##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




FORM 10-Q





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For
the Quarterly Period Ended June 30, 2002





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the Transition Period From
 to





---




Commission File Number 0-21484





TARANTELLA, INC.


(Exact name of registrant as specified in this charter)





CALIFORNIA

94-2549086(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)425 Encinal Street, Santa Cruz, California

95060(Address of principal executive office)

(Zip Code)





Registrants telephone number, including area code (831) 427-7222





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 June 30, 2002 was 40,586,697.





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##### Table of Contents

TARANTELLA, INC.





FORM 10-Q





For the Quarterly Period Ended June 30, 2002





Table of Contents





Part I.

Financial InformationItem 1.

Financial Statements

Pagea)      
Condensed Consolidated Statements of Operations for the three months and nine months ended June 30, 2002 and 2001

3b)     
Condensed Consolidated Balance Sheets, as of June 30, 2002 and September 30, 2001

4c)      
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2002 and 2001

5d)     
Notes to Condensed Consolidated Financial Statements

7Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

15Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23Part II.

Other InformationItem 6.

Exhibits

23Signatures

24




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##### Table of Contents

TARANTELLA, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)





Three Months Ended June 30,


Nine Months Ended June 30,2002


2001


2002


2001(Unaudited)


(Unaudited)Net revenues:Licenses

$
2,940


$
7,753


$
9,224


$
54,779Services


710



1,084



1,590



7,864Total net revenues


3,650



8,837



10,814



62,643Cost of revenues:Licenses


127



1,042



356



8,033Services


360



1,434



867



8,655Total cost of revenues


487



2,476



1,223



16,688Gross margin


3,163



6,361



9,591



45,955Operating expenses:Research and development


1,322



3,593



4,375



16,543Selling, general and administrative


4,642



14,856



15,733



56,634Restructuring charge










1,718



1,133Total operating expenses


5,964



18,449



21,826



74,310Operating loss


(2,801
)


(12,088
)


(12,235
)


(28,355
)Gain/(loss) on Caldera transaction


445



53,267



(2,593
)


53,267Equity losses in Caldera










(4,010
)


Interest income, net


36



98



477



788Other income (expense), net


3,585



(3,036
)


3,597



621Income (loss) before income taxes


1,265



38,241



(14,764
)


26,321Income tax provision (benefit)






154



(760
)


(47
)Net income (loss)


1,265



38,087



(14,004
)


26,368Other comprehensive income (loss):Unrealized gain (loss) on available for sale securities


5



(1,417
)


70



(5,413
)Foreign currency translation adjustment


8



(204
)


24



25Total other comprehensive income (loss)


13



(1,621
)


94



(5,388
)Comprehensive income (loss)

$
1,278


$
36,466


$
(13,910
)

$
20,980Earnings (loss) per share:Basic

$
0.03


$
0.95


$
(0.35
)

$
0.66Diluted

$
0.03


$
0.95


$
(0.35
)

$
0.66Shares used in earnings (loss) per share calculation:Basic


40,572



40,030



40,346



39,734Diluted


42,738



40,200



40,346



40,027




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TARANTELLA, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





June 30, 2002


September 30, 2001(In thousands)

(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
6,889


$
12,100Short-term investments






2,000Receivables, net of allowance for doubtful accounts of $0.8 million and $2.3 million, respectively


2,644



4,098Available-for-sale equity securities


172



101Note receivable from Caldera






1,846Other receivablesCaldera


3,068



1,274Other receivables


238



384Prepaids and other current assets


989



1,163Total current assets


14,000



22,966Property and equipment, net


1,378



2,232Long-term portion of note receivable from Caldera






5,260Equity investment in Caldera






4,010Other assets


1,226



1,123Total assets

$
16,604


$
35,591Liabilities and shareholders equityCurrent liabilities:Trade accounts payable

$
588


$
802Royalties payable


454



733Income taxes payable


215



374Accrued restructuring charges


472



344Other payablesCaldera






657Accrued expenses and other current liabilities


4,990



8,849Deferred revenues


1,135



1,185Total current liabilities


7,854



12,944Long-term lease obligations






2Long-term deferred revenues


39



91Other long-term liabilities


1,000



1,760Total long-term liabilities


1,039



1,853Commitments and contingenciesShareholders equity:Preferred stock, authorized 20,000 shares;no shares issued and outstanding in 2002 and 2001






Common stock, no par value, authorized 100,000 shares;issued and outstanding 40,587 and 40,117 shares at June 30,
2002 and September 30, 2001, respectively


120,746



119,919Accumulated other comprehensive income


(72
)


(166
)Accumulated deficit


(112,963
)


(98,959
)Total shareholders equity


7,711



20,794Total liabilities and shareholders equity

$
16,604


$
35,591




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##### Table of Contents

TARANTELLA, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





Nine Months Ended June 30,(In thousands)

2002


2001Cash flows from operating activities:Net income (loss)

$
(14,004
)

$
26,368Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activitiesDepreciation and amortization


714



4,963Investment (gain) loss






Foreign currency exchange (gain) loss


36



26Gain on sale of marketable security


(4,491
)


(116
)Loss on disposal of property and equipment


284



753(Gain) loss on Caldera transaction


2,593



(53,267
)Equity losses in Caldera


4,010



Realized loss on available-for-sale investments






675Impairment of equity investments


796



Warrant and stock compensation expense


733



(214
)Changes in operating assets and liabilitiesReceivables


1,077



9,782Other current assets






38Other assets


153



230Trade accounts payable


(238
)


(3,997
)Royalties payable


(279
)


(733
)Income taxes payable


(159
)


(691
)Accrued restructuring expenses


128



128Accrued expenses and other current liabilities


(3,621
)


(3,672
)Deferred revenues


(102
)


(5,172
)Other long-term liabilities


(760
)


(657
)Net cash used for operating activities


(13,130
)


(25,556
)Cash flows from investing activities:Purchases of short-term investments






(33
)Sales of short-term investments and marketable securities


2,000



3,200Purchases of property and equipment


(153
)


(1,427
)Purchases of software and technology licenses


(4
)


(839
)Proceeds from sale of marketable securities


1,531



3,600Proceeds from sale of property and equipment






588Proceeds from Caldera transaction


4,451



20,493Net cash provided by investing activities


7,825



25,582Cash flows from financing activities:Payments on capital lease obligations


(2
)


(545
)Net proceeds from issuance of common stock


94



1,176Net cash provided by (used for) financing activities


92



631Effects of exchange rate changes on cash and cash equivalents


2



(72
)Change in cash and cash equivalents


(5,211
)


585Cash and cash equivalents at beginning of period


12,100



20,879Cash and cash equivalents at end of period

$
6,889


$
21,464




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Nine Months Ended June 30,(In thousands)

2002

2001Supplemental disclosure of cash flow information:Cash paidIncome taxes

$
424

$
1,230Interest


20


301Non-cash financing and investing activitiesIssuance of warrant for private placement under FAS 133





1,227Issuance of warrant related to note payable under FAS 133





969Product sale exchanged for equity investment


375


150Unrealized gain (loss) on available-for-sale equity securities


70


(5,413
)





See accompanying notes to consolidated financial statements.




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





|1. |  | Basis of Presentation
|-- |  | ---------------------




In the opinion of management, the accompanying unaudited, consolidated statements of operations, balance sheets and statements of cash flows include all material adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial condition and results of operations as of and for the interim period presented. The financial statements include the accounts of the Company and its wholly owned subsidiaries
after all material intercompany balances and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto included in the
Companys 2001 Annual Report on form 10-K. The consolidated interim results presented are not necessarily indicative of results to be expected for a full year. The September 30, 2001 balance sheet was derived from audited financial statements,
and is included for comparative purposes. Certain reclassifications have been made for consistent presentation.





The Company has restated its consolidated balance sheets and statements of operations for each of the three-month periods ended December 31, 2000 and March 31, 2001 to reflect a sale and exchange of investments held by the company
and to account for derivatives held under Statement of Financial Accounting Standard No. 133 which was effective for the Company on October 1, 2000. Accordingly, the results of operations for the nine-month period ended June 30, 2001 included herein
reflect the effect of such restatements.





|2. |  | Transaction with Caldera
|-- |  | ------------------------




On May 4, 2001, the Company consummated the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc. Under the terms of the transaction, Caldera Systems, Inc. acquired
the assets of the server and professional services groups. A new company, Caldera International, Inc., was formed which combined the assets acquired from the Company with the assets of Caldera Systems. Upon the completion of the sale, the Company is
continuing to operate its Tarantella business, and accordingly, changed its corporate name to Tarantella, Inc. and Nasdaq trading symbol to TTLA to reflect the new corporate name.





As consideration for the transaction, the Company received 16 million common stock shares of Caldera International (representing approximately 28.2% of Caldera
International), $23 million in cash (of which $7 million was received on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that was to be received in quarterly installments of $2 million beginning in August
2002. As part of the original transaction, if the OpenServer line of business of the Server and Professional Services groups generated revenues in excess of specified thresholds during the three-year period following the completion of the
combination, the Company had earn-out rights entitling it to receive 45% of these excess revenues. The transaction was treated as a disposal of Server and Professional Services groups and a gain of $53,267,000 was recorded upon completion of the
transaction.





For the fourth fiscal quarter of 2001, the Companys operating results included 28.2% of the
operating results of Caldera International, adjusted for amortization of 5 months of negative goodwill of approximately $0.7 million. The net amount of the losses included was $4.6 million. In the fourth fiscal quarter of 2001, the Company also
recorded an impairment of the investment, net of the remaining negative goodwill of $7.8 million, in the amount of $22.5 million. The impairment was recorded as the share price of Caldera International was significantly below the fair market value
of Tarantellas and was deemed to be other than temporarily impaired.





During the first fiscal quarter of
2002, the Companys net loss included equity losses of $4.0 million for its share of Caldera International losses. After recording this loss, the carrying value of the shares of Caldera International stock was reduced to zero, in accordance
with APB opinion No. 18.





During the second quarter of fiscal 2002, the Company signed an agreement with Caldera
International to redeem the $8 million note receivable held by the Company for $5 million, which was originally payable in four quarterly installments of $2 million each, beginning in August 2002. Additionally, Caldera International agreed to the
buyout of certain licenses for products bundled in older releases of The Santa Cruz Operation, Inc.s software, and the buyback of 500,000 post split shares of Caldera International stock held by the Company for $555,000. A loss of $3,038,000
was recorded against the gain on Caldera transaction for the redemption of the note




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##### Table of Contents

receivable. On March 7, 2002, Caldera International executed a 1 for 4 reverse stock split. Accordingly, the shares held by the Company were
adjusted to reflect the stock split.





During the third fiscal quarter of fiscal 2002, Tarantella announced an
agreement with Caldera International to repurchase the remaining 3,289,401 shares of Caldera common stock held by Tarantella. Tarantella recorded other income of $3,059,250 from this transaction in the third fiscal quarter and subsequently received
the cash in July 2002. For the nine-months ended June 30, 2002, the Company sold 4,010,417 post split shares of Caldera International stock for total proceeds of $4,360,938. As of June 30, 2002, the Company no longer owns any securities in Caldera
International. Caldera also bought out the remaining term of the OpenServer revenue sharing plan that was part of the original transaction, for $100,000, which was recorded as a gain on Caldera transaction. In addition, royalty reserves of $345,000
related to the original transaction were written off and recorded as a gain on Caldera transaction.





At June 30,
2002, the net gain on the sale of the Server and Professional Services Division consummated on May 4, 2001 was $50,674,000 of which a gain of $53,267,000 was recognized during the third quarter of fiscal 2001 offset by a loss of $2,593,000 for the
nine-months ended June 30, 2002.





As part of the agreement between the Company and Caldera International, various
building leases were assigned to Caldera International, however, the Company remains a guarantor under such leases which expire in 2005. As of June 30, 2002, the remaining lease payments assigned to Caldera International is estimated at $2,658,090.
No amounts have been accrued for this contingent liability as management does not believe a loss is probable.





|3. |  | Accrued Restructuring Charge
|-- |  | ----------------------------




Fiscal 2002





During the first quarter of fiscal 2002, the Company announced a restructuring
plan, which resulted in a charge of $1.7 million. The Company reduced its spending levels to align its operating expenses with the Companys lower than expected revenues. The restructuring included a reduction in staffing of 52 employees, a
reserve for unused facilities at the Companys corporate headquarters, and costs associated with closing several foreign offices.





A severance charge of $0.9 million included the elimination of 19 positions in the United States, 23 positions in the United Kingdom, and 10 positions in Japan. The reductions in force affected the product development,
support, sales, marketing and general and administrative functions of the Company. As of March 31, 2002, all positions had been eliminated.





A facilities charge of $0.7 million related to space the Company vacated. The Company anticipates that it will sub-lease the space by December 31, 2002. In addition, a charge was taken for expenses
associated with office closures in Japan and Brazil. A non-cash charge of $39,000 related to fixed asset disposals retired at the Japan subsidiary.





The Company expects to complete substantially all of the cost reduction actions initiated in the first quarter of fiscal year 2002 and in the second and fourth quarter of fiscal 2001 during the
remainder of fiscal year 2002. The Company cannot assure that its current estimates of the costs associated with these restructuring actions will not change during the implementation period.




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Fiscal 2002 First Quarter Restructuring Accrual





(In Thousands)

Reduction in Force


Facilities


Disposal of Fixed Assets


TotalRestructuring charge accrued

$
856


$
736


$
44


$
1,636Payments/utilization of the accrual


(772
)


(31
)






(803
)Accrual at December 31, 2001


84



705



44



833Payments/utilization of the accrual


(89
)


(211
)


(39
)


(339
)Provision Adjustment


5







(5
)


Accruals at March 31, 2002

$



$
494


$



$
494Payments/utilization of the accrual






(156
)






(156
)Provision Adjustment














Accruals at June 30, 2002






338







338





Fiscal 2001





During the second quarter of fiscal 2001, the Company announced a restructuring plan which resulted in a charge of $1.6 million, which when taken with an adjustment to a
previously established restructuring reserve, resulted in the net charge of $1.1 million. The restructuring charge was related to the Tarantella division and included a reduction in personnel of 28 employees and a reserve for unused facilities.
Total cash expenditures were $1.6 million.





The severance charge of $1.5 million included the elimination of 16
positions in the United States, 4 positions in the United Kingdom, and 8 positions in various other geographies. The reduction in force affected the sales, marketing and general and administrative functions of the Company. As of September 30, 2001,
all 28 positions had been eliminated and all cash payments had been made. The Company anticipated that the sub-lease contemplated in the restructuring plan would be completed by September 30, 2001, however, the space remained vacant as of the end of
the first quarter of fiscal 2002. As the Company vacated additional space within its Santa Cruz, California office in the first quarter of fiscal 2002, an additional charge was recorded for estimated payments on the lease for an additional 12
months.




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Fiscal 2001 Second Quarter Restructuring Accrual





(In Thousands)

Reduction in Force


Facilities


TotalRestructuring charge accrued

$
1,499


$
64


$
1,563Payments/utilization of the accrual


(885
)






(885
)Accrual at March 31, 2001


614



64



678Payments/utilization of the accrual


(484
)






(484
)Accruals at June 30, 2001


130



64



194Payments/utilization of the accrual


(91
)


(24
)


(115
)Provision Adjustment


(39
)






(39
)Accruals at September 30, 2001






40



40Payments/utilization of the accrual






(40
)


(40
)Provision Adjustment






81



81Accruals at December 31, 2001






81



81Payments/utilization of the accrual






(20
)


(20
)Accruals at March 31, 2002

$



$
61


$
61Payments/utilization of the accrual






(20
)


(20
)Accruals at June 30, 2002

$



$
41


$
41





During the fourth quarter of fiscal 2001, the Company announced a
restructuring plan, which resulted in a charge of $0.5 million. The restructuring charge included a reduction in personnel of 10 employees and a planned elimination of offices in Singapore and Australia. Total cash expenditures were $0.5 million.





The severance charge of $0.4 million included the elimination of 4 positions in the United States and 6 positions
in the United Kingdom. The reductions in force affected the sales, marketing and general and administrative functions of the Company. At September 30, 2001, all 10 positions had been eliminated and all cash payments had been made. The remaining
reserve of $93,000 relates to the facilities in Singapore and Australia which the Company is still in the process of closing.




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Fiscal 2001 Fourth Quarter Restructuring Accrual





(In Thousands)

Reduction in Force


Facilities


TotalRestructuring charge accrued

$
402


$
102


$
504Payments/utilization of the accrual


(200
)






(200
)Accrual at September 30, 2001


202



102



304Payments/utilization of the accrual


(202
)


(3
)


(205
)Accrual at December 31, 2001






99



99Payments/utilization of the accrual






(6
)


(6
)Accrual at March 31, 2002

$



$
93


$
93Payments/utilization of the accrual










Accrual at June 30, 2002

$



$
93


$
93





|4. |  | Segment Information
|-- |  | -------------------




Beginning on May 4, 2001, with the sale of the Server Software and Professional Services divisions, the Company discontinued managing the business by division or geographic segment. Prior to May 4, 2001, the Company reviewed
performance on the basis of its three divisionsthe Server Software Division, the Tarantella Division, and the Professional Services Division. Accordingly, the Company now operates in one reportable segment, Tarantella.





The following table presents information on revenue and long-lived assets by geography. Revenue is allocated based on the location from
which the sale is satisfied and long-lived asset information is based on the physical location of the asset.





The
significant reduction of revenues and long-lived assets is due to the sale of the Server and Professional Services divisions to Caldera International.




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Three Months Ended June 30,

Nine Months Ended June 30,2002

2001

2002

2001(In thousands)

(In thousands)Net revenues:United States

$
2,359

$
4,008

$
6,363

$
29,988Canada and Latin America


84


489


522


3,629Europe, Middle East, India and Africa


786


3,390


2,857


23,344Asia Pacific


380


603


995


5,247Corporate adjustments


41


347


77


435Total net revenues

$
3,650

$
8,837

$
10,814

$
62,643





June 30, 2002

September 30, 2001(In thousands)Long-lived assets:United States

$
2,105

$
11,852Canada and Latin America


13


13Europe, Middle East, India and Africa


474


663Asia Pacific


12


97Corporate adjustments





Total long-lived assets

$
2,604

$
12,625





|5. |  | Investments
|-- |  | -----------




Available for sale equity securities:





At June 30, 2002, the Company held 505,767
shares of Rainmaker stock. The Company accounts for this investment as available-for-sale, and accordingly, records it at fair market value based on quoted market prices. Any unrealized gains or losses are included as part of accumulated other
comprehensive income. The fair market value at June 30, 2002 was $172,000 and cost was $171,000 for an unrealized gain of $1,000. Rainmakers common stock is traded on the Nasdaq under the symbol RMKR. The Company no longer has the
right to appoint a member to the Board of Directors.





|6. |  | Earnings Per Share (EPS) Disclosures
|-- |  | ------------------------------------




Basic and diluted earnings per share were calculated as follows during the three and nine months ended June 30, 2002 and 2001 (in thousands):




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##### Table of Contents

Three Months Ended June 30,

Nine Months Ended June 30,(In thousands, except per share data)

2002

2001

2002


2001Basic:Weighted average shares


40,572


40,030


40,346



39,734Net income (loss)

$
1,265

$
38,087

$
(14,004
)

$
26,368Earnings (loss) per share

$
0.03

$
0.95

$
(0.35
)

$
0.66Diluted:Weighted average shares


40,572


40,030


40,346



39,734Common equivalent shares from stock options and warrants


2,166


170






293Shares used in per share calculation


42,738


40,200


40,346



40,027Net income (loss)

$
1,265

$
38,087

$
(14,004
)

$
26,368Earnings (loss) per share

$
0.03

$
0.95

$
(0.35
)

$
0.66Options and warrants outstanding at 6/30/02 and at 6/30/01 not included in computation of diluted EPS because the
exercise price was greater than the average market price


9,808


8,016


9,968



3,103Options outstanding at 6/30/02 and at 6/30/01 not included in computation of diluted EPS because their inclusion would
have an anti-dilutive effect due to net loss during the period








4,285









|7. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------




In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard ( SFAS) No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for an exit cost as defined in Issue No. 94-3 was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and
recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002 and the adoption will not have an impact on the historical results of operations, financial position
or liquidity of the Company. SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.





In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Tarantella is required to adopt
SFAS No. 144 on October 1, 2002. The adoption of this statement in not expected to have a material impact on the Companys financial position or results of operations.





In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 is applicable to business combinations completed after July 1, 2001.





In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition.
SFAS No. 142 also addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. Goodwill and




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intangible assets previously recorded on the Companys consolidated financial statements will be affected by the provisions of SFAS No.
142. SFAS No. 142 will be effective for the Companys fiscal year 2003. As the company does not currently have any goodwill or intangible assets, the adoption of this statement will not impact the Companys financial position or results of
operations.




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto
included elsewhere in the Quarterly Report on Form 10-Q, as well as the Managements Discussion and Analysis of Financial Condition and Result of Operations included in our Annual Report on Form 10-K for the fiscal year ended September 30,
2001. 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.





On February 14, 2002, the Company received a letter from Nasdaq notifying it that for 30 consecutive trading days the price of the Companys common stock had closed below the minimum bid
requirement of $1 per share and that the Company had 90 calendar days to regain compliance with Nasdaq rules. If, by May 15, 2002, the bid price of the Companys common stock did not close at $1 per share or more for a minimum of 10 consecutive
trading days, the Company would be subject to de-listing from Nasdaq. On April 23 rd the Company applied
to voluntarily move to the Nasdaq SmallCap Market, extending the time Nasdaq allowed for compliance from 90 to 180 days. The Companys application was accepted on June 4, 2002, however, the Companys shares are still subject to de-listing.
The Company believes that it will be able to get an extension for another 180 days as the Company meets all of the criteria for small cap except the minimum bid requirement.





Critical Accounting Policies





The preparation of financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial
statements and the accompanying notes. Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001 describes the significant accounting policies and methods used in the preparation
of the consolidated financial statements for the three fiscal years in the period ended September 30, 2001. The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal
periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for revenue, product returns and a valuation allowance for deferred tax assets. Actual results could differ from these estimates. The following
critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the condensed consolidated financial statements.





Revenue Recognition





The Companys net revenues are derived
from software licenses and fees for services, which include custom engineering, support and training. In accordance with Statement of Position 97-2 Software Revenue Recognition we recognize revenue when the price is fixed and
determinable, upon persuasive evidence of an agreement, when fulfillment of our obligations under any such agreement is complete and when there is a determination that collection is probable. Our payment arrangements with customers provide primarily
30 day terms and to a limited extent with certain customers 45, 60 or 90 day terms. In certain transactions, the Company does not have a reliable basis to estimate returns and allowances for certain customers or is unable to determine that
collection of receivables is probable. In such circumstances, the Company defers revenues at the time of sale and recognizes revenues when collection of the related receivable becomes probable or cash is collected and any potential returns can be
reasonably estimated.





Returns and Reserves





The Company records a provision for product returns for related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit
memo data and other known




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factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, revenue could be
affected.





Income Taxes





Tarantella has operations in many countries other than the United States. Transfer prices for services provided between the United States and these countries has been documented as reasonable, however, tax authorities could
challenge these transfer prices and assess additional taxes on prior period transactions. Any such assessment could require the Company to record an additional tax provision in its statement of operations.





Income tax assets and liabilities are determined by taxable jurisdiction. The Company evaluates net deferred tax assets in each tax
jurisdiction by estimating the likelihood of the Company generating future profits to realize these assets. The Company has assumed that it will not generate sufficient future taxable income to realize these assets and has created valuation reserves
to reduce the net deferred tax asset values to zero.





Results of Operations





Net Revenues





The Companys net revenues
are derived from software licenses and fees for services.





Net revenues for the three months ended June 30, 2002
decreased 59% to $3.7 million from $8.8 million in the same period in fiscal 2001. For the nine months ended June 30, 2002, net revenues decreased 83% to $10.8 million from $62.6 million in the same period in fiscal 2001. The decline in revenue
performance was worldwide across all geographies and is attributable to the sale of the Server Software and Professional Services divisions to Caldera International in the third quarter of fiscal 2001. Tarantella division net revenues for the three
months ended June 30, 2002 were $3.7 million compared to $3.1 million for the same period in the prior year, an increase of 19%. For the nine months ended June 30, 2002, Tarantella division net revenues increased 5% to $10.8 million from $10.3
million for the same period in fiscal 2001. The increase in net revenues was the result of an increase in the average transaction size due to increased sales to large enterprise customers.





License revenues for the three months ended June 30, 2002 were $2.9 million compared to $7.8 million in the same quarter of fiscal 2001, a decrease of 62% from the prior
year. For the nine months ended June 30, 2002, license revenues decreased 83% to $9.2 million from $54.8 million in the same period in fiscal 2001. The decline is attributed to the sale of the Server Software division to Caldera International.





Service revenues decreased to $0.7 million for the three months ended June 30, 2002, from $1.1 million in the
same period in fiscal 2001, a decline of 35%. Service revenue was 19% of the total revenue for the third fiscal quarter of 2002, compared to 12% for the same period in the prior year. For the nine months ended June 30, 2002, service revenues
decreased 80% to $1.6 million from $7.9 million in the same period in fiscal 2001. The decline in service revenues is the result of the sale of the Server Software and Professional Services divisions to Caldera International. Tarantella division
service revenues of $0.7 million for the three months ended June 30, 2002 increased $0.4 million from $0.3 million for the same period in the prior year.





International revenues were 35% of total revenues for the third fiscal quarter of 2002 and 51% for the same period in the prior year. For the nine months ending June 30, 2002, international revenues
were 41% compared to 52% for the prior year. For the three months ended June 30, 2002, two customers accounted for 23% and 11% of revenue. For the nine months ended June 30, 2002, one of these customers accounted for 14% of revenue.





Costs and Expenses





Cost of license revenues for the three months ended June 30, 2002 decreased by 88% to $0.1 million compared to $1.0 million in the same period of fiscal 2001. For the nine months ended June 30, 2002, cost of license revenues
decreased 96% to $0.4 million from $8.0 million in the same period in fiscal 2001. The declining cost of revenues is primarily due to significantly lower revenues due to the sale of the Server Software division to Caldera International.





Cost of service revenues for the three months ended June 30, 2002 decreased by 75% to $0.4 million compared to
$1.4 million for the same period in fiscal 2001. For the nine months ended June 30, 2002, cost of service




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revenues decreased 90% to $0.9 million from $8.7 million in the same period in fiscal 2001. This decline is primarily a result of the sale of
the Server Software and Professional Services divisions to Caldera International as well as reduced staffing levels in the support organization.





Total cost of revenues as a percentage of net revenues decreased to 13% in the third quarter of fiscal 2002 from 28% for the same period in fiscal 2001. Cost of revenues as a percentage of net revenue
was lower because the Company now sells only Tarantella products that have lower royalty expenses than the server products. In addition, certain acquired technology became fully amortized during fiscal 2001 thus reducing amortization costs for
technology.





Research and development expenses decreased 63% to $1.3 million in the third quarter of fiscal 2002
from $3.6 million in the comparable quarter of fiscal 2001, and as a percentage of net revenues were 36% and 41%, respectively. For the nine months ended June 30, 2002 research and development expenses decreased 74% to $4.4 from $16.5 million in the
comparable period of fiscal 2001, and as a percentage of net revenues were 40% and 26%, respectively. The decrease in research and development expenses can be attributed to lower labor costs driven by lower headcount as a result of planned
reductions in force and the sale of the Server Software division to Caldera International. The increase as a percentage of net revenues is primarily related to lower revenues for the current fiscal year.





Selling, general and administrative expenses decreased 69% to $4.6 million in the third quarter of fiscal 2002 from $14.9 million for the
comparable quarter of the prior year. For the nine months ended June 30, 2002, selling, general and administrative expenses decreased 72% to $15.7 from $56.6 million in the comparable period of fiscal 2001. The decrease in expenses is due to lower
labor costs as a result of the sales of the Server Software and Professional Service divisions to Caldera International, combined with reductions driven by lower headcount as a result of a planned reduction in force. Selling, general and
administrative expenses as a percentage of net revenues were 127% in the third quarter of fiscal 2002 and 168% in the same period in fiscal 2001. For the nine months ended June 30, 2002, selling, general and administrative expenses were 145% of net
revenues compared to 90% in the same period of fiscal 2001. The significant increase in selling, general and administrative as a percentage of net revenues is primarily related to lower revenues for the current fiscal year.





There were no restructuring charges in the third quarter of fiscal 2002 or in the third quarter of fiscal 2001. For the nine months ended
June 30, 2002, restructuring charges were $1.7 million for a restructuring plan that was initiated in the first quarter of fiscal 2002. For the nine months ended June 30, 2001, restructuring charges were $1.1 million for a restructuring plan that
was initiated in the first quarter of fiscal 2001. The Company plans to substantially complete these plans by September 30, 2002. The Company cannot assure that its current estimates of costs associated with these restructuring actions will not
change during the implementation period.





The gain (loss) on the Caldera transaction was $0.4 million for the
third quarter of fiscal 2002 and ($2.6) million for the nine months ended June 30, 2002 compared to $53.3 million for the same periods of fiscal 2001. The transaction with Caldera was completed during the third quarter of fiscal 2001 and a gain on
the sale recognized for $53.3 million. In the third quarter of fiscal 2002, the gain (loss) on Caldera included $0.1 million for the buy out of the OpenServer earn-out and a $0.3 million adjustment for excess royalty reserves associated with the
original Caldera agreement. This gain was offset by a loss of $3.0 million recognized in the second quarter of fiscal 2002 for the redemption of the $8.0 million note receivable from Caldera $5.0 million.





Interest income, net was $36,000 for the third quarter of fiscal 2002 and $98,000 for the same period in fiscal 2001. For the nine months
ended June 30, 2002, interest income, net was $477,000 compared to $788,000 for the same period in fiscal 2001. The decrease in interest income, net reflects the lower cash balances held for the quarter and nine month period ended June 30, 2002.





Other income (expense), net was $3.6 million in the third quarter of fiscal 2002, compared to ($3.0) million for
the same period of fiscal 2001. For the nine months ended June 30, 2002, other income (expense) was $3.6 million compared to $0.6 million for the same period in 2001. In the third quarter of fiscal 2002 there was a $3.1 million gain due to the sale
of 3,289,401 shares of Caldera International common stock. In the third quarter of fiscal 2001, an impairment charge of $2.9 million was recorded for two privately held companies where the decline in value was determined to be other than temporary.





Income tax provision was zero for the third quarter of fiscal 2002 compared to $0.2 million for the same period
in fiscal year 2001. For the nine months ended June 30, 2002, there was an income tax benefit of $0.8 million compared to $47,000 in the same period of fiscal 2001. The income tax benefit for the nine months ended June




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30, 2002, reflects foreign taxes payable offset by a benefit incurred due to changes in the tax law. The income tax benefit for the nine months
ended June 30, 2001 reflects foreign taxes payable offset by the resolution of foreign audit issues.





Net income
(loss) for the third quarter of fiscal 2002 was $1.3 million compared to net income of $38.1 million for the same quarter of fiscal 2001. For the nine months ended June 30, 2002, the net income (loss) was ($14.0) million compared to $26.4 million
for the same period of fiscal 2001. The decrease in net income is primarily due to a gain of $53.3 million that was recorded in the third quarter of fiscal 2001.





Liquidity and Capital Resources





Cash, cash equivalents and short-term investments
were $6.9 million at June 30, 2002, representing 41% of total assets compared to $12.1 million at September 30, 2001. The nine-month decrease in cash and short-term investments of $5.2 million was primarily attributable to the year-to-date net loss,
which was $7.4 million excluding losses due to the transaction with Caldera International. The Companys operating activities used cash of $13.1 million for the first nine months of fiscal 2002, compared to $25.6 million for the same period in
fiscal 2001. Cash provided by investing activities during the nine-month period in fiscal 2002 was $7.8 million compared to $25.6 million for the same period of fiscal 2001. The decrease in the cash provided by investing activities was a result of
the higher proceeds from the sale of marketable securities in the first nine months of fiscal 2001 as well as the $20.5 million proceeds received on the Caldera transaction consummated in the third quarter of fiscal 2001. Cash provided by financing
activities for the first nine months of fiscal 2002 was $0.1 million compared with $0.6 million for the same period in fiscal 2001. The decrease in the net cash provided by financing activities was a result of reduced proceeds from the issuance of
common stock in fiscal 2002.





The Company incurred losses from operations of approximately $12.2 million during
the first nine months of fiscal 2002 and $28.3 million during the same quarter of fiscal 2001. The Company has an accumulated deficit of $113.0 million at June 30, 2002.





During the second quarter of fiscal 2002, the Company signed an agreement with Caldera International to redeem the $8 million note receivable held by the Company for $5
million, which was originally payable in four quarterly installments of $2 million each, starting in August 2002. Additionally, Caldera International agreed to the buyout of certain licenses for products bundled in older releases of The Santa Cruz
Operation, Inc.s software, and the buyback of 500,000 post split shares of Caldera International stock held by the Company for $555,000.





On March 7, 2002, Caldera International executed a 1 for 4 reverse stock split. Accordingly, the shares held by the Company were adjusted to reflect the stock split. In the first nine months of fiscal
2002, the Company sold 4,010,417 post split shares of Caldera International stock, and recognized proceeds of $4,360,938, of which cash of $1,531,358 had been received as of June 30, 2002. The Company no longer owns any securities in Caldera
International.





As part of the agreement between the Company and Caldera International, various building leases
were assigned to Caldera International, however, the Company remains a guarantor under such leases which expire in 2005. As of June 30, 2002, the guarantee for the leases is estimated at $2,658,090. No amounts have been accrued for this contingent
liability as management does not believe a loss is probable.





Factors That May Affect Future Results





Set forth below and elsewhere in this filing and in other documents the Company files with the SEC are risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the forward-looking statement in this filing.





The
companys operating results may fluctuate in future periods





The results of operations for any quarter or
fiscal year are not necessarily indicative of the results to be expected in future periods. The Companys operating results have in the past been, and will continue to be, subject to quarterly and annual fluctuations as a result of a number of
factors, including but not limited to:





| |  |  | Overall technology spending
| | - |  | ---------------------------



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| |  |  | Changes in general economic conditions and specific market conditions in the Internet infrastructure industry
| | - |  | -------------------------------------------------------------------------------------------------------------




| |  |  | Rapid technological changes that can adversely affect the demand for the Companys products
| | - |  | -------------------------------------------------------------------------------------------




| |  |  | Fluctuations in demand for the Companys products and services
| | - |  | --------------------------------------------------------------




| |  |  | The publics perception of Tarantella and its products
| | - |  | ------------------------------------------------------




| |  |  | The long sales and implementation cycle for the Companys products
| | - |  | ------------------------------------------------------------------




| |  |  | General industry trends and the potential effects of price and product competition in the Internet infrastructure industry
| | - |  | --------------------------------------------------------------------------------------------------------------------------




| |  |  | The introduction and acceptance of new technologies and products
| | - |  | ----------------------------------------------------------------




| |  |  | Reductions in sales to, or loss of, any significant customers
| | - |  | -------------------------------------------------------------




| |  |  | The timing of orders, timing of shipments, and the ability to satisfy all contractual obligations in customer contracts
| | - |  | -----------------------------------------------------------------------------------------------------------------------




| |  |  | The impact of acquired technologies and businesses
| | - |  | --------------------------------------------------




| |  |  | The Companys ability to control spending and achieve targeted cost reductions
| | - |  | ------------------------------------------------------------------------------




| |  |  | The ability of the Company to generate cash adequate to continue operations
| | - |  | ---------------------------------------------------------------------------




| |  |  | The potential loss of key employees
| | - |  | -----------------------------------




| |  |  | The Companys ability to attract and retain qualified personnel
| | - |  | ---------------------------------------------------------------




| |  |  | Adverse changes in the value of equity investments in third parties held by the Company
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | The ability of the Companys customers and suppliers to obtain financing or to fund capital expenditures
| | - |  | --------------------------------------------------------------------------------------------------------




As a consequence, operating results for a particular future period are difficult to predict.





The company is exposed to general economic and market conditions





Any significant downturn in the Companys customers markets, or domestic and global conditions, which result in a decline in demand for their software and services could harm our business.
The state of the economy has had a negative impact on the software industry. This could result in customers continuing to delay or cancel orders for software. Any of these occurrences could have a significant impact on the Companys operating
results, revenues and costs and may cause the market price of our common stock to decline or become more volatile.





The Companys future operating results may be affected by various uncertain trends and factors that are beyond the Companys control. These include adverse changes in general economic conditions and rapid or unexpected
changes in the technologies affecting the Companys products. The process of developing new high technology products is complex and uncertain and requires accurate anticipation of customer needs and technological trends.





The company depends on the development and acceptance of new products in a rapidly changing market





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





The Company anticipates new releases of products in the fiscal year ending September 30, 2003. There can be no
assurance that such new releases will not be affected by technical problems or bugs, as is common in the software industry. Furthermore, there can be no assurance that these or other future product introductions will not be delayed.
Delays in the availability, or a lack of market acceptance, of new or enhanced products could have an adverse effect on the Companys business. There can be no assurance that product introductions in the future will not disrupt product revenues
and adversely affect operating results.





The company competes in the highly competitive internet infrastructure market





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.




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Operating results for a particular quarter are difficult to predict





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s revenues may be affected by the seasonality of revenues in the European and government markets





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





Cost
of revenues may be affected by changes in the mix of products and services





The overall cost of
revenues may be affected by changes in the mix of net revenue contribution between licenses and services, 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 and services costs are fixed within certain volume ranges.





The companys operational results could be affected by price variations





The Companys results of operations could be adversely affected if it were to lower its prices significantly. In the event the Company reduced its prices, the Companys standard terms for
selected distributors would be to provide credit for inventory ordered in the previous 180 days, such credits to be applied against future purchases. The Company, as a matter of policy, does not allow product returns for refund. Product returns are
generally allowances for stock balancing and are accompanied by compensating and offsetting orders. Revenues are net of a provision for estimated future stock balancing and excess quantities above levels the Company believes are appropriate in its
distribution channels. The Company monitors the quantity and mix of its product sales.





The company is dependent upon information
received from third parties in order to determine reserves for product returns.





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. In the event information is not received timely or accurately, our ability to monitor the inventory levels will be affected and may negatively impact our business.





The companys business depends upon its proprietary rights and there is a risk that such rights will be infringed





The Company attempts to protect its software with a combination of patent, copyright, trademark, and trade
secret laws, employee and third party nondisclosure agreements, license agreements, and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information the Company regards as proprietary.




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While the Companys competitive position may be affected by its ability to protect its intellectual property rights, the Company believes
that trademark and copyright protections are less significant to the Companys success than other factors, such as the knowledge, ability, and experience of the Companys personnel, name recognition, and ongoing product development and
support.





Portions of the companys shrink-wrap and/or click through licenses may not be enforceable in certain jurisdictions





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





Risks of claims from third
parties for intellectual property infringement could adversely affect the business





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





The companys results of operations may be affected by fluctuations in foreign currency exchange rates





Although the Companys revenues are predominantly in U.S. dollars, substantial portions of the Companys revenues are derived from sales to customers outside the
United States. Trade sales to international customers represented 41%, 52% and 58% of total revenues for the first nine months of fiscal 2002, 2001 and 2000 respectively. The Companys revenues can be affected by general economic conditions in
the United States, Europe and other international markets. Also, portions of the Companys operating expenses are transacted in foreign currencies. 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 carrying amount of purchased software and technology licenses may be reduced due to the companys amortization policy





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





The companys success largely depends upon its ability to retain and recruit key
personnel





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





The companys stock
price is volatile




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The stock market in general, and the market for shares of technology companies in
particular, has experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. Strategic factors such as new product introductions, acquisitions or restructurings 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 operating results 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.





Recent Accounting Pronouncements





In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard ( SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.
Under Issue No. 94-3, a liability for an exit cost as defined in Issue No. 94-3 was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at
fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002 and the adoption will not have an impact on the historical results of operations, financial position or
liquidity of the Company. SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.





In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Tarantella is required to adopt
SFAS No. 144 on October 1, 2002. The adoption of this statement in not expected to have a material impact on the Companys financial position or results of operations.





In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 is applicable to business combinations completed after July 1, 2001.





In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition.
SFAS No. 142 also addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. Goodwill and intangible assets previously recorded on
the Companys consolidated financial statements will be affected by the provisions of SFAS No. 142. SFAS No. 142 will be effective for the Companys fiscal year 2003. As the company does not currently have any goodwill or intangible
assets, the adoption of this statement will not impact the Companys financial position or results of operations.




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Item 3.    Quantitative and Qualitative Disclosures About Market Risk





Reference is made to part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended September 30, 2001.





Part II.    Other Information





Items 4 and 5 are not applicable and have been omitted.





Item 6.    Exhibits




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Signatures





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





TARANTELLA, INC.Date:

August 12, 2002



By:

/s/    RANDALL
BRESEERandall Bresee Senior Vice President,
Chief Financial OfficerBy:

/s/    JENNY TWADDLEJenny Twaddle Vice President, Corporate
Controller




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