition, the
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.

1993 DIRECTOR OPTION PLAN The Company's 1993 Director Option Plan (the "Director
Plan") provides for the granting of nonstatutory stock options to non-employee
directors of the Company and is administered by the Board of Directors. In
February of 1998, the number of shares available for issuance under the Director
Plan was increased by 200,000 shares from 750,000 shares to 950,000 shares.

A summary of the status of the Company's stock option plans as of September 30,
1998, 1997 and 1996, and changes during the years then ended on those dates is
presented below:
<PAGE>   21

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                      1998                           1997                            1996
                                            -------------------------      -------------------------      ------------------------
                                                            Weighted-                      Weighted-                     Weighted-
                                                            Average                        Average                       Average
                                             Shares         Exercise       Shares          Exercise       Shares         Exercise
Option and Director Plans                    (000)           Price          (000)           Price          (000)           Price
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>             <C>            <C>              <C>           <C>    
Outstanding at beginning of year              8,558         $  5.25          6,419         $  6.93          6,244         $  6.60

Granted                                       3,102            3.87          8,345            5.43          1,424            7.03

Exercised                                       (91)           2.37           (441)           2.08           (506)           1.96

Cancelled                                    (1,220)           5.80         (5,765)           7.62           (743)           7.73
                                            -------                        -------                          -----

Outstanding at end of year                   10,349            4.80          8,558            5.25          6,419            6.93
                                            =======                        =======                          =====

Options exercisable at year-end               3,484         $  5.17          1,678         $  5.54          2,468         $  5.73
Weighted-average fair value of
     options granted during the year                        $  2.19                        $  2.13                        $  3.48
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about stock options outstanding at
September 30,1998:

(In thousands)

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                      ------------------------------------------------   ------------------------------
                         Number       Weighted-Avg                         Number
     Range of         Outstanding      Remaining         Weighted-Avg     Exercisable    Weighted-Avg
  Exercise Price       at 9/30/98   Contractual Life    Exercise Price    at 9/30/98     Exercise Price
-------------------------------------------------------------------------------------------------------
<S>                   <C>           <C>                 <C>               <C>            <C>
$ 0.41   -   0.41              9        0.7 years           $ 0.41               9           $ 0.41
  1.25   -   1.50            197        1.9                   1.37             197             1.37
  2.00   -   3.00            558        8.7                   2.54             110             2.38
  3.19   -   4.75          3,351        9.1                   4.08             672             4.17
  4.81   -   7.15          5,967        7.6                   5.34           2,281             5.57
  7.25   -  10.50            224        6.1                   8.53             172             8.52
 12.00   -  12.00             43        4.6                  12.00              43            12.00
$  .41   -  12.00         10,349        8.0                 $ 4.80           3,484           $ 5.17
                          ======                                             =====

-------------------------------------------------------------------------------------------------------
</TABLE>

PRO FORMA FAIR VALUE ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123,
Accounting for Stock-Based Compensation, requires pro forma information
regarding net income and earnings per share be determined as if the Company had
accounted for its employee stock options and other stock-based compensation
granted subsequent to September 30, 1996 under the fair value method of that
statement. The fair value of the options granted under the Incentive Option Plan
and the Director Option Plan was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996: risk-free interest rate of 5.45% for 1998,
6.19% for 1997, and 5.97% for 1996; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of 65% for 1998 and 55%
for 1997 and 1996, respectively; an average turnover rate of 15%

<PAGE>   22

for options granted to employees and a four year and five year expected life for
options granted to employees and executives, respectively.

The fair value for the Employee Stock Purchase Plan rights were also estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 1998, 1997 and 1996: risk-free interest rates of
5.31%, 5.31% and 5.34%, respectively; dividend yield of 0%; volatility factors
of 65% for 1998 and 55% for 1997 and 1996; and six month expected life. The
weighted average fair value of the ESPP rights granted in 1998, 1997 and 1996
was $ 1.27, $1.71 and $2.01, respectively.

(In thousands, except per share price)

<TABLE>
<CAPTION>
                                                            Fiscal Year Ended
                                                               September 30,
                                                     -------------------------------
                                                        1998        1997       1996
------------------------------------------------------------------------------------
<S>                                                 <C>          <C>         <C>     
Pro forma net loss                                    (20,664)   (18,625)    (23,376)

Pro forma loss per share, basic and diluted             (0.58)     (0.51)      (0.65)
------------------------------------------------------------------------------------
</TABLE>

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

COMMON STOCK REPURCHASES The Company repurchases its common stock on the open
market, both systematically and non-systematically. Under the systematic stock
repurchase plan, shares of common stock are repurchased to help negate the
dilutive effects of the Incentive Stock Option Plan and the Employee Stock
Purchase Plan. For the fiscal years ended September 30, 1998, 1997, and 1996,
the purchases and retirements of common stock under the systematic plan were
1,115,000 shares, 843,000 shares and 601,000 shares, respectively. Under the
non-systematic repurchase plan, the Company may repurchase up to 6,000,000
shares of its common stock. During the fiscal years ended September 30, 1998,
1997 and 1996, 945,050, 685,000 and 88,000 shares, respectively, were
repurchased and retired under the non-systematic plan. Both the systematic and
non-systematic plans have been approved for continuance into fiscal 1999.

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

NOTE 12 - INCOME TAXES

Loss before income taxes for fiscal 1998, 1997, and 1996 include foreign pretax
profit (loss) of approximately $(3.0) million, $2.2 million and $2.2 million,
respectively. The components of income taxes are as follows:
<PAGE>   23

<TABLE>
<CAPTION>
                                             Fiscal Year Ended September 30,
                                          --------------------------------------
(In thousands)                              1998          1997            1996
--------------------------------------------------------------------------------
<S>                                       <C>           <C>             <C>    
Current:
   Federal                                $   --        $  (846)        $   301
   State                                      20           (774)            814
   Foreign                                 3,334          2,394           1,205
--------------------------------------------------------------------------------
      Total current                        3,354            774           2,320
--------------------------------------------------------------------------------
Deferred:
   Federal                                    --          1,450          (1,684)
   State                                      --           (308)           (568)
   Foreign                                   205         (2,159)            410
--------------------------------------------------------------------------------
      Total deferred                         205         (1,017)         (1,842)
--------------------------------------------------------------------------------
Charge in lieu of income
    tax expense related to
    employee stock options                    --            244             263
--------------------------------------------------------------------------------
                                          $3,559        $     1         $   741
--------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                             Fiscal Year Ended September 30,
                                          --------------------------------------
(In thousands)                             1998           1997           1996
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>    
Statutory federal income
    benefit at 34%                        $(3,776)       $(5,157)       $(7,369)
State income tax (benefit),
    net of federal effect                    (338)          (714)           162
Foreign taxes less related tax
    benefit, if any                         3,659            502            577
Losses and expenses without
    tax benefit                             4,014          5,836          7,379
Other, net                                     --           (466)            (8)
--------------------------------------------------------------------------------
                                          $ 3,559        $     1        $   741
--------------------------------------------------------------------------------
</TABLE>

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

<PAGE>   24

<TABLE>
<CAPTION>
                                             Fiscal Year Ended September 30,
                                         ---------------------------------------
(In thousands)                             1998           1997           1996
--------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>     
Deferred tax assets:
Accruals and reserve
    accounts                             $  9,732       $  6,130       $  7,685
Property and equipment                      1,477          2,696            142
Purchased software                             --             --          5,005
Net operating loss carryforward            18,550          9,644             --
Research credit                             7,105          6,715          4,593
Other credits                               1,020          1,986             --
--------------------------------------------------------------------------------
Total gross deferred tax assets            37,884         27,171         17,425
Less valuation allowance                  (26,330)       (17,452)        (9,598)
--------------------------------------------------------------------------------
Net deferred  tax assets                   11,554          9,719          7,827
--------------------------------------------------------------------------------
Deferred tax liabilities:
Purchased software                          3,730          1,690            815
--------------------------------------------------------------------------------
Total deferred tax liabilities              3,730          1,690            815
--------------------------------------------------------------------------------
Net tax assets and liabilities           $  7,824       $  8,029       $  7,012
--------------------------------------------------------------------------------
</TABLE>

The net change in the total valuation allowance for the years ended September
30, 1998, 1997 and 1996 was an increase of approximately $8.9 million, $7.9
million and $5.4 million, respectively.

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

At September 30, 1998, the Company has net operating loss carryforwards of
approximately $53.0 million which expire in fiscal years 2012 through 2013, and
foreign tax credit and research credit carryforwards of approximately $0.6
million and $7.3 million, respectively, which expire in fiscal 1999 through
2013.

At September 30, 1998, the cumulative unremitted foreign earnings of the Company
were not material. The Company intends to reinvest these earnings indefinitely.

NOTE 13 - RESTRUCTURING CHARGE

A worldwide restructuring during the third quarter of fiscal 1997 resulted in a
one-time charge of $8.4 million. The charge included a 10% reduction in
headcount, elimination of lease obligations of non-essential facilities and a
write-off of certain acquired technologies. The majority of the reduction of
force was in manufacturing, product development and marketing. Of the $8.4
million, $5.3 million related to cash expenditures and $3.1 million related to
non-cash charges. As a result of this restructuring, the Company realigned its
product development organization, eliminated some research and development
programs and focused product marketing. Additionally, some key manufacturing
processes have been outsourced and elements of general and administration
functions have been consolidated.

The restructuring charge payable and payments against it can be summarized as
follows:
<PAGE>   25

<TABLE>
<CAPTION>
                                      Reduction
(In thousands)                         in Force    Facilities    Technology      Other        Total
----------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>           <C>            <C>          <C>    
Restructuring charge accrued            $ 3,359       $1,925       $ 1,433      $ 1,656      $ 8,373

Fiscal 1997 payments / write-offs        (2,551)        (485)       (1,433)      (1,055)      (5,524)
----------------------------------------------------------------------------------------------------

Accrual at end of fiscal 1997               808        1,440            --          601        2,849

Fiscal 1998 payments / write-offs          (798)        (758)           --         (601)      (2,157)
----------------------------------------------------------------------------------------------------

Accrual at end of fiscal 1998           $    10       $  682       $    --      $    -       $   692
----------------------------------------------------------------------------------------------------
</TABLE>

NOTE 14 - ACQUISITIONS

UNIX ASSETS In December 1995, the Company acquired from Novell certain assets
related to UnixWare including the core intellectual property. The consideration
consisted of 6,127,500 newly issued shares of non-registered common stock.
Additionally, cash payments to Novell with a present value of $84 million will
be paid periodically by SCO provided certain unit volumes of UNIX distribution
are achieved. To date, distribution unit volume of UNIX has not reached levels
which have required the Company to make cash payments to Novell. Such payments
terminate at the end of calendar year 2002. Non-recurring charges of $38.4
million were incurred in fiscal 1996 for costs allocated to in-process research
and development for which technological feasibility had not been established and
for which there was no alternative future use. The Company also purchased core
intellectual property totaling $5.8 million, software technology licenses
totaling $5.5 million and intangibles of $1.7 million.

NOTE 15 - INVESTMENTS

In November 1996, the Company purchased $2.0 million of convertible debentures
of a domestic distribution channel partner. The debentures can be converted, in
whole or in part, at any time prior to maturity on February 18, 1999, for
preferred stock equal to 19.9% of the fully diluted common stock outstanding. If
the Company does not convert the debenture, the partner will repay all principal
and interest in twelve equal quarterly installments commencing March 31, 1999.

In January 1995, the Company purchased 10% of another domestic distribution
channel partner's preferred 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, 2000, but may be converted at any time
prior to maturity for an additional 10% of either the partner's preferred stock
or common stock. Interest accrued as of July 1, 1998 was paid in July 1998.
Interest accrued subsequent to July 1, 1998 on the outstanding borrowing is due
and payable at the loan's maturity.

At September 30, 1998, the Company had accounts receivable outstanding with the
related parties of $1.5 million. The September 30, 1997 outstanding accounts
receivable with the related parties was $3.9 million. Sales to the related
parties were $18.6 million for fiscal 1998 and $18.3 million for fiscal 1997.
One of the parties accounted for receivables of $1.6 million as of September 30,
1996, and sales of $7.7 million for fiscal 1996.

<PAGE>   26
NOTE 16 - INFORMATION BY GEOGRAPHIC AREA

<TABLE>
<CAPTION>
                                                  Fiscal Year Ended September 30,
                                           ---------------------------------------------
(In thousands)                                1998              1997              1996
----------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>      
NET REVENUES:
United States                              $ 108,482         $ 113,328         $ 125,759
Europe                                        61,191            77,931            80,603
Other international operations                 2,227             2,401             1,528
----------------------------------------------------------------------------------------
Total net revenues                         $ 171,900         $ 193,660         $ 207,890
========================================================================================

TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States                              $  11,620         $  13,205         $  16,894
Europe                                         1,865             2,136               916
----------------------------------------------------------------------------------------
Total transfers                            $  13,485         $  15,341         $  17,810
========================================================================================

OPERATING INCOME (LOSS):
United States                              $ (10,966)        $ (17,496)        $ (29,017)
Europe                                        (2,932)            1,999             2,864
Other international operations                   305               189               120
Eliminations                                      --            (1,286)            2,452
----------------------------------------------------------------------------------------
Operating loss                             $ (13,593)        $ (16,594)        $ (23,581)
========================================================================================

IDENTIFIABLE ASSETS:

United States                              $ 102,825         $ 117,068         $ 135,040
Europe                                        27,914            32,816            31,930
Other international operations                 1,643             3,728             3,860
Eliminations                                     301            (6,947)           (4,023)
----------------------------------------------------------------------------------------
Total assets                               $ 132,683         $ 146,665         $ 166,807
========================================================================================
</TABLE>

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

NOTE 17 - EMPLOYEE BENEFIT PLAN

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 20% of their pre-tax salary, but not more than the
statutory limits. The Company matches 50% of employee contributions up to the
lower of 6% of the employee's annual salary or $3,000. For fiscal 1998, 1997 and
1996, the Company's total contributions towards the 401(k) plan amounted to $0.9
million, $0.9 million and $0.5 million, respectively.
<PAGE>   27
REPORTS OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
The Santa Cruz Operation, Inc. and its subsidiaries at September 30, 1998, and
the results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

San Jose, California
October 23, 1998 except for Note 7 which is as of December 11, 1998


To 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, 1997 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the two-year period ended September 30, 1997.
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, 1997 and the results of
their operations and their cash flows for each of the years in the two-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

San Jose, California
October 22, 1997

<PAGE>   28
THE SANTA CRUZ OPERATION, INC.
QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                           Three Months Ended
                                     ----------------------------------------------------------------------------------------------
(In thousands, except                Sept. 30,   June 30,     Mar. 31,    Dec. 31,   Sept. 30,   June 30,     Mar. 31,     Dec. 31,
per share data)                        1998        1998         1998        1997       1997        1997         1997         1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>          <C>        <C>        <C>          <C>          <C>     
Net revenues                          $48,622    $ 25,241     $ 50,540     $47,497    $51,799    $ 31,166     $ 54,087     $ 56,608
Cost of revenues                       10,473      10,126       12,953      12,346     13,800      12,826       15,027       13,662
-----------------------------------------------------------------------------------------------------------------------------------
       Gross margin                    38,149      15,115       37,587      35,151     37,999      18,340       39,060       42,946
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
    Research and
        development                    10,066      10,157       10,411      10,759     10,825      11,055       12,284       11,966
    Sales and marketing                20,393      20,445       19,187      19,619     17,868      20,197       20,695       20,776
    General and
        administrative                  5,078       4,626        4,250       4,604      4,776       5,523        5,365        5,236
    Non-recurring charges                  --          --           --          --         --       8,373           --           --
-----------------------------------------------------------------------------------------------------------------------------------
       Total operating
           expenses                    35,537      35,228       33,848      34,982     33,469      45,148       38,344       37,978
-----------------------------------------------------------------------------------------------------------------------------------
       Operating income (loss)          2,612     (20,113)       3,739         169      4,530     (26,808)         716        4,968

Other income (expense):
    Interest income, net                  637         679          470         475        630         396          628          637
    Other income (expense), net           230         (53)         (52)        101        157        (661)         (45)        (317)
-----------------------------------------------------------------------------------------------------------------------------------
       Income (loss) before
           income taxes                 3,479     (19,487)       4,157         745      5,317     (27,073)       1,299        5,288
-----------------------------------------------------------------------------------------------------------------------------------
    Income taxes                          800       1,482          956         321        798      (2,444)         325        1,322
-----------------------------------------------------------------------------------------------------------------------------------
       Net income (loss)              $ 2,679    ($20,969)    $  3,201     $   424    $ 4,519    ($24,629)    $    974     $  3,966
-----------------------------------------------------------------------------------------------------------------------------------
       Net income (loss) per share:
           Basic                      $  0.08    ($  0.59)    $   0.09     $  0.01    $  0.12    ($  0.67)    $   0.03     $   0.11
           Diluted                    $  0.08    ($  0.59)    $   0.09     $  0.01    $  0.12    ($  0.67)    $   0.03     $   0.11
-----------------------------------------------------------------------------------------------------------------------------------
       Shares used in income (loss)
         per share calculation:
           Basic                       35,221      35,611       36,094      36,345     36,443      36,547       36,611       36,909
           Diluted                     35,408      35,611       36,431      37,094     37,220      36,547       37,522       37,683
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   29
                             DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
BOARD OF DIRECTORS                  CORPORATE OFFICERS                          DIVISIONAL OFFICERS
<S>                                 <C>                                         <C>
NINIAN EADIE+#                      DOUG MICHELS*+                              MICK ADAMSON
                                    President and Chief Executive Officer       Vice President and General Manager,
JEAN-FRANCOIS HEITZ+#                                                           Tarantella Business Unit
                                    RAY ANDERSON+
RONALD LACHMAN+                     Senior Vice President, Marketing            SHEILA BAKER
                                                                                Vice President, US Channel Sales
ROBERT MCCLURE+#                    JOHN LUHTALA*+
                                    Senior Vice President, Operations,          WAYNE BERGLAND
                                    and Chief Financial Officer
DOUG MICHELS+                                                                   Vice President, US Field Sales

ALOK MOHAN+, CHAIRMAN               DAVID MCCRABB+                              JOHN BONDI
                                    Executive Vice President,                   Vice President, Server Product Marketing
GLENN RICART+#                      Worldwide Sales and Field Operations
                                                                                RANDY BRESEE
R. DUFF THOMPSON+                   JACK MOYER+                                 Vice President, Corporate Controller
                                    Senior Vice President, Human
                                    Resources
GIL WILLIAMSON+                                                                 JIM CLARK
                                    STEVE SABBATH*+                             Vice President, Asia/Pacific Operations
                                    Senior Vice President,
                                    Law and Corporate Affairs, and              EDMUNDO COSTA
                                    Secretary
                                                                                Vice President,
                                    GEOFF SEABROOK+                             OEM and Alliance Management
                                    Senior Vice President,
                                    Corporate Development                       DAVE CUSS
                                                                                Regional Vice President,
                                    JAMES WILT                                  (Nordic, Benelux, Iberia,
                                    Senior Vice President, Products             Middle East, and Africa)

                                                                                CHRIS FLYNN
                                                                                Regional Vice President,
#Member of Audit Committee          * Elected by Board of Directors             (Germany, France, UK and India)
                                    + Affiliate or Executive Officer
                                    subject to the provisions of 
                                    Section 16(b) of the Securities             NIMER MAABADI
                                    Exchange Act of 1934                        Vice President, Canada and Latin America

                                                                                HELENE MANN-BOUCHARD
                                                                                Vice President,
                                                                                Worldwide Customer Delivery Systems

                                                                                LISA OZIMEK
                                                                                Vice President, UNIX Systems Group

                                                                                ANTONIO PRIVITERA
                                                                                Regional Vice President,
                                                                                (Italy, Greece, Turkey, Eastern Europe,
                                                                                And Central Asia)

                                                                                RON RASMUSSEN
                                                                                Vice President, Server Products Group

                                                                                CHRIS SCHEYBELER
                                                                                Vice President,
                                                                                Client Integration Development

                                                                                DAVID TAYLOR
                                                                                Vice President,
                                                                                World Wide Field Programs
                                                                                and Professional Services

                                                                                RICHARD TREADWAY
                                                                                Vice President,
                                                                                Segment Business Development
</TABLE>