<PAGE>   1

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------

                                    FORM 10-Q


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


                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001


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

         FOR THE TRANSITION PERIOD FROM _____________ TO _______________

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

                         COMMISSION FILE NUMBER 0-21484

                                TARANTELLA, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)


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


             425 ENCINAL STREET, SANTA CRUZ, CALIFORNIA          95060
             (Address of principal executive office)           (Zip Code)


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


Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes   [X]    No   [ ]


 The number of shares outstanding of the registrant's common stock as of March
 31, 2001 was 39,877,212.

================================================================================



<PAGE>   2

                                TARANTELLA, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     PAGE
                                                                                     ----
<S>                                                                                  <C>
PART I.  FINANCIAL INFORMATION

        ITEM 1.FINANCIAL STATEMENTS

               A)  CONSOLIDATED STATEMENTS OF OPERATIONS
                     FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000........1

               B)  CONSOLIDATED BALANCE SHEETS
                     AS OF MARCH 31, 2001 AND SEPTEMBER 30, 2000.......................2

               C)  CONSOLIDATED STATEMENTS OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000..................3

               D)  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................4

        ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS.................................................11

        ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........17


PART II.  OTHER INFORMATION


        ITEM 6.    EXHIBITS...........................................................18


SIGNATURES............................................................................19
</TABLE>



<PAGE>   3

Part I. Financial Information
Item I. Financial Statements


TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED                     SIX MONTHS ENDED
                                                                      MARCH 31,                             MARCH 31,
                                                             ---------------------------           ---------------------------
                                                               2001               2000               2001               2000
                                                             --------           --------           --------           --------
                                                                     (UNAUDITED)                           (UNAUDITED)
<S>                                                          <C>                <C>                <C>                <C>
    NET REVENUES
      License, third parties                                 $ 22,040           $ 29,934           $ 43,007           $ 75,769
      License, related parties                                  2,125              1,878              4,019              5,481
      Service, third parties                                    2,638              2,965              5,649              6,142
      Service, related parties                                    548                765              1,131              1,803
                                                             --------           --------           --------           --------
         Total net revenues                                    27,351             35,542             53,806             89,195
                                                             --------           --------           --------           --------
    COST OF REVENUES
      License, third parties                                    5,746              8,718              8,937             18,776
      License, related parties                                    553                513                841              1,325
      Service, third parties                                      689                821              3,707              1,546
      Service, related parties                                    143                205                727                442
                                                             --------           --------           --------           --------
         Total cost of revenues                                 7,131             10,257             14,212             22,089
                                                             --------           --------           --------           --------
         GROSS MARGIN                                          20,220             25,285             39,594             67,106
                                                             --------           --------           --------           --------
    OPERATING EXPENSES:
      Research and development                                  6,518             11,632             12,950             22,210
      Sales and marketing                                      16,675             23,723             33,006             49,022
      General and administrative                                4,505              4,672              8,772              8,508
      Restructuring charges                                     1,133              5,887              1,133              5,887
                                                             --------           --------           --------           --------
         Total operating expenses                              28,831             45,914             55,861             85,627
                                                             --------           --------           --------           --------
         OPERATING LOSS                                        (8,611)           (20,629)           (16,267)           (18,521)
    OTHER INCOME (EXPENSE):
      Interest income, net                                        284                592                478              1,192
      Other income, net                                         1,677                908              1,858              1,745
                                                             --------           --------           --------           --------
         Loss before income taxes                              (6,650)           (19,129)           (13,931)           (15,584)
      Income taxes                                               (817)               680               (201)             1,350
                                                             --------           --------           --------           --------
         NET LOSS                                              (5,833)           (19,809)           (13,730)           (16,934)
    OTHER COMPREHENSIVE LOSS, NET OF TAX
      Unrealized gain (loss) on available-for-sale
         equity securities                                     (1,976)           (34,198)            (5,134)            21,665
      Foreign currency translation adjustment                     282                (79)               229                (78)
                                                             --------           --------           --------           --------
         COMPREHENSIVE LOSS                                  $ (7,527)          $(54,086)          $(18,635)          $  4,653
                                                             --------           --------           --------           --------
         LOSS PER SHARE:
              Basic                                          $  (0.15)          $  (0.56)          $  (0.35)          $  (0.48)
              Diluted                                        $  (0.15)          $  (0.56)          $  (0.35)          $  (0.48)
                                                             --------           --------           --------           --------
         SHARES USED IN LOSS PER SHARE CALCULATION:
              Basic                                            39,733             35,596             39,586             35,154
              Diluted                                          39,733             35,596             39,586             35,154
                                                             --------           --------           --------           --------
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       1
<PAGE>   4

TARANTELLA, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
                                                                                    MARCH 31,           SEPTEMBER 30,
                                                                                      2001                  2000
                                                                                    ---------           -------------
                                                                                   (UNAUDITED)
<S>                                                                                 <C>                 <C>
         ASSETS
         Current assets:
              Cash and cash equivalents                                             $  15,014             $  20,879
              Short-term investments                                                    3,100                 5,567
              Receivables, third parties, net                                          18,253                22,917
              Receivables, related parties                                              4,770                 1,352
              Available-for-sale equity securities                                      2,905                 7,119
              Other current assets                                                      7,769                 9,858
                                                                                    ---------             ---------
                  Total current assets                                                 51,811                67,692
                                                                                    ---------             ---------
         Property and equipment, net                                                    7,251                 9,012
         Purchased software and technology licenses, net                                4,593                 5,830
         Other assets                                                                   4,755                 6,348
                                                                                    ---------             ---------
                       TOTAL ASSETS                                                 $  68,410             $  88,882
                                                                                    ---------             ---------
         LIABILITIES AND SHAREHOLDERS' EQUITY
         Current liabilities:
              Trade accounts payable                                                $   2,667             $   5,521
              Royalties payable                                                         3,771                 4,530
              Note payable                                                              7,000                    --
              Income taxes payable                                                      1,397                 1,964
              Accrued restructuring charges                                             2,058                 5,964
              Accrued expenses and other current liabilities                           22,835                26,905
              Deferred revenues                                                        10,968                 7,334
                                                                                    ---------             ---------
                  Total current liabilities                                            50,696                52,218
                                                                                    ---------             ---------
         Long-term lease obligations                                                        6                   545
         Long-term deferred revenues                                                    1,371                 1,397
         Other long-term liabilities                                                    2,982                 3,520
                                                                                    ---------             ---------
                  Total long-term liabilities                                           4,359                 5,462
                                                                                    ---------             ---------
         SHAREHOLDERS' EQUITY
              Common stock, no par value, net, authorized 100,000 shares
                  Issued and outstanding 39,877 and 39,436 shares                     119,728               118,940
              Accumulated other comprehensive income                                      581                 5,486
              Accumulated deficit                                                    (106,954)              (93,224)
                                                                                    ---------             ---------
                  Total shareholders' equity                                           13,355                31,202
                                                                                    ---------             ---------
                       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                   $  68,410             $  88,882
                                                                                    ---------             ---------
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      2
<PAGE>   5

TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
                                                                                            SIX MONTHS ENDED
                                                                                                MARCH 31,
                                                                                       -----------------------------
                                                                                         2001                 2000
                                                                                       --------             --------
                                                                                      (UNAUDITED)          (UNAUDITED)
<S>                                                                                    <C>                  <C>
      CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                         $(13,730)            $(16,934)
      Adjustments to reconcile net loss to net cash
           used for operating activities -
             Depreciation and amortization                                                4,520                6,124
             Exchange (gain) loss                                                           336                 (190)
             Gain on sale of marketable securities                                       (2,120)                  --
             Non-cash restructuring charge                                                   --                5,887
      Changes in operating assets and liabilities -
             Receivables                                                                  1,327                6,628
             Other current assets                                                        (3,443)                 351
             Other assets                                                                   136                1,328
             Royalties payable                                                             (748)              (2,787)
             Trade accounts payable                                                      (2,844)                (152)
             Income taxes payable                                                        (1,145)               1,295
             Accrued expenses and other current liabilities                               5,048               (6,743)
             Deferred revenues                                                            3,540                    9
             Other long-term liabilities                                                     (3)                (493)
                                                                                       --------             --------
                 Net cash used for operating activities                                  (9,126)              (5,677)
                                                                                       --------             --------
      CASH FLOWS FROM INVESTING ACTIVITIES:
             Purchases of property and equipment                                           (989)              (2,526)
             Purchases of software and technology licenses                                 (341)                (433)
             Sales of short-term investments                                              2,500               11,725
             Purchases of short-term investments                                            (33)             (10,606)
             Proceeds from sale of marketable securities                                  3,200                   --
             Changes in other assets                                                       (736)              (2,869)
                                                                                       --------             --------
                 Net cash provided by (used for) investing activities                     3,601               (4,709)
                                                                                       --------             --------
      CASH FLOWS FROM FINANCING ACTIVITIES:
             Payments on capital leases                                                  (1,121)              (1,580)
             Net proceeds from sale of common stock                                         788               11,331
             Repurchases of common stock                                                     --              (12,786)
                                                                                       --------             --------
                 Net cash provided by (used for) financing activities                      (333)              (3,035)
                                                                                       --------             --------
      Effects of exchange rate changes on cash and cash equivalents                          (7)                  33
                                                                                       --------             --------
      Change in cash and cash equivalents                                                (5,865)             (13,388)
                                                                                       --------             --------
      Cash and cash equivalents at beginning of period                                   20,879               33,683
                                                                                       --------             --------
      Cash and cash equivalents at end of period                                       $ 15,014             $ 20,295
                                                                                       --------             --------
      SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
          Cash paid-
             Income taxes                                                              $    641             $      5
             Interest                                                                        90                  135
          Non-cash financing and investing activities-
             Unrealized gain (loss) on available-for-sale equity securities            $ (1,976)            $ 29,124
             Assets acquired under capital leases                                            --                   20
                                                                                       --------             --------
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       3
<PAGE>   6


TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.      BASIS OF PRESENTATION

        In the opinion of management, the accompanying unaudited, consolidated
statements of operations, balance sheets and statements of cash flows have been
prepared in accordance with generally accepted accounting principles and include
all material adjustments (consisting of only normal recurring adjustments)
necessary for their fair presentation. The financial statements include the
accounts of the Company and its wholly owned subsidiaries after all material
intercompany balances and transactions have been eliminated. The Notes to
Consolidated Financial Statements contained in the fiscal year 2000 report on
Form 10-K should be read in conjunction with these Consolidated Financial
Statements. The consolidated interim results presented are not necessarily
indicative of results to be expected for a full year. Certain reclassifications
have been made for consistent presentation. The September 30, 2000 balance sheet
was derived from audited financial statements, and is included for comparative
purposes. The Company's original incorporated name was The Santa Cruz Operation,
Inc. As of May 7, 2001 the name has been changed to Tarantella, Inc.

2.      TRANSACTION WITH CALDERA

        On May 7, 2001, the Company consummated the sale of its Server Software
and Professional Services Divisions to Caldera Systems, Inc. Under the terms of
the transaction, SCO received cash consideration of $23.0 million, of which
$7.0 million has already been received, as well as a note from Caldera Systems,
Inc. for $8.0 million due in four quarterly installments in the second year
after the close of the transaction. Additionally, SCO received 16 million
shares of Caldera International, Inc., the resulting newly created company that
combines the assets of Caldera Systems, Inc. and the newly acquired Server
Software and Professional Services Divisions. In connection with the sale, the
Company will also be entitled to receive earn-out payments from Caldera
International Inc. determined as 45% of the amount by which OpenServer revenues
exceed certain specified threshold amounts during the three year period
following the closing.

        The Company has changed its corporate name to Tarantella, Inc. The
company has also changed its NASDAQ trading symbol to TTLA to reflect the new
corporate name.

        The following table presents the effects of the transaction on revenues
and net income; had the transaction been consummated at the beginning of the
quarter. The following amounts do not include any gains or losses from the
transaction with Caldera. The Company, Tarantella Inc., anticipates no changes
to the accounting methods that have been historically used.

<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                             March 31,
                                                               2001
                                                           (Unaudited)
--------------------------------------------------------------------------
<S>                                                          <C>
Total (pro forma) net revenues                                4,028
--------------------------------------------------------------------------
(Pro forma) net loss                                         (4,193)
(Pro forma) loss per share:
  Basic                                                      $(0.11)
  Diluted                                                    $(0.11)
--------------------------------------------------------------------------
Shares used in (pro forma) loss per share calculation:
  Basic                                                       39,733
  Diluted                                                     39,733
--------------------------------------------------------------------------
</TABLE>

3.      ACCRUED RESTRUCTURING CHARGE

FISCAL 2001

        During the second quarter of fiscal 2001, the Company announced and
completed a restructuring plan, which resulted in a one-time charge of $1.6
million, which when taken with an adjustment to a previously established
restructuring reserve, resulted in the net charge of $1.1 million. The Company
has reduced its spending levels to align its operating expenses with the
Company's revenues. The restructuring charge is related to the Tarantella
division and includes a reduction in personnel of 28 employees and a planned
elimination and sublet of unused facilities. The entire $1.6 million relates to
cash expenditures.

        The severance charges of $1.5 million include the elimination of 16
positions in the United States, 4 positions in the United Kingdom, and 8
positions in various other geographies. The reductions in force affect the
sales, marketing and general and administrative functions of the Company. As of
March 31, 2001 a total of 23 positions have been eliminated.

        The Company intends to partially sublet space in the Santa Cruz,
California office. This space will be vacated and restored and subsequently
sublet. The Company anticipates this will be complete within six months.

        The fiscal 2001 second quarter restructuring charge is summarized as
follows:

                FISCAL 2001 SECOND QUARTER RESTRUCTURING ACCRUAL

<TABLE>
<CAPTION>
                                             Reduction
(In thousands)                                in Force          Facilities         Total
                                             ---------          ----------        -------
<S>                                          <C>                <C>               <C>
Restructuring charge accrued                   $ 1,499             $64            $ 1,563
Payments/utilization of the accrual               (885)             --               (885)
                                               -------             ---            -------
Accrual at March 31, 2001                          614              64                678
                                               -------             ---            -------
</TABLE>


FISCAL 2000



                                       4
<PAGE>   7

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

FISCAL 2000 SECOND QUARTER RESTRUCTURING PLAN

        During the second quarter of fiscal 2000, the Company announced and
completed a restructuring plan, which resulted in a one-time charge of $5.9
million. During the second quarter of fiscal 2001, the Company disposed of fixed
assets related to this restructuring accrual. Additionally, the Company made
payments on facilities costs related to this restructuring during the second
quarter of fiscal 2001.

        The fiscal 2000 second quarter restructuring charge is summarized as
follows:

                FISCAL 2000 SECOND QUARTER RESTRUCTURING ACCRUAL

<TABLE>
<CAPTION>
                                             Reduction                                               Disposal of
(In thousands)                                in Force           Facilities         Technology       Fixed Assets           Total
                                             ---------           ----------         ----------       ------------          -------
<S>                                          <C>                 <C>                <C>              <C>                   <C>
Restructuring charge accrued                   $ 3,574             $ 1,052             $ 667             $ 594             $ 5,887
Payments/utilization of the accrual             (2,660)                (94)             (667)             (256)             (3,677)
Provision adjustment                              (914)                 --                --                --                (914)
                                               -------             -------             -----             -----             -------
Accrual at September 30, 2000                       --                 958                --               338               1,296
Payments/utilization of the accrual                 --                 (75)               --                (4)                (79)
                                               -------             -------             -----             -----             -------
Accrual at December 31, 2000                        --                 883                --               334               1,217
Payments/utilization of the accrual                 --                (169)               --              (334)               (503)
                                               -------             -------             -----             -----             -------
Accrual at March 31, 2001                           --                 714                --                --                 714
                                               -------             -------             -----             -----             -------
</TABLE>


FISCAL 2000 FOURTH QUARTER RESTRUCTURING PLAN

        In the fourth quarter of fiscal 2000, in connection with management's
plan to reduce operating expenses, the Company announced a further restructuring
plan, which resulted in a one-time charge of $5.7 million. During the second
quarter of fiscal 2001 the Company made payments related to facilities costs and
severance costs associated with this restructuring. Also during the second
quarter of fiscal 2001, the Company disposed of certain fixed assets related to
this restructuring. The Company recorded an adjustment to the fiscal 2000 fourth
quarter restructuring provision of $0.4 million in severance costs in the second
quarter of fiscal 2001. The severance costs were adjusted to reflect changes to
the estimated expenses as actual payments were made.

        The fiscal 2000 fourth quarter restructuring charge is summarized as
follows:

                FISCAL 2000 FOURTH QUARTER RESTRUCTURING ACCRUAL

<TABLE>
<CAPTION>
                                             Reduction                           Disposal of
(In thousands)                                in Force          Facilities       Fixed Assets           Total
                                             ---------          ----------       ------------          -------
<S>                                          <C>                <C>              <C>                   <C>
Restructuring charge accrued                   $ 4,658             $ 804             $ 248             $ 5,710
Payments/utilization of the accrual             (1,042)               --                --              (1,042)
                                               -------             -----             -----             -------
Accrual at September 30, 2000                    3,616               804               248               4,668
Payments/utilization of the accrual             (2,794)             (167)              (21)             (2,982)
                                               -------             -----             -----             -------
Accrual at December 31, 2000                       822               637               227               1,686
Payments/utilization of the accrual               (392)             (157)              (41)               (590)
Provision adjustment                              (430)               --                --                (430)
                                               -------             -----             -----             -------
Accrual at March 31, 2001                           --               480               186                 666
                                               -------             -----             -----             -------
</TABLE>



                                       5
<PAGE>   8

4.      SEGMENT INFORMATION

        For the quarter ended March 31, 2001, the Company reviewed the
performance of its three divisions the Server Software Division, the Tarantella
Division, and the Professional Services Division. Each segment markets the
Company's software products and services to companies in a number of industries
including telecommunications, manufacturing and government bodies. These
products and services are either sold directly by each segment's sales force or
are sold to end users through distributors or OEMs.

The following table presents information about reportable segments (in
thousands):

<TABLE>
<CAPTION>
                                                     Three Months Ended                         Six Months Ended
                                                          March 31,                                 March 31,
                                                -----------------------------             -----------------------------
                                                  2001                 2000                 2001                 2000
                                                --------             --------             --------             --------
                                                                              (Unaudited)
<S>                                             <C>                  <C>                  <C>                  <C>
Net revenues:
    Server software division                    $ 23,523             $ 32,876             $ 46,549             $ 82,372
    Tarantella division                            4,028                2,492                7,206                5,991
    Professional services division                   474                  892                1,335                2,176
    Corporate adjustments                           (674)                (718)              (1,284)              (1,344)
                                                --------             --------             --------             --------
          Total net revenues                    $ 27,351             $ 35,542             $ 53,806             $ 89,195
                                                ========             ========             ========             ========

Gross margin:
    Server software division                    $ 17,530             $ 24,382             $ 34,481             $ 63,883
    Tarantella division                            3,371                1,713                5,954                4,558
    Professional services division                  (410)                (810)                (516)              (1,335)
    Corporate adjustments                           (271)                  --                 (325)                  --
                                                --------             --------             --------             --------
          Total gross margin                    $ 20,220             $ 25,285             $ 39,594             $ 67,106
                                                ========             ========             ========             ========

Restructuring charge:
    Server software division                    $    430             $ (5,768)            $    430             $ (5,768)
    Tarantella division                           (1,563)                  --               (1,563)                  --
    Professional services division                    --                 (119)                  --                 (119)
                                                --------             --------             --------             --------
          Total restructuring charge            $ (1,133)            $ (5,887)            $ (1,133)            $ (5,887)
                                                ========             ========             ========             ========

Operating loss:
    Server software division                    $   (400)            $(16,781)            $   (610)            $(13,166)
    Tarantella division                           (6,971)              (2,626)             (13,495)              (3,358)
    Professional services division                (1,269)              (1,222)              (2,199)              (1,997)
    Corporate adjustments                             29                   --                   37                   --
                                                --------             --------             --------             --------
           Total operating loss                 $ (8,611)            $(20,629)            $(16,267)            $(18,521)
                                                ========             ========             ========             ========
</TABLE>


      The following table presents information about geographical segments
                                (in thousands):



                                       6
<PAGE>   9

<TABLE>
<CAPTION>
                                                          Three Months Ended                      Six Months Ended
                                                               March 31,                              March 31,
                                                     ----------------------------            ----------------------------
(In thousands)                                         2001                2000                2001                2000
                                                     --------             -------            --------             -------
                                                                                  (Unaudited)
<S>                                                  <C>                  <C>                <C>                  <C>
Net revenues:
    United States                                    $ 13,363             $17,386            $ 25,637             $36,590
    Canada and Latin America                            1,093               1,373               3,140               4,126
    Europe, Middle East, India and Africa              10,174              14,339              19,954              40,101
    Asia Pacific                                        2,553               2,272               4,644               5,419
    Corporate Adjustments                                 168                 172                 431               2,959
                                                     --------             -------            --------             -------
          Total net revenues                         $ 27,351             $35,542            $ 53,806             $89,195
                                                     ========             =======            ========             =======

Gross margin:
    United States                                    $  9,911             $11,332            $ 19,790             $24,309
    Canada and Latin America                              856               1,008               2,563               3,002
    Europe, Middle East, India and Africa               7,923              10,889              14,522              32,371
    Asia Pacific                                        2,038               1,885               3,574               4,466
    Corporate Adjustments                                (508)                171                (855)              2,958
                                                     --------             -------            --------             -------
          Total gross margin                         $ 20,220             $25,285            $ 39,594             $67,106
                                                     ========             =======            ========             =======
</TABLE>


 Revenue is allocated to geographical segments based on the location from which
                             the sale is satisfied.

5.      INVESTMENTS

        AVAILABLE FOR SALE EQUITY SECURITIES. During the second quarter of
fiscal 2001, the Company sold 3.2 million shares of Series D of the preferred
stock of Rainmaker Systems, Inc. ("Rainmaker") with a cost basis of $1.1
million, and received cash proceeds of $3.2 million. At March 31, 2001, the
Company held 505,767 shares of Rainmaker's stock. The Company accounts for these
shares as available for sale securities and records them at fair market value,
based on quoted market prices with any unrealized gains or losses included as
part of accumulated other comprehensive income.

Unrealized gains and losses on available for sale investments as of March 31,
2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   Gross unrealized
                               Fair market value        Cost          gain (loss)
                               -----------------       ------      ----------------
<S>                            <C>                     <C>         <C>
Rainmaker                            $  380            $  171            $209
Other investments                     2,525             2,250             275
                                     ------            ------            ----
                                     $2,904            $2,421            $484
                                     ======            ======            ====
</TABLE>

        Rainmaker's common stock is traded on the Nasdaq National Market under
the symbol "RMKR." The Company no longer has the right to appoint a member to
the Board of Directors.



                                       7
<PAGE>   10

6.      COMPREHENSIVE INCOME

        The following table presents the calculation of comprehensive income as
required by SFAS 130. The components of other comprehensive income (loss) for
the three and six months ended March 31, 2001 and 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                 Three Months Ended                        Six Months Ended
                                                                      March 31,                                March 31,
                                                             ----------------------------             -----------------------------
                                                              2001                 2000                 2001                 2000
                                                             -------             --------             --------             --------
<S>                                                          <C>                 <C>                  <C>                  <C>
Net loss                                                     $(5,833)            $(19,809)            $(13,730)            $(16,934)
Other comprehensive income (loss):
     Foreign currency translation adjustment                     282                  (79)                 229                  (78)
     Unrealized gain (loss) on available-for-sale             (1,976)             (47,730)              (5,134)              29,124
          equity securities
     Gross tax on unrealized gain (loss) on                       --               19,011                   --              (11,600)
          available-for-sale equity securities
     Release of deferred tax valuation allowance                  --               (5,479)                  --                4,141
                                                             -------             --------             --------             --------
Total other comprehensive income (loss)                      $(7,527)            $(54,086)            $(18,635)            $  4,653
                                                             =======             ========             ========             ========
</TABLE>



                                       8
<PAGE>   11

7.      EARNINGS PER SHARE (EPS) DISCLOSURES

        Basic and diluted earnings per share were calculated as follows during
the three and six months ended March 31, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                 Three Months Ended                         Six Months Ended
                                                                      March 31,                                 March 31,
                                                            -----------------------------             -----------------------------
                                                              2001                 2000                 2001                 2000
                                                            --------             --------             --------             --------
<S>                                                         <C>                  <C>                  <C>                  <C>
Basic:
     Weighted average shares                                  39,733               35,596               39,586               35,154
                                                            --------             --------             --------             --------
     Net loss                                               $ (5,833)            $(19,809)            $(13,730)            $(16,934)
                                                            ========             ========             ========             ========
     Net loss per share                                     $  (0.15)            $  (0.56)            $  (0.35)            $  (0.48)
                                                            ========             ========             ========             ========

Diluted:
     Weighted average shares                                  39,733               35,596               39,586               35,154
     Shares used in per share calculation                     39,733               35,596               39,586               35,154
                                                            ========             ========             ========             ========
     Net loss                                               ($ 5,833)            $(19,809)            $(13,730)            $(16,934)
                                                            ========             ========             ========             ========
     Net loss per share                                     $  (0.15)            $  (0.56)            $  (0.35)            $  (0.48)
                                                            ========             ========             ========             ========

Options and warrants outstanding at 3/31/01
      and at 3/31/00 not included in computation
      of diluted EPS because the exercise price
      was greater than the average market price               10,668                  495               10,653                  519

Options outstanding at 3/31/01 and at 3/31/00
     not included in computation of diluted EPS
     because their inclusion would have an anti-
     dilutive effect                                              61               10,462                   75               10,438
</TABLE>


8.      RECENT ACCOUNTING PRONOUNCEMENTS

        In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company has adopted SAB
101 effective with the first quarter of fiscal 2001. The implementation of SAB
101 did not have a material effect on the financial position or results of
operations of the Company.

        In June 1998, the Financial Accounting Standards Board 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 recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137
(SFAS 137), Accounting for Derivative Instruments - Deferral of the Effective
Date of SFAS Statement No. 133. SFAS 137 defers the effective date of SFAS 133
until June 15, 2000. The Company has adopted SFAS 133 as required for its first
quarterly filing of fiscal year 2001. SFAS 133 shall be effective for all
subsequent



                                       9
<PAGE>   12

quarters and annual filings. The adoption of SFAS 133 did not have a material
effect on the financial position or results of operations of the Company.

9.      SUBSEQUENT EVENTS

        On May 7, 2001, the Company consummated the sale of its Server Software
and Professional Services Divisions to Caldera Systems, Inc. Under the terms of
the transaction, SCO received cash consideration of $23.0 million, of which $7.0
million had already been received, as well as a note from Caldera Systems, Inc.
for $8.0 million due in four quarterly installments in the second year after the
close of the transaction. Additionally, SCO received 16 million shares of
Caldera International, Inc., the resulting newly created company that combines
the assets of Caldera Systems, Inc. and the newly acquired Server Software and
Professional Services Divisions. In connection with the sale, the Company will
also be entitled to receive earn-out payments from Caldera International Inc.
determined as 45% of the amount by which OpenServer revenues exceed certain
specified threshold amounts during the three year period following the closing.

        The Company has changed its corporate name to Tarantella, Inc. The
company has also changed its NASDAQ trading symbol to TTLA to reflect the new
corporate name.



                                       10
<PAGE>   13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

RESULTS OF OPERATIONS

NET REVENUES

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

        Net revenues for the three months ended March 31, 2001 decreased 23% to
$27.3 million from $35.5 million in the same period in fiscal 2000. For the six
months ended March 31, 2001, net revenues decreased 40% to $53.8 million from
$89.2 million for the six months ended March 31, 2000. The decline in revenue
performance was worldwide across all geographies and is attributable to fewer
large project deals, as well as other market factors. The Company's revenues
were directly impacted by the reduction in information technology ("IT")
investments by companies for application server software and service
initiatives. Furthermore, the Company experienced the impact of being involved
in a protracted transaction involving the sale of a majority of the Company. For
the three month period ended March 31, 2001, one customer accounted for 13.8% of
the Company's net revenues. No one customer accounted for more than 10% of the
Company's net revenues for same period in the prior year.

        License revenue for the three months ended March 31, 2001 was $24.2
million compared to $31.8 million in the same quarter of fiscal 2000. For the
six months ended March 31, 2001, license revenues decreased 42% to $47.0 million
from $81.3 million for the six months ended March 31, 2000. This decline is
attributed to fewer large project deals and other market factors.

        Service revenues decreased to $3.2 million for the three months ended
March 31, 2001, from $3.7 million in the same period in 2000, a decline of 15%.
Service revenue was 12% of the total revenue of the second quarter, compared to
10% in the prior year. The decline in service revenues was primarily in
professional services area and is the result of re-focusing of the professional
services division on the implementation of new strategies.

        International revenues continue to represent a significant portion of
total net revenues comprising 50% of the revenues for the second fiscal quarter
of 2001 and 51% for the same quarter in fiscal 2000.

COSTS AND EXPENSES

        Cost of license revenues for the three months ended March 31, 2001
decreased by 32% to $6.3 million compared to $9.2 million in the same period of
fiscal 2000. For the six months ended March 31, 2001, cost of license revenues
decreased 51% to $9.8 million from $20.1 million for the six months ended March
31, 2000. The declining cost of revenues is primarily due to expirations of
several technology obligations. Additionally, material costs continue to decline
as a result of the increasing number of internet orders. Also certain fixed
costs such as technology and overhead declined.



                                       11
<PAGE>   14

        Cost of service revenues for the three months ended March 31, 2001
decreased by 20% to $0.8 million compared to $1.0 million in the same period of
fiscal 2000. For the six months ended March 31, 2001, cost of service revenues
was $4.4 million as compared to $2.0 million for the same period in 2000. This
decline is primarily a result of reduced staffing levels in both the support and
professional services organizations due to realignments of these organizations.

        Total cost of revenues as a percentage of net revenues decreased to 26%
in the second quarter of fiscal 2001 from 29% in the same period of fiscal 2000.
For the six month periods ended March 31, 2001 and 2000, cost of revenues
represented 26% and 25% of net revenues, respectively. A significant portion of
cost of goods sold is fixed and the decrease in revenue impacted gross margin.
These fixed costs include technology and overhead costs and certain of these
fixed costs declined during both the second quarter of fiscal 2001 and the six
month period ended March 31, 2001.

        Research and development expenses decreased 44% to $6.5 million in the
second quarter of fiscal 2001 from $11.6 million in the comparable quarter of
fiscal 2000, or 24% and 33% of net revenues, respectively. For the six months
ended March 31, 2001, research and development expenses decreased 42% to $ 13.0
million compared to $22.2 million for the same period in 2000. The decrease in
research and development expenses can be attributed to lower labor costs driven
by lower headcount as a result of a planned reduction in force and higher than
normal attrition , as well as, a significant decrease in allocating the
corporate overhead costs to research and development.

        Sales and marketing expenses decreased 30% to $16.7 million in the
second quarter of fiscal 2001 from $23.7 million for the comparable quarter of
the prior year. Sales and marketing expenses represented 61% of net revenues in
the second quarter of fiscal 2001 and 67% in 2000. For the six months ended
March 31, 2001, sales and marketing expenses decreased to $33.0 million (61% of
net revenues) from $49.0 million (55% of net revenues) for the same period of
the prior fiscal year. The decrease is due to lower labor costs as a result of a
reduction in force and attrition, combined with reductions in sales program
costs that vary directly with revenue, including cooperative advertising.

        General and administrative expenses decreased to $4.5 million for the
second quarter of fiscal 2001 compared with $4.7 million in the second quarter
of fiscal 2000, representing 16% and 13% of net revenues, respectively. For the
six months ended March 31, 2001, general and administrative expenses increased
$8.8 million, or 16% of net revenues, compared to $8.5 million, or 10% of net
revenues, for the same period in 2000. The decline in general and administrative
expense for the three months ended March 31, 2001 can be attributed to reduced
spending for travel, and legal expenses and lower depreciation costs. The six
month increase in general and administrative expenses of $0.3 million is due to
a one-time facility repair and higher data processing costs in the first fiscal
quarter.

        Restructuring charges decreased to $1.1 million in the second quarter of
fiscal 2001 from $5.9 million for the comparable quarter of the prior year.
During the second quarter of fiscal 2001, the Company announced and completed a
restructuring plan, which resulted in a one-time charge of $1.6 million. The
Company has reduced its spending levels to align its operating expenses with the
Company's revenues. The restructuring charge is related to the Tarantella
division and includes a reduction in personnel of 28 employees and an
elimination and sublet of unused facilities. The entire $1.6 million relates to
cash expenditures. The severance charges of $1.5 million include the elimination
of 16 positions in the United States, 4 positions in the United Kingdom, and 8
positions in various other geographies. The reductions in force affect the
sales, marketing and general and administrative functions of the Company. As of
March 31, 2001 a total of 23 positions have been eliminated. The Company intends
to partially sublet space in the Santa Cruz, California office. This space will
be vacated and restored and subsequently sublet. The Company anticipates this
will be complete within six months. Additionally, the Company recorded an
adjustment to the fiscal 2000 fourth quarter restructuring provision of $0.4
million in severance costs in the second quarter of fiscal 2001. The severance
costs were adjusted to reflect changes to the estimated expenses as actual
payments were made.

        Other income consists of net interest income, foreign exchange gain and
loss, and realized gain and loss on investments, as well as other miscellaneous
income and expense items. Net interest income was $0.3 million for the second
quarter of fiscal 2001 and $0.6 million for the comparable quarter in the prior
year. For the six months ended March 31, 2001, net interest income was $0.5
million as compared to $1.2 million for the same period in 2000. Other income
was $1.7 million in the second quarter of fiscal 2001, compared to $0.9 million
for the same period of fiscal 2000. For the six months ended March 31, 2001,
other income was $1.9 million as compared to $1.7 million for the same period in
2000. The decrease in interest income is due to lower cash balances compared to
last year and a higher exchange rate variance in the second quarter of fiscal
2001. The increase of other income in the second



                                       12
<PAGE>   15

quarter of fiscal 2001 included a gain of $2.1 million realized on the
liquidation of certain available-for-sale securities.

        The benefit from income taxes was $0.8 million for the second quarter of
fiscal 2001 compared to a provision of $0.7 million for the same period of the
prior fiscal year, and a benefit of $0.2 million for the six months ended March
31, 2001, compared to a provision of $1.4 million for the corresponding fiscal
2000 period. The income tax benefits are the result of foreign losses and the
resolution of foreign audit issues.

        Net loss for the second quarter of fiscal 2001 was $5.8 million compared
to net loss of $19.8 million for 2000. For the six months ended March 31, 2001,
net loss was $13.7 million compared to net loss of $16.9 million in the same
period in 2000.

        Segment Information. The Company began reviewing its performance on the
basis of its three divisions during the third quarter of fiscal 2000. Further
information is disclosed in Note 4.

        Server Software Division. Net revenues for the server division for the
three months ended March 31, 2001 decreased 28% to $23.5 million from $32.9
million in the same period in fiscal 2000. For the six months ended March 31,
2001, net revenues for the server division was $46.5 million as compared to
$82.3 million for the same period in 2000. The decline in revenue performance is
attributable to fewer large project deals, as well as other market factors.

        Gross margin for the server division declined 28% to $17.5 million for
the second quarter of fiscal 2001 compared to $24.4 million for the same period
of fiscal 2000. For the six months ended March 31, 2001, gross margin for the
server division was $34.5 million as compared to $63.9 million for the same
period in 2000. The decline in gross margin is mainly attributable to lower
sales. Gross margin as a percentage of revenues was 74.5% for the second quarter
of fiscal 2001 compared to 74.2% for the same period of fiscal 2000 for the
server division.

        The server division's operating loss for the three months ended March
31, 2001 was $0.4 million, compared to an operating loss of $16.8 million in the
same period of fiscal 2000. For the six months ended March 31, 2001, operating
loss for the server division was $0.6 million as compared to $13.2 million for
the same period in 2000. The decline is due to lower operating expenses
attributable to lower labor costs caused by a reduction in force and higher than
normal attrition combined with reductions in sales program costs that vary
directly with revenue, including cooperative advertising, and was partially
offset by lower revenues in fiscal 2001.

        Tarantella Division. Net revenues for the Tarantella division for the
three months ended March 31, 2001 increased 62% to $4.0 million from $2.5
million in the three months ended March 31, 2000. For the six months ended March
31, 2001, net revenues for the Tarantella division was $7.2 million as compared
to $6.0 million for the same period in 2000. The increase in net revenues is due
to an overall increase in the repeat business of current customers as well as an
increase in the number of new customers. Additionally, there is an increase in
the average deal size that is a result of a recent re-alignment of sales
structure. Tarantella revenues increased 27% in the second quarter of fiscal
2001 when compared to the first quarter of this fiscal year.

        Gross margin for the Tarantella division was $3.3 million for the three
months ended March 31, 2001 compared with gross margin of $1.7 million for the
same period in fiscal 2000, an increase of 97%. Gross margin as a percentage of
net revenues improved to 83.7% in the second quarter of fiscal 2001 compared to
68.7% for the comparable period of the prior year. For the six months ended
March 31, 2001, gross margin for the Tarantella division was $6.0 million as
compared to $4.6 million for the same period in 2000. The increase is attributed
to improvement due to technology and overhead savings.

        The operating loss reported by the Tarantella division for the three
months ended March 31, 2001 was $7.0 million, compared to a loss of $2.6 million
in fiscal 2000. For the six months ended March 31, 2001, the operating loss for
the Tarantella division was $13.5 million as compared to $3.4 million for the
same period in 2000. The decrease is a result of the impact of being involved in
a protracted transaction which more recently involves the re-alignment of the
Tarantella sales structure. The Company has developed a dedicated, focused team
for the Tarantella division and has increased the resources used by the
division.

        Professional Services Division. Net revenues for the professional
services division for the three month period ended March 31, 2001 declined to
$0.5 million compared to $0.9 million for the same period in fiscal 2000. For
the six months ended March 31, 2001, the net revenues for the professional
services division was $1.3 million as compared to $2.2



                                       13
<PAGE>   16

million for the same period in 2000. The revenue decrease can be attributed to a
shift in strategies undertaken to accommodate the transaction with Caldera.

        Gross loss for the professional services division was $0.4 million for
the three months ended March 31, 2001 compared with a loss of $0.8 million for
the same period in fiscal 2000, a reduction of 49%. For the six months ended
March 31, 2001, the gross loss for the professional services division was $0.5
million as compared to $1.3 million for the same period in 2000. The reduction
in gross loss is directly attributable to improved control of operating
expenses.

        The operating loss for the professional services division remained
relatively stable. For the three months ended March 31, 2001 was $1.3 million,
compared to the operating loss of $1.2 million in fiscal 2000. For the six
months ended March 31, 2001, the operating loss for the professional services
division was $2.2 million as compared to $2.0 million for the same period in
2000.

FACTORS THAT MAY AFFECT FUTURE RESULTS

        On May 7, 2001, the Company consummated the sale of its Server Software
and Professional Services Divisions to Caldera Systems, Inc. Caldera may
experience difficulty in integrating the assets and the employees acquired from
the Company. There can be no assurance that the combination will create positive
results for Caldera in which the Company will be a major shareholder. The
successful combination will require substantial effort from each company.

        The Company's Tarantella products are still in the early stages of the
product life-cycle. Furthermore, the market in which the products are sold is a
new market. Therefore, it is difficult to assess the market potential and the
ability of the products to meet the requirements of the market. As a small
company, the Company may not have credibility with enterprise customers, which
is critical to its success.

        Historically, revenues generated by the Server Software business and
Professional Services have been a significant portion of the Company's total
revenues. The Company's revenues derived from the distribution of Tarantella
products will be but a fraction of historical revenues, and the Company's
success will be dependent upon relatively significant revenue growth.

        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's staffing and operating expense levels are based
on an operating plan and are relatively fixed throughout the quarter. As a
result, if revenues are not realized in the quarter as expected, the Company's
expected operating results and cash balances could be adversely affected, and
such effect could be substantial and could result in an operating loss and
depletion of the Company's cash balances. In such event, it may not be possible
for the Company to secure sources of cash to maintain operations.

        The Company experiences seasonality of revenues for both the European
market and the U.S. federal government market. European revenues during the
quarter ending June 30 are historically lower or relatively flat compared to the
prior quarter. This reflects a reduction in 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.



                                       14
<PAGE>   17

federal government prior to the close of its fiscal year. Additionally, net
revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.

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

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

        Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 50% and 51% of total revenues for the second quarter of fiscal 2001
and 2000, respectively. A substantial portion of the international revenues of
the Company's U.K. subsidiary are denominated in the U.S. dollar, and operating
results can vary with changes in the U.S. dollar exchange rate to the U.K. pound
sterling. The Company's revenues can also be affected by general economic
conditions in the United States, Europe and other international markets. The
Company's operating strategy and pricing take into account changes in exchange
rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.

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

        As the Company determines whether its tax carryforwards will more likely
than not be utilized in the future, or as new legislation is enacted, the
Company's effective tax rate is subject to change.

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

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



                                       15
<PAGE>   18

employees or the Company's inability to attract and retain other key employees
could have a material adverse effect on the Company.

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

        The Company is aware of the issues associated with the new European
economic and monetary union (the "EMU"). One of the changes resulting from this
union required EMU member states to irrevocably fix their respective currencies
to a new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. Through December 31, 2001,
business in the EMU member states will be conducted in both the 25 existing
national currencies, such as the Franc or Deutsche Mark, and the Euro. As a
result, companies operating in or conducting business in EMU member states will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling these currencies, including the
Euro. The Company has done a preliminary assessment of the impact the EMU
formation will have on both its internal systems and the products it sells and
has commenced appropriate actions. The Company has not yet determined all of the
cost related to addressing this issue, and there can be no assurance that this
issue and its related costs will not have a materially adverse affect on the
Company's business, operating results and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

        Cash, cash equivalents and short-term investments were $18.1 million at
March 31, 2001, representing 26% of total assets. The six month decrease in cash
and short-term investments of $8.3 million was primarily attributable to the
decrease in revenue and a decrease in sales linearity, resulting in lower cash
collections. The Company's operating activities used cash of $9.1 million for
the first six months of fiscal 2001, compared to $5.7 million used for operating
activities for fiscal 2000. Cash provided by investing activities during the six
month period was $3.6 million in fiscal 2001 compared to cash used for investing
of $4.7 million in fiscal 2000. In both fiscal 2001 and 2000 cash was used to
fund purchases of property and equipment and short-term investments. In fiscal
2000 cash was used for common stock repurchases. Cash used for financing
activities was $0.3 million for the first six months of fiscal 2001 compared
with $3.0 million for the same period in fiscal 2000.

        The Company's second quarter ended March 31, 2001 Days Sales Outstanding
(DSO) remained relatively flat from 75.8 days, an increase of 0.4 days from the
first quarter of fiscal 2001.

        As of March 31, 2001, the Company had an equity investment in Rainmaker
Systems having a fair market value of $0.4 million and a cost basis of $0.2
million. The fair market value of this investment could fluctuate substantially
due to changing stock prices. This investment is available-for-sale, and the
Company may choose to sell a portion of this investment position in the future.
In January 2001, the Company sold 3,200,000 shares of its Rainmaker stock for
$1.00 per share, and received cash proceeds of $3.2 million. The cost basis of
the sale was $1.1 million, and the Company realized a gain of $2.1 million from
this sale.

        The Company has incurred losses from operations of approximately $8.6
million during the second quarter of fiscal 2001 and $20.6 million during fiscal
2000 and revenues have declined from $35.5 million for the second quarter of
fiscal 2000 to $27.4 million for the same quarter of fiscal 2001. For the six
month period ended fiscal 2001 losses from operations were $16.3 million and
$18.5 million during the comparable quarters in fiscal 2000. Revenues declined
from $89.1 million for the six months ended fiscal 2000 to $53.8 million for the
same period of fiscal 2001. Revenues have declined $223.6 million for the year
ended September 30, 1999 to $148.9 million for the year ended September 30, 2000
and the Company has an accumulated deficit as of March 31, 2001. These factors
have caused management to evaluate the Company's liquidity and to establish
plans to reduce costs, and increase revenues and improve margins. The Company
has recently announced cost reduction plans in order to reduce operating
expenses to levels consistent with current revenues and is investigating
financing alternatives. There can be no assurance that such cost reduction
measures will be adequate or such financing will be available, if at all, on
terms acceptable to the Company.



                                       16
<PAGE>   19

        In connection with the transaction with Caldera, the Company entered
into a Loan Agreement and a Secured Convertible Promissory Note effective
January 8, 2001, with The Canopy Group for borrowings up to $18.0 million.
Drawings on the financing agreement are repayable on December 31, 2001 and bear
interest at a rate per annum of 10%. Drawings are collateralized by the
Company's tangible and intangible assets and are convertible into common stock
at the option of the lender at the closing price of SCO common stock on the date
of issuance, subject to certain limitations. The unconverted principal is
repayable in cash. The Company has not made any drawings on this line of credit.

        At March 31, 2001, the Company had available lines of credit of
approximately $0.9 million under which the Company had $0.3 million in
outstanding borrowings. The Company believes that, based on its current plans,
which include the completion of the transaction with Caldera discussed above,
its existing cash and cash equivalents, short-term investments, funds generated
from operations and available borrowing capabilities will be sufficient to meet
its operating requirements through fiscal 2001, however additional financing may
be required thereafter.


RECENT ACCOUNTING PRONOUNCEMENTS

        In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company has adopted SAB
101 effective with the first quarter of fiscal 2001. The implementation of SAB
101 did not have a material effect on the financial position or results of
operations of the Company.

        In June 1998, the Financial Accounting Standards Board 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 recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137
(SFAS 137), Accounting for Derivative Instruments - Deferral of the Effective
Date of SFAS Statement No. 133. SFAS 137 defers the effective date of SFAS 133
until June 15, 2000. The Company has adopted SFAS 133 as required for its first
quarterly filing of fiscal year 2001. SFAS 133 shall be effective for all
subsequent quarters and annual filings. The adoption of SFAS 133 did not have a
material effect on the financial position or results of operations of the
Company.


        ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information called for by this item is provided under the paragraph
beginning with the sentence "The Company is exposed to equity price risk
regarding the marketable portion of equity securities in its portfolio of
investments entered into for the promotion of business and strategic
objectives," under the caption "Factors That May Affect Future Results" under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.



                                       17
<PAGE>   20

                           PART II. OTHER INFORMATION


ITEMS 1, 2, 3, 4, 5  AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.



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<PAGE>   21

                                   Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                                  Tarantella, Inc.


Date:  May 15, 2001                         By:     /s/ Randall Bresee
                                  ----------------------------------------------
                                                  Randall Bresee
                                  Senior Vice President, Chief Financial Officer


                                            By:     /s/ Jenny Twaddle
                                  ----------------------------------------------
                                                   Jenny Twaddle
                                       Vice President, Corporate Controller



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