<PAGE>   1
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                                  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 DECEMBER 31, 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
                       December 31, 1998 was 34,373,468.

--------------------------------------------------------------------------------
<PAGE>   2
                         THE SANTA CRUZ OPERATION, INC.

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 MONTHS ENDED DECEMBER 31, 1998 AND 1997.....  1

                b)  CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 
                    AND SEPTEMBER 30, 1997....................................  2

                c)  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE 
                    MONTHS ENDED DECEMBER 31, 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 AND REPORTS ON FORM 8-K..............................  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 amounts per share)

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                DECEMBER 31,
                                                            1998             1997
                                                          --------         --------
                                                                (UNAUDITED)
<S>                                                       <C>              <C>
NET REVENUES                                              $ 52,706         $ 47,497
COST OF REVENUES                                            11,868           12,346
                                                          --------         --------
      GROSS MARGIN                                          40,838           35,151
                                                          --------         --------
OPERATING EXPENSES:
    Research and development                                 9,890           10,759
    Sales and marketing                                     23,057           19,619
    General and administrative                               4,573            4,604
                                                          --------         --------
       Total operating expenses                             37,520           34,982
                                                          --------         --------
        OPERATING INCOME                                     3,318              169
OTHER INCOME (EXPENSE):
    Interest income, net                                       576              475
    Other income (expense), net                                (10)             101
                                                          --------         --------
       Income before income taxes                            3,884              745
    Income taxes                                               780              321
                                                          --------         --------
      NET INCOME                                             3,104              424
OTHER COMPREHENSIVE INCOME, NET OF TAX
    Foreign currency translation adjustment                   (256)             223
                                                          --------         --------
      COMPREHENSIVE INCOME                                $  2,848         $    647
                                                          --------         --------
      NET INCOME PER SHARE:
            Basic                                         $   0.09         $   0.01
            Diluted                                       $   0.09         $   0.01
                                                          --------         --------

      SHARES USED IN INCOME PER SHARE CALCULATION:
            Basic                                           34,757           36,345
            Diluted                                         35,321           37,094
                                                          --------         --------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       1
<PAGE>   4

THE SANTA CRUZ OPERATION, INC.
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,     SEPTEMBER 30,
CONSOLIDATED BALANCE SHEETS                                                1998              1998
                                                                         ---------         ---------
(In thousands, except for share data)                                   (UNAUDITED)
<S>                                                                      <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents                                             $  15,628         $  23,758
   Short-term investments                                                   28,543            27,318
   Receivables, net                                                         33,694            29,027
   Deferred tax assets                                                       3,488             3,487
   Other current assets                                                      6,493             8,052
                                                                         ---------         ---------
      Total current assets                                                  87,846            91,642
                                                                         ---------         ---------
Property and equipment, net                                                 12,585            12,929
Purchased software and technology licenses, net                             11,602            13,013
Other assets                                                                13,694            13,999
                                                                         ---------         ---------
         TOTAL ASSETS                                                    $ 125,727         $ 131,583
                                                                         ---------         ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Trade accounts payable                                                $   7,492         $   7,655
   Royalties payable                                                         5,439             5,062
   Income taxes payable                                                      2,370             1,876
   Accrued expenses and other current liabilities                           27,672            28,590
   Deferred revenues                                                        13,360            16,238
                                                                         ---------         ---------
      Total current liabilities                                             56,333            59,421
                                                                         ---------         ---------
Other long-term liabilities                                                  9,926            12,027
                                                                         ---------         ---------
SHAREHOLDERS' EQUITY
   Common stock, no par value, net, authorized 100,000,000 shares
      Issued and outstanding 34,373,468 and 35,048,916 shares              108,457           111,972
   Accumulated other comprehensive income                                    1,036             1,292
   Accumulated deficit                                                     (50,025)          (53,129)
                                                                         ---------         ---------
      Total shareholders' equity                                            59,468            60,135
                                                                         ---------         ---------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                      $ 125,727         $ 131,583
                                                                         ---------         ---------
</TABLE>



See accompanying notes to consolidated financial statements. 



                                       2
<PAGE>   5

THE SANTA CRUZ OPERATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                            DECEMBER 31,
                                                                        1998             1997
                                                                      --------         --------
                                                                              (UNAUDITED)
<S>                                                                   <C>              <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                           $  3,104         $    424
 Adjustments to reconcile net income to net cash
      provided by operating activities -
       Depreciation and amortization                                     3,339            4,072
       Deferred tax assets                                                  --              (51)
       Exchange gain                                                        33             (315)
       Changes in operating assets and liabilities-
           Receivables                                                  (6,087)           3,478
           Other current assets                                          2,549               18
           Other assets                                                     74              592
           Royalties payable                                               381           (2,550)
           Trade accounts payable                                          (93)             403
           Income taxes payable                                            524              (95)
           Accrued expenses and other current liabilities                 (583)            (683)
           Deferred revenues                                            (2,640)          (1,048)
                                                                      --------         --------
           Net cash provided by operating activities                       601            4,245
                                                                      --------         --------
CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchases of property and equipment                              (1,237)          (1,364)
       Purchases of software and technology licenses                      (163)            (195)
       Sales of short-term investments                                   7,304            6,630
       Purchases of short-term investments                              (8,529)          (5,351)
       Changes in other assets                                              39             (338)
                                                                      --------         --------
           Net cash used for investing activities                       (2,586)            (618)
                                                                      --------         --------
CASH FLOWS FROM FINANCING ACTIVITIES:
       Payments on capital leases                                         (863)            (555)
       Net proceeds from sale of common stock                              134               72
       Repurchases of common stock                                      (3,649)          (1,784)
       Changes in other long-term liabilities                           (1,464)             836
                                                                      --------         --------
           Net cash used for financing activities                       (5,842)          (1,431)
                                                                      --------         --------
 Effects of exchange rate changes on cash and cash equivalents            (303)             210
                                                                      --------         --------
 Change in cash and cash equivalents                                    (8,130)           2,406
 Cash and cash equivalents at beginning of period                       23,758           23,225
                                                                      --------         --------
 Cash and cash equivalents at end of period                           $ 15,628         $ 25,631
                                                                      --------         --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid-
       Income taxes                                                   $    280         $    231
       Interest                                                            128              233
     Non-cash financing and investing activities-
       Assets recorded under capital leases                           $     --         $    852
                                                                      --------         --------
</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 1998 report on Form 10-K should
        be read in conjunction with these Consolidated Financial Statements. The
        consolidated interim results presented are not necessarily indicative of
        results to be expected for a full year. Certain reclassifications have
        been made for consistent presentation. The September 30, 1998 balance
        sheet was derived from audited financial statements, and is included for
        comparative purposes.

        For software arrangements entered into on or after October 1, 1998, the
        Company recognizes revenue in accordance with Statement of Position
        ("SOP") 97-2, "Software Revenue Recognition" as amended by SOP 98-9. SOP
        97-2 supercedes SOP 91-1 "Software Revenue Recognition" and requires
        that if an arrangement to deliver software or a software system does not
        require significant production, modification, or customization of
        software, then revenue should be recognized when persuasive evidence of
        an arrangement exists, delivery has occurred, the vendor's fee is fixed
        or determinable, and collectibility is probable. Accordingly, the
        Company will generally recognize license fee revenue upon product
        shipment provided there are no contingencies and collection is probable.

        Effective October 1, 1998 the Company has adopted the provisions of SFAS
        130 "Reporting Comprehensive Income". Accordingly, the total for
        comprehensive income as defined by SFAS 130 has been reported for the
        three months ended December 31, 1998 and 1997.

2.      EARNINGS PER SHARE (EPS) DISCLOSURES

        The Company calculates earnings per share in accordance with the
        provisions of Statement of Financial Accounting Standards No. 128 (SFAS
        128), Earnings Per Share. SFAS 128 requires the presentation of basic
        and diluted earnings per share. Basic EPS is computed by dividing income
        available to common shareholders by the weighted average number of
        common shares outstanding for the period. Diluted EPS is computed 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. Basic and diluted earnings per share were calculated as
        follows during the three months ended December 31, 1998 and 1997:



                                       4
<PAGE>   7
<TABLE>
<CAPTION>
(In thousands, except per share and option data)             1998              1997
                                                          ----------        ----------
                                                                   (unaudited)
<S>                                                       <C>               <C>
Basic:
       Weighted average shares                                34,757            36,345
       Net income                                         $    3,104        $      424
       Net income per share                               $     0.09        $     0.01

Diluted:
       Weighted average shares                                34,757            36,345
       Common equivalent shares from stock options
         and warrants                                            564               749
                                                          ----------        ----------
       Shares used in per share calculation                   35,321            37,094
                                                          ----------        ----------
       Net income                                         $    3,104        $      424
       Net income per share                               $     0.09        $     0.01

Options outstanding at 12/31/98 and at 12/31/97
       not included in computation of diluted
       EPS because the exercise price was greater
       than the average market price                       7,051,457         2,587,856

Price range of options not used in
       diluted EPS calculation                            $4.44 - 12.00     $5.36 - 12.00
</TABLE>



3. RECENT ACCOUNTING PRONOUNCEMENTS

On December 31, 1998 AcSec issued SOP 98-9 "Modification of SOP 97-2 Software
Revenue Recognition". SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2 to
require revenue recognition using the "residual method" under certain
circumstances. This statement will be effective for transactions entered into
for fiscal years beginning after March 15, 1998 and will be adopted by the
Company in fiscal year 2000. Management does not anticipate that the adoption of
this SOP will have a material impact on the Company's financial position or the
results of its operations.

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.

In June 1997, The Financial Accounting Standards Board 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 became effective for the Company's fiscal year 1999. The Company will
adopt the requirements of and provide all disclosures necessary in the Company's
annual report for fiscal year 1999.

4. SUBSEQUENT EVENT

In January 1995, the Company purchased 10% of a domestic distribution channel
partner's preferred stock in exchange for cash, product and equipment valued at
$1.0 million. In addition, the Company had loaned $1.0 million to this partner.
On February 12, 1999, the Company entered into an agreement to convert the loan
and Series A Preferred stock into a single class of Series D Preferred stock. As
part of the agreement to convert, the channel partner has offered to redeem up
to 18.9% of its total as-converted shares. Per the terms of the redemption
offer, the Company has the option to liquidate its pro-rata portion of the
as-converted shares within six months of the date of the agreement. The
financial implications of the liquidation have not yet been determined pending
calculation of the exact number of shares available for redemption.


                                       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 may contain 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 after the date hereof.

RESULTS OF OPERATIONS

NET REVENUES
Net revenues for the three months ended December 31, 1998 increased 11% to $52.7
million from $47.5 million in the same period in fiscal 1998. The stronger
revenue performance across all geographies is attributable to strong upgrade
business associated with Year 2000 compliance, more contact with customers as a
result of added sales resources and higher project business, particularly in
Asia Pacific and Europe. No one customer accounted for more than 10% of net
revenues in the first quarter ended December 31, 1998 or in the same period in
the prior year.

International revenues continue to represent a significant portion of total net
revenues comprising 58% of the revenues for the first fiscal quarter of 1999,
and 54% for the same quarter in fiscal 1998.

COSTS AND EXPENSES
Cost of revenues as a percentage of net revenues decreased to 23% for the first
quarter of fiscal 1999 from 26% in the same period of 1998, principally due to
reduced royalty rates and reduced technology costs coupled with the impact of
stable fixed costs over higher unit sales volume.

Research and development expenses decreased 8% to $9.9 million in the first
quarter of fiscal 1999 from $10.8 million in the comparable quarter of fiscal
1998, or 19% and 23% of net revenues, respectively. The spending decrease is
primarily attributable to reduced staffing levels and reduced depreciation.

Sales and marketing expenses increased 18% to $23.1 million in the first quarter
of fiscal 1999 from $19.6 million for the comparable quarter of the prior year.
Sales and marketing expenses represented 44% of net revenues in the first
quarter of fiscal 1999 and 41% in 1998. Added staffing drove the increase as
well as sales program costs that vary directly with increased sales.

General and administrative expenses remained constant at $4.6 million for the
first quarter of fiscal 1999 and 1998, representing 9% and 10% of net revenues
for the first quarter of fiscal 1998 and 1997, respectively.

Other income consists of net interest income, foreign exchange gain and loss as
well as other miscellaneous income and expense items. For the first quarter of
fiscal 1999 and fiscal 1998, other income was unchanged at $.6 million.

The provision for income taxes was $.8 million for the first quarter of fiscal
1998 compared to $.3 million for the same period of the prior fiscal year. The
tax provisions for the first quarters of the current and prior fiscal years
resulted from foreign taxes paid and reflect the realization of certain U.S.
deferred tax assets for which a valuation allowance was previously established.

Net income for the first quarter of fiscal 1999 was $3.1 million compared to $.4
million for 1998.


FACTORS THAT MAY AFFECT FUTURE RESULTS

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



                                       6
<PAGE>   9

has become increasingly competitive and, accordingly, the Company's results may
also be adversely affected by the actions of existing or future competitors,
including the development of new technologies, the introduction of new products,
and the reduction of prices by such competitors to gain or retain market share.
The Company's results of operations could be adversely affected if it were
required to lower its prices significantly.

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

The Company 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 balancing and are
accompanied by compensating and offsetting orders. Revenues are net of a
provision for estimated future stock balancing and excess quantities above
levels the Company believes are appropriate in its distribution channels. The
Company monitors the quantity and mix of its product sales.

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

As the Company determines whether its tax carryforwards will more likely than
not be utilized in the future, or 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 sufficient profitability in the future, the Company
may be required to write off portions of the net deferred tax assets previously
recognized up to the entire amount of $7.8 million.

Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 58% and 54% of total revenues for first quarter of fiscal 1999 and
1998, 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



                                       7
<PAGE>   10

Company's results of operations may be significantly affected in the short term
by fluctuations in foreign currency exchange rates.

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

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

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

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

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

YEAR 2000 ISSUES

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

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

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



                                       8
<PAGE>   11

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

o   performed Year 2000 testing of all current SCO products;

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

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

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

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

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

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

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

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


LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and short-term investments totaled $44.2 million at December
31, 1998, representing 35% of total assets. The three month decrease in cash and
short-term investments of $6.9 million was primarily attributable to the higher
level of accounts receivable created by the first quarter sales growth and to
the Company's ongoing stock repurchase program. At December 31, 1998, the
Company had available lines of credit of approximately $0.9 million under which
the Company had $0.7 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 1999.

The Company's first quarter ended December 31, 1998 Days Sales Outstanding (DSO)
was 57.5 days, an increase of 3.8 days from the fourth quarter of fiscal 1998.



                                       9
<PAGE>   12

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 December 31,
1998, 2,268,000 shares had been repurchased and retired under this
non-systematic program.





                           PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

       10.1   ++ Joint Development Agreement between the Santa Cruz Operation,
              Inc. and International Business Machines Corporation dated October
              26, 1998.

       27     Financial Data Schedule.


(b)  Report on Form 8-K

On October 26, 1998, the Company filed a Current Report on Form 8-K to report
that the Company and International Business Machines Corporation (IBM), entered
into a Joint Development Agreement which provides for the licensing to IBM of
certain operating system technology, the licensing from IBM of certain operating
system technology and the cooperation between the parties for the development of
a UNIX operating system designed to operate on the 64-bit Intel architecture.

++     Confidential treatment requested for portions of this document.

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: February 12, 1999             By:     /s/ John W.  Luhtala
                                           -------------------------------------
                                                   John W. Luhtala
                                          Senior Vice President, Operations,
                                             and Chief Financial Officer


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



                                       11
<PAGE>   14
EXHIBIT INDEX

       10.1   ++ Joint Development Agreement between the Santa Cruz Operation,
              Inc. and International Business Machines Corporation dated October
              26, 1998.

       27.    Financial Data Schedule.

++     Confidential treatment requested for portions of this document.



                                       12