<PAGE>   1
================================================================================

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

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

                                   FORM 10-Q/A

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

        FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

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

         FOR THE TRANSITION PERIOD FROM _____________ TO _______________

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

                         COMMISSION FILE NUMBER 0-21484

                         THE SANTA CRUZ OPERATION, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN 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
December 31, 2000 was 39,444,513.

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


<PAGE>   2

                         THE SANTA CRUZ OPERATION, INC.

                                   FORM 10-Q/A

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS


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


         ITEM 1.  FINANCIAL STATEMENTS

                  a)  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999......1

                  b)  CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND SEPTEMBER 30, 2000.......................2

                  c)  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999......3

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

         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............13

         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................19

PART II.  OTHER INFORMATION

         ITEM 6.  EXHIBITS............................................................................................20

SIGNATURES ...........................................................................................................21
</TABLE>



<PAGE>   3

                          Part I. Financial Information
                          Item I. Financial Statements


THE SANTA CRUZ OPERATION, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except amounts per share)



<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                                                                    DECEMBER 31,
                                                                            ---------------------------
                                                                              2000               1999
                                                                            --------           --------
                                                                                   (UNAUDITED)
<S>                                                                         <C>                <C>
NET REVENUES
    License, third parties                                                  $ 20,967           $ 45,835
    License, related parties                                                   1,894              3,603
    Services, third parties                                                    3,011              3,177
    Services                                                                     583              1,038
                                                                            --------           --------
       Total net revenues                                                     26,455             53,653
                                                                            --------           --------
COST OF REVENUES
    License, third parties                                                     3,191              6,204
    License, related parties                                                     288                488
    Services, third parties                                                    3,018              3,874
    Services                                                                     584              1,266
                                                                            --------           --------
       Total cost of revenues                                                  7,081             11,832
                                                                            --------           --------
      GROSS MARGIN                                                            19,374             41,821
                                                                            --------           --------

OPERATING EXPENSES:
    Research and development                                                   6,432             10,578
    Sales and marketing                                                       16,331             25,299
    General and administrative                                                 4,267              3,836
                                                                            --------           --------
       Total operating expenses                                               27,030             39,713
                                                                            --------           --------
       OPERATING INCOME (LOSS)                                                (7,656)             2,108

OTHER INCOME (EXPENSE):
    Interest income, net                                                         406                600
    Other income (expense), net                                                  586                837
                                                                            --------           --------
       Income (loss) before income taxes                                      (6,664)             3,545
    Income taxes                                                                 616                670
                                                                            --------           --------
      NET INCOME (LOSS)                                                       (7,280)             2,875
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
    Unrealized gain (loss) on available-for-sale equity securities            (3,876)            55,863
    Foreign currency translation adjustment                                      (53)                 1
                                                                            --------           --------
      COMPREHENSIVE INCOME (LOSS)                                           $(11,209)          $ 58,739
                                                                            ========           ========
      EARNINGS (LOSS) PER SHARE:
            Basic                                                           $  (0.18)          $   0.08
            Diluted                                                         $  (0.18)          $   0.07
                                                                            ========           ========
      SHARES USED IN EARNINGS (LOSS) PER SHARE CALCULATION:
            Basic                                                             39,443             34,713
            Diluted                                                           39,443             41,258
                                                                            ========           ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       1
<PAGE>   4


THE SANTA CRUZ OPERATION, INC.


<TABLE>
<CAPTION>
                                                                   DECEMBER 31,       SEPTEMBER 30,
CONSOLIDATED BALANCE SHEETS                                           2000                 2000
                                                                   ------------       -------------
(In thousands)                                                     (UNAUDITED)
<S>                                                                <C>                 <C>
ASSETS
Current assets:
    Cash and cash equivalents                                       $  10,009           $  20,879
    Short-term investments                                              3,100               5,567
    Receivables, third parties, net                                    19,672              22,917
    Receivables, related third parties                                  2,483               1,352
    Available-for-sale equity securities                                5,212               7,119
    Other current assets                                                6,001               4,358
                                                                    ---------           ---------
       Total current assets                                            46,477              62,192
                                                                    ---------           ---------
Property and equipment, net                                             7,906               9,012
Purchased software and technology licenses, net                         5,030               5,830
Other assets                                                            3,692               5,168
                                                                    ---------           ---------
          TOTAL ASSETS                                              $  63,105           $  82,202
                                                                    =========           =========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                          $   4,205           $   5,521
    Royalties payable                                                   2,362               4,530
    Income taxes payable                                                2,178               1,964
    Accrued restructuring charges                                       2,903               5,964
    Accrued expenses and other current liabilities                     19,795              20,225
    Deferred revenues                                                   6,174               7,334
                                                                    ---------           ---------
       Total current liabilities                                       37,617              45,538
                                                                    ---------           ---------
Long-term lease obligations                                               346                 545
Long-term deferred revenues                                             1,626               1,397
Other long-term liabilities                                             3,516               3,520
                                                                    ---------           ---------
       Total long-term liabilities                                      5,488               5,462
                                                                    ---------           ---------
SHAREHOLDERS' EQUITY
    Common stock, no par value, authorized 100,000 shares;
       Issued and outstanding 39,445 and 39,436 shares                118,947             118,940
    Accumulated other comprehensive income                              1,557               5,486
    Accumulated deficit                                              (100,504)            (93,224)
                                                                    ---------           ---------
       Total shareholders' equity                                      20,000              31,202
                                                                    ---------           ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $  63,105           $  82,202
                                                                    =========           =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                        2

<PAGE>   5

THE SANTA CRUZ OPERATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED
                                                                                      DECEMBER 31,
                                                                               ---------------------------
                                                                                 2000                1999
                                                                               --------           --------
                                                                                       (UNAUDITED)
<S>                                                                            <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                              $ (7,280)          $  2,875
Adjustments to reconcile net income (loss) to net cash
     provided by operating activities -
       Depreciation and amortization                                              2,432              2,874
       Investment (gain) loss                                                      (617)                --
       Exchange (gain) loss                                                         (41)               (80)
       Changes in operating assets and liabilities-
           Receivables                                                            2,112              6,868
           Other current assets                                                  (1,695)             1,002
           Other assets                                                              75                543
           Royalties payable                                                     (2,163)               723
           Trade accounts payable                                                (1,317)            (1,618)
           Income taxes payable                                                     239                785
           Accrued restructuring charge                                          (3,061)                --
           Accrued expenses and other current liabilities                            12             (3,035)
           Deferred revenues                                                       (900)            (2,457)
           Other long-term liabilities                                               (4)              (908)
                                                                               --------           --------
           Net cash provided by (used for) operating activities                 (12,208)             7,572
                                                                               --------           --------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchases of property and equipment                                         (191)            (1,258)
       Purchases of software and technology licenses                               (198)              (108)
       Sales of short-term investments                                            2,500              6,500
       Purchases of short-term investments                                          (33)            (6,886)
       Investments in other assets                                                 (145)            (1,505)
                                                                               --------           --------
           Net cash provided by (used for) investing activities                   1,933             (3,257)
                                                                               --------           --------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Payments on capital leases                                                  (585)              (835)
       Net proceeds from sale of common stock                                         7              6,883
       Repurchases of common stock                                                   --             (6,278)
                                                                               --------           --------
           Net cash used for financing activities                                  (578)              (230)
                                                                               --------           --------
Effects of exchange rate changes on cash and cash equivalents                       (17)                99
                                                                               --------           --------
Change in cash and cash equivalents                                             (10,870)             4,184
Cash and cash equivalents at beginning of period                                 20,879             33,683
                                                                               --------           --------
Cash and cash equivalents at end of period                                     $ 10,009           $ 37,867
                                                                               ========           ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid-
       Income taxes                                                            $    383           $   (121)
       Interest                                                                      55                 86
    Non-cash financing and investing activities-
       Unrealized gain (loss) on available-for-sale equity securities          $ (3,876)          $ 76,854
                                                                               ========           ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       3
<PAGE>   6


THE SANTA CRUZ OPERATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
--------------------------------------------------------------------------------


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.

RESTATEMENT

        Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, was effective for the Company
beginning October 1, 2000. Accordingly, any derivative investments of this type
that are held by the Company as of that date is required to be recorded at its
fair value and then revalued at each period end with a corresponding adjustment
to income. Upon further analysis by the Company, it was determined the Company
obtained and held warrants in a private company which was purchased by a
publicly traded entity during the Company's first quarter ended December 31,
2000. Under FAS 133 and as part of the restatement, these warrants were deemed
derivatives and their fair values were recorded by the Company and revalued at
the current market value at each period end which resulted in an increase of
$0.2 million in interest income. In addition, the Company held an investment in
the private entity that was purchased by a publicly traded entity and the
exchange created a new cost basis for the investments at the date of exchange.
The increase in the cost basis of the investment created a gain of $0.4 million
in other income. Due to the new cost basis there was an increase to unrealized
loss of $0.7 million on available for sale equity securities. The net effect of
the two changes resulted in a total decrease of $0.1 million to comprehensive
income. The financial statements for the three months ended December 31, 2000
have been restated to reflect these changes. The restatement does not affect
previously reported net cash flows for the periods. The effects of this
restatement on previously reported consolidated financials are as follows
(amounts in thousands except per share data):



                                       4
<PAGE>   7

<TABLE>
<CAPTION>
                                                                                          Three months ended
                                                                                           December 31, 2000
                                                                                  --------------------------------
                                                                                  As previously
                                                                                     reported             Restated
                                                                                  -------------          ---------
<S>                                                                               <C>                   <C>
STATEMENT OF OPERATIONS:
        Other income, (expense)
             Interest income (net)                                                   $     194           $     406
             Other income (expense), net                                                   181                 586
        Net income (loss)                                                               (7,897)             (7,280)
        Other comprehensive income
             Unrealized gain (loss) on available-for-sale equity securities             (3,158)             (3,876)
             Foreign currency translation adjustment                                       (53)                (53)
        Earnings (loss) per share                                                    $   (0.20)          $   (0.18)

BALANCE SHEET
        Available-for-sale equity securities                                         $   5,313           $   5,212
        Accumulated other comprehensive income                                           2,275               1,557
        Accumulated deficit                                                          $(101,121)          $(100,504)
</TABLE>


ACCRUED RESTRUCTURING CHARGE

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

SECOND QUARTER RESTRUCTURING PLAN

        During the second quarter of fiscal 2000, the Company announced and
completed a restructuring plan, which resulted in a one-time charge of $5.9
million. The Company restructured its business operations into three independent
divisions, each with a separate management team and dedicated development,
marketing and sales organizations - the Server Software Division, the Tarantella
Division and the Professional Services Division. The charge included a reduction
in personnel of 70 employees, write-off of certain acquired technologies,
write-off of certain fixed assets, and elimination of non-essential facilities.
Of the $5.9 million charge, $4.6 million related to cash expenditures and $1.3
million related to non-cash charges. The restructuring charge related to cash
expenditures included $3.6 million for severance costs and $1.0 million for
facilities costs. Included in the non-cash charges were technology write-offs of
$0.7 million relating to technology associated with the Unixware 7 product. This
technology had previously been capitalized as it had alternative future use.
However, in conjunction with the restructuring, certain personnel associated
with product development of Unixware 7 were terminated and future development
related to this technology was terminated. As a result, the technology had no
other use and was written off. The disposal of fixed assets was comprised of
computer equipment that will no longer be used due to the reduction in
development personnel. The computer equipment was taken out of service and
disposed of during the third and fourth quarters of fiscal 2000 and the first
quarter of fiscal 2001. The timing of the fixed asset disposals directly
corresponds to the time of the employee terminations. The write-offs of the
computer equipment occurred at the time that the equipment was no longer in use
and taken out of service. Depreciation, where applicable, continued on these
assets until disposal. The computer equipment was scrapped or sold to the
terminated employees. Any gain



                                       5
<PAGE>   8


realized on the sale of these assets was applied to the restructuring accrual.
All fixed asset disposals were related to the Server Software division. Included
in the facilities charge are amounts relating to the abandonment of certain
leased space at the Company's Watford, United Kingdom facility. The space is
being reconfigured in preparation for subletting. The restructuring provision
includes the estimated costs associated with the reconfiguring and the rent
associated with the unoccupied space prior to sublet. The facility closure
affected the Server Software Division.

        The second quarter restructuring charges affected the Server Software
Division and the Professional Services Division. The Professional Services
Division had $0.1 million of severance costs accrued for the restructuring. The
balance of the second quarter restructuring charge of $5.8 million related to
the Server Software Division. The majority of the reduction in force was in
product development for the Server Software Division. As of December 31, 2000, a
total of 70 positions were eliminated including 66 in the Server Software
Division and 4 in the Professional Services Division.

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

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

                      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
                                             =======           =======           =======           =======           =======
</TABLE>

FOURTH QUARTER RESTRUCTURING PLAN

        In the fourth quarter of fiscal 2000, in connection with management's
plan to reduce operating expenses, the Company announced a further restructuring
plan, which resulted in a one-time charge of $5.7 million. The restructuring
included the elimination of various regional offices in the United States,
United Kingdom, Latin America and Asia Pacific. The charge included a reduction
in personnel of 170 employees, write-off of certain fixed assets and the
elimination of nonessential facilities. The restructuring charges affect the
Server Software Division of the Company as well as corporate general and
administrative areas. Of the $5.7 million charge, $5.5 million related to cash
expenditures and $0.2 related to non-cash charges. The restructuring charge
related to cash expenditures included $4.7 million for severance costs and $0.8
million for facilities costs.

        The severance charges include elimination of 75 positions in the United
States, 66 positions in the United Kingdom, 16 positions in Europe, 9 positions
in Latin America and 4 position in the Asia Pacific region.

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

        The non-cash charges were made up of fixed asset disposal costs at the
Company's U.S and Watford, U.K. locations. The fixed assets being disposed of
are made up of computer equipment that will no longer be in use due to the
reduction in personnel. The computer equipment will be taken out of service and
disposed of at the



                                       6
<PAGE>   9

time of the employee terminations. Depreciation, where applicable, will continue
on these assets until disposal. The United States assets will be scrapped or
sold to the terminated employees. The United Kingdom assets will be sold at
auction during the second fiscal quarter of fiscal 2001, and any unsold assets
will be scrapped. Any gain realized on the sale of these assets will be applied
to the restructuring accrual. The disposal of fixed assets affects both the
Server Software Division and the Corporate Division. As of December 31, 2000 a
total of 170 positions have been eliminated: 91 positions in the Server Software
Division, 72 in the Corporate Division, and 7 in the Tarantella Division. The
Corporate Division is allocated to the three primary Company divisions for
segment reporting purposes.

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


<TABLE>
<CAPTION>
                                                FOURTH QUARTER RESTRUCTURING ACCRUAL

                                           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
                                             =======           =======           =======           =======
</TABLE>


3. SEGMENT INFORMATION

        For the quarter ended December 31, 2000, 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
                                                            December 31,
                                                    ---------------------------
                                                      2000               1999
                                                    --------           --------
<S>                                                 <C>                <C>
Net revenues:
      Server software division                      $ 23,026           $ 49,496
      Tarantella division                              3,178              3,499
      Professional services division                     861              1,284
      Corporate adjustments                             (610)              (626)
                                                    --------           --------
             Total net revenues                     $ 26,455           $ 53,653
                                                    ========           ========

Gross margin:
      Server software division                      $ 16,951           $ 39,501
      Tarantella division                              2,583              2,845
      Professional services division                    (106)              (525)
      Corporate adjustments                              (54)                --
                                                    --------           --------
            Total gross margin                      $ 19,374           $ 41,821
                                                    ========           ========

Operating income (loss):
      Server software division                      $   (210)          $  3,615
      Tarantella division                             (6,524)              (732)
      Professional services division                    (930)              (775)
      Corporate adjustments                                8                 --
                                                    --------           --------
             Total operating income (loss)          $ (7,656)          $  2,108
                                                    ========           ========
</TABLE>


                                       7
<PAGE>   10

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


<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             December 31,
                                                     ---------------------------
                                                       2000               1999
                                                     --------           --------
<S>                                                  <C>                <C>
Net revenues:
      United States                                  $ 12,270           $ 19,204
      Canada and Latin America                          2,047              2,753
      Europe, Middle East, India and Africa             9,780             25,762
      Asia Pacific                                      2,091              3,147
      Corporate Adjustments                               267              2,787
                                                     --------           --------
            Total net revenues                       $ 26,455           $ 53,653
                                                     ========           ========

Gross margin:
      United States                                  $  9,879           $ 12,977
      Canada and Latin America                          1,707              1,994
      Europe, Middle East, India and Africa             6,599             21,482
      Asia Pacific                                      1,536              2,581
      Corporate Adjustments                              (347)             2,787
                                                     --------           --------
            Total gross margin                       $ 19,374           $ 41,821
                                                     ========           ========

Long-lived assets:
      United States                                  $ 13,468           $ 42,689
      Canada and Latin America                          2,799              5,221
      Europe, Middle East, India and Africa               156                148
      Asia Pacific                                        205                236
      Corporate Adjustments                                --                 --
                                                     --------           --------
            Total long-lived assets                  $ 16,628           $ 48,294
                                                     ========           ========
</TABLE>


        Revenue is allocated to geographical segments based on the location from
which the sale is satisfied and long-lived asset information is based on the
physical location of the asset.

4. INVESTMENTS

        AVAILABLE FOR SALE EQUITY SECURITIES. In January 1995, the Company
purchased 10% of the preferred stock of Rainmaker Systems, Inc. ("Rainmaker"),
one of the Company's domestic distribution partners, in exchange for cash,
product and equipment valued at $1.0 million. In addition, the Company loaned
$1.0 million to Rainmaker in exchange for convertible debentures. In February
1999, the Company exchanged the preferred stock and debentures for shares of
Series D Convertible Participating Preferred Stock (the "Series D Preferred").
During fiscal year 1999, the Company sold approximately 1,704,011 shares of
Series D with a cost basis of $0.6 million, and received cash proceeds of $3.8
million. The Company's interest of ownership of Rainmaker before and after the
sale was 15.2% and 10.3% respectively. On November 17, 1999, Rainmaker completed
an initial public offering of its common stock. At which time, the shares of
Series D Preferred held by the Company automatically converted into shares of
Rainmaker's common stock on a one-for-one basis. At December 31, 2000, the
Company held 3,705,767 shares of Rainmaker's common stock. The Company accounts
for these shares as available for sale securities and records them at fair
market value, based on quoted market prices with any unrealized gains or losses
included as part of accumulated other comprehensive income.



                                       8
<PAGE>   11

Unrealized gains and losses on available for sale investments as of December 31,
2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                             Unrealized
                                               FMV              Cost          Gain/Loss
                                             -------          -------        ----------
<S>                                          <C>              <C>             <C>
Caldera                                           81              250             (169)
Ebiz Stock                                       499            2,795           (1,470)
Rainmaker                                      4,632            1,251            3,381
                                             -------          -------          -------
Total Stock                                    5,212            4,296            1,742
                                             =======          =======          =======
Ebiz Warrants                                                     528               --
                                             =======          =======          =======
Total Available for Sale Equity Securities   $ 5,212          $ 4,824          $ 1,742
                                             -------          -------          -------
</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.

5. PROPOSED TRANSACTION WITH CALDERA

        On August 1, 2000, the Company entered into an agreement with Caldera
Systems, Inc. in which Caldera Systems, Inc. will acquire the Company's Server
Software and Professional Services Divisions. Caldera Systems, Inc. will form a
new holding company, Caldera, Inc., to acquire assets from the Company's Server
Software Division and the Company's Professional Services Division, including
its employees, products and channel resources. Caldera, Inc. will have exclusive
distribution rights for the SCO OpenServer product line. SCO will receive a 28%
ownership interest in Caldera, Inc., which is estimated to be an aggregate of
approximately 17.54 million shares of Caldera stock (including approximately 2
million shares reserved for employee options assumed by Caldera, Inc. for
options currently held by SCO employees joining Caldera, Inc.), and $7.0 million
in cash. In conjunction with the acquisition, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan $18.0 million to the
Company. Further, Caldera Systems, Inc. has agreed to loan $7.0 million to the
Company in the form of a short-term note repayable at the consummation of the
transaction between SCO and Caldera Systems, Inc. SCO will retain its Tarantella
Division and the SCO OpenServer revenue stream and intellectual properties. The
boards of directors of both companies have unanimously approved the acquisition
which is subject to the approval of Caldera Systems, Inc. and The Santa Cruz
Operation, Inc. stockholders, and regulatory agencies, as well as meeting
certain other closing conditions. The companies anticipate closing the
transaction during the second quarter of 2001.

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 months ended December 31, 2000 and 1999 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                            2000               1999
                                                                          --------           --------
<S>                                                                       <C>                <C>
               Net income (loss)                                          $ (7,280)          $  2,875
               Other comprehensive income:
                    Foreign currency translation adjustment                    (53)                 1
                    Unrealized gain (loss) on available-for-sale
                         equity securities                                  (3,876)            76,854
                    Gross tax on unrealized gain (loss) on
                         available-for-sale equity securities                   --            (30,611)
                    Release of deferred tax valuation allowance                 --              9,620
                                                                          --------           --------
               Total other comprehensive income (loss)                    $(11,209)          $ 58,739
                                                                          ========           ========
</TABLE>


                                       9
<PAGE>   12

7. EARNINGS PER SHARE (EPS) DISCLOSURES

        Basic and diluted earnings per share were calculated as follows during
the three months ended December 31, 2000 and 1999:


<TABLE>
<CAPTION>
                                                                              2000               1999
                                                                            --------           --------
<S>                                                                        <C>                <C>
          Basic:
                  Weighted average shares                                     39,443             34,713
                                                                            --------           --------
                  Net income (loss)                                         $ (7,280)          $  2,875
                                                                            ========           ========
                  Earnings (loss) per share                                 $  (0.18)          $   0.08
                                                                            ========           ========

          Diluted:
                  Weighted average shares                                     39,443             34,713
                  Common equivalent shares from stock options
                       and warrants                                               --              6,545
                                                                            --------           --------
                  Shares used in per share calculation                        39,443             41,258
                                                                            ========           ========
                  Net income (loss)                                         $ (7,280)          $  2,875
                                                                            ========           ========
                  Net income (loss) per share                               $  (0.18)          $   0.07
                                                                            ========           ========

          Options and warrants outstanding at 12/31/00 and at
                12/31/99 not included in computation of diluted
                EPS because the exercise price was
               greater than the average market price                          11,958                  9

          Options outstanding at 12/31/00 and at 12/31/99 not
               included in computation of diluted EPS because
               their inclusion would have an anti- dilutive effect               797                 --
</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 and financial statements 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. Management
believes that 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. Adoption of the standard required the
Company to recognize the fair value of derivatives held during the first quarter
ended December 31, 2000. The cumulative effect of the adjustment was an increase
in available-for-sale securities of $0.1 million at December 31, 2001 and an
increase to net income of $1.1 million for the three-month period ended December
31, 2001.

9.  SUBSEQUENT EVENTS



                                       10
<PAGE>   13

        In January 2001, EBIZ Enterprises, Inc. ("EBIZ") acquired all the
outstanding shares in one of the Company's domestic distribution channel
partners. The Company had an investment in the distribution channel partner as
discussed in Note 16 of the Company's fiscal year 2000 report on Form 10-K. In
exchange for its shares in this distribution channel partner, the Company
received a 6.6% direct ownership in EBIZ common stock which, when combined with
other shares of EBIZ held by the Company, results in a total direct ownership of
13.7%. Should the proposed transaction with Caldera Systems discussed in Note 5
be completed, the Company will indirectly own an additional 3.5% in EBIZ through
its investment in Caldera.

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

        In connection with the proposed transaction with Caldera, the Company
entered into a Loan Agreement and a Secured Convertible Promissory Note
effective January 8, 2001, with The Canopy Group ("Lender") under which the
Company can borrow up to $18.0 million. Drawings on this line of credit are
repayable on December 31, 2001 and bear interest at a rate per annum of 10%. Any
drawings on the line of credit are convertible into common stock, subject to
certain limitations, at the option of the Lender at the closing price of SCO
common stock on the date of issuance. At the date of issuance, the closing price
of SCO common stock was $1.5625. The unconverted principal is repayable in cash.
Drawings on the line of credit are collateralized by the Company's tangible and
intangible assets.

        In connection with the Loan Agreement, the Company also issued to the
Lender warrants to purchase 1,440,000 shares of common stock at an exercise
price of $1.5625. In addition, the Company is obligated to issue additional
warrants to purchase shares of SCO common stock at an exercise price of $1.5625
to the extent advances on the line of credit exceed $9.0 million. The number of
shares that may be purchased under these additional warrants equals the product
of the amounts advanced in excess of $9.0 million multiplied by 0.25 and divided
by the exercise price. The exercise price is $1.5625 per share; the term of the
warrants is 2 years. The Company has not made any drawings on this line of
credit.

        In conjunction with the signing of the reorganization agreement, Caldera
agreed to advance $7.0 million of the purchase price for the server and
professional services division in the form of a promissory note that matures on
either the closing of the combination or the date of termination of the
reorganization agreement. The loan was made on January 29, 2001. If the
combination closes, the loan will be treated by Caldera and the Company as cash
consideration to the Company for the server and professional services groups.
The loan is secured by a first priority security interest in all of the
Company's assets and is convertible at Caldera's option into the Company's
common stock at a price per share of $2.75, the closing price of the Company's
common stock on January 29, 2001.

        The number of shares that can be converted by The Canopy Group under the
Secured Convertible Promissory Note and by Caldera under the promissory note are
limited such that the aggregate of shares issued upon conversion, when combined
with the number of shares issued under the warrants described above may not
exceed 19% of the total outstanding shares of the Company's outstanding common
stock as of January 8, 2001.

        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.

        On February 9, 2001, the Company entered into a Third Amendment to the
Agreement and Plan of Reorganization entered into on August 1, 2000 (as
subsequently amended on September 13, 2000 and December 12, 2000) (collectively,
the "Amended Reorganization Agreement") with Caldera Systems, Inc. and Caldera
International, Inc. ("Caldera International"). Under the terms of the Amended
Reorganization Agreement, (i) Caldera International will acquire the Company's
Server Software and Professional Services divisions and the Company's OpenServer
product line, including the intellectual property and revenue derived therefrom,
(ii) the Company will receive cash consideration of $23.0 million at the close
of the transaction ($7.0 million of which has been previously advanced to the
Company) as well as a note for $8.0 million due in four quarterly installments
beginning in the second year following the close of the transaction and 16
million shares of Caldera International common stock, initially representing
approximately 25.9% of Caldera International, (iii) Caldera International will
also share revenue from the OpenServer products for a period of three years, if
sales exceed pre-defined levels during that time and (iv) Caldera International
will receive an assignment by the Company of its accounts receivable from
certain long-term agreements that become due



                                       11
<PAGE>   14

subsequent to the close of the transaction. These receivables will vary
depending on the timing of the transaction and product usage by customers,
currently estimated to be $3-4 million.

        On May 4, 2001 the Company consummated its agreement with Caldera
Systems, Inc., in which Caldera Systems, Inc. acquired the Company's Server
Software and Professional Services divisions.



                                       12
<PAGE>   15

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 December 31, 2000 decreased 51%
to $26.5 million from $53.7 million in the same period in fiscal 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 is also experiencing the impact of
being involved in a protracted transaction involving the sale of a majority of
the Company. No one customer accounted for more than 10% of net revenues in the
first quarter ended December 31, 2000 or in the same period in the prior year.

        License revenue for the three months ended December 31, 2000 was $22.9
million compared to $49.4 million in the same quarter of fiscal 2000. This
decline is attributed to delays in large project deals.

        Service revenues decreased to $3.6 million for the three months ended
December 31, 2000, from $4.2 million in the same period in 2000, a decline of
15%. The decline of $0.6 million was primarily due to customer delays in
implementing services. Service revenue was 14% of the total revenue of the first
quarter, compared to 8% in the prior year. The percentage increase is due to the
decline in license revenues.

        International revenues continue to represent a significant portion of
total net revenues comprising 54% of the revenues for the first fiscal quarter
of 2001 and 59% for the same quarter in fiscal 2000.

COSTS AND EXPENSES

        Cost of license revenues for the three months ended December 31, 2000
decreased by 48% to $3.5 million compared to $6.7 million in the same period of
fiscal 2000. The declining cost of revenues is primarily due to lower sales.
Additionally, material costs continue to decline as a result of the increasing
number of internet orders and certain fixed costs such as technology and
overhead also declined.

        Cost of service revenues for the three months ended December 31, 2000
decreased by 30% to $3.6 million compared to $5.1 million in the same period of
fiscal 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 increased to 27%
in the first quarter of fiscal 2001 from 22% in the same period of fiscal 2000.
The percentage increases are due to the decline in total revenue. 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 the first quarter of fiscal 2001.

        Research and development expenses decreased 39% to $6.4 million in the
first quarter of fiscal 2001 from $10.6 million in the comparable quarter of
fiscal 2000, or 24% and 20% of net revenues, respectively. The decrease in


                                       13
<PAGE>   16

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.

        Sales and marketing expenses decreased 35% to $16.3 million in the first
quarter of fiscal 2001 from $25.3 million for the comparable quarter of the
prior year. Sales and marketing expenses represented 62% of net revenues in the
first quarter of fiscal 2001 and 47% in 2000. The decrease is due to lower labor
costs as a result of a planned reduction in force and attrition, combined with
reductions in sales program costs that vary directly with revenue, including
cooperative advertising.

        General and administrative expenses increased to $4.3 million for the
first quarter of fiscal 2001 compared with $3.8 million in the first quarter of
fiscal 2000, representing 16% and 7% of net revenues, respectively. The increase
of $0.5 million was due to increases in data processing costs, rent, and a
one-time facility repair.

        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 $0.4 million for the first
quarter of fiscal 2001 and $0.6 million for the comparable quarter in the prior
year. Other income was $0.6 million in the first quarter of fiscal 2001,
compared to $0.8 million for the same period of fiscal 2000. The decrease in
interest income is due to the lower cash and short-term investment balances in
the first quarter of fiscal 2001. In the first quarter of fiscal 2000, other
income included a gain on the sale of an equity security investment of $0.6
million. There was no corresponding sale in fiscal 2001. However, there was
investment income related to the accounting for derivatives under SFAS 133.

        The provision for income taxes was $0.6 million for the first quarter of
fiscal 2001 compared to $0.7 million for the same period of the prior fiscal
year. The tax provisions for the first quarters of the current and prior fiscal
years reflect foreign taxes payable.

        Net loss for the first quarter of fiscal 2001 was $7.3 million compared
to net income of $2.9 million for 2000.

        Segment Information. The Company began reviewing its performance on the
basis of its three divisions during the third quarter of fiscal 2000. Prior year
financial information has been revised for divisional comparison purposes and is
disclosed in Note 3.

        Server Software Division. Net revenues for the server division for the
three months ended December 31, 2000 decreased 54% to $23.0 million from $49.5
million in the same period in fiscal 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.

        Gross margin for the server division declined 57% to $17.0 million for
the first quarter of fiscal 2001 compared to $39.5 million for the same period
of fiscal 2000. The decline in gross margin is mainly attributable to lower
sales.

        The server division's operating loss for the three months ended December
31, 2000 was $0.2 million, a decline of $3.8 million from the operating income
of $3.6 million in the same period of fiscal 2000. The decline is due to lower
operating expenses which declined year over year due to lower labor costs caused
by a planned 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 December 31, 2000 decreased 9% to $3.2 million from $3.5
million in the three months ended December 31, 2000. Tarantella division
revenues include several products including the Tarantella product, Customer
Support and the Vision Family products. The revenue for the Tarantella product
line saw growth of 79%, and support revenues increased by 114%. These increases
were offset by the decline in the Vision Family product revenue of 54%. Vision
Family revenues declined because this is an older product that is near the end
of its life. The Company expects to see revenues continue declining for this
product line over the next few years.

        Gross margin for the Tarantella division was $2.6 million for the three
months ended December 31, 2000 compared with gross margin of $2.8 million for
the same period in fiscal 2000, a decrease of 9%. As the Company continues to
develop new products in the Tarantella family, there will continue to be some
variations in the gross margin percentages.

        The operating loss reported by the Tarantella division for the three
months ended December 31, 2000 was $6.5 million, compared to a loss of $0.7
million in fiscal 2000. The Company has developed a dedicated, focused team for
the Tarantella division and has increased the resources used by the division.



                                       14
<PAGE>   17

        Professional Services Division. Net revenues for the professional
services division for the three month period ended December 31, 2000 declined to
$0.9 million compared to $1.3 million for the same period in fiscal 2000. The
revenue decrease can be attributed to customer delays in implementing services.

        Gross loss for the professional services division was $0.1 million for
the three months ended December 31, 2000 compared with a loss of $0.5 million
for the same period in fiscal 2000, an reduction of 80%. The reduction in gross
loss is directly attributable to improved control of operating expenses.
Additionally, the fiscal 2001 numbers include the transfer of certain staff to
general and administrative functions as a result of the creation of the
Company's divisions.

        The operating loss for the professional services division for the three
months ended December 31, 2000 was $0.9 million, compared to the operating loss
of $0.8 million in fiscal 2000. The relatively stable loss reflects improved
spending controls offset by lower revenues during the first quarter of fiscal
2001.

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'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. 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 54% and 59% of total revenues for the first 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



                                       15
<PAGE>   18

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.

        On August 1, 2000, the Company entered into an agreement with Caldera
Systems, Inc. ("Caldera") in which Caldera will acquire the Company's Server
Software Division and its Professional Services Division. This transaction
involves a number of risks, including but not limited to i) the potential
disruption of the Company's business that might result from employee or customer
uncertainty, and lack of focus following announcement of the transaction in
connection with integrating the operations of Caldera and the Company; ii) the
risk that the announcement of the transaction could result in decisions by
customers to defer purchases of products; iii) the substantial charges to be
incurred due to the transaction; iv) the difficulties of managing geographically
dispersed operations; and v) the possibility that the transactions contemplated
in the agreement with Caldera might not be consummated. The Company has
experienced significant delays in closing the transaction with Caldera, during
which time the Company has been obligated to maintain the business divisions to
be sold to Caldera in their present state, which has caused the Company's cash
position to deteriorate. In the event the closing is further delayed, or in the
event the transaction ultimately fails to close, the Company may have inadequate
cash resources to maintain the business at sufficient operating levels.

        Further, once the aforesaid transaction is consummated, the ongoing
operations will be significantly altered. The Company's revenues will be derived
from only one product line: Tarantella products, which have only been recently
introduced by the Company. While the Company believes that its staffing plan
following the consummation of the transaction is reasonable, it is possible that
the Company may find itself to be overstaffed or, on the other hand, unable to
retain sufficient staff to sustain efficient operations. Following the close of
the transaction, the company will hold in its treasury a significant investment
in Caldera, the value of which may be subject to significant fluctuations.

        The Company continually evaluates potential acquisition candidates. Such
candidates are selected based on products or markets 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



                                       16
<PAGE>   19

agreement. Competition for qualified people in the software industry is intense.
The loss of one or more key employees or the Company's inability to attract and
retain other key employees could have a material adverse effect on the Company.

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

        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 $13.1 million at
December 31, 2000, representing 21% of total assets. The three month decrease in
cash and short-term investments of $13.4 million was a result of the decline in
revenue and a decrease in sales linearity, resulting in lower cash collections.
Additionally, the Company made cash payments for restructuring charges during
the quarter. The Company's operating activities used cash of $12.2 million in
the first quarter of fiscal 2001, compared with $7.6 million provided by
operating activities for the same period of fiscal 2000. The cash used by
operating activities has declined due to the restructuring efforts of the
Company, but did not reach a level on a par with the first quarter revenues of
the Company. Cash provided by investing activities during the quarter ending
December 31, 2000 was $1.9 million compared with cash used for investing
activities of $3.3 million in the same period of fiscal 2000. In both fiscal
2001 and 2000, cash was used to fund purchases of property and equipment, and
short-term investments. The sales of short-term investments contributed to the
cash provided by investing activities for fiscal 2001. Cash used for financing
activities was $0.6 million for the first quarter of fiscal 2001 compared with
$0.2 million for the first quarter of fiscal 2000. In the first quarter of both
fiscal 2001 and fiscal 2000, proceeds from the issuance of common stock were
more than offset by the Company's stock repurchases and payments on capital
lease obligations.

        The Company's first quarter ended December 31, 2000 Days Sales
Outstanding (DSO) was 75.4 days, an increase of 9 days from the fourth quarter
of fiscal 2000, and an increase of 32.6 days when compared to the December 1999
DSO. The increase in DSO is due to a decline in sales linearity as well as an
increase in longer term product sales.

        As of December 31, 2000, the Company had an equity investment in
Rainmaker Systems having a fair market value of $4.6 million and a cost basis of
$1.3 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 $7.3
million during the first quarter of fiscal 2001 and $57.0 million during fiscal
2000 and revenues have declined from $49.4 million for the first quarter of
fiscal 2000 to $22.9 million for the same quarter 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 December 31, 2000. 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



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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.

        On February 9, 2001, the Company entered into a Third Amendment to the
Agreement and Plan of Reorganization entered into on August 1, 2000 (as
subsequently amended on September 13, 2000 and December 12, 2000) (collectively,
the "Amended Reorganization Agreement") with Caldera Systems, Inc. and Caldera
International, Inc. ("Caldera International"). Under the terms of the Amended
Reorganization Agreement, (i) Caldera International will acquire the Company's
Server Software and Professional Services divisions and the Company's OpenServer
product line, including the intellectual property and revenue derived therefrom,
(ii) the Company will receive cash consideration of $23.0 million at the close
of the transaction ($7.0 million of which has been previously advanced to the
Company) as well as a note for $8.0 million due in four quarterly installments
beginning in the second year following the close of the transaction and 16
million shares of Caldera International common stock, initially representing
approximately 25.9% of Caldera International, (iii) Caldera International will
also share revenue from the OpenServer products for a period of three years, if
sales exceed pre-defined levels during that time and (iv) Caldera International
will receive an assignment by the Company of its accounts receivable from
certain long-term agreements that become due subsequent to the close of the
transaction. These receivables will vary depending on the timing of the
transaction and product usage by customers, currently estimated to be $3-4
million.

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

        In connection with the proposed 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.
Further, Caldera Systems, Inc., has agreed to loan $7.0 million to the Company
in the form of a short-term note repayable at the consummation of the
transaction between the Company and Caldera Systems, Inc.

        At December 31, 2000, the Company had available lines of credit of
approximately $0.9 million under which the Company had $0.5 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 and financial statements 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. Management
believes that 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



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<PAGE>   21
as required for its first quarterly filing of fiscal year 2001. Adoption of the
standard required the Company to recognize the fair value of derivatives held
during the first quarter ended December 31,2000. The cumulative effect of the
adjustment was an increase in available-for-sale securities of $0.2 million at
December 31, 2000 and an increase to net income of $1.1 million for the
three-month period ended December 31, 2000.

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.



                                       19
<PAGE>   22

                           PART II. OTHER INFORMATION


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



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<PAGE>   23

                                   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.



                                         The Santa Cruz Operation, Inc.

Date: August 29, 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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