<PAGE>
                                  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, 2001


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

         FOR THE TRANSITION PERIOD FROM _____________ TO _______________

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

                         COMMISSION FILE NUMBER 0-21484

                                TARANTELLA, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)


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


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


        Registrant's telephone number, including area code (831) 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
December 31, 2001 was 40,134,488.

<PAGE>

                                TARANTELLA, INC.

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001


                                TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

<TABLE>
<CAPTION>
        ITEM 1.  FINANCIAL STATEMENTS                                                PAGE
                                                                                     ----
<S>            <C>                                                                   <C>
               a)  CONSOLIDATED STATEMENTS OF OPERATIONS
                     FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000.............3

               b)  CONSOLIDATED BALANCE SHEETS,
                     AS OF DECEMBER 31, 2001 AND SEPTEMBER 30, 2001....................4

               c)  CONSOLIDATED STATEMENTS OF CASH FLOWS
                     FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000.............5

               d)  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................6

        ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS................................................12

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


PART II.  OTHER INFORMATION

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

                                       2
<PAGE>

                          Part I. Financial Information
                          Item I. Financial Statements

TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                           Three Months Ended
                                                                              December 31,
                                                                        -------------------------
                                                                          2001            2000
                                                                        --------         --------
                                                                               (Unaudited)
<S>                                                                     <C>              <C>
Net revenues:
    Licenses                                                            $  2,454         $ 22,861
    Services                                                                 371            3,594
                                                                        --------         --------
       Total net revenues                                                  2,825           26,455
                                                                        --------         --------
Cost of revenues:
    Licenses                                                                  68            3,479
    Services                                                                 250            3,602
                                                                        --------         --------
       Total cost of revenues                                                318            7,081
                                                                        --------         --------

       Gross margin                                                        2,507           19,374
                                                                        --------         --------
Operating expenses:
    Research and development                                               1,746            6,432
    Selling, general and administrative                                    6,393           20,598
    Restructuring charge                                                   1,718               --
                                                                        --------         --------
       Total operating expenses                                            9,857           27,030
                                                                        --------         --------

       Operating loss                                                     (7,350)          (7,656)
                                                                        --------         --------
Other income (expense):
    Equity losses in Caldera                                              (4,010)              --
    Interest income, net                                                     233              406
    Other income (expense), net                                             (533)             586
                                                                        --------         --------
       Total other income (expense)                                       (4,310)             992
                                                                        --------         --------

       Loss before income taxes                                          (11,660)          (6,664)
                                                                        --------         --------
    Provision for income taxes                                                --              616
                                                                        --------         --------
       Net loss                                                          (11,660)          (7,280)

Other comprehensive income (loss):

         Unrealized gain (loss) on available for sale securities              25           (3,876)
         Foreign currency translation adjustment                             (26)             (53)
                                                                        --------         --------
    Total other comprehensive loss                                            (1)          (3,929)

                                                                        --------         --------
    Comprehensive loss                                                  $(11,661)        $(11,209)
                                                                        ========         ========

       Loss per share:
          Basic and diluted                                             $  (0.29)        $  (0.18)
                                                                        ========         ========
       Shares used in earnings (loss) per share calculation:

          Basic and diluted                                               40,121           39,443
                                                                        ========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

TARANTELLA, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            December 31,     September 30,
                                                                               2001              2001
(In thousands)
                                                                           -----------       -------------
                                                                           (Unaudited)
<S>                                                                        <C>               <C>
ASSETS
Current assets:
     Cash and cash equivalents                                             $   8,941         $  12,100
     Short-term investments                                                       --             2,000
     Receivables, net of allowance for doubtful accounts
        of $2.7 million and $2.3 million, respectively                         2,436             4,098
     Available for sale equity securities                                        126               101
     Note receivable from Caldera                                              3,734             1,846
     Other receivables                                                         1,275             1,658
     Prepaids and other current assets                                           511             1,163
                                                                           ---------         ---------
        Total current assets                                                  17,023            22,966
                                                                           ---------         ---------
Property and equipment, net                                                    1,763             2,232
Long-term portion of note receivable from Caldera                              3,550             5,260
Equity investment in Caldera                                                      --             4,010
Other assets                                                                   1,087             1,123
                                                                           ---------         ---------
           Total assets                                                    $  23,423         $  35,591
                                                                           =========         =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:

     Trade accounts payable                                                $     539         $     802
     Royalties payable                                                           454               733
     Income taxes payable                                                        298               374
     Accrued restructuring charges                                             1,013               344
     Accrued expenses and other current liabilities                            8,187             9,506
     Deferred revenues                                                         1,299             1,185
                                                                           ---------         ---------
        Total current liabilities                                             11,790            12,944
                                                                           ---------         ---------
Long-term lease obligations                                                       --                 2
Long-term deferred revenues                                                       68                91
Other long-term liabilities                                                    1,835             1,760
                                                                           ---------         ---------
        Total long-term liabilities                                            1,903             1,853
                                                                           ---------         ---------
Commitments and contingencies
Shareholders' equity:

     Preferred stock, authorized 20,000 shares;
        No shares issued and outstanding
          at December 31, 2001 and September 30, 2001, respectively               --                --
     Common stock, no par value, authorized 100,000 shares;
        Issued and outstanding 40,134 and 40,117 shares
          at December 31, 2001 and September 30, 2001, respectively          120,516           119,919
     Accumulated other comprehensive income                                     (167)             (166)
     Accumulated deficit                                                    (110,619)          (98,959)
                                                                           ---------         ---------
        Total shareholders' equity                                             9,730            20,794
                                                                           ---------         ---------
           Total liabilities and shareholders' equity                      $  23,423         $  35,591
                                                                           =========         =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     Three Months Ended
                                                                                         December 31,
                                                                                  -------------------------
(In thousands)                                                                      2001             2000
                                                                                  --------         --------
<S>                                                                               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                 $(11,660)        $ (7,280)
Adjustments to reconcile net income (loss) to net cash
  provided by (used for) operating activities -
      Depreciation and amortization                                                    237            2,432
      Foreign currency exchange (gain) loss                                             (6)             (41)
      Gain on sale of marketable security                                             (267)            (617)
      Loss on disposal of property and equipment                                       217               --
      Equity losses in Caldera                                                       4,010               --
      Impairment of investments                                                        350               --
      Warrant and stock compensation expense                                           912               --
      Changes in operating assets and liabilities -
           Receivables                                                               1,288            2,112
           Other current assets                                                        903           (1,695)
           Other assets                                                               (117)              75
           Trade accounts payable                                                     (263)          (1,317)
           Royalties payable                                                          (279)          (2,163)
           Income taxes payable                                                        (76)             239
           Accrued restructuring expenses                                              669           (3,061)
           Accrued expenses and other current liabilities                           (1,319)              12
           Deferred revenues                                                            91             (900)
           Other long-term liabilities                                                  --               (4)
                                                                                  --------         --------
               Net cash provided by (used for) operating activities                 (5,310)         (12,208)
                                                                                  --------         --------
CASH FLOWS FROM INVESTING ACTIVITIES:

      Purchases of short-term investments                                               --              (33)
      Sales of short-term investments and marketable securities                      2,157            2,500
      Purchases of property and equipment                                               (5)            (191)
      Purchases of software and technology licenses                                     --             (198)
      Changes in other assets                                                           --             (145)
                                                                                  --------         --------
          Net cash provided by (used for) investing activities                       2,152            1,933
                                                                                  --------         --------
CASH FLOWS FROM FINANCING ACTIVITIES:

      Payments on capital lease obligations                                             (2)            (585)
      Net proceeds from issuance of common stock                                         2                7
                                                                                  --------         --------
          Net cash provided by (used for) financing activities                          --             (578)
                                                                                  --------         --------
Effects of exchange rate changes on cash and cash equivalents                           (1)             (17)
                                                                                  --------         --------
Change in cash and cash equivalents                                                 (3,159)         (10,870)
Cash and cash equivalents at beginning of period                                    12,100           20,879
                                                                                  --------         --------
Cash and cash equivalents at end of period                                        $  8,941         $ 10,009
                                                                                  ========         ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Cash paid -
            Income taxes                                                          $     71         $    383
            Interest                                                                     8               55
      Non-cash financing and investing activities -
            Unrealized gain (loss) on available-for-sale equity securities              25           (3,876)
            Product sale exchanged for equity investment                          $    375         $     --
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

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 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 three-month period ended December 31, 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, 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 will be received in quarterly installments of $2 million beginning
the fifth quarter after the combination is completed. In addition, if the
OpenServer line of business of the server and professional services groups
generates revenues in excess of specified thresholds during the three-year
period following the completion of the combination the Company will have
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. The
Company accounts for its investment in Caldera International using the equity
method of accounting.

For 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. In the
first fiscal quarter of 2002,the Company sold 320,000 shares of Caldera
International stock, recognized proceeds of $266,860, and received cash of
$157,273. Subsequently, in the second fiscal quarter of 2002, the Company sold
564,066 shares of Caldera International stock and has received proceeds of
$527,994. Accordingly, the Company now owns 15,157,600 shares of Caldera
International common stock. Caldera's stockholders' equity at it's year ended
October 31, 2001 was $34.6 million of which Tarantella's ownership share,
represented approximately 27.9%, or a book value of $9.5 million in Caldera. If
Caldera's operations decline to reduce the stockholders' equity to a deficit
balance, Tarantella may be required to write down the value of any uncollected
note receivable from Caldera, which was valued at $7.3 million as of December
31, 2001.

3.   ACCRUED RESTRUCTURING CHARGE

FISCAL 2002

During the first quarter of fiscal 2002, the Company announced and completed a
restructuring plan, which resulted in a charge of $1.7 million. The Company has
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.

                                       6

<PAGE>

A severance charge of $0.9 million includes 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
December 31, 2001, 51 positions had been eliminated.

A facilities charge of $0.7 million relates to space the Company has 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.

The non-cash charge of $44,571 relates to fixed asset disposals for assets
retired in Japan as this subsidiary will be closed.

The Company expects to complete substantially all of the cost reduction actions
initiated in the first quarter of fiscal year 2002 and in the 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.

           FISCAL 2002 FIRST QUARTER RESTRUCTURING ACCRUAL

<TABLE>
<CAPTION>
                                          Reduction                     Disposal of
(In Thousands)                            in Force      Facilities      Fixed Assets       Total
                                          ---------     ----------      ------------      -------
<S>                                       <C>           <C>             <C>               <C>
Restructuring charge accrued               $   856         $   736         $    44        $ 1,636
Payments/utilization of the accrual           (772)            (31)             --           (803)
                                           -------         -------         -------        -------
Accrual at December 31, 2001                    84             705              44            833
                                           -------         -------         -------        -------
</TABLE>


FISCAL 2001

During the second quarter of fiscal 2001, the Company announced and completed 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 is related to the
Tarantella division and included a reduction in personnel of 28 employees and a
reserve for unused facilities. The entire $1.6 million relates to cash
expenditures.

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 have been eliminated and there are no remaining cash
expenditures. The Company anticipates 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 the
estimated payments on the lease for an additional 12 months.

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

                                       7
<PAGE>
                FISCAL 2001 SECOND QUARTER RESTRUCTURING ACCRUAL

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

Payments/utilization of the accrual           (484)             --            (484)
                                           -------         -------         -------
Accruals at June 30, 2001                      130              64             194

Payments/utilization of the accrual            (91)            (24)           (115)
Provision Adjustment                           (39)             --             (39)
                                           -------         -------         -------
Accruals at September 30, 2001                  --              40              40

Payments/utilization of the accrual             --             (40)            (40)
Provision Adjustment                            --              81              81
                                           -------         -------         -------
Accruals at December 31, 2001              $    --         $    81         $    81
                                           -------         -------         -------
</TABLE>


During the fourth quarter of fiscal 2001, the Company announced and completed 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. The entire $0.5
million relates to cash expenditures.

The severance charges of $0.4 million include the elimination of 4 positions in
the United States and 6 positions in the United Kingdom. The reductions in force
affect the sales, marketing and general and administrative functions of the
Company. As of September 30, 2001, all 10 positions were eliminated and all cash
payments had been made. The Company in still in the process of closing the
offices in Singapore and Australia so there is a remaining reserve of $99,000.

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

<TABLE>
<CAPTION>
                                          Reduction
(In Thousands)                            in Force    Facilities       Total
                                          ---------   ----------      -------
<S>                                       <C>         <C>             <C>
Restructuring charge accrued               $ 402         $ 102         $ 504
Payments/utilization of the accrual         (200)           --          (200)
                                           -----         -----         -----
Accrual at September 30, 2001                202           102           304

Payments/utilization of the accrual         (202)           (3)         (205)
                                           -----         -----         -----
Accrual at December 31, 2001               $  --         $  99         $  99
                                           -----         -----         -----
</TABLE>


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

                                       8
<PAGE>

Division, and the Professional Services Division. Accordingly, the Company
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.

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                              December 31,
                                                      --------------------------
                                                        2001               2000
                                                      -------            -------
                                                            (In thousands)
<S>                                                   <C>                <C>
Net revenues:
      United States ......................            $ 1,346            $12,270
      Canada and Latin America ...........                223              2,047
      EMEIA (1) ..........................                960              9,780
      Asia Pacific .......................                243              2,091
      Corporate adjustments .............                  53                267
                                                      -------            -------
           Total net revenues ............            $ 2,825            $26,455
                                                      =======            =======
</TABLE>

<TABLE>
<CAPTION>
                                                     December 31,      September 30,
                                                         2001              2001
                                                     ------------      ------------
                                                             (In thousands)
<S>                                                  <C>               <C>
Long-lived assets:
      United States ........................           $ 5,711           $11,853
      Canada and Latin America .............                13                13
      EMEIA (1) ............................               591               663
      Asia Pacific .........................                85                97
      Corporate adjustments ................                --                --
                                                       -------           -------
           Total long-lived assets .........           $ 6,400           $12,626
                                                       =======           =======
</TABLE>

(1)  Europe, Middle East, India and Africa

5.   INVESTMENTS

AVAILABLE FOR SALE EQUITY SECURITIES. At December 31, 2001, the Company held
505,767 shares of Rainmaker's stock. The Company accounts for these shares as
available for sale securities and records them at fair market value, based on
quoted market prices with any unrealized gains or losses included as part of
accumulated other comprehensive income.

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

<TABLE>
<CAPTION>
                                                                       Unrealized
                                        FMV      Cost      Impairment     Loss
                                       ----     ------     ----------  ----------
<S>                                    <C>      <C>        <C>         <C>
Rainmaker                               126        171           --       (45)
Ebiz                                     --      3,139       (3,319)       --
                                       ----     ------      -------      ----
Total Stock                             126      3,310        3,139       (45)
                                       ----     ------      -------      ----
                                       ----     ------      -------      ----
Ebiz warrants                            --        176         (176)       --
                                       ----     ------      -------      ----
Total Available for Sale Securities    $126     $3,486      $(3,315)     $(45)
                                       ====     ======      =======      ====
</TABLE>

                                       9
<PAGE>

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

Ebiz's common stock is traded OTC under the symbol "EBIZ". The Company has a
right to appoint one member to the board of directors, which has a total of 4
members. During the quarter ended June 30, 2001, the Company determined the
decline in the fair value of its investment was other than temporary and thus
required a permanent write-down of the stock held. In addition, Ebiz filed for
Chapter 11 bankruptcy and thus the Company determined the investment held was
impaired and no portion of the asset was recoverable.

6.   EARNINGS PER SHARE (EPS) DISCLOSURES

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

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                            December 31,
                                                                                     ---------------------------
(In thousands, except per share data)                                                   2001             2000
                                                                                     ---------         ---------
<S>                                                                                  <C>               <C>
Basic and diluted:
      Weighted average shares                                                           40,121           39,443
                                                                                      --------         --------
      Net income (loss)                                                               $(11,660)        $ (7,280)
                                                                                      ========         ========
      Earnings (loss) per share                                                       $  (0.29)        $  (0.18)
                                                                                      ========         ========

Options and warrants outstanding at 12/31/01 and at 12/31/00 not included in
      computation of diluted EPS because the exercise price was greater than
      the average market price                                                          10,244           11,958

Options outstanding at 12/31/01 and at 12/31/00 not included in computation of
      diluted EPS because their inclusion would have an anti-dilutive effect             4,318              797
</TABLE>


7.   RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, at
the beginning of its fiscal year 2001. The standard requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. During the
year, the Company maintained certain derivatives related to warrants held by the
Company in Ebiz, Inc., and warrants issued by the Company to underwriters of a
private placement completed in the prior year. The fair value of the warrants
were recorded at October 1, 2000 with adjustments recorded to income based on
the change in fair value as determined at the end of each period.

In June 2001, the Financial Accounting Standards Board ("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 beginning July
1, 2001. The adoption of this statement is 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. 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

                                       10
<PAGE>

provisions of SFAS No. 142. SFAS No. 142 will be effective for the Company's
fiscal year 2003. The adoption of this statement is not expected to have a
material impact on the Company's financial position or results of operations.

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 September of 2000, SFAS No. 140 was issued replacing SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on a financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. In addition, this statement requires
certain disclosures regarding securitization of financial assets. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The adoption of this statement
did not have a material effect on the Company's consolidated financial
statements.

                                       11
<PAGE>

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
From 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.

RESULTS OF OPERATIONS

NET REVENUES

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

Subsequent to the sale of the Server Software and Professional Services
divisions to Caldera International, meaningful analysis should include a
comparison of Tarantella division revenue. Tarantella division net revenues for
the three months ended December 31, 2001 were $2.8 million compared to $3.2
million for the same period in the prior year, a decline of 11%. Tarantella
division license revenues of $2.4 million for the three months ended December
31, 2001 declined $0.4 million or 16% from the same period in the prior year.
Tarantella division service revenues of $0.4 million for the three months ended
December 31, 2001 increased $0.1 million or 48% from the same period in the
prior year. The decrease was primarily related to a general reduction in
information technology ("IT") investments by companies for software and services
initiatives. Net revenues for the three months ended December 31, 2001 decreased
89% to $2.8 million from $26.5 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. The
Company's revenues were also impacted by the general reduction in IT investments
by companies for software and service initiatives. One customer accounted for
21% of the Company's net revenues during the quarter ended December 31,
2001 License revenues for the three months ended December 31, 2001 were $2.4
million compared to $22.9 million in the same quarter of fiscal 2001. This
decline is attributed to fewer large project deals and other market factors and
the sale of the Server Software division to Caldera International.

Service revenues decreased to $0.4 million for the three months ended December
31, 2001, from $3.6 million in the same period in 2001, a decline of 90%.
Service revenue was 13% of the total revenue of the first fiscal quarter of
2002, compared to 14% for the same period in the prior year. The decline in
service revenues was primarily in the support area and is the result of the sale
of the Server Software and Professional Services divisions to Caldera
International.

International revenues continue to represent a significant portion of total net
revenues comprising 50% of the revenues for the first fiscal quarter of 2002 and
54% for the same period in the prior year.

COSTS AND EXPENSES

Cost of license revenues for the three months ended December 31, 2001 decreased
by 98% to $68,000 compared to $3.5 million in the same period of fiscal 2001.
The declining cost of revenues is primarily due to the fact that revenues were
significantly lower due to the sale of the Server Software division to Caldera
International.

                                       12
<PAGE>

Cost of service revenues for the three months ended December 31, 2001 decreased
by 93% to $250,000 compared to $3.6 million for 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 11% in the
first quarter of fiscal 2002 from 27% for the same period in fiscal 2001. Cost
of revenues were lower as a percentage of net revenue because the Company now
sells only Tarantella products which have lower royalty expenses than the
server products. Also, there was a reduction in technology amortization costs
for Tarantella products because some acquired technology became fully amortized
during fiscal 2001.

Research and development expenses decreased 73% to $1.7 million in the first
quarter of fiscal 2002 from $6.4 million in the comparable quarter of fiscal
2001, and as a percentage of net revenues were 62% and 24% , 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 reduction
in expenses related to headcount was partially offset by a $0.2 million
write-off of purchased technology in the first quarter of fiscal 2002.

Selling, general and administrative expenses decreased 69% to $6.4 million in
the first quarter of fiscal 2002 from $20.6 million for the comparable quarter
of the prior year. Selling, general and administrative expenses as a percentage
of net revenues were 226% in the first quarter of fiscal 2002 and 78% in the
same period in fiscal 2001. The significant increase as a percentage of net
revenues is primarily related to the previously mentioned decrease in revenue.
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. This decrease in expenses was partially offset by a $0.5
million stock compensation charge in the first quarter of fiscal 2002 as a
result of discounted stock options issued to selected employees who took
reductions to their annual compensation.

Restructuring charges for the first quarter of fiscal 2002 were $1.7 million.
There were no restructuring charges in the first quarter of fiscal 2001. During
the first quarter of 2002, the Company announced and completed 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 Companies corporate
headquarters, and the costs associated with closing several foreign offices.

Other income (expense) consists of net interest income, foreign exchange gain
and loss, and realized gain and loss on investments, as well as other
miscellaneous income and expense items. Net interest income was $0.2 million for
the first quarter of fiscal 2002 and $0.4 million for the same period in fiscal
2001. Other income (expense) was ($0.5) million in the first quarter in fiscal
2002, compared to $0.6 million for the same period of fiscal 2001. In the first
quarter of fiscal 2002 there was an investment write off of $0.4 million due to
the Company's assessment that the investment was more than temporarily impaired,
and a charge of $0.2 million for warrant amortization and a $4.0 million charge
of equity losses for our ownership in Caldera International. During the first
quarter of fiscal 2001 income of $0.4 million was recognized to record the fair
value of a warrant which was classified as a derivative under FAS No. 133.

The provision for income taxes was zero for the first quarter of fiscal 2002
compared to $0.6 million for the same period in fiscal year 2001. The tax
provision for the first quarter of fiscal 2001 reflects foreign taxes payable.

Net loss for the first quarter of fiscal 2002 was $11.7 million compared to net
loss of $7.3 million for 2001. The increase in net loss is due to the inclusion
of $4.0 million of equity losses for our ownership of Caldera International.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $8.9 million at December
31, 2001, representing 38% of total assets. The three-month decrease in cash and
short-term investments of $3.2 million was primarily attributable to the
decrease in revenue resulting in lower cash collections. The Company's operating
activities

                                       13
<PAGE>

used cash of $5.2 million for the first three months of fiscal 2002, compared to
$12.2 million used for operating activities for the same period in fiscal 2001.
Cash provided by investing activities during the three-month period was $2.1
million in fiscal 2002 compared to cash provided from investing of $1.9 million
for the same period in fiscal 2001. There was no cash used for financing
activities for the first three months of fiscal 2002 compared with $0.6 million
used for the same period in fiscal 2001.

The Company's first quarter ended December 31, 2001 Days Sales Outstanding (DSO)
remained relatively flat at 77.2 days, an increase of 2 days from the same
period of fiscal 2001.

The Company incurred losses from operations of approximately $7.4 million during
the first quarter of fiscal 2002 and $7.7 million during the same quarter of
fiscal 2001. The Company has an accumulated deficit of $110.6 million at
December 31, 2001.

In the first fiscal quarter of 2002, the Company sold 320,000 shares of Caldera
International stock, and recognized proceeds of $266,860, of which it received
cash of $157,273. Subsequently, in the second fiscal quarter of 2002, the
Company sold 564,066 shares of Caldera International stock and received proceeds
of $527,994. Accordingly, the Company now owns 15,157,600 shares of Caldera
International common stock, Caldera's stockholders' equity at it's year ended
October 31, 2001 was $34.6 million of which Tarantella's ownership share,
represented approximately 27.9%, or a book value of $9.5 million in Caldera. If
Caldera's operations decline to reduce the stockholders' equity to a deficit
balance, Tarantella may be required to write down the value of any uncollected
note receivable from Caldera, which was valued at $7.3 million as of December
31, 2001.

The Company believes that, based on its current plans, its existing cash and
cash equivalents and funds generated from operations will be sufficient to meet
its operating requirements for the next twelve months. Additional financing may
be required thereafter, however, adequate funds may not be available when needed
or may not be available on favorable terms, which could have a negative effect
on its business and results of operations.

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

-    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.

                                       14
<PAGE>

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 the business. The terrorist attacks of September 11, 2001,
the subsequent military response by the United States and future events
occurring in response to, or in connection with the attacks has negatively
impacted the economy in general. In particular, the negative impacts of these
events have affected 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, 2002. 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.

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.

                                       15
<PAGE>

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, 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, services costs and production 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 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 INVENTORY AND RESERVES

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. 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

                                       16
<PAGE>

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 DEPENDS UPON LICENSING ADEQUATE TECHNOLOGY FROM THIRD PARTIES

The Company depends on the availability of technology from third parties. Most
of the software licensed by the Company is written to comply with industry
standards and because the licensor is seeking to broaden its market it is made
widely available on a non-exclusive basis by the licensor. As a result, this
software is also readily available to competitors of the Company which want to
incorporate such software into their products. The loss of any significant
third-party license or the inability to license additional technology as
required, could have a materially adverse effect on the Company's results of
operations until such time as the Company could replace such technology.

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 50%, 52%
and 54% of total revenues for 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. 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 MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS
INVOLVE NUMEROUS RISKS

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

                                       17
<PAGE>

acquired companies, and the difficulty of presenting a unified corporate image.
The Company's operations and financial results could be significantly affected
by such an acquisition.

THE COMPANY IS EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF ITS PORTFOLIO OF
INVESTMENTS

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

THE COMPANY'S 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 MAY BE VOLATILE

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. 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.

IF THE COMPANY FAILS TO BECOME EURO-COMPLIANT IN A TIMELY MANNER, IT MAY RESULT
IN AN ADVERSE IMPACT ON THE COMPANY'S RESULTS OF OPERATIONS OR FINANCIAL
POSITION

The Single European Currency (Euro) was introduced on January 1, 1999 with
complete transition to this new currency required by January 2002. We have made
changes to our internal systems in order to transition to the Euro. The main
change that we made was changing the operating currency of the European
subsidiaries that are affected by the Euro from the national currency to the
Euro.

We further expect that use of the Euro may affect our foreign exchange
activities and may result in increased fluctuations in foreign currency results.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, at
the beginning of its fiscal year 2001. The standard requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that

                                       18
<PAGE>

are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. During the
year, the Company maintained certain derivatives related to warrants held by the
Company in Ebiz, Inc., and warrants issued by the Company to underwriters of a
private placement completed in the prior year. The fair value of the warrants
were recorded at October 1, 2000 with adjustments recorded to income based on
the change in fair value as determined at the end of each period.

In June 2001, the Financial Accounting Standards Board ("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 beginning July
1, 2001. The adoption of this statement is 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. 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. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.

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 September of 2000, SFAS No. 140 was issued replacing SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on a financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. In addition, this statement requires
certain disclosures regarding securitization of financial assets. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The adoption of this statement
did not have a material effect on the Company's consolidated financial
statements.

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.

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<PAGE>

                           PART II. OTHER INFORMATION

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

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<PAGE>

                                   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: February 14, 2002                   By: /s/ Randall Bresee
                                        ----------------------------------------

                                                   Randall Bresee

                                               Senior Vice President,
                                              Chief Financial Officer


                                                 By: /s/ Jenny Twaddle
                                        ----------------------------------------


                                                     Jenny Twaddle
                                          Vice President, Corporate Controller

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