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

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

                                    FORM 10-Q


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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

             [ ] 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.)


        400 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 June 30,
                              1998 was 35,284,352


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



<PAGE>   2
                         THE SANTA CRUZ OPERATION, INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

                                TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

<TABLE>
<CAPTION>
         ITEM 1.  FINANCIAL STATEMENTS                                                         PAGE
                                                                                               ----
<S>                                                                                            <C>
                  a)  CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997..............1

                  b)  CONSOLIDATED BALANCE SHEETS
                        AS OF JUNE 30, 1998 AND SEPTEMBER 30, 1997..............................2

                  c)  CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997........................3

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

         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS.........................................................6

PART II.  OTHER INFORMATION

         ITEM 6.    EXHIBITS...................................................................10

SIGNATURES.....................................................................................11
</TABLE>



<PAGE>   3
                          Part I. Financial Information
                          Item I. Financial Statements

THE SANTA CRUZ OPERATION, INC.

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


<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                                JUNE 30,                           JUNE 30,
                                                         1998             1997             1998             1997
                                                              (UNAUDITED)                      (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>              <C>              <C>      
NET REVENUES                                          $  25,241        $  31,166        $ 123,278        $ 141,861

COST OF REVENUES                                         10,126           12,826           35,425           41,515
------------------------------------------------------------------------------------------------------------------
     GROSS MARGIN                                        15,115           18,340           87,853          100,346
------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES:

   Research and development                              10,157           11,055           31,327           35,305

   Sales and marketing                                   20,445           20,197           59,251           61,668

   General and administrative                             4,626            5,523           13,480           16,124

   Non-recurring charges                                     --            8,373               --            8,373
------------------------------------------------------------------------------------------------------------------
      Total operating expenses                           35,228           45,148          104,058          121,470
------------------------------------------------------------------------------------------------------------------
       OPERATING LOSS                                   (20,113)         (26,808)         (16,205)         (21,124)

OTHER INCOME (EXPENSE):

   Interest income, net                                     679              396            1,624            1,661

   Other expense, net                                       (53)            (661)              (4)          (1,023)
------------------------------------------------------------------------------------------------------------------
      Loss before income taxes                          (19,487)         (27,073)         (14,585)         (20,486)
------------------------------------------------------------------------------------------------------------------
   Income taxes                                           1,482           (2,444)           2,759             (797)
------------------------------------------------------------------------------------------------------------------
     NET LOSS                                         $ (20,969)       $ (24,629)       $ (17,344)       $ (19,689)
------------------------------------------------------------------------------------------------------------------
     NET LOSS PER SHARE:

           Basic                                      $   (0.59)       $   (0.67)       $   (0.48)       $   (0.54)

           Diluted                                    $   (0.59)       $   (0.67)       $   (0.48)       $   (0.54)
------------------------------------------------------------------------------------------------------------------
     SHARES USED IN LOSS PER SHARE CALCULATION:

           Basic                                         35,611           36,547           36,018           36,690

           Diluted                                       35,611           36,547           36,018           36,690
------------------------------------------------------------------------------------------------------------------
</TABLE>


 See accompanying notes to consolidated financial statements 



                                       1
<PAGE>   4
THE SANTA CRUZ OPERATION, INC.

                                                                   
<TABLE>
<CAPTION>
                                                                   JUNE 30,       
CONSOLIDATED BALANCE SHEETS                                          1998         SEPTEMBER 30,
(In thousands, except for share data)                             (UNAUDITED)         1997
---------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                       $  21,901        $  23,225
   Short-term investments                                             29,013           28,486
   Receivables, net                                                   14,028           36,546
   Deferred tax asset                                                  6,630            6,631
   Other current assets                                                8,094            6,934
---------------------------------------------------------------------------------------------
     Total current assets                                             79,666          101,822
---------------------------------------------------------------------------------------------
Property and equipment, net                                           12,943           13,666
Purchased software and technology licenses                            13,551           16,523
Other assets                                                          12,632           14,654
---------------------------------------------------------------------------------------------
        TOTAL ASSETS                                               $ 118,792        $ 146,665
---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Royalties payable                                               $   7,198        $  11,262
   Trade accounts payable                                              8,601            8,600
   Income taxes payable                                                2,738            1,101
   Accrued expenses and other current liabilities                     23,126           27,230
   Deferred revenues                                                   7,167            7,465
---------------------------------------------------------------------------------------------
     Total current liabilities                                        48,830           55,658
---------------------------------------------------------------------------------------------
Other long-term liabilities                                           11,969            9,545
---------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
   Common stock, net, authorized 100,000,000 shares
     Issued and outstanding 35,284,352 and 34,450,115 shares         112,826          119,287
   Cumulative translation adjustment                                     975              639
   Accumulated deficit                                               (55,808)         (38,464)
---------------------------------------------------------------------------------------------
     Total shareholders' equity                                       57,993           81,462
---------------------------------------------------------------------------------------------
        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $ 118,792        $ 146,665
---------------------------------------------------------------------------------------------
</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>
                                                                     NINE MONTHS ENDED
                                                                           JUNE 30,
                                                                      1998            1997
                                                                         (UNAUDITED)
--------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                            $(17,344)       $(19,689)
Adjustments to reconcile net income to net cash
     used for operating activities -
     Depreciation and amortization                                     9,855          12,949
     Deferred tax assets                                                (153)           (187)
     Exchange gain                                                      (699)             --
     Stock option income tax benefit                                      --             244
Changes in operating assets and liabilities -
     Receivables                                                      22,925          23,147
     Other current assets                                             (1,048)          1,549
     Royalties payable                                                (4,058)         (1,601)
     Trade accounts payable                                             (155)         (2,245)
     Income taxes payable                                              1,580          (2,514)
     Accrued expense and other current liabilities                    (5,473)          7,885
     Deferred revenue                                                   (163)          1,617
--------------------------------------------------------------------------------------------
         Net cash provided by operating activities                     5,267          21,155
--------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment                                (602)         (2,394)
     Purchases of software and technology licenses                    (1,807)         (4,826)
     Sales of short-term investments                                  21,725           9,907
     Purchases of short-term investments                             (22,252)        (14,257)
     Changes in other assets                                           2,471            (543)
--------------------------------------------------------------------------------------------
         Net cash used for investing activities                         (465)        (12,113)
--------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on capital lease                                        (1,912)           (845)
     Net proceeds from sale of common stock                            1,064           1,836
     Payments on stock repurchases                                    (7,525)         (7,613)
     Other long-term liabilities                                       2,003          (2,357)
--------------------------------------------------------------------------------------------
         Net cash used for financing activities                       (6,370)         (8,979)
--------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents            244           1,358
--------------------------------------------------------------------------------------------
Change in cash and cash equivalents                                   (1,324)          1,421
Cash and cash equivalents at beginning of period                      23,225          32,065
--------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                          $ 21,901        $ 33,486
--------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid-
     Income taxes                                                   $  1,099        $  1,646
     Interest                                                            635             460
    Non-cash financing and investing activities-
     Assets recorded under capital leases                           $  3,623        $  3,129
     Assets written off against restructuring reserve                    568             125
--------------------------------------------------------------------------------------------
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       3
<PAGE>   6

THE SANTA CRUZ OPERATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



1.   BASIS OF PRESENTATION

     In the opinion of management, the accompanying unaudited, consolidated
     statements of operations, balance sheets and statements of cash flows have
     been prepared in accordance with generally accepted accounting principles
     and include all material adjustments (consisting of only normal recurring
     adjustments) necessary for their fair presentation. The financial
     statements include the accounts of the Company and its wholly owned
     subsidiaries after all material intercompany balances and transactions have
     been eliminated. The Notes to Consolidated Financial Statements contained
     in the fiscal year 1997 report on form 10K 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, 1997 balance sheet was derived from audited
     financial statements, and is included for comparative purposes.


2.   EARNINGS PER SHARE (EPS) DISCLOSURES

     The Company has adopted the provisions of Statement of Financial Accounting
     Standards No. 128 (SFAS 128), Earnings Per Share, effective December 31,
     1997. SFAS 128 requires the presentation of basic and diluted earnings per
     share. Basic EPS is computed by dividing income available to common
     stockholders by the weighted average number of common shares outstanding
     for the period. Diluted EPS is computed giving effect to all dilutive
     potential common shares that were outstanding during the period. Dilutive
     potential common shares consist of the incremental common shares issuable
     upon the exercise of stock options for all periods. All prior period
     earnings per share amounts have been restated to comply with SFAS 128.
     Basic and diluted earnings per share were calculated as follows during the
     three month and nine month periods ended June 30, 1998 and 1997:

<TABLE>
<CAPTION>
(In thousands, except per share and option data)          Three Months Ended                  Nine Months Ended
                                                                June 30,                           June 30,
                                                        1998              1997            1998                1997
                                                       --------------------------         --------------------------- 
<S>                                                    <C>               <C>              <C>                <C>
Basic:
    Weighted average shares                              35,611            36,547           36,018             36,690
    Net loss                                           ($20,969)         ($24,629)        ($17,344)          ($19,689)
    Net loss per share                                   ($0.59)           ($0.67)          ($0.48)            ($0.54)

Diluted:
    Weighted average shares                              35,611            36,547           36,018             36,690
    Common equivalent shares from
         stock options and warrants                           0                 0                0                  0
                                                       --------          --------         --------           -------- 
    Shares used in per share calculation                 35,611            36,547           36,018             36,690
                                                       --------          --------         --------           -------- 

    Net loss                                           ($20,969)         ($24,629)        ($17,344)          ($19,689)
 Net loss per share                                      ($0.59)           ($0.67)          ($0.48)            ($0.54)

Options outstanding at 6/30/98 and at 6/30/97
    not included in computation of diluted
    EPS because the effect would be
      antidilutive                                    9,530,455         8,054,886        9,530,455          8,054,886
Price range of options not used in
    diluted EPS calculation                       $0.41 - 12.00     $0.41 - 13.94    $0.41 - 12.00      $0.41 - 13.94
</TABLE>


                                       4
<PAGE>   7
3.   RECENT ACCOUNTING PRONOUNCEMENTS

     In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
     Software Revenue Recognition, which supersedes SOP 91-1. It provides
     guidance on applying generally accepted accounting principles in
     recognizing revenue on software transactions. Different interpretations of
     a provision of SOP 97-2 have arisen with the result that the effective date
     of that provision of SOP 97-2 for certain transactions has been deferred
     for one year. The Company will be required to adopt SOP 97-2 prospectively
     for software transactions entered into beginning October 1, 1998. The
     Company's management is currently evaluating whether the adoption of SOP
     97-2 will have a material impact on the Company's financial position or
     results of operations.

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

     In June 1997, the FASB issued Statement of Financial Accounting Standards
     No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and
     Related Information. This statement establishes standards for disclosure
     about operating segments in annual financial statements and selected
     information in interim financial reports. It also establishes standards for
     related disclosures about products and services, geographic areas and major
     customers. This statement supersedes Statement of Financial Accounting
     Standards No. 14, Financial Reporting for Segments of a Business
     Enterprise. The new standard becomes effective for fiscal years beginning
     after December 15, 1997, and requires that comparative information from
     earlier years be restated to conform to the requirements of this standard.
     The Company is evaluating the requirements of SFAS 131 and the effects, if
     any, on the Company's current reporting and disclosures.

     In June 1998, the FASB issued Statement of Financial Accounting Standards
     No. 133, (SFAS 133), Accounting for Derivative Instruments and Hedging
     Activities, which establishes accounting and reporting standards for
     derivative instruments and hedging activities. It requires that an entity
     recognizes all derivatives as either assets or liabilities in the statement
     of financial position and measures those instruments at fair value.
     Management has not yet evaluated the effects of this change on its
     operations. The Company will adopt SFAS 133 as required for its first
     quarterly filing of fiscal year 2000.



                                       5
<PAGE>   8
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 that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly update these forward-looking statements in response to
events or circumstances occurring after the date hereof.

RESULTS OF OPERATIONS

NET REVENUES

Net revenues for the three months ended June 30, 1998 decreased 19% to $25.2
million from $31.2 million for the same period in fiscal year 1997. For the nine
months ended June 30, 1998, net revenues decreased 13% to $123.3 million from
$141.9 million for the nine months ended June 30, 1997. During this quarter, the
Company reduced channel inventories and recorded a reserve against remaining
channel stock in connection with its preparations for electronic licensing and
distribution. Revenues were also impacted by delayed business in India and Asia.
No one customer accounted for more that 10% of net revenues for the three and
nine month periods ending June 30, 1998 and June 30, 1997.

International revenues continue to be a significant portion of net revenues,
comprising 50% of the revenues for the third fiscal quarter of 1998 and 63% for
the same quarter in fiscal year 1997.

COST AND EXPENSES

Cost of revenues as a percentage of net revenues decreased to 40% in the third
quarter of 1998 from 41% for the same period in 1997. Significantly lower
royalty and technology costs were offset by higher cost of service revenues and
the impact of stable fixed costs over lower unit sales volume to net to the 1%
decline. For each of the nine month periods ended June 30, 1998 and 1997, cost
of revenues represented 29% of net revenues.

Research and development expenses decreased 8% to $10.2 million (40% of net
revenues), for the quarter ended June 30, 1998, compared to $11.1 million (35% 
of net revenues) for the same quarter in 1997. For the nine months ended June 
30, 1998, research and development expenses decreased 11% to $31.3 million 
compared to $35.3 million for the same period in 1997. Both cases represented 
25% of net revenues. The spending decrease is primarily attributable to reduced
staffing levels initiated in conjunction with the restructuring of operations 
in the third quarter of fiscal 1997.

Sales and marketing expenses increased 1% to $20.4 million for the third quarter
of fiscal 1998 from $20.2 million for the comparable period in 1997. For the
nine months ended June 30, 1998, sales and marketing expenses decreased to $59.3
million (48% of net revenues) from $61.7 million (43% of net revenues) for the
same period of the prior fiscal year. This decrease resulted principally from
reduced labor costs as a result of lower headcount.

General and administrative expenses decreased 16% to $4.6 million for the three
months ended June 30, 1998 from $5.5 million for the same period in 1997,
representing 18% of net revenues in both periods. The decrease in absolute
dollars was primarily due to a 1997 one-time charge for settlement of
litigation. For the nine months ended June 30, 1998, general and administrative
expenses decreased 16% to $13.5 million from $16.1 million for the same period
of the prior year, representing 11% of net revenues in both periods. Reduced
headcount, lower legal costs and lower discretionary spending resulted in the
nine months decline.

Non-recurring charges of $8.4 million were incurred in the third quarter of
fiscal 1997 relating to a worldwide restructuring.

Other income consists of net interest income, foreign exchange gain and loss as
well as other miscellaneous income and expense items. For the third quarter of
fiscal 1998, other income was $0.6 million, compared to a loss of $0.3 million
for the same quarter of fiscal 1997. This variance was attributable to decreased
foreign exchange losses and decreased interest expense. For the nine months
ended June 30, 1998, other income was $1.6 million as compared to 



                                       6
<PAGE>   9

$0.6 million for the same period in 1997. This increase was due to a change in
foreign exchange from a loss of $1.0 million in 1997 to a gain of $0.2 million
in 1998.

The provision for income taxes was $1.5 million for the third quarter of fiscal
1998 compared to a benefit of $2.4 million for the same period of the prior
fiscal year. The provision was $2.8 million for the nine months ended June 30,
1998 compared with a benefit of $0.8 million for the corresponding fiscal 1997
period. The tax provision for the current fiscal year resulted from foreign
taxes paid. The tax benefit for the first nine months of the prior fiscal year
reflects a tax benefit on losses offset by a valuation allowance for the
realization of deferred tax assets.

Net loss for the three months ending June 30, 1998 was $21.0 million, compared
to a loss of $24.6 million in the third quarter of fiscal 1997. For the nine
months ended June 30, 1998, net loss was $17.3 million compared to $19.7 million
in the same period in 1997.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Various uncertain trends and factors that are beyond the Company's control may
affect the Company's future operating results. 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 be adversely affected by the actions
of existing or future competitors, including the development of new
technologies, the introduction of new products and the reduction of prices by
such competitors to gain or retain market share. The Company's results of
operations could be adversely affected if it were required to lower its prices
significantly.

The Company participates in a highly dynamic industry and future results could
be subject to significant volatility, particularly on a quarterly basis. The
Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues have been booked and shipped in
the third month of the quarter, with a concentration of these revenues in the
latter half of that third month. In addition, the timing of closing of large
license contracts and the release of new products and product upgrades increase
the risk of quarter to quarter fluctuations and the uncertainty of quarterly
operating results. The Company periodically may adjust the level of inventory
held in its distribution channels, which may also cause quarter-to-quarter
fluctuations. The Company's staffing and operating expense levels are based on
an operating plan and are relatively fixed throughout the quarter. As a result,
if revenues are not realized in the quarter as expected, the Company's expected
operating results could be adversely affected, and such effect could be
substantial and could result in an operating loss.

The Company is in the process of moving to electronic licensing and distribution
of its products. There may be risks associated with this model including but not
limited to the channel partners' willingness to adopt this method of
distribution and the Company's ability to implement it.

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

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

The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowances for stock 



                                       7
<PAGE>   10

balancing and are accompanied by compensating and offsetting orders. Revenue is
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.

As the Company determines that it is more likely than not able to utilize its
tax carryforwards and other deferred tax assets in the future and as new tax
legislation is enacted, the Company's effective tax rate is subject to
significant change. In the event that the Company does not show profitability in
the subsequent fiscal quarters, the Company may be required to write off
portions of the net deferred tax assets previously recognized up to the entire
amount of $8 million.

The Company depends on information received from external sources in evaluating
the inventory levels at distribution partners in the determination of
contingency 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 outside the
United States. Trade sales to international customers represented 50% and 63% of
total revenues for the third quarter of fiscal 1998 and 1997, respectively. A
substantial portion of these international revenues are denominated in the U.K.
pound sterling and operating results can vary with changes in the U.S. dollar
exchange rate for such currency. The Company's revenues can also be affected by
general economic conditions in the United States, Europe and other international
markets. The Company's operating strategy and pricing take into account changes
in exchange rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.

The Company has adopted a strategy of reviewing and forecasting all material
foreign denominated assets and liabilities to cover any potential transactional
gain or loss which may occur should exchange rates change significantly. The
Company may employ hedging instruments to offset uncovered exposure.

The Company amortizes 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 possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the product, or both will be reduced significantly in the near future.
As a result, the carrying amount of the Company's purchased software and
technology licenses may be reduced materially in the near future and, therefore,
could create an adverse impact on the Company's future reported earnings.

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

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

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 that 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.

Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer software will need to be modified prior to the year
2000 in order to remain functional. The Company has assessed 



                                       8
<PAGE>   11

both the readiness of its internal computer systems and the compliance of its
software sold to customers for handling the year 2000 issue. The Company has
designed and tested the most current versions of its products to be year 2000
compliant. However, there can be no assurances that the Company's current
products do not contain undetected errors or defects associated with year 2000
date functions that may result in material costs to the Company. The Company has
also instituted a warranty program to support earlier product versions and
provide corrections where necessary. The Company does not believe that the cost
of such actions will have a material adverse effect on the Company's results of
operations or financial condition. The Company expects to implement successfully
the internal information systems changes necessary to address year 2000 issues
by the end of fiscal 1998, however, there can be no assurances that such changes
will be fully completed in a timely manner. Moreover, year 2000 issues faced by
major distributors, suppliers, customers and financial service organizations
with which the Company interacts, could adversely impact the Company.


LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and short-term investments totaled $50.9 million at June 30,
1998, representing 43% of total assets. At June 30, 1998, the Company had
available lines of credit of approximately $17.0 million under which the Company
had $0.6 million in outstanding borrowings. The Company believes that its
existing cash and short-term investments, funds generated from operations and
available borrowing capabilities will be sufficient to meet its operating
requirements through at least calendar 1998.

The Company's third quarter ended June 30, 1998 Days Sales Outstanding (DSO) was
50.0 days, a 17.8 day decrease from the second quarter ended March 31, 1998. The
decrease was primarily attributable to decreased revenue and lower accounts
receivable due to the inventory reduction.

The Company is engaged in a systematic repurchase of the Company's Common Stock
for the funding of its employee programs. Additionally, the Company is
authorized to buy back up to 6,000,000 additional shares. As of June 30, 1998,
1,443,350 shares had been repurchased and retired under this non-systematic
program.



                                       9
<PAGE>   12
                           PART II. OTHER INFORMATION




ITEM 6. EXHIBITS

(a)  Exhibits

     27.  Financial Data Schedule.


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



                                       10
<PAGE>   13
                                   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 13, 1998         By:       /s/ John W.  Luhtala
                                          --------------------------------------
                                                     John W. Luhtala
                                            Senior Vice President, Operations,
                                               and Chief Financial Officer



                                       By:      /s/ Randall Bresee
                                          --------------------------------------
                                                    Randall Bresee
                                           Vice President, Corporate Controller


                                       11
<PAGE>   14
                               INDEX TO EXHIBITS



Exhibit
Number                             Description
-------                            -----------
27                          Financial Data Schedule