POS AM

As filed with the Securities and Exchange Commission on December 30, 2004

Registration No. 333-115812

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

TARANTELLA, INC.

(Exact name of Registrant as specified in its charter)

California	3577	94-2549086
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

Tarantella, Inc.

425 Encinal Street

Santa Cruz, CA 95060

(831) 427-7222

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

John M. Greeley

Chief Financial Officer

Tarantella, Inc.

425 Encinal Street

Santa Cruz, California 95060

(831) 427-7222

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Legal Department	Michael J. Danaher
Tarantella, Inc.	Wilson Sonsini Goodrich & Rosati
425 Encinal Street	Professional Corporation
Santa Cruz, California 95060	650 Page Mill Road
(831) 427-7222	Palo Alto, California 94304-1050
	(650) 493-9300

Approximate date of commencement of proposed sale to the public:  From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

Calculation of Registration Fee

Title of Each Class of Securities to be Registered	Amount To be Registered	Proposed Maximum Offering Price Per Share(1)	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee(2)
Common Stock, no par value (including Preferred Stock Purchase Rights (3))(4)	24,085,891 shares	$1.63	$39,260,002	$4,974.24

(1) Estimated solely for the purpose of computing the amount of the registration fee, in accordance with to Rule 457(c) promulgated under the Securities Act of 1933 based on the last sale reported on May 21, 2004.

(2) A filing fee of $4,999.68 was previously paid.

(3) Rights trade together with the Common Stock. The value attributable to the Rights, if any, is reflected in the market price of the Common Stock.

(4) Pursuant to Rule 416 of the Securities Act of 1933, as amended, also includes such indeterminate number of shares as may become issuable upon stock splits, stock dividends and other similar events.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell securities, nor is it a solicitation of offers to buy these securities, in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED December 30, 2004

PROSPECTUS

24,085,891 Shares

Common Stock

This prospectus relates to up to 24,085,891 shares of our common stock that may be disposed of from time to time by the shareholders listed in “Selling Shareholders” on page 51 of this prospectus. We have issued these shares or rights to purchase these shares to the selling shareholders in several transactions described below:

• Up to 80,000 shares of our common stock issuable upon exercise of warrants issued to certain individuals in connection with a financial advisory and investment banking agreement with EarlyBirdCapital, Inc. entered into in April 2002.

• 1,468,845 shares of our common stock issued in connection with our acquisition in June 2003 of New Moon Systems, Inc.

• 1,950,000 shares of our common stock, and up to an additional 1,950,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in September 2003.

• 570,250 shares of our common stock issued in December 2003 to five of our executive officers and directors as part of their calendar year 2004 compensation.

• 2,750,000 shares of our common stock, and up to an additional 550,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in December 2003.

• 90,000 shares of our common stock issued to InteSec Group LLC in January 2004 as compensation for performance as an independent contractor.

• 11,678,580 shares of our common stock, and up to an additional 2,658,216 shares of our common stock issuable upon exercise of warrants issued to certain investors and placement agents in a private placement transaction in February 2004.

• 140,000 shares of our common stock issued in March 2004 to Olympus Securities, LLC as payment for a finders fee for the December 2003 private placement.

• 100,000 shares of our common stock, and up to 100,000 shares of our common stock issuable upon exercise of warrants issued in connection with our March 2004 acquisition of Caststream, Inc.

In all cases, the selling shareholders will receive all of the net proceeds from the disposition of the shares under this prospectus and will pay all brokerage fees and selling commissions, if any, applicable to the sale of the shares. We will not receive any proceeds from the disposition of shares by the selling shareholders.

Our common stock is listed on the Over-the-Counter Bulletin Board and is traded under the symbol TTLA.OB.” On December 16, 2004, the closing sales price of our common stock as reported by the Bulletin Board was $1.40 per share.

You should consider carefully the risk factors beginning on page 4 of this prospectus before purchasing any of our common stock offered under this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2004.

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	4
Special Note Regarding Forward-Looking Statements	11
Use of Proceeds	12
Dividend Policy	12
Price Range of Our Common Stock	12
Capitalization	13
Selected Consolidated Financial Data	14
Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Business	25
Management	37
Certain Relationships and Related Transactions	46
Selling Shareholders	50
Principal Shareholders	59
Description of Capital Stock	61
Plan of Distribution	64
Shares Eligible for Future Sale	67
Legal Matters	68
Experts	68
Where You Can Find Additional Information	68
Index to Consolidated Financial Statements	F-1

You should rely on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy shares in any jurisdiction where such offer or any sales of shares would be unlawful. The information in this prospectus is complete and accurate only as of the date of the front cover regardless of the time of delivery of this prospectus or any sale of shares. In this prospectus, the “Company,” “Tarantella,” “we,” “us,” and “our” refer to Tarantella, Inc., a California corporation.

PROSPECTUS SUMMARY

In this prospectus, the “Company,” “Tarantella,” “we,” “us,” and “our” refer to Tarantella, Inc., a California corporation.

This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors.”

Tarantella, Inc.

Tarantella is a leading provider of secure application access software to customers’ sites worldwide. Tarantella enables organizations to access and manage information, data and applications across all platforms, networks and devices. Tarantella bridges the gap between vendors, ensuring that customers have complete access to business-critical information. Using Tarantella’s software, customers realize the benefits of secure corporate data, maximizing return on existing information technology (“IT”) assets and improved productivity. We market our products through the internet, key industry partnerships, and a worldwide network of consultants and resellers.

We are headquartered in Santa Cruz, California, and operate development centers in the United States, the United Kingdom and India, and have sales presence in the U.S., U.K., Germany, the Netherlands, Canada, Brazil, France, Spain and Italy. We maintain exclusive distribution relationships in Japan as well as distribution and agent relationships in China, and Northern and Southeast Asia. In total, our products are available through resellers in more than 30 countries.

Our flagship product, Tarantella Secure Global Desktop^™ Enterprise Edition, a UNIX/Linux-based secure application access suite, is installed in corporations and governmental agencies around the world. We introduced Secure Global Desktop Enterprise Edition to the marketplace in 2001 as our Tarantella Enterprise 3 product.

We also offer a Windows-based application access product, Tarantella Secure Global Desktop^™ Terminal Services Edition. Terminal Services Edition is positioned as a companion to Microsoft Windows Terminal Services, and is intended for use by small to mid-sized business customers and departmental deployments with Windows-only infrastructure. Terminal Services Edition is distributed via an internet webstore as well as through our channel partners. In May 2004, we began a program offering a Terminal Services Edition user license at no fee, provided the licensee acquires two years of maintenance per user with the license. Terminal Services Edition was previously known as New Moon Canaveral iQ^™ from Tarantella ^®. This product has been added to our portfolio of product offerings following our acquisition of New Moon Systems, Inc. in June 2003.

In March 2004, we acquired Caststream, Inc. and added its cast:stream^™ product to our list of offerings. cast:stream^™ is an integrated suite of applications that enable live and on-demand presentations including video and audio synchronized graphics and animation that enhances interactivity.

We also continue to offer our earlier client integration products that were introduced in the 1990s. These offerings are part of our Vision2K^™ suite of products.

Our strategy is to focus on the application access needs of Forbes Magazine Global 2000 firms and mobile service providers, and deliver purpose-built, non-invasive, non-disruptive infrastructure software solutions to meet the needs of new classes of users and applications, including new wireless applications, home information

1

service providers and web services applications. From a sales perspective, we approach our target market through our worldwide, integrated sales process, including direct sales, channel partners and strategic alliances.

The scalability and flexibility of Secure Global Desktop Enterprise Edition in heterogeneous and demanding system architectures differentiates it from competing products. Secure Global Desktop Enterprise Edition software installs on all major UNIX and Linux platforms and delivers Windows, UNIX, Linux, Mainframe and web-based applications. Our products can also be used in place of, or to augment, Virtual Private Network (“VPN”) or extranet products. Our Secure Global Desktop Terminal Services Edition product was designed expressly as a companion to Microsoft Windows Terminal Services and is designed to satisfy the needs of small to medium-sized enterprises and departments of larger enterprises who find products such as Citrix’s Metaframe XP to be too complex and too expensive to implement. Secure Global Desktop Terminal Services Edition seamlessly installs in an organization’s existing Microsoft infrastructure to host Windows-based client software on centralized Microsoft Windows servers.

We were incorporated in California in 1979 under the name The Santa Cruz Operation, Inc. On May 4, 2001, we completed the sale of our Server Software and Professional Services Divisions to Caldera Systems, Inc., retaining the Tarantella Division. Upon the completion of the sale, we changed our corporate name to Tarantella, Inc.

Our principal executive offices are located at 425 Encinal Street, Santa Cruz, California 95060. Our telephone number is (831) 427-7222. Our internet addresses are http://www.tarantella.com and http://www.caststream.com. Information contained on our websites or that is accessible through our websites should not be considered to be part of this prospectus.

Tarantella, Tarantella Enterprise 3, Tarantella Secure Global Desktop, Canaveral iQ, New Moon Systems, Caststream, cast:stream, Vision 2K, PartnerConnect and the Tarantella logo are trademarks or registered trademarks of Tarantella in the USA and other countries. Other trademarks and trade names appearing in this prospectus are the property of their respective holders.

Up to 24,085,891 shares of our common stock are being offered by the selling shareholders listed beginning on page 51 of this prospectus. We will not receive any proceeds from the sale of shares by the selling shareholders.

We issued the shares of common stock to be sold by the selling shareholders in the following transactions:

• Up to 80,000 shares of our common stock issuable upon exercise of warrants issued to certain individuals in connection with a financial advisory and investment banking agreement with EarlyBirdCapital, Inc. entered into in April 2002.

• 1,468,845 shares of our common stock issued in connection with our acquisition in June 2003 of New Moon Systems, Inc.

• 1,950,000 shares of our common stock, and up to an additional 1,950,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in September 2003.

• 570,250 shares of our common stock issued in December 2003 to five of our executive officers and directors as part of their calendar year 2004 compensation.

• 2,750,000 shares of our common stock, and up to an additional 550,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in December 2003.

2

• 90,000 shares of our common stock issued to InteSec Group LLC in January 2004 as compensation for performance as an independent contractor.

• 11,678,580 shares of our common stock, and up to an additional 2,658,216 shares of our common stock issuable upon exercise of warrants issued to certain investors and placement agents in a private placement transaction in February 2004.

• 140,000 shares of our common stock issued in March 2004 to Olympus Securities, LLC as payment for a finders fee for the December 2003 private placement.

• 100,000 shares of our common stock, and up to 100,000 shares of our common stock issuable upon exercise of warrants issued in connection with our March 2004 acquisition of Caststream, Inc.

3

RISK FACTORS

An investment in our common stock involves many risks. You should carefully consider the following information about these risks, together with the financial and other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In these circumstances, the market price of our common stock could decline, and you might lose all or part of your investment in our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Fluctuations in our operating results on a quarterly or annual basis could cause the market price of our common stock to decline.

The results of operations for any quarter or fiscal year are not necessarily indicative of the results to be expected in future periods. Our 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 our products;

• fluctuations in demand for our products and services;

• the public’s perception of our Company and our products;

• the long sales and implementation cycle for our 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;

• reductions in sales to, or loss of, 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;

• our ability to control spending and achieve targeted cost reductions;

• our ability to generate cash adequate to continue operations;

• the potential loss of key employees;

• our ability to attract and retain qualified personnel; and

• the ability of our customers and suppliers to obtain financing or to fund capital expenditures.

As a consequence, operating results for any particular future period are difficult to predict, and such unpredictability may cause the price of our stock to fluctuate or decline. We participate in a highly dynamic industry and future results could be subject to significant volatility, particularly on a quarterly basis. Our revenue and operating results may be unpredictable due to our shipment patterns. We operate with little backlog of orders because our products are generally shipped as orders are received. In general, a substantial portion of our revenues have been booked and shipped in the third month of each fiscal 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

4

uncertainty of quarterly operating results. Our 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, our 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 our cash balances.

We may never achieve profitability in the future.

We divested our server software and professional services divisions in May 2001. Since the divestiture, we have not achieved profitability, and may never generate sufficient revenues to achieve profitability. As of September 30, 2004 we had an accumulated deficit of $140.5 million. Many of our operating expenses are relatively fixed in nature, particularly in the short term. We expect to continue to incur significant operating expenses in connection with our ongoing sales and marketing efforts. We also expect to incur noncash charges relating to amortization of intangibles related to past acquisitions. We must therefore generate revenues sufficient to offset these increased expenses in order for us to become profitable. We cannot assure you that we will successfully generate sufficient revenues or that we will ever achieve profitability. If we do achieve profitability, we may not be able to sustain our profitability.

We compete in the highly competitive internet infrastructure market.

The industry has become increasingly competitive and, accordingly, our 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. Our results of operations could be adversely affected if we are required to lower our prices significantly or our products or technologies are rendered obsolete or less attractive to customers.

We depend on the development and acceptance of new products in a rapidly changing market.

The market for our products is characterized by rapidly changing technology, evolution of new industry standards, and frequent introductions of new product enhancements. Our success will depend upon our continued ability to enhance our existing products, to introduce new products on a timely and cost-effective basis to meet the 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 we will be successful in developing new products or enhancing our existing products, or that such new or enhanced products will receive market acceptance. Our success also depends upon our ability to license from third parties and to incorporate into our products new technologies that become industry standards. There can be no assurance that we will continue to obtain such licenses on favorable terms or at all, or that we will successfully incorporate such third-party technologies into our own products. We anticipate new releases of our products in our current fiscal year ending September 2005. 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 affect on our business. There can be no assurance that product introductions in the future will not disrupt product revenues and adversely affect operating results.

We are exposed to general economic and market conditions that affect the software industry.

Any significant downturn in our customers’ markets, or domestic and global conditions, which results in a decline in demand for software and services could harm the Company’s business. The recent state of the economy has had a negative impact on the software industry. This could result in customers continuing to delay or cancel orders for software. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may cause the market price of our common stock to decline or become more volatile. Our future operating results may be affected by various uncertain trends and factors that are beyond our control. These include adverse changes in general economic conditions and rapid or unexpected changes in the

5

technologies affecting our products. The process of developing new high technology products is complex and uncertain and requires accurate anticipation of customer needs and technological trends.

Any inability to hire, retain or integrate key personnel will impact our business.

We rely heavily on the contributions of our senior management and other key management and technical personnel. The competition for such employees is extremely intense, particularly in the technology-centric regions where we operate. We may not be able to hire, retain and integrate such key personnel. The loss of any individual member of our management team or other key employees may create disruptions in our business.

Furthermore, we have historically used stock options and other forms of equity-related compensation as a key component to our employee compensation program in order to align employees’ interests with the interests of shareholders, encourage employee retention, and provide competitive compensation packages. In recent periods, a majority of our employee stock options have had exercise prices in excess of our stock price, which may affect our ability to retain or attract present and prospective employees. In addition, the Financial Accounting Standards Board has released changes to United States Generally Accepted Accounting Principles that would require us and other companies to record a charge to earnings for employee stock option grants and other equity incentives. These and other developments in the provision of equity compensation to employees could make it more difficult to attract, retain and motivate employees and result in additional expenses to us.

Our lease on our corporate headquarters building expires in June 2005, and we have not entered into a new lease.

The lease on our corporate headquarters building in Santa Cruz, California, expires in June 2005. Our management believes it is in our best interest to locate a new, appropriately-sized building. Our management is looking for new office space for our corporate headquarters, but we have not yet entered into a new lease, and may not be able to secure space on terms that are favorable to us, if at all. Furthermore, moving from one building to another may be disruptive to our business, which could affect our results of operations.

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

Our overall cost of revenues may be affected by changes in the mix of net revenue contribution between licenses and services, geographic regions and channels of distribution, as the costs associated with these revenues may be substantially different. We may also experience a change in margin as net revenues increase or decrease since technology costs and services costs are fixed within certain volume ranges.

Our operational results may be affected by price variations.

Our results of operations could be adversely affected if we were to lower our prices significantly. In the event we reduce our prices, our standard terms for selected distributors would be to provide credit for inventory ordered in the previous 180 days, such credits to be applied against future purchases. As a matter of policy, we do not allow product returns for a 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 we believe are appropriate in our distribution channels.

Our revenues may be affected by seasonality of revenues in the European and government market.

We experience 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

6

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.

We are dependent upon information received from third parties in order to determine reserves for product returns.

We depend on information received from our distribution partners 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. We have invested significant effort into developing systems and procedures for determining the appropriate reserve level. However, if we do not receive timely or accurate information, our ability to monitor the inventory levels will be affected and may negatively impact our business.

If we fail to manage the distribution of our products and services properly, or if our distributors’ financial condition or operations weaken, our revenue could suffer.

We market products directly and through our resellers and distributors. Since direct sales may compete with the sales made by resellers and distributors, these resellers and distributors may elect to use other suppliers that do not directly sell their own products. Any increase in our commitment to direct sales could cause conflict with some of our channel partners. Further, some of our resellers and distributors may have insufficient financial resources and may not be able to withstand changes in business conditions, including economic weakness and industry consolidation. Revenue from indirect sales could suffer if our distributors’ and resellers’ financial condition weakens.

Our business depends on our proprietary rights and there is a risk that such rights will be infringed.

We attempt to protect our software with a combination of patent, copyright, trademark, trade secret protection, 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 our products or reverse engineer or obtain and use information that we regard as proprietary. Further, certain provisions of our 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 our intellectual property rights to the same extent as do the laws of the United States. If we are unable to protect our proprietary rights, our competitive position may be adversely affected.

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

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

Our business may be adversely affected by events outside our control.

From time to time, we have experienced disruption of our internal systems due to viruses, which caused denial of service to our customers and ourselves. While we have not been the target of software viruses specifically designed to impede the performance of our products, such viruses could be created and deployed against our products in the future. Similarly, experienced computer programmers or hackers could attempt to penetrate our network security or the security of our web sites. A hacker who penetrates our network or web sites could misappropriate propriety information or cause interruptions of services. We might be required to expend

7

significant capital and resources to protect against, or to alleviate, problems caused by virus creators and/or hackers. In addition, war, power shortages, natural disasters, acts of terror, and regional and global health risks could impact our ability to conduct business in certain regions around the world. Any of these events could have an adverse affect on our business, results of operations, and financial condition.

Our results of operations may be affected by international economic conditions and fluctuations in foreign currency exchange rates.

Although our revenues are predominantly in U.S. dollars, substantial portions of our revenues are derived from sales to customers outside the United States. Trade sales to international customers represented 42%, 53% and 44% of total revenues for fiscal 2004, 2003 and 2002, respectively. Our revenues can be affected by general economic conditions in the United States, Europe and other international markets. Also, portions of our revenue and operating expenses are transacted in foreign currencies. Our operating strategy and pricing take into account changes in exchange rates over time. However, our results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates.

Our results of operations may be affected by the assessment of additional taxes.

We have operations in many countries other than the United States. Transfer prices for services provided between the United States and these countries have been documented as reasonable, however, tax authorities could challenge these transfer prices and assess additional taxes on prior transactions. Any such assessment could require that we record an additional tax liability in our statement of operations.

If we are unable to effectively integrate and develop the operations of our recent acquisitions, our business may suffer.

We acquired Caststream, Inc. (“Caststream”) in March 2004. We are in the process of integrating the operations, certain employees, products and technology of Caststream into our business, and we face various risks as a result of these acquisitions including, but not limited to:

• the ability to retain and motivate certain key Caststream employees;

• the ability to retain and develop Caststream customers;

• the failure to integrate the technology, operations and certain members of the workforce of Caststream with our business;

• the failure to realize the potential or strategic benefits of the acquisitions;

• the incurrence of substantial unanticipated integration costs; and

• the disruption of our ongoing business.

If we are not able to successfully integrate and develop the business of Caststream, our business may be negatively affected in future periods, which may cause our stock price to decline. In addition, if the value of the intangible assets and acquired becomes impaired, we will be required to write down the value of the assets, which would negatively affect our financial results. We may incur liabilities from Caststream that include liabilities for intellectual property infringement or indemnification of Caststream’s customers for similar claims, which could materially and adversely affect our business.

We could make future acquisitions that may result in additional risks to us.

We may continue to make investments in complementary companies, products or technologies. If we acquire a company or a division of a company, we may experience difficulty integrating that company or division’s personnel and operations, which could negatively affect operating results. In addition:

• key personnel of the acquired company may decide not to accept employment with us;

8

• the ongoing business may be disrupted or receive insufficient management attention; and/or

• we may not be able to recognize the anticipated cost savings or other financial benefits.

In connection with future acquisitions, we may be required to assume the liabilities of the acquired companies, including liabilities for intellectual property infringement or indemnification of customers of acquired businesses for similar claims, which could materially and adversely affect the business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which may involve restrictive covenants or be dilutive to existing shareholders.

Our stock is subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control, and those fluctuations may prevent shareholders from reselling their stock at a profit.

The stock market in general, and the market for shares of technology companies in particular, has experienced extreme price and volume 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 us or our competitors may have a significant impact on the market price of our common stock. Furthermore, quarter-to-quarter fluctuations in operating results may have a significant impact on the market price of the stock. These conditions, as well as factors that generally affect the market for stocks of high technology companies, could cause the price of our stock to fluctuate substantially over short periods.

Our stock was delisted from the Nasdaq SmallCap Market on October 21, 2003, and is now listed on the Over-the-Counter Bulletin Board. Since then, the trading volume for our common stock has been low and there may not be a market for the resale of our common stock.

Our stock was de-listed by the Nasdaq on October 21, 2003, and is now listed on the Over-the-Counter Bulletin Board under the symbol TTLA.OB. Trading our stock may be more difficult due to the OTC market’s limited trading activity, and there may not be a market for the resale of our common stock. This could cause a further decline in our stock price. Declines in the market price of our stock could greatly impair our ability to raise capital through equity or debt financing.

We have issued a significant number of shares of our common stock and warrants to purchase shares of our common stock over the past several years, substantially diluting our outstanding common stock. A substantial portion of those shares will be eligible for sale on the open market, which may cause the trading price of our common stock to fluctuate or decline.

In connection with several transactions since June 2003, we have issued over 24,000,000 shares of our common stock and warrants to purchase shares of our common stock to investors, employees and shareholders of acquired companies. While certain shares and warrants are subject to trading restrictions, the majority of them are not. Therefore, we have little control over the timing of any sales of shares by any of the selling shareholders. As a result, the market price of our common stock may fall if a large portion of those shares is sold in the public market. If we continue to issue shares of our common stock, or if a substantial portion of the outstanding warrants are exercised, further diluting the number of shares outstanding, this may cause the price of our common stock to decline.

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all.

The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this Registration Statement on Form S-1. In addition, the stock market in general, and technology companies in particular, have experienced extreme price and volume fluctuations. The average trading volume of our common stock is low, and current trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the

9

overall market and the market price of a company’s securities, securities class action litigation has often been instituted against companies that have experienced significant declines in share price. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

It may be difficult for us to raise needed capital in the future.

We may require substantial additional capital to finance future growth and fund ongoing operations through the remainder of fiscal 2005 and beyond. Due to risks and uncertainties in the market place, we may need to raise additional capital. We may raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot be certain that the funding, if or when needed, will be available on attractive terms, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. If we fail to raise capital when needed, our business will be negatively affected, which could cause the price of our common stock price to decline.

Our corporate actions are substantially controlled by principal shareholders.

Our principal shareholders beneficially own approximately 51% of our outstanding common stock. These shareholders, if they acted together, could exert substantial control over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also influence the outcome of a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other shareholders.

We will continue to incur increased costs as a result of being a public company subject to the Sarbanes-Oxley Act of 2002 as well as new rules implemented by the Securities and Exchange Commission.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the Securities and Exchange Commission, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make certain activities more time-consuming and costly. For example, as a result of the Sarbanes-Oxley Act and related rules adopted by the Securities and Exchange Commission, we have created additional board committees and are adopting comprehensive new policies regarding internal controls and disclosure controls and procedures. We are currently evaluating and monitoring developments with respect to these new rules and are working towards becoming Sarbanes-Oxley Act section 404 compliant. However, we cannot predict or estimate the full amount of additional costs related to these activities that we are likely to incur or the timing of such costs, or if we will become Sarbanes-Oxley Act section 404 compliant.

10

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Examples of forward-looking statements include those relating to financial risk management activities and the adequacy of financial resources for operations. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and elsewhere in this prospectus, including, among other things:

• the future growth of the small business and home markets;

• our business strategies and development plans;

• new products and technologies;

• future expenses and financing requirements; and

• competition and competitive factors in the small business and home markets.

These risks are not exhaustive. Other sections of this prospectus may include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

11

USE OF PROCEEDS

We will not receive any proceeds from the disposition of the shares by the selling shareholders. All proceeds from the disposition of our common stock will go to the selling shareholders.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain future earnings to finance the operation and expansion of our business. Therefore, we do not anticipate paying cash dividends on our capital stock in the foreseeable future.

PRICE RANGE OF OUR COMMON STOCK

Our common stock is quoted on the Over-the-Counter Bulletin Board, under the symbol “TTLA.OB”. The following table sets forth the range of high and low sale prices for our Common Stock for the periods indicated:

	Low Sale Price		High Sale Price
Fiscal 2003:
First Quarter	$	0.75	$	1.45
Second Quarter	$	0.75	$	1.05
Third Quarter	$	0.85	$	2.65
Fourth Quarter	$	1.07	$	2.20
Fiscal 2004:
First Quarter	$	0.75	$	1.80
Second Quarter	$	1.50	$	2.65
Third Quarter	$	1.30	$	2.78
Fourth Quarter	$	0.74	$	1.92
Fiscal 2005
First Quarter (October 1, 2004—December 7, 2004)	$	1.12	$	1.60

On December 14, 2004, there were approximately 11,800 holders of record of Tarantella common stock, and 27,650,380 shares issued and outstanding.

12

CAPITALIZATION

You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The following table sets forth our capitalization as of September 30, 2004:

	As of September 30, 2004
	(in thousands, except share and per share data)
Stockholders’ equity
Common stock, no par value; 100 million shares authorized; 27,552,640 shares issued and outstanding	$	146,088
Deferred stock-based compensation		(187	)
Accumulated other comprehensive income		184
Accumulated deficit		(140,489	)
Total stockholders’ equity	$	5,596
Total capitalization	$	5,596

The table above excludes the following shares:

• 4,570,201 shares of common stock subject to stock options outstanding as of September 30, 2004, with a weighted average exercise price of $5.99 per share; and

• 1,617,746 shares of common stock available for future grant or issuance under our stock plans as of September 30, 2004.

• Warrants to purchase 5,338,216 shares of common stock exercisable at prices ranging from $1.39 to $2.20 per share as of September 30, 2004.

13

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this Registration Statement on Form S-1. We derived the financial data for the years ended September 30, 2004, 2003 and 2002 from our audited financial statements included elsewhere in this Registration Statement.

Selected Five Year Financial Data

	Fiscal Year Ended September 30,
	2004			2003			2002			2001			2000
	(In thousands, except per share data)
Net revenues	$	12,488		$	14,006		$	14,220		$	66,662		$	148,923
Cost of revenues		2,727			1,555			1,499			17,315			41,796
Gross margin		9,761			12,451			12,721			49,347			107,127
Operating expenses		25,711			21,712			27,504			83,724			158,360
Operating loss		(15,950	)		(9,261	)		(14,783	)		(34,377	)		(51,233	)
Other income (expense):
Gain (loss) on Caldera transaction		—			—			(2,443	)		53,267			—
Gain on sale of Caldera common stock		—			—			4,491			—			—
Loss and impairment of equity investment in Caldera		—			—			(4,010	)		(27,066	)		—
Interest income net		76			46			518			1,118			1,679
Other income (expense), net		348			(169	)		(1,040	)		253			819
Loss before income taxes		(15,526	)		(9,384	)		(17,267	)		(6,805	)		(48,735	)
Income taxes (benefit)		129			300			(1,076	)		(1,070	)		8,218
Net loss	$	(15,655	)	$	(9,684	)	$	(16,191	)	$	(5,735	)	$	(56,953	)
Comprehensive loss	$	(16,024	)	$	(9,248	)	$	(15,907	)	$	(11,388	)	$	(51,875	)
Loss per share-basic and diluted	$	(0.71	)	$	(1.10	)	$	(2.00	)	$	(0.72	)	$	(7.97	)
Shares used in per share calculation-basic and diluted		21,951			8,809			8,096			7,966			7,144
	September 30,
	2004			2003			2002			2001			2000
	(In thousands)
Cash, equivalents and short-term investments	$	9,621		$	3,151		$	7,055		$	14,100		$	26,446
Working capital		2,371			(2,226	)		3,563			10,021			16,654
Total assets		16,594			12,388			13,254			35,591			82,202
Long-term liabilities		810			36			33			1,853			5,462
Shareholders’ equity		5,596			2,468			5,811			20,793			31,202

The significant change in the above selected financial data in fiscal 2001 is due to the sale of the Server and Professional Services divisions to Caldera International in May 2001. See Note 14 of Notes to Consolidated Financial Statements.

14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Registration Statement on Form S-1, as well as the Management’s Discussion and Analysis of Financial Condition and Result of Operations included in this Registration Statement on Form S-1 for the fiscal year ended September 30, 2004. 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 (also referred to as “Tarantella,” “we,” “us,” or “our”) believes that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this Registration Statement on Form S-1. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s expectations only as of the date hereof.

Overview

We are a leading provider of internet infrastructure software that enables web-based access to enterprise applications.

Our products provide managed and secure web access to enterprise mainframe, Windows, AS/400, Linux, and UNIX applications. Our products allow businesses to leverage their existing information technology assets to provide cost savings, improved productivity, and the flexibility to accommodate the rapid changes in today’s organizations.

Applications of Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and the accompanying notes. Note 3 to the consolidated financial statements for the fiscal year ended September 30, 2004 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements for the fiscal years in the period ended September 30, 2004. The amounts of assets and liabilities reported on the balance sheets and the amounts of revenues and expenses reported for each of the fiscal periods are affected by estimates and assumptions which are used for, but not limited to, the accounting for revenue, product returns and a valuation allowance for deferred tax assets. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.

Revenue Recognition

We account for the licensing of software in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended. The application of SOP 97-2 requires judgment, including whether (i) a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements, or (ii) the end users receive certain elements of our products over a period of time. These elements include post-delivery support and the right to receive unspecified upgrades/enhancements of our products on a when-and-if-available basis. Changes to the elements in a software arrangement, the ability to identify VSOE for those

15

elements and the fair value of the respective elements could materially impact the amount of our earned and unearned revenue. Judgment is also required (i) to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products, and (ii) in our on-going evaluation of our customer’s credit worthiness at the time of sale.

New Moon and Caststream Acquisitions

In connection with the New Moon Systems, Inc. (“New Moon”) and Caststream acquisitions, we allocated the purchase price associated with each acquisition to the tangible and intangible assets acquired, liabilities assumed and in-process research and development based on their estimated fair values. We engaged two third-party appraisal firms to assist us in determining the fair values of the assets acquired and the liabilities assumed. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. The critical estimates we used in allocating the purchase price and valuing certain intangible assets included but were not limited to: future expected cash flows from customer contracts, acquired developed technologies and patents, expected costs to develop the in-process research and development into commercially viable products, estimated cash flows from the projects when completed, and the trade name and the market position of the acquired products and assumptions about the period of time the trade name will continue to be used in the New Moon product portfolio, and determining the appropriate discounts rates and other assumptions. Our estimate of fair value at the time when they were made is based upon assumptions that we believed to be reasonable, but which are inherently uncertain and unpredictable.

Goodwill and Other Intangible Assets

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. We will perform the annual goodwill impairment test as of July 1st every year to determine if there is any goodwill impairment. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

Restructuring charges

Over the last several years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities. These plans have required us to record estimated expenses for severance, lease cancellations, long-term asset write downs, and other restructuring costs. Given the significance and the timing of the execution of such activities, this process is complex and involves periodic reassessments of original estimates. Our policies, as supported by current authoritative guidance, require us to continually evaluate the adequacy of the remaining liabilities under our restructuring activities. As we continue to evaluate the business, there may be additional charges for new restructuring activities as well as changes in estimates of amounts previously recorded.

Returns and Reserves and Allowance for Doubtful Accounts

Our recognition of revenue from sales to distributors is affected by agreements giving distributors the right to return up to ten percent of the amount of the last ninety days of the distributor’s software sales. Historically, the return rate has averaged less than the ten percent. We record a provision for product returns for related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be affected. Accordingly, estimating product returns

16

requires significant management judgment. In addition, different return rate estimates that we reasonably could have used would have had a material impact on our reported sales and thus have had a material impact on the presentation of the results of operations.

Payments from customers are continuously monitored and allowances are maintained for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of allowances for doubtful accounts, various factors are taken into consideration, including accounts receivable aging, customer credit-worthiness, historical bad debts, and geographic and political risk. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates that we have in the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

As of September 30, 2004, our net accounts receivable balance was $2.1 million, net of allowances of $0.1 million.

Income Taxes

SFAS 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially affect our financial position or our results of operations.

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

Income tax assets and liabilities are determined by taxable jurisdiction. We evaluate net deferred tax assets in each tax jurisdiction by estimating the likelihood of generating future profits to realize these assets. When necessary, a valuation allowance is recorded to reduce tax assets to an amount for which realization is more likely than not. The provision for income taxes represents taxes payable for the current period, plus the net change in deferred tax amounts.

De-Listing Status

On October 20, 2003, we announced that we had received notification from the Nasdaq Listing Qualifications Panel that our stock would discontinue trading on the Nasdaq SmallCap Market effective with the open of business on Tuesday, October 21, 2003. Our stock began trading over the counter on the Pink Sheets in October 2003.

This action followed our appeal to Nasdaq for a listing extension after not meeting the stated time requirements to file SEC Form 10-Q for our third quarter of fiscal 2002. The Nasdaq Panel determination to delist our stock was based on our filing delinquency, public interest concerns, and the nature of the ongoing internal revenue investigation. On December 8, 2003, we filed an appeal to reverse that portion of the Nasdaq Panel’s decision relating to its public interest concerns. On February 27, 2004, the Nasdaq advised us that our appeal had been denied.

On April 6, 2004, we were once again current with our periodic reporting obligations under the Securities and Exchange Act of 1934, as amended, which is required for our shares to trade on the OTC Bulletin Board. On August 25, 2004, we announced that we had received notification that our shares were approved for trading on

17

the OTC Bulletin Board, and that trading had begun at the open of the market on August 24, 2004 under our new symbol TTLA.OB.

Now that we have resumed compliance with the periodic reporting requirements of the Exchange Act, we will attempt to meet the listing requirements for the Nasdaq SmallCap Market, however some requirements such as minimum bid price and market capitalization are outside of our control.

Management Changes

On December 11, 2003, we announced that our board of directors had appointed Francis E. Wilde as Chief Executive Officer (CEO), President and a member of our board of directors. Mr. Wilde succeeds Douglas Michels, who continues with us as a strategic advisor to Tarantella, focusing initially on merger and acquisition opportunities. Mr. Michels will also continue as a director of Tarantella.

In December 2003, Gregory Quinn and E. Joseph Vitetta, Jr. joined us as our Vice President North American Operations and Strategic Alliances and Vice President Corporate Development, respectively. In January 2004, Mr. Vitetta was also appointed Corporate Secretary, and in October 2004, also assumed the role of Managing Director of EMEA. Stephen Bannerman joined us in December 2003 as Vice President Corporate Marketing, and his title was subsequently changed to Chief Marketing Officer. Joseph Makoid joined us in January 2004 as our Vice President OEM Sales. Messrs. Quinn, Bannerman, Vitetta and Makoid all report directly to Mr. Wilde. On January 6, 2004, we announced the appointment of John M. Greeley as Chief Financial Officer (CFO), reporting directly to Mr. Wilde. Mr. Greeley assumed the CFO responsibilities from Mr. Alok Mohan, who had been serving as acting CFO since September 8, 2003.

In January 2004, Thomas P. Rhodes joined us as our Vice President-General Counsel. Mr. Rhodes reported to Mr. Greeley. Mr. Rhodes subsequently left our employment in July 2004.

In September 2004, Christopher Scheybeler resigned as our Chief Technology Officer and assumed the role of a consultant for us, and Mr. Bannerman assumed his responsibilities for product development.

In September 2004, Edmundo Costa resigned his position as Vice President Sales and assumed the role of a consultant for us.

Results of Operations

Net Revenues

Our net revenues are derived from software licenses and fees for services, which include engineering services, consulting, custom engineering, support and training.

Net revenues were $12.5 million in fiscal 2004, a decrease of 11% from $14.0 million in fiscal 2003. In fiscal 2003, net revenues decreased by 2% from $14.2 million in fiscal 2002. Revenue declined in fiscal 2004 due to a decrease in license revenue of $2.8 million, partially offset by increased services revenue of $1.3 million. Revenue declined slightly in fiscal 2003 versus fiscal 2002 due to a decrease in prepaid royalty transactions to OEM’s and ISV’s. In fiscal 2002, we had $3.2 million in revenue for prepaid royalties. In fiscal 2003, this number decreased to $1.7 million. The decrease of 47% in prepaid royalty transactions in fiscal 2003 was due to customers still consuming prepaid royalties purchased in fiscal 2002. Our revenues were also impacted by the continuing general reduction in information technology (“IT”) spending by companies for application server software and service initiatives. For the fiscal year ended September 30, 2004, no single customer accounted for 10% or more of our net revenues, for the fiscal year ended September 30, 2003, Northrop Grumman Computing accounted for 14% of our net revenues and for the fiscal year ended September 30, 2002, Netilla Networks, Inc. accounted for 10% of our net revenues.

18

International revenues continue to be a significant portion of net revenues, comprising 58%, 53% and 44% of the revenues for fiscal 2004, fiscal 2003 and fiscal 2002, respectively.

License Revenues. License revenues were $8.2 million in fiscal 2004 as compared to $11.0 million in fiscal 2003 and $11.4 million in fiscal 2002, representing a decrease of 25% in fiscal 2004 over 2003 and a decrease of 3.5% in fiscal 2003 over 2002. License revenues were 65% of total net revenues for fiscal 2004 and 78% and 80% of total net revenues for fiscal 2003 and 2002, respectively. The decline in license revenues of $2.8 million in fiscal 2004 is primarily due to lower overall license sales over $0.4 million to customers, including sales to U.S. to government customers and independent software vendors (“ISV”). In fiscal 2003 one single transaction with the U.S. government resulted in revenues of $1.3 million. Because of the size of our revenues, these types of large transactions can cause significant fluctuations in our net revenues. The decline in license revenues in fiscal 2003 is due to a decrease in prepaid royalty transactions to OEMs and ISVs. These transactions resulted in $3.2 million in revenue in 2002, but only $1.7 million in 2003.

Services Revenues. Services revenues were $4.3 million in fiscal 2004, as compared to $3.0 million in fiscal 2003 and $2.9 million in fiscal 2002, representing an increase of 42% in fiscal 2004 over fiscal 2003, and an increase of 6% in fiscal 2003 over fiscal 2002. Services revenues were 35% of total net revenues for fiscal 2004 and 22% and 20% of total net revenues for fiscal 2003 and fiscal 2002, respectively. The increase in services revenues in fiscal 2004 is the result of an increased percentage of customers purchasing service contracts with new product, as well as an increase in the number of customers renewing service contracts with us. The increase in the purchase of service contracts with new product is due to the bundling of product with one year of service during fiscal 2004. The increase in the services renewal rate is a direct result of a new inside sales group hired to target customers with lapsed service agreements. The increase in services revenues in fiscal 2003 over fiscal 2002 was primarily due to an increased percentage of customers purchasing service contracts.

Cost of Revenues

Our overall cost of revenues as a percentage of net revenues can be affected by changes in net revenue contribution between product families, geographic regions and channels of distribution, since both price and cost characteristics associated with these revenue streams can vary greatly. We can also experience fluctuations in gross margin as net revenues increase or decrease since certain costs of revenues including technology, services, and distribution act as fixed costs within certain volume ranges.

Cost of License Revenues. Cost of license revenues includes royalties paid to certain software vendors, amortization of acquired technologies, product packaging, documentation and all costs associated with the acquisition of components and shipping. Cost of license revenues as a percentage of license revenues increased to 9% due to higher consulting and staffing costs coupled with a rise in facility cost allocations and costs associated with rebranding our products, versus having remained flat from fiscal 2003 to fiscal 2002 at 3%.

Impairment of Intangibles. During fiscal 2003 we acquired various intangible assets as the result of a business combination. These included various trade names and developed technologies related to marketed products. Per our accounting policy, we reevaluated the estimated economic value of these assets and determined that an impairment of $0.4 million had been incurred as of July 1, 2004. See Notes 3 and 17 to Notes to Consolidated Financial Statements.

Cost of Services Revenues. Cost of services revenues includes documentation, consulting and personnel related expenses associated with providing such services. Costs of services revenues as a percentage of services revenues decreased to 36% due to higher sales and lower percentage cost per revenue dollar in fiscal 2004, versus having decreased to 40% in fiscal 2003 from 41% in fiscal 2002. The improvement in cost of services revenues in fiscal 2004, 2003 and 2002 is also a result of reduced staffing levels in the support organization due to realignment of this organization.

19

Research and Development

We invest in research and development both for new products and to provide continuing enhancements to current products. Research and development expenses increased slightly to $4.4 million in fiscal 2004, versus having decreased 24% to $4.3 million in fiscal 2003 from $5.6 million in fiscal 2002. Research and development expenses represented 35% of net revenues for fiscal 2004, 31% of net revenues for fiscal 2003, and 40% of net revenues for fiscal 2002. The increase in fiscal 2004 of $0.1 million is primarily due to new product validation costs and various increased facility and travel cost, partly offset by lower expenses from decreased staffing. The decrease in research and development expenses in fiscal 2003 is due to lower labor costs, which decreased $0.5 million from fiscal 2002 to fiscal 2003. The lower labor costs were driven by lower headcount, which decreased by 41% as a result of several planned reductions in force. Labor costs were also lower because there was a 15% pay reduction for all employees in research and development. In addition to lower labor costs, there was a reduction of allocations for facilities and IT costs. Expenses allocated to research and development decreased by $0.6 million in fiscal 2003. The reason for the decrease in allocations is that there was lower headcount in the allocated departments and there was an elimination of redundant facilities.

Selling, General and Administrative

Selling, general and administrative expenses increased 22% to $18.6 million in fiscal 2004, compared with $15.2 million in fiscal 2003 and $19.6 million in fiscal 2002. Selling, general and administrative expenses represented 149% of net revenues in fiscal 2004, 108% in fiscal 2003 and 138% in fiscal 2002. The increase in selling, general and administrative expenses of $3.4 million in fiscal 2004 versus fiscal 2003 was mainly due to increased costs of sales and administrative personnel and consultants, and higher spending on outside professional services related to various legal and auditing requirements.

The decrease in selling, general and administrative expenses in fiscal 2003 versus fiscal 2002 was mainly due to lower labor costs, which decreased by $2.1 million. The lower labor costs were driven by lower headcount, which decreased by 39% as a result of several planned reductions in force. Labor costs were also lower because there was a 15% pay reduction for all employees in marketing and general and administrative and a 7.5% pay reduction for all employees in sales. In addition to lower labor costs, there was a reduction of allocations for facilities and IT costs. Expenses allocated to selling, general and administrative decreased by $0.9 million in fiscal 2003. The reason for the decrease in allocations is that there was lower headcount in the allocated departments and there was an elimination of redundant facilities. The decrease in labor and allocation costs in selling, general and administrative expenses was partially offset by increased legal and audit fees. We incurred expenses of $0.7 million during fiscal 2003 for the internal revenue investigation and the related audit.

Allowance for doubtful accounts at the end of September 30, 2004 was $0.1 million, or 5% of gross accounts receivable. Allowance for doubtful accounts at the end of September 30, 2003 was $0.5 million, or 15% of gross accounts receivable. Allowance for doubtful accounts at the end of September 30, 2002 was $0.3 million, or 11% of gross accounts receivable. The decrease in allowance for doubtful accounts during fiscal 2004 was primarily due to an aggressive program to resolve our outstanding over 30 days accounts receivable items. There was also a $0.1 million decrease in reserves for returns authorized but not yet returned.

Legal Settlement and Litigation Costs

In fiscal 2004 we incurred legal settlement and litigation costs of $1.2 million. At the end of fiscal 2003 a suit was brought against us by a former employee. During October 2004 we entered into settlement of this matter and for which we believe we are fully accrued as of September 30, 2004. See Legal Proceedings and Note 11 to Notes to Consolidated Financial Statements.

20

Restructuring Charges

Restructuring charges of $1.6 million, $2.2 million and $2.3 million were incurred in fiscal 2004, fiscal 2003 and fiscal 2002, respectively. These restructurings in fiscal 2004, fiscal 2003 and fiscal 2002 were made to align spending with lower than expected revenues and to facilitate our business strategies.

Restructuring charges of $1.6 million in fiscal 2004 included severance costs for a reduction in staffing of 15 employees, and expenses associated with vacated facility space. We also made provision adjustments to prior restructurings because we have been unable to sublet space in the Santa Cruz, California office. We have now fully reserved for the vacated portion of the Santa Cruz, California, office space through June 2005, the end of the lease period.

Restructuring charges of $2.2 million were incurred in fiscal year 2003, including $1.7 million relating to worldwide restructurings undertaken in the first, third and fourth quarters of fiscal 2003 and provision adjustments of $0.5 million made in the fourth quarter of fiscal 2003. The fiscal 2003 restructurings included a reduction in staffing of 62 employees, expenses associated with the closing of several foreign offices and the write-off of fixed assets.

Restructuring charges of $2.3 million were incurred in fiscal year 2002 relating to a worldwide restructuring undertaken in the first quarter of fiscal 2002 and provision adjustments made in the fourth quarter of fiscal 2002. The restructuring included a reduction in staffing of 52 employees, a reserve for unused facilities at our corporate headquarters, and costs associated with closing several foreign offices. We also made provision adjustments to prior restructurings because we have been unable to sublet space in the Santa Cruz, California office.

Other Income (Expense)

Other income and expense consists of interest income net of interest expense, foreign exchange gains and losses, and realized gains and losses on investments, as well as other miscellaneous income and expense items. Net interest income was $76,000 in fiscal 2004 compared to net interest income of $46,000 in fiscal 2003 and $0.5 million in fiscal 2002. Net interest income increased in fiscal 2004 due to the increase in cash during the year from $3.2 million at the end of fiscal 2003 to $9.6 million at the end of fiscal 2004, primarily as a result of our private placements during fiscal 2004. Net interest income decreased in fiscal 2003 due to the decrease in cash from $7.0 million at the end of fiscal 2002 to $3.2 million at the end of fiscal 2003. In fiscal 2004 we had net other income of $0.4 million compared to net other expense of $0.1 million in fiscal 2003 and $2.5 million in fiscal 2002. The $0.4 million of net other expense in fiscal 2004 was primarily due to gain on sale of an equity investment, partially offset by recognizing an impairment on an equity investment. The $0.1 million of net other expense in fiscal 2003 was due mainly to charges related to the impairment of certain investments. In fiscal 2002, our other income/(expense) included equity losses of $4.0 million for its share of Caldera International losses; also a loss of $2.4 million was recorded against the gain on the sale of divisions to Caldera. This loss included expense of $3.0 million for the early redemption of a note receivable from Caldera.

Income Taxes

In fiscal 2004, 2003 and 2002, our effective income tax benefit (expense) rates were (1%), (3%) and 7%, respectively. The fiscal 2004 tax provision of $0.1 million reflects foreign income taxes. The fiscal 2003 tax provision of $0.3 million reflects foreign income taxes of $0.5 million less the favorable resolution of foreign tax issues of $0.2 million. The fiscal 2002 tax benefit of $1.1 million reflects a benefit of $0.3 million due to a change in U.S. law and a benefit of $1.3 million due to the resolution of foreign audit issues, less foreign income taxes of $0.5 million.

Net Loss

Our reported net loss of $15.7 million in fiscal 2004 compared to a net loss of $9.7 million in fiscal 2003, and a net loss of $16.2 million in fiscal 2002. Net loss increased by $6.0 million in fiscal 2004 over fiscal 2003

21

and reflects lower licensing revenues of $2.8 million, a cost of revenues increase of $1.2 million including an impairment of intangible assets for $0.4 million, and an operating expenses increase of $4.0 million including a legal settlement and litigation costs of $1.2 million. Partially offsetting fiscal 2004 higher costs were increased services revenues of $1.3 million, lower restructuring charges and a gain on the sale of certain equity investments. Net losses were lower in fiscal 2003 than in fiscal 2002 because we implemented several cost reduction measures to reduce our breakeven point. Net losses were higher in fiscal 2002 because fiscal 2002 included $6.5 million in losses from the sale of divisions to Caldera.

Liquidity and Capital Resources

We have incurred net losses from operations of approximately $15.7 million during fiscal 2004 and $9.7 million during fiscal 2003 and revenues have declined from $14.0 million in fiscal 2003 to $12.5 million in fiscal 2004. For fiscal 2004 losses from operations were $16.0 million and $9.3 million during fiscal 2003. Net cash used for operating activities was $11.3 million in fiscal 2004 and $9.3 million used in fiscal 2003. We have an accumulated deficit of $140.5 million as of September 30, 2004. These conditions, among others, raise questions about our ability to continue to fund losses from operations in the future.

We have financed our operations through private offerings of our common stock and bank borrowings. As of September 30, 2004, our principal source of liquidity included cash and cash equivalents of $9.6 million, representing 58% of total assets. During the second quarter of fiscal 2004, we closed our available bank line of credit of $1.5 million under which we had no outstanding borrowings. The increase in cash and cash equivalents of $6.5 million in fiscal 2004 is primarily due to two private placements of common stock and warrants which resulted in net proceeds to us of approximately $17.8 million, partially offset by net cash used in operating activities of $11.3 million.

Our net cash used for operating activities was $11.3 million, $9.3 million and $17.2 million during fiscal 2004, fiscal 2003 and fiscal 2002, respectively. The increase in net cash used for operating activities of $2.0 million comparing fiscal 2004 to fiscal 2003 is primarily due to lower revenues and higher operating costs. The decrease in net cash used for operating activities of $7.9 million comparing fiscal 2003 to fiscal 2002 is primarily due to significantly lower operating costs.

Our days sales outstanding (DSO) at the end of fiscal 2004, fiscal 2003 and fiscal 2002 was 57 days, 87 days and 71 days, respectively. DSO is calculated using revenues for the fourth quarter of each fiscal year and net accounts receivable at September 30. The improvement in our DSO as of the end of fiscal 2004 was due to a lower trade accounts receivable over 30 days outstanding. The increase in DSO at the end of fiscal 2003 was due to one transaction totaling $0.6 million, for a large Italian customer, which was paid late. DSO is impacted about 1.4 days for every $50,000 that is uncollected, so this transaction added 15 days to the Company’s DSO calculation for fiscal 2003.

Net cash provided by investing activities was insignificant in fiscal 2004, compared to net cash provided by investing activities of $3.0 million and $12.4 million in fiscal 2003 and fiscal 2002, respectively. During fiscal 2004 proceeds from the sale of investments offset purchases of tangible assets and software and licenses. Net cash provided by investing activities during fiscal 2003 primarily related to cash acquired as part of our New Moon acquisition. Net cash provided by investing activities during fiscal 2002 primarily related to the sale of investments.

Net cash provided by financing activities was $17.7 million in fiscal 2004, compared to net cash provided by financing activities of $2.4 million for fiscal 2003 and net cash used for financing activities of $0.3 million for fiscal 2002. Net cash provided by financing activities in fiscal 2004 and fiscal 2003 was primarily due to proceeds from private placements of common stock and warrants.

During fiscal 2004 we completed two private placements of our common stock and warrants. On December 10, 2003, we entered into a private placement transaction pursuant to which we sold common stock and warrants

22

resulting in gross proceeds of approximately $2,750,000. In connection with the financing, we paid placement fees in the amount of $232,303. On February 23, 2004, we completed a private placement of common stock and warrants for gross proceeds of $16,350,000, for which we incurred fees in the amount of $1,198,000, and issued warrants to the placement agents to purchase up to 322,500 shares of commons stock at $1.70 per share.

During fiscal 2003, the Company completed a private placement of common stock and warrants resulting in gross proceeds to the Company of approximately $2,254,200 for which we paid fees of $155,345.

See Note 12 of Notes to Consolidated Financial Statements regarding our private placements.

We had capital lease commitments of $31,000 in fiscal 2004, which were paid by March 31, 2004. There are no capital lease commitments beyond fiscal 2004. We have operating lease commitments of $1.4 million for fiscal 2005, and no operating lease commitments past fiscal 2007. See Note 11 of our Notes to Consolidated Financial Statements for more information.

On April 15, 2004 we signed an agreement to surrender the property in Leeds, UK, which reduced our total future operating lease commitments from $10.4 million to $1.6 million. After signing the agreement, our various remaining operating lease commitments now extend to 2007. The Company has no capital lease commitments at fiscal year end 2004. See Note 11 of Notes to Consolidated Financial Statements for more information.

The following summarizes our contractual lease obligations at September 30, 2004, and the effects such obligations are expected to have on liquidity and cash flow in future periods:

(In thousands)	Total		Less than 1 Year		1-3 Years		4-5 Years		Beyond 5 Years
Contractual obligations:
Capital lease obligations	$	—	$	—	$	—	$	—	$	—
Non-cancelable operating lease obligations		1,643		1,405		238		—		—
Total contractual cash obligation	$	1,643	$	1,405	$	238	$	—	$	—

We have an obligation to pay certain former New Moon shareholders a minimum cash earnout of approximately $1.7 million over a period from January 1, 2004 to December 31, 2006 based on a royalty of 30% of New Moon product revenues, net of direct costs. During fiscal 2004 we rebranded the New Moon product as Terminal Services Edition. After the shareholders have been paid the minimum earnout, they are entitled to an additional royalty of 15% of Terminal Services Edition revenues, net of direct costs, during this period. In the event the minimum earnout is not achieved by the conclusion of the quarter ending December 31, 2006, we shall pay along with the final earnout payment an amount equal to the minimum earnout less all aggregate earnouts paid to date, less any off-sets and any escrow claim deficiencies. We have recorded this minimum cash earnout amount as Royalties payable – former New Moon shareholders in our consolidated financial statements.

We believe, based on our current plans, existing cash and cash equivalents, and expected results from operations, that our existing funds may be sufficient to meet our operating requirements through fiscal 2005. However, given the uncertainty of projecting future revenue levels, additional financing may be required during fiscal 2005 and thereafter. We cannot be assured that additional financing will be available if required.

Quantitative and Qualitative Disclosures about Market Risk

Market-Rate Sensitive Instruments and Risk Management

We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and equity security prices. We do not use derivative financial instruments for speculative or trading purposes.

23

Interest-Rate Risk

As of September 30, 2004 the Company had cash of $9.6 million, consisting of cash and highly liquid money market instruments with maturities of less than 90 days. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. We would not expect operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on our portfolio.

Foreign Exchange Risks

Currently, we denominate sales to some European customers in Euros and also incur expenses related to our European operations in British Pounds and Euros. Through May 2001, we used forward foreign exchange contracts to manage foreign exchange exposures associated with underlying assets, liabilities and anticipated transactions. Since the completion of the transaction in which we sold the Server Software and Professional Services divisions to Caldera International, we do not believe the foreign exchange risk is great enough to warrant the purchase of forward foreign exchange contracts. A hypothetical change of 10% in the foreign currency exchange rates would not have a material impact on our consolidated financial position or results of operations.

Equity Security Price Risk

As of September 30, 2004 the Company has investments in small number of privately held companies, the carrying value of which is now zero. Historically, we do not hedge our investments in equity securities.

Recent Accounting Pronouncements

In December 2003 the Financial Accounting Standards Board issued Interpretation 46R (“FIN 46R”), a revision to Interpretation 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R was effective for us during the quarter ending March 31, 2004. We have no interest in variable interest entities, so the adoption of FIN 46 and FIN 46R had no affect on our financial position or results of operations.

In July 2004, the FASB ratified Emerging Issues Task Force consensus on Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock”, which provides guidance regarding application on the equity method of accounting to investments other than common stock. EITF Issue No. 02-14 will be effective beginning in our first quarter of fiscal 2005. We do not believe the adoption of EITF Issue No. 02-14 will have a material impact on our financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (“SFAS 123R) “), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Adoption of the provisions of SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Tarantella has not yet evaluated the potential impact that the adoption of SFAS 123R will have on its consolidated financial position and results of operations.

24

BUSINESS

Company Background

We were incorporated in 1979 as a California Corporation under the name The Santa Cruz Operation (“SCO”), Inc. On May 4, 2001, we completed the sale of our Server Software and Professional Services Divisions to Caldera Systems, Inc., retaining the Tarantella Division. Upon the completion of the sale, we changed our corporate name to Tarantella, Inc.

We are a leading provider of secure application access software to customers’ sites worldwide. Tarantella enables organizations to access and manage information, data and applications across all platforms, networks and devices. Tarantella bridges the gap between vendors, ensuring that customers have complete access to business-critical information. Using Tarantella’s software, customers realize the benefits of secure corporate data, maximizing return on existing information technology (“IT”) assets and improved productivity. We market our products through the internet, key industry partnerships, and a worldwide network of consultants and resellers.

We are headquartered in Santa Cruz, California, and operate development centers in the United States, the United Kingdom and India, and have sales presence in the U.S., U.K., Germany, the Netherlands, Canada, Brazil, France, Spain and Italy. We maintain exclusive distribution relationships in Japan as well as distribution and agent relationships in China, and Northern and Southeast Asia. In total, our products are available through resellers in more than 30 countries.

Our flagship product, Tarantella Secure Global Desktop^™ Enterprise Edition, a UNIX/Linux-based secure application access suite, is installed in corporations and governmental agencies around the world. We introduced Secure Global Desktop Enterprise Edition to the marketplace in 2001 as our Tarantella Enterprise 3 product.

We also offer a Windows-based application access product, Tarantella Secure Global Desktop^™ Terminal Services Edition. Terminal Services Edition is positioned as a companion to Microsoft Windows Terminal Services, and is intended for use by small to mid-sized business customers and departmental deployments with Windows-only infrastructure. Terminal Services Edition is distributed via an internet webstore as well as through our channel partners. In May 2004, we began a program offering a Terminal Services Edition user license at no fee, provided the licensee acquires two years of maintenance per user with the license. Terminal Services Edition was previously known as New Moon Canaveral iQ^™ from Tarantella ^®. This product has been added to our portfolio of product offerings following our acquisition of New Moon Systems, Inc. in June 2003.

In March 2004, we acquired Caststream, Inc. and added its cast:stream^™ product to our list of offerings. cast:stream is an integrated suite of applications that enable live and on-demand presentations including video and audio synchronized graphics and animation that enhances interactivity.

We also continue to offer our earlier client integration products that were introduced in the 1990s. These offerings are part of our Vision2K^™ suite of products.

Our strategy is to focus on the application access needs of Forbes Magazine Global 2000 firms and mobile service providers, and deliver purpose-built, non-invasive, non-disruptive infrastructure software solutions to meet the needs of new classes of users and applications, including new wireless applications, home information service providers and web services applications. From a sales perspective, we approach our target market through our worldwide, integrated sales process, including direct sales, channel partners and strategic alliances.

The scalability and flexibility of Secure Global Desktop Enterprise Edition in heterogeneous and demanding system architectures differentiates it from competing products. Secure Global Desktop Enterprise Edition software installs on all major UNIX and Linux platforms and delivers Windows, UNIX, Linux, Mainframe and

25

web-based applications. Our products can also be used in place of, or to augment, Virtual Private Network (“VPN”) or extranet products. Our Secure Global Desktop Terminal Services Edition product was designed expressly as a companion to Microsoft Windows Terminal Services and is designed to satisfy the needs of small to medium-sized enterprises and departments of larger enterprises who find products such as Citrix’s Metaframe XP to be too complex and too expensive to implement. Secure Global Desktop Terminal Services Edition seamlessly installs in an organization’s existing Microsoft infrastructure to host Windows-based client software on centralized Microsoft Windows servers.

Geographic Information

See Note 20 of the Notes to Consolidated Financial Statements, “Industry and Geographic Segment Information” regarding the geographies in which we operate.

Tarantella Mission and Vision: Managed, Secure, Adaptive Application Access

We believe application access will play an increasingly prominent role in a ubiquitously wired world. As more companies find themselves with an increasingly distributed workforce, we see server-based application hosting as the most cost-effective way of delivering applications to businesses, homes and mobile users, regardless of time or location. Our mission is to become the world’s leading provider of managed, secure and adaptive application access software for Global 2000 companies and government agencies around the world.

Importance of Web-Based Application Access

Organizations today need secure, managed access to business-critical systems for employees, customers and partners. Mobile and remote worker numbers continue to grow and more companies are consolidating, often requiring diverse computer systems to work together immediately. Workers are dispersed, needing access to data from remote locations. Home workers and extended day workers require efficient, secure access to corporate data outside the office. The internet offers a cost-effective and reliable way for businesses to gain access to their data. This method, however, brings with it an urgent need for high-level security and manageability.

Data center disaster contingency plans must also allow for alternative user access modes when offices are no longer available. Valuable corporate information kept on desktops is at risk and companies need a centralized, managed business approach that is more cost-effective and secure.

Our product offerings address global enterprises’ needs for remote and mobile access, flexible business continuance plans and provide ways to cut the high costs and risks of managing distributed desktop computers. Our software suite is a powerful solution regardless of company size or platform environment.

Key Customer Benefits—Application Access and Server-Centric Computing, including:

• centralizing Information Technology (“IT”) systems for cost savings and increased return on investment;

• facilitating distributed server consolidation;

• prolonging IT asset life—desktops, applications, servers, etc.;

• enabling application access through leading web portal products;

• facilitating centralized management of intellectual property and data files;

• enabling delivery of existing applications over the internet instantly without the need to rewrite existing software;

• facilitating enhanced security and disaster recovery; and

• delivering web-based application access and workforce mobility.

26

Target Markets

Our software products provide secure access to business networks that are used by various types and sizes of companies. However, several target markets have emerged in which the Tarantella value proposition is particularly compelling, including large financial institutions, government agencies (federal, local, and defense departments), utilities and telecommunications.

Our target customers generally employ heterogeneous or mixed information systems architectures, are often geographically dispersed with remote access requirements and are under operational pressures to reduce costs while optimizing a maximum return on assets. These companies require extremely high levels of security to protect their information assets as they provide this remote access. Large companies with diverse application platforms and a widely distributed user base are an excellent fit for a Tarantella solution. The scalability and flexibility features of our software differentiate it from competitors who cannot scale to meet the demanding heterogeneous architectures of the largest enterprises.

Industry Background

We compete in the “Server-Based Computing” segment of the software industry. The core element of this market has achieved maturity in the vast majority of Fortune 1000 companies that have adopted server-based computing. However, we believe there will be continued interest in remote access solutions. Significant market drivers include an increase in wired and wireless connectivity to serve increasingly distributed users, the continuing market shift to Linux and Open Source technologies, and larger budgets as companies upgrade legacy enterprise applications. Our major competitor in this industry is Citrix Systems, Inc., which enjoys a majority market share in the Windows-based server-based computing industry.

Competitive Strengths

The Tarantella Secure Global Desktop Enterprise Edition and Secure Global Desktop Terminal Services Edition solutions face strong competition from a range of point products from companies that include Citrix Systems, Inc., Hummingbird Ltd., and Attachmate Corporation. For example, Citrix is the market leader in providing remote access to Windows applications, while Hummingbird and Attachmate are viable competitors for UNIX and mainframes, respectively.

While each of these competitors is formidable in its own space, we offer an integrated approach, designed to meet enterprise requirements across the board. Our software solutions address the various needs of specific customer segments, regardless of company size or IT sophistication. Additionally, our products often work alongside those of our competition.

The scalability and flexibility of the solution in heterogeneous and demanding architectures differentiates Secure Global Desktop Enterprise Edition from its competitors. Our Enterprise Edition software installs on all major UNIX and Linux platforms and delivers Windows, UNIX, Linux, Mainframe and web-based applications. Our products can also be used in place of, or to augment, VPN or extranet products.

Secure Global Desktop Terminal Server Edition was designed as a companion to Microsoft Terminal Services targeted to the needs of small and medium-sized enterprises and departments of larger enterprises seeking a simple and cost-effective alternative to such products as Citrix’s Metaframe XP. Secure Global Desktop Terminal Server Edition seamlessly installs in an organization’s existing Microsoft infrastructure to host Windows-based client software on centralized Microsoft Windows servers.

Strategic Relationships

Strong industry partners augment our Tarantella enterprise value proposition.

Tarantella entered into an agreement with IBM in September 2004, pursuant to which our Tarantella Secure Global Desktop Enterprise Edition software has been accepted into the IBM Server Proven Program and is a

27

member of the IBM Leaders for Linux program. Furthermore, pursuant to the Agreement, Tarantella is a member of IBM’s prestigious Software Vendor Logo program. IBM features Secure Global Desktop Enterprise Edition on the IBM price list for direct sales through IBM and the IBM sales representatives are compensated for selling it. We have developed several strategic marketing initiatives with IBM, and have signed distribution/partner agreements with their largest reseller in the US (Mainline Information Systems) and in Europe (Morse plc).

Secure Global Desktop Enterprise Edition is also Sun Tone Certified, and we are a featured technology/development partner for Sun Ray, Java Desktop System, SPARC Solaris and the Java Enterprise Server. In addition, Sun Professional Services has a worldwide contract to resell licenses of Tarantella Secure Global Desktop Enterprise Edition. We also have a worldwide joint marketing agreement with Sun Microsystems and have signed distribution agreements with some of the largest Sun distributors in the world, including GE Access in the U.S., and Morse plc in the U.K.

We recently announced an OEM agreement with Novell, Inc. to bundle Novell’s SUSE Enterprise Server 9 Linux distribution with Enterprise Edition to form a “software appliance.” This software appliance will be marketed initially via OEMs, but is also expected to form the basis for new channel products such as Morse’s Secure Global Desktop for BladeCenter product.

We are a Microsoft Gold Certified ISV Partner and licensee of the Remote Desktop Protocol specification. We view Secure Global Desktop Terminal Services Edition as an important complement to Microsoft Windows Terminal Services. Terminal Services Edition completes the Terminal Services experience for end users.

In addition to IBM, Sun, Novell and Microsoft, we also have built strategic relationships with Oracle, Computer Associates and a variety of thin client vendors, such as ChipPC, eSeSix, Igel, Maxspeed, Neoware, Netvoyager, Priam, VXL, and Wyse. Our Technology Alliance Group (“TAG”) program demonstrates our dedication to forging strong alliances with these vendors, and our TAG certification ensures compatibility with either Secure Global Desktop Enterprise Edition or Secure Global Desktop Terminal Services Edition. Members of the Tarantella TAG Program include: Aventail, Sun Microsystems, Neoware, Wyse, Fujitsu Siemens, CodeWeavers, and Hewlett Packard. These strategic relationships, both new and ongoing, provide us with additional credibility and leverage in selling to the enterprise market.

Our Products

We offer a comprehensive, server-centric computing product line serving a broad cross-section of customers. This is accomplished by market bifurcation and by addressing distinct customer segments with purpose-built software solutions: Secure Global Desktop Enterprise Edition and Secure Global Desktop Terminal Services Edition. As a result, our software solutions deliver the benefits of application access and server-centric computing to organizations with the simplest computing and network environments as well as to those with the largest and most complex. See Note 19 of the Notes to Consolidated Financial Statements, “Industry and Geographic Segment Information” for information regarding the revenue contribution of each of our products.

Product Offerings

Our product offerings include Tarantella’s flagship products Secure Global Desktop Enterprise Edition, and Secure Global Desktop Terminal Services Edition software products, in addition to our cast:stream suite of applications and the established Vision2K suite of products, as described below:

Secure Global Desktop Enterprise Edition

Secure Global Desktop Enterprise Edition software focuses on organizations with large, heterogeneous and complex IT environments with overriding requirements for flexibility, scalability and application and data security. Customers of Secure Global Desktop Enterprise Edition software generally have well-developed UNIX support infrastructure and capabilities. Our patented technology was designed for the internet and enterprise

28

intranets. Our Adaptive Internet Protocol is designed to optimize the tradeoffs between bandwidth and application performance to give users the best possible experience over any speed connection.

The Tarantella architecture is based on a three-layer approach, whereby the Tarantella server sits in between the application layer (server) and the client layer (user). The non-intrusive nature of our solution allows installation in the network infrastructure without impacting existing applications or clients.

Secure Global Desktop Enterprise Edition software provides secure, universal access to corporate applications, whether modern or legacy, including those that run on Microsoft Windows, UNIX, Linux, mainframe or midrange servers. With Secure Global Desktop Enterprise Edition software, users access applications remotely from a client device (anything from a thin client to a top-of-the-range PC) needing only a web browser (such as a current version of Microsoft Internet Explorer or Netscape Navigator), with Java technology enabled. A native client version is also available to operate without a web browser. The centralized management capabilities of Secure Global Desktop Enterprise Edition scales to accommodate rapid corporate change, technological advancement and expanding remote access needs. The product can span global multi-site IT architectures, unifying and simplifying IT complexity and diversity, providing an enhanced level of business continuity via increased application availability.

Secure Global Desktop Enterprise Edition software’s elegant, three-tier “drop-in” architecture means there is no need to modify clients, networks, applications or the servers on which they run, making the software ideal for heterogeneous platform environments and large-scale deployment scenarios. Users access all applications through a single, unified and familiar web-based interface. Global resources are opened up without increasing vulnerability, change is managed rapidly and complex IT infrastructures can be simplified without major disruption, expensive development or costly administration.

Secure Global Desktop Enterprise Edition software enables users to access business applications over the internet, without jeopardizing corporate security, affecting the end user, disrupting the existing infrastructure or requiring costly alternatives, such as a VPN. Secure Socket Layer security, encryption technology and firewall and proxy server traversal are included.

Secure Global Desktop Terminal Services Edition

Secure Global Desktop Terminal Services Edition provides server-based computing for small to mid-sized companies and departments of larger companies that primarily use Microsoft Windows operating systems and platforms in their IT infrastructure. Secure Global Desktop Terminal Services Edition’s design focus is on simple installation and deployment, ease of administration and seamless integration with a Microsoft infrastructure. Secure Global Desktop Terminal Services Edition is a simple, intelligent and cost-effective application access solution for Microsoft-based IT companies.

Secure Global Desktop Terminal Services Edition helps organizations fully leverage their investment in Microsoft infrastructure by extending the Windows Terminal Services capabilities available within Microsoft Windows Server 2000 and 2003. The software enhances Windows Terminal Services’ client experience by adding features like seamless windows, enhanced printing and file saving functionality, as well as application access through web-based browsers, Windows desktops or the Windows Start Menu. At the network level, Secure Global Desktop Terminal Services Edition enables Windows Terminal Services to more effectively scale to multiple servers and higher user counts by providing:

• application-level load balancing;

• application, user and server provisioning; and

• reporting and monitoring capabilities.

Secure Global Desktop Terminal Services Edition easily integrates into existing Microsoft environments, providing an affordable solution to centralize the hosting of applications, both over a local area network or to remote users.

29

cast:stream Suite of Applications

cast:stream provides a logical extension to our focus on remote access and communication in a distributed digital world. The cast:stream suite of applications provides users with a robust method of broadcasting digital presentations to an audience wherever they may be. cast:stream delivers both live and on-demand presentations including video and audio with synchronized graphics and animation that enhances interactivity. Participants remain engaged with the presenter through advanced communication and collaboration tools, such as instant messaging and real-time polling feedback.

The presenter controls the live broadcast through the cast:stream Moderator application. In addition to cueing up slides and rich media, the Moderator also provides the presenter with audience feedback and broadcast status information.

The cast:stream Server application synchronizes slides with streaming video and audio, to provide a coordinated and uninterrupted presentation for viewers.

The cast:stream Player application provides the viewer with an immersive user experience, displaying video of the presenter simultaneously with slides and rich media. The Player also allows the viewer to send text messages to the presenter and other participants in real-time during a broadcast for a fully interactive experience.

After a live broadcast is over, the cast:stream Editor application can be used to edit the broadcast for creating on-demand presentations that can be viewed online from a website or offline on a CD, DVD or hard drive.

Vision2K Suite of Products

Integrating the Windows and UNIX worlds, our established Vision2K software suite extends the power and dependability of UNIX servers to the Windows desktop environment and provides character-based and graphical user interface access to UNIX applications.

The Vision2K suite of products consists of:

• VisionFS—server based file and print sharing;

• XVision Eclipse—fast access to X applications;

• TermVision—terminal emulation for Windows and the internet;

• SuperVision—centralized management of users; and

• TermLite—lightweight terminal emulator.

Sales Channels, Marketing and Distribution

Our target customers comprise the Global 2000 and government agencies worldwide. With our current worldwide customer sites, we have developed an integrated, three-pronged sales and distribution strategy: direct, channel and web sales. Utilizing an extremely focused direct sales force, as well as enterprise distribution channels, our sales force effectively leverages value-added distributors and resellers, systems integrators, original equipment manufacturers (OEMs) and independent software vendors (ISVs). We select channel partners based on expertise, experience and access to the target markets. In most large opportunities, channel partners and our sales representatives work together on identifying, selling and closing these targeted accounts.

In addition to our enterprise sales process, we sell to small to medium businesses through our PartnerConnect^™ program, with registered and associate partners primarily managed by value-added distributors. Our sales network includes the support of over 500 resellers and channel partners globally.

30

Finally, we use a “web store” as an alternative channel to sell licenses and support agreements for our Secure Global Desktop Terminal Services Edition. By visiting Tarantella’s web site (http://www.tarantella.com/products/) potential users can download a 30-day evaluation copy of the software, install it and decide if it meets their needs. If it does, by again visiting the web store, users can acquire a license key to fully enable the software when they purchase two years of maintenance for the software. After the two year maintenance period concludes, users may renew the maintenance agreement. If the user does not renew the maintenance agreement, the software remains fully enabled, but the user will no longer receive updates and revisions to the software.

We believe web-based marketing and sales can be important new tools for reaching potential users of Tarantella’s products. In addition, we promote our products in print media geared to IT professionals, as well as at trade shows and through other forms of advertising.

Our software is primarily delivered electronically via the internet or shipped to our customers on a compact disc.

Research and Development

Our product development is comprised of one integrated organization with three sites located in Santa Cruz, California, Leeds, United Kingdom, and Pune, India. We have developed or acquired skills in complex internet infrastructure areas including web-based technologies, communications, security, Java^™ technology, virtual user interfaces, networking and adaptive protocols, as well as deep expertise in Microsoft platforms such as Windows Terminal Services, Active Directory, Microsoft Windows Server 2000 and 2003, Microsoft SQL, COM, and DCOM. The combined product team has developed strong links with application server vendors, including Microsoft, IBM, Sun and Oracle, as well as with client vendors manufacturing a range of products from traditional desktop and complex workstation clients to thin clients and wireless handheld devices.

We hold seven issued U.S. patents, including “Method of Displaying an Application on a Variety of Client Devices in a Client/Server Network,” “Universal Application Server for Providing Applications on a Variety of Client Devices in a Client/Server Network,” “Network Traffic by Instruction Packet Size Reduction,” “System for Detecting of Peripheral Input Activity and Dynamically Adjusting Flushing Rate of Corresponding Output Device in Response to Detected Activity,” “System and Method for Virtualizing and Controlling I/O of Applications,” “Virtualizing and Controlling Input and Output of Computer Programs,” and “Client-Server Application Partitioning with Metering Technique for Distributed Computing.” We also have a number of patent applications pending, including “Color Quality and Packet Shaping Features for Displaying an Application on a Variety of Client Devices,” “System and Method for Dynamic Allocation of Computing Tasks,” “System and Method for Dynamic Content Allocation,” “Improved Client Server Technique for Distributed Computing,” “System and Method for Managing Access of Distributed Resources,” and “Client-Server Application Partitioning with Metering Technique for Distributed Computing.”

Tarantella devotes resources to ongoing product testing and quality assurance to support product reliability. We believe our ability to integrate product technologies, to incorporate a wide variety of standards into our products and to continue to offer enhancements to our existing products is essential to maintaining a competitive advantage in the marketplace.

Technical Support and Services

Our products are used in business-critical environments that require us to provide customer support and services that are essential to our full product offering. Our services are designed to support customers ranging from small businesses to large enterprises, both at the end user and reseller levels. We offer a variety of support programs and services through our worldwide customer support and services staff as well as through our authorized third-party education staff, support and channel partners, including:

• Technical Support—Online support through the web and varying levels of telephone support for corporate accounts;

31

• Educational Services—Courseware and instruction guides provided to the worldwide Tarantella Learning Centers, which train and provide materials for both end users and resellers; and

• Developer Services—Technical advisory and support services, as well as access to early product releases, for application developers.

We sell support services to end users, generally on an annual contract basis. Options are available for customers to tailor support solutions to meet their specific needs. Electronic access to support services is available via the internet. Software updates, enhancements and bug fixes are also available electronically. We also support end users via Authorized Tarantella Service Providers. In addition, we provide support services to distributors, value added resellers, OEMs and integrators.

Employees

As of September 30, 2004, Tarantella had 100 full time equivalent employees, including 17 in product development, 50 in sales and marketing, 12 in customer support services and 21 in distribution services and administration. In addition, Tarantella employs 15 product development contractors in Pune, India.

See also Note 19 of the Notes to Consolidated Financial Statements for the effect of the recent restructuring on employees.

Brief Company History

• 1979 Doug Michels and Larry Michels co-found The Santa Cruz Operation, Inc.

• 1986 Company expands into Europe—acquisition of a division of Logica, UK.

• 1987 Agreement with Microsoft to license XENIX.

• 1992 Launch of SCO OpenServer product.

• 1993 Acquisition of IXI, Ltd. for client integration technology.

• 1993 Company goes public on Nasdaq Stock Market, trading as SCOC.

• 1994 Acquisition of Visionware, Ltd., for client emulation technology.

• 1995 Acquisition of UNIX technology from Novell.

• 1997 Launch of the Tarantella product.

• 1998 Launch of UnixWare7 product.

• 2001 Release of Tarantella Enterprise 3 software.

• 2001 Sale of Server Operating System division and the Server Professional Services division to Caldera Systems, Inc.

• 2001 Company changes name to Tarantella, and changes trading symbol to TTLA.

• 2003 Acquisition of New Moon Systems, Inc. for Windows-based products expertise.

• 2003 Tarantella completes a private placement raising gross proceeds of approximately $2.3 million.

• 2003 Tarantella is de-listed from Nasdaq and begins trading as TTLA.PK.

• 2004 Tarantella rebrands product line as part of business restructuring strategy.

• 2004 Tarantella completes two private placements raising gross proceeds of $19.1 million.

• 2004 Tarantella begins trading as TTLA.OB.

32

Facilities

We occupy leased office space in the United States, the United Kingdom, Germany, Spain and Italy, consisting of an aggregate of approximately 28,000 square feet. Our office lease in Santa Cruz, California will expire in June 2005 and we are looking for other suitable facilities. We believe that the remaining facilities are adequate for our needs in the foreseeable future.

Legal Proceedings

On October 29, 2004, we entered into a Settlement Agreement and General Release of all Claims with a former employee who had filed a lawsuit against us in August 2003, pursuant to which the plaintiff gave Tarantella and its officers, directors, affiliates, subsidiaries, agents, employees, attorneys, successor and assigns a full release from all claims, rights, demands, actions, obligations, liabilities, and causes of action of any and every kind, nature and character whatsoever, whether based on a tort, contract, statute, or any other theory of recovery, and whether for compensatory or punitive damages which the plaintiff may now have, has ever had, or may in the future have, arising or in any way connected with the plaintiff’s employment or contractual relationship with Tarantella, or the manner in which those relationships terminated in exchange for a settlement amount of $680,000. This amount was expensed in fiscal 2004. A Notice of Settlement was filed October 21, 2004 and a Request for Dismissal with Prejudice was filed on or around November 9, 2004 in the Superior Court of California, Santa Clara County.

No other material legal proceedings are pending to which we are a party.

Securities Authorized for Issuance Under Equity Compensation Plans

Securities Authorized for Issuance Under Equity Compensation Plans as of September 30, 2004

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) )
	(a)	(b)		(c)
Equity compensation plans approved by security holders:
2002 Incentive Stock Option Plan	3,122,668	$	7.73	1,059,333
2003 Director Stock Option Plan	68,400	$	22.73	193,700
Employee Stock Purchase Plan	—		—	283,747
Equity compensation plans not approved by security holders:
2003 Stock Option Plan	1,379,133	$	1.24	80,966
Total	4,570,201			1,617,746

Brief Description of Plans:

2002 Incentive Stock Option Plan. As of September 30, 2004, we had authorized 5,802,733 shares of common stock for issuance under the 2002 Incentive Stock Option Plan (the “Option Plan”). Our board of directors administers the Option Plan and determines the terms of the options granted under the Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004 there were 1,059,333 shares available for issuance.

33

The exercise price of all incentive options granted under the Option Plan must be at least equal to the fair market value. Options granted under the Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

Director Option Plan. Our Director Option Plan, which provides for the grant of non-statutory stock options to our non-employee directors, was originally adopted by the board of directors in March 1993 and approved by the shareholders in May 1993. Our board of directors renewed the Director Option Plan in November 2002, and our shareholders voted to renew it in February 2003. We have reserved a total of 300,000 shares of common stock for issuance under the Director Option Plan. The Director Option Plan is currently administered by the board of directors. Under the Director Option Plan, each non-employee director automatically receives a non-statutory option to purchase 8,000 shares of our common stock on the date upon which such person first becomes a director (the “Initial Grant”). In addition, each non-employee director who remains in continuous status as a non-employee director is automatically granted a non-statutory option (the “Annual Grant”) to purchase 1,200 shares of common stock on the first day of each fiscal year pursuant to our Director Option Plan. As of September 30, 2004, there were 193,700 shares available for issuance under the Director Option Plan.

Our outside directors may elect to receive cash compensation in lieu of an Annual Grant. Each outside director who makes such an election shall receive cash compensation each quarter payable at a rate determined by the board. Options granted under our Director Option Plan have a term of ten (10) years unless terminated sooner upon termination of the optionee’s status as a director or otherwise pursuant to the Director Plan. Such options are not transferable by the optionee other than by will or the laws of descent or distribution, and each option is exercisable during the lifetime of the director only by such director. The exercise price of each option granted under the Director Option Plan is equal to the fair market value of the common stock on the date of grant. Initial Grant options granted under the Director Plan vest cumulatively at the rate of one-twentieth (1/20th) of the shares subject to the option for every three months after the date of grant. Annual Grant options vest at a rate of one-fourth (1/4th) of the shares subject to the option for every three months after the date of grant.

Employee Stock Purchase Plan. We have an Employee Stock Purchase Plan (“ESPP”) for all eligible employees which is administered by our board of directors. Under the ESPP, shares of our common stock may be purchased at six-month intervals at 85% of the fair market value on the first or last day of each six-month period whichever is lower. Employees may purchase shares through payroll deductions of up to 10% of gross compensation during an offering period. During fiscal 2004, fiscal 2003 and fiscal 2002, employees purchased 49,761, 81,972 and 123,814 shares at an average per share price of $1.36, $0.72 and $1.34, respectively. The number of shares reserved for issuance under the ESPP was increased by 50,000 shares in February 2002, (as calculated on a post-reverse split basis) and by 250,000 shares in May 2004. The number of shares reserved for future issuance as of September 30, 2004 was 283,747.

2003 Stock Option Plan. On April 2, 2003, our board of directors adopted the 2003 Stock Option Plan and authorized 200,000 shares of common stock for issuance under the plan. An additional 1,300,000 shares were added to the 2003 Stock Option Plan in December 2003. Our board of directors administers the 2003 Stock Option Plan and determines the terms of the options granted under the 2003 Stock Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004, there were 80,966 shares available for issuance. Options granted under the 2003 Stock Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

Recent Sales of Unregistered Securities.

Since June 2001, the Registrant has sold the following securities without registration under the Securities Act of 1933:

On June 5, 2003 we issued 1,592,014 unregistered shares of our common stock valued at $3.6 million in connection with our acquisition of all of the outstanding capital stock of New Moon Systems, Inc. and to satisfy New Moon’s obligations to the former employees of New Moon. Certain New Moon shareholders shall also

34

receive a minimum cash earnout of approximately $1.7 million over a period from January 1, 2004 to December 31, 2006 based on a royalty of 30% of New Moon product revenues, net of direct costs. After the shareholders have been paid the minimum earnout, they will be entitled to an additional royalty of 15% of New Moon product revenues, net of direct costs, during this period. In the event the minimum earnout is not achieved by the conclusion of the quarter ending December 31, 2006, Tarantella shall pay along with the final earnout payment an amount equal to the minimum earnout less all aggregate earnouts paid to date, less any off-sets and any escrow claim deficiencies. We also incurred approximately $0.3 million of direct merger costs, for a total purchase price of approximately $5.7 million. Our common stock issued to the New Moon Systems shareholders in the acquisition was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On December 9, 2003, we entered into an agreement whereby we issued 570,250 shares of our restricted and unregistered common stock at $0.93 per share to five of our senior executives and directors in lieu of a substantial portion of their calendar year 2004 cash compensation. The aggregate value of the shares issued to the executives and directors is $530,332.50, based on the market price of our common stock as of the date of the issuance. Our common stock issued to the five senior executives was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) thereof.

On January 23, 2004, we entered into an Independent Contractor Agreement whereby we issued 90,000 shares of our unregistered common stock at a value of $1.95 per share to InteSec Group LLC. InteSec will perform certain services for us in consideration for the issuance of the shares. The aggregate value of the shares issued to InteSec is $175,500, based on the market price of our common stock as of the date of the issuance. Our common stock issued to InteSec was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) thereof.

On September 30, 2003, we issued 1,950,000 unregistered shares of our common stock at a price of $1.156 per share, and warrants to purchase an additional 1,950,000 shares of our common stock at $1.395 per share. The warrants carry a five-year term. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On December 10, 2003, we entered into a private placement transaction pursuant to which we issued 2,750,000 unregistered shares of our common stock at a price of $1.00 per share, and warrants to purchase an additional 550,000 shares of our common stock at $1.39 per share. The warrants carry a five year term. The shares and warrant shares were issued under two separate purchase agreements. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On February 23, 2004, we completed a private placement transaction pursuant to which we issued 11,678,580 shares of our common stock at a price of $1.40 per share, and warrants to purchase an additional 2,335,716 shares of our common stock at $1.70 per share. The shares and warrant shares were issued under two separate purchase agreements. The warrants carry a five-year term. Additional warrants were issued in the February 2004 private placement as consideration for the placement agents, and are exercisable for up to 322,500 shares of our common stock at $1.70 per share, and carry a five-year term. Our common stock and warrants issued to the selling shareholders and the placement agents were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On March 29, 2004, we issued 140,000 unregistered shares of our common stock to Olympus Securities LLC at a price of $1.00 per share in lieu of payment of a finders fee for the December 2003 private placement. The aggregate price of the shares issued to Olympus Securities is $140,000. Our common stock issued to Olympus was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

35

On March 29, 2004, we acquired all of the outstanding capital stock of Caststream, Inc. in exchange for 100,000 shares of our common stock at a price of $2.27 per share, and warrants to purchase up to 100,000 shares of our common stock at a price of $2.10. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On November 1, 2004, we entered into an agreement whereby we issued 124,999 shares of our restricted and unregistered common stock at $1.14 per share to four members of our board of directors in lieu of a substantial portion of their fiscal year 2005 cash compensation. The aggregate value of the shares issued to directors is $142,499, based on the market price of our common stock as of the date of the issuance. Our common stock issued to the directors was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

36

MANAGEMENT

Executive Officers and Directors

The following table sets forth the names, ages and positions of our executive officers and directors as of November 23, 2004:

Name	Age	Position with the Company	Position Since
Alok Mohan(1)	56	Chairman	1994
Francis E. Wilde	53	President, Chief Executive Officer and Director	2003
Douglas L. Michels(3)	50	Director	1979
Gilbert P. Williamson(1)(2)(4)	67	Director	1993
Ronald Lachman(1)(4)	47	Director	1996
Ninian Eadie(2)(4)	67	Director	1996
Bruce Ryan(2)(3)	61	Director
John M. Greeley	57	Vice President, Chief Financial Officer	2004
E. Joseph Vitetta Jr.	47	Vice President, Corporate Development,     Corporate Secretary and Managing Director of     EMEA	2003
Gregory T. Quinn	52	Vice President North America Sales	2003
Steve Bannerman	45	Chief Marketing Officer	2004
Joseph Makoid	44	Vice President OEM Sales	2004

(1) Messrs. Mohan, Lachman and Williamson are members of the Compensation Committee

(2) Messrs. Eadie, Williamson and Ryan are members of the Audit Committee

(3) Messrs. Ryan and Michels are members of the Stock Option Committee

(4) Messrs. Eadie, Lachman and Williamson are members of the Nominating and Governance Committee

Mr. Mohan became Chairman of our board of directors in April 1998 after having served on our board since December 1994. Prior to this appointment, he served as our President since December 1994 and as our Chief Executive Officer from July 1995 until April 1998. In December 1994, he was elected to our board of directors and was appointed as our President and Chief Operating Officer. From May 1994 to December 1994, Mr. Mohan served as our Senior Vice President, Operations and Chief Financial Officer. Prior to joining us, Mr. Mohan was employed with NCR Corporation, a global technology company, where he served as Vice President and General Manager of the Workstation Products Division, from January 1990 until July 1993 before assuming the position of Vice President of Strategic Planning and Controller, with responsibility for financial planning and analysis as well as worldwide reporting from July 1993 to May 1994. Mr. Mohan serves as a director of Rainmaker Systems, Inc. and ImproveNet, Inc.

Mr. Wilde was appointed our President, Chief Executive Officer and Director in December 2003. Mr. Wilde served as Chairman of the board of Digital Stream USA, Inc., a privately-held software company from February 2002 until October 2003. Mr. Wilde served as President and CEO of Ravisent Technologies, Inc. a DVD software company, from August 1997 until August 2001. Mr. Wilde was also a Director of Ravisent Technologies, Inc. from August 1997 until January 2002. Mr. Wilde has also held executive management positions at IBM, Dell Computer, Memorex Telex and Academic Systems. Mr. Wilde is a Managing Director of Starlight Technology Partners.

Mr. Michels has served on our board of directors since 1979. As one of our co-founders, Mr. Michels was the principal architect of our technology strategy. Mr. Michels served as our President and Chief Executive Officer from April 1998 until December 2003. Mr. Michels also served as our Executive Vice President between January 1979 and April 1998 and was our Chief Technical Officer between January 1993 and April 1998. Mr. Michels serves as a director of FastNet Corporation and Arete Corporation.

37

Mr. Williamson has served on our board of directors since May 1993. From September 1991 until May 1993, he served as Chairman of the Board and Chief Executive Officer of NCR Corporation, and also served as a member of the board of directors of AT&T. He retired from NCR and the AT&T board of directors in May 1993. From January 1989 until September 1991, he served as President of NCR and as a director, and prior to that time served as Executive Vice President for Marketing at NCR for three years. Mr. Williamson is also a director of Fifth-Third Bank of Western Ohio (formerly Citizens Federal Bank, F.S.B.) headquartered in Dayton, Ohio. He also serves on the board of directors of two private companies: Dean Investments and French Oil Mill Machinery.

Mr. Lachman has served on our board of directors since February 1996. He is a partner of Lachman Goldman Ventures, a venture capital company that helps co-found and invest in internet infrastructure technology ventures including Lachman Goldman Ventures, Connected Corporation, UltraDNS, Catbird Networks, DuoDesign, Centergate Research, Whitehat/ACG, Availl, and Crestview Funds. Mr. Lachman has helped co-found or sits on the board of several of these companies. He founded Lachman Associates in January 1975 and served as its President from January 1975 until June 1989. In January of 1993 he founded Lachman Technology, serving as its President from January 1993 until May 1994. Both Lachman companies developed networking software shipped with most UNIX servers. Mr. Lachman served as Executive Vice President of Interactive Systems, a Kodak Company, from June 1989 through the end of 1992.

Mr. Eadie has served on our board of directors since April 1996. He retired from International Computers Limited (“ICL”), a hardware and software manufacturer, in April 1997. Mr. Eadie served as ICL’s Group Executive Director, Technology, from January 1994 until July 1996, where he was responsible for research, development, manufacturing and third party distribution of all ICL products. Prior to that he served as President of ICL Europe from January 1990 until January 1994 and from May 1988 until January 1990 he served as President, ICL International. Mr. Eadie served on ICL’s Board of Directors from 1984 until 1997, and was a member of ICL’s Executive Management Committee from 1988 until 1997. He was a member of the SCO (UK) Advisory Board from June 1994 until his appointment to our board of directors in April 1996.

Mr. Ryan has served on our board of directors since May 2004, and is chairman of our audit committee. Mr. Ryan is the Chairman of Infinicon Systems, a private technology company where he served as interim Chief Executive Officer from December 2003 to July 2004. Mr. Ryan served as the Executive Vice President and Chief Financial Officer of Global Knowledge Inc., an information technology education company, from February 1998 until November 2002. From 1994 until October 1997, Mr. Ryan was Executive Vice President and Chief Financial Officer at Amdahl Corporation. Mr. Ryan held several executive positions at Digital Equipment Corporation from 1969 until 1994, including Senior Vice President of Financial Services, Government and Professional Industries. Mr. Ryan serves as director of KVH Industries, Inc., CNT Corporation, and Axeda Systems, Inc.

Mr. Greeley was appointed as our Vice President and Chief Financial Officer in January 2004. Prior to joining us, Mr. Greeley held the position of CFO at Phoenix Technologies, a public software company, from April 2000 until May 2003. Mr. Greeley was Chief Financial Officer and Chief Operating Officer at Leasing Solutions, Inc. from 1999 until 2000. Mr. Greeley held various senior positions at GE Capital Corporation between 1983 and 1999.

Mr. Vitetta joined us as our Vice President, Corporate Development in December 2003, was appointed as our Corporate Secretary in January 2004. In October 2004, he also assumed the role of Managing Director of EMEA. Prior to joining us in 2003, Mr. Vitetta served as Executive Vice President, Corporate Development at Starlight Digital Technologies, LLC from February 2003 until December 2003. Mr. Vitetta served as Vice President, Corporate Development at Axeda Systems, Inc. (formerly known as Ravisent Technologies, Inc. and Quadrant International), from September 1998 until February 2003.

Mr. Quinn joined us in December 2003 as Vice President North American Operations & Strategic Alliances. Prior to joining us, Mr. Quinn served as Senior Vice President of Strategic Alliances and Major Accounts at

38

Caststream, Inc., an e-learning and online presentation delivery company, from June 2003 to December 2003. Prior to Caststream Mr. Quinn served from June 2000 to December 2002 as VP of Sales and Strategic Alliances at Conxion Corporation. In addition, Mr. Quinn has held a number of senior management positions in sales and marketing with IBM, Dell, Unisys, and Ravisent Technologies as well as spending 13 years at IBM from June 1974 to August 1987, holding several senior positions in sales and product marketing.

Mr. Bannerman joined us in December 2003, and serves as our Chief Marketing Officer. Prior to joining us, Mr. Bannerman served as CEO and Founder of Caststream, Inc., an e-learning and online presentation delivery company, from March 2003 to March 2004. From 1989 to 2001, Mr. Bannerman worked at Apple Computer in senior sales and marketing roles, most recently from 1999 to 2001 as Director of Marketing for QuickTime TV (QTV).

Mr. Makoid joined us in January 2004 as our Vice President OEM Sales. Prior to joining us, Mr. Makoid was Founder and CEO of Managed Service Partners, International, a joint development with the Sungard Corporation. From 1999 to 2001, Mr. Makoid worked for Data Center Direct, a company he founded in 1999. In 1987, Mr. Makoid co-founded Bus-Tech, a supplier of interconnect controllers and was instrumental in selling the company to Network Systems Corp. in 1994. From 1994 to 1998, Mr. Makoid was Vice President of Channel Sales for Network Systems and Bus-Tech. Mr. Makoid and other investors repurchased Bus-Tech in 1998, where he remained until founding Data Center Direct.

There is no family relationship between any of our director and executive officers.

Financial Code of Ethics

We have adopted a Financial Code Of Ethics, which we amended in November 2004, for our Chief Executive Officer, Chief Financial Officer, Vice Presidents and Employees With Financial Reporting Responsibilities, an amended copy of which is filed as Exhibit 14.1 to our Annual Report on Form 10-K, filed on December 29, 2004.

Board Composition

Currently, our board of directors has seven (7) members, a majority of whom, including Messrs. Eadie, Lachman, Ryan and Williamson, are “independent directors” as defined by the rules of the National Association of Securities Dealers, Inc. (“NASD”).

Director Compensation

In addition to the annual election of either cash compensation or stock options grants and the annual retainer payments, each outside Board member also received the following payments for meeting attendance in fiscal 2004: three hundred fifty dollars ($350) per each additional board meeting or committee meeting, (which may be attended telephonically), that occurred in addition to the regularly scheduled quarterly board and committee meeting. Directors are reimbursed for certain expenses in connection with attendance at board and committee meetings.

Outside directors (i.e., non-employee directors) receive compensation for their service on the board pursuant to the Director Plan, which is described in more detail in “Benefit Plans—Director Option Plan.” This compensation is in the form of stock options, or in the case of the annual grant, which is automatically granted on the first day of each fiscal year, cash may be elected in lieu of stock options. All current outside directors eligible for the annual grant elected to receive stock options for fiscal year 2004. Each outside director who makes an election to receive cash shall receive cash compensation each quarter payable at a rate determined by the board. In addition, our outside directors are paid an annual retainer valued at $25,000. For Fiscal 2005 the annual retainer is payable 25% in cash plus at the directors’ election, the value of the remaining 75% in either shares of common stock or a stock option grant of shares that vests quarterly over one year.

39

Board Committees

Our board of directors has the authority to appoint committees to perform certain management and administrative functions. Our board of directors currently has an audit committee, a compensation committee, a nominating and governance committee, and a stock option committee.

Audit Committee

Our audit committee is responsible for annually recommending independent accountants, preparing the reports, statements or charters as may be required by the NASD or the Securities and Exchange Commission, and reviewing:

• the adequacy of our system of internal accounting controls;

• our audited financial statements and reports and discussing the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; and

• disclosures by independent accountants concerning relationships with our company and the performance of our independent accountants.

Our audit committee currently consists of Messrs. Eadie, Ryan and Williamson, each of whom is an “independent director” as that term is defined under Rule 4200(a)(14) of the National Association of Securities Dealers, Inc. and under applicable SEC rules. The board of directors has determined that Mr. Ryan, the chairman of the audit committee, satisfies all of the criteria to be a “financial expert” as defined in Item 401(h) of Regulation S-K. We did not have an audit committee financial expert during the 2003 fiscal year and part of fiscal 2004. Our principal focus during that time was on the New Moon acquisition, the internal review of the accounting irregularities that led to the restatement of consolidated financial statements for the fiscal year ended September 30, 2002 and the quarters ended December 31, 2002 and March 31, 2003, and regaining compliance with the Nasdaq SmallCap Market’s minimum bid level requirement and its reporting requirement under the Exchange Act.

Compensation Committee

Our compensation committee is primarily responsible for reviewing and approving the compensation, benefits, corporate goals and objectives of our chief executive officer and our other executive officers; evaluating the performance and compensation of our executive officers in light of those goals and objectives; administering our employee benefit plans and making recommendations to our board of directors regarding these matters. Our compensation committee currently consists of Messrs. Lachman, Mohan and Williamson, a majority of whom are “independent directors” as that term is defined under Rule 4200(a)(14) of the NASD.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officer serving as a member of our board of directors or compensation committee (“Interlock”). There are no Interlocks between our board of directors or compensation committee and boards of directors or compensation committees of other companies.

Nominating and Governance Committee

In April 2004, we established a nominating and governance committee of our board of directors. The nominating and governance committee makes recommendations to the board regarding the size and composition of the board and is responsible for reviewing with the board from time to time the appropriate skills and characteristics required of board members. Further, the nominating and governance committee establishes procedures for the nomination process, identifies, recruits and recommends candidates for election to the board

40

of directors and provides oversight for all board, committee, and subcommittee activities. Our nominating and governance committee currently consists of Messrs. Williamson, Lachman and Eadie, each of whom is an “independent director” as that term is defined under Rule 4200(a)(14) of the National Association of Securities Dealers, Inc.

Stock Option Committee

Our stock option committee primarily serves as an administrative arm of the board to grant stock options under our option plans to persons other than directors, officers and consultants. Our stock option committee currently consists of Mr. Ryan, an outside director, and Mr. Michels. The members of our stock option committee are appointed by and serve at the discretion of the board. Our stock option committee is responsible for making option grants to persons other than directors, officers and consultants under our 2002 Incentive Stock Option Plan and the 2003 Stock Option Plan.

Executive Compensation

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation paid by the Company during the last three fiscal years to (i) the Company’s Chief Executive Officer, the Company’s former Chief Executive Officer and (ii) each of the four other most highly compensated executive officers (Named Executive Officers) of the Company, whose salary plus bonus exceeded $100,000 in fiscal year 2004:

		Annual Compensation						Long-Term Compensation
Name and Principal Position	Year	Salary($)(1)		Bonus/($)(2)		Other Annual Compensation ($)		Awards Securities Underlying Options(#)	All Other Compensation ($)(3)
Francis Wilde(4) President, Chief Executive Officer	2004	$	97,596	$	100,000	—		400,000	$	—
Christopher Scheybeler(17) Chief Technology Officer	2004 2003 2002		167,153 152,651 165,952		3,594 10,441 4,138	33,457 29,876 34,463	(8) (8) (8)	35,000 41,175 25,921		—   —   —
John M. Greeley(5) Senior Vice President, Chief Financial Officer	2004		111,346		55,000	—		272,500		2,271	(16)
Edmundo Costa(18) Vice President, Sales	2004 2003 2002		154,286 163,497 193,225		2,061 6,731 69,724	90,780 37,004 93,835	(9) (10) (11)	35,000 35,000 41,729		307,436 935 —	(14) (15)
E. Joseph Vitetta(6) Vice President, Corporate Development, Corporate Secretary, and Managing Director of EMEA	2004		97,115		27,500	50,562	(12)	147,500		—
Douglas L. Michels (7) Former President, Chief Executive Officer	2004 2003 2002		140,621 308,011 364,014		—   —   —	—   2,148 2,148	(13) (13)	60,000 40,001 476,109		3,406 2,007 3,000	(16) (15) (15)

(1) Includes salary earned in the applicable fiscal year but paid or to be paid in the following fiscal year.

(2) We pay bonuses to executive officers as determined by the Board of Directors. The bonuses for each executive officer are based on the officer’s base salary, the Company’s financial performance, and individual performance during the fiscal year. Includes bonuses earned in the applicable fiscal year but paid or to be paid in the following fiscal year.

41

(3) The dollar amounts in this column include a “Change in Control” payment made in 2004, Company paid life insurance premium above $50,000 and 401(k) contributions.

(4) Wilde was hired as President and CEO in December 2003.

(5) Mr. Greeley was appointed our Vice President and CFO in January 2004.

(6) Mr. Vitetta was appointed our Vice President Corporate Development in December 2003.

(7) Mr. Michels resigned as CEO in December 2003 but remains a Director.

(8) Represents car and travel allowances.

(9) Represents commission of $69,313 and car allowance of $5,587.

(10) Represents commission of $31,254, car allowance of $5,400, and annual airline club membership of $350.

(11) Represents commission of $88,435 and car allowance of $5,400.

(12) Represents commission of $36,830, housing allowance of $9,661 and living allowance of $4,071.

(13) Represents taxable Company paid health insurance benefit.

(14) Represents “Change in Control” payment made in 2004 of $307,436 and Company-paid life insurance premium of $3,406.

(15) Represents Company paid life insurance premium above $50,000 of $2,007 for Mr. Michels in 2003 and $623 for Mr. Costa in 2003, and 401(k) contributions paid by us on behalf of Mr. Michels of $3,000 in 2002 and on behalf of Mr. Costa of $312 in 2002.

(16) Represents Company paid life insurance premium

(17) In September 2004, Mr. Scheybeler resigned as our Chief Technology Officer, and assumed the role of a consultant for us.

(18) In September 2004, Mr. Costa resigned as our Vice President, Sales, and assumed the role of a consultant for us.

OPTION GRANTS IN FISCAL YEAR 2004

The following table sets forth each grant of stock options during the fiscal year ended September 30, 2004 to the Named Executive Officers:

Name	Option Shares Granted		Granted to Employees in Fiscal Year(3)		Price Per Share		Expiration Date	Value of Unexercised In-the-Money Option Shares(4)
								5%		10%
Francis Wilde	100,000 100,000 200,000	(2) (1) (7)	4.58 4.58 9.16	% % %	$ $ $	0.94 2.50 1.78	12/08/13 04/20/14 06/28/14	$ $ $	59,116 157,224 223,886	$ $ $	149,812 398,436 567,372
Christopher Scheybeler(5)	30,000 5,000	(2) (1)	1.37 0.23	% %	$ $	0.94 2.50	12/08/13 04/20/14	$ $	17,735 7,861	$ $	44,944 19,922
John M. Greeley	150,000 22,500 100,000	(2) (1) (7)	6.87 1.03 4.58	% % %	$ $ $	1.60 2.50 1.78	01/04/14 04/20/14 06/28/14	$ $ $	163,151 35,375 111,943	$ $ $	401,951 89,648 283,686
Edmundo Costa(6)(8)	30,000 5,000	(2) (1)	1.37 0.23	% %	$ $	0.94 2.50	12/08/13 04/20/14	$ $	17,735 7,861	$ $	44,944 19,922
E. Joseph Vitetta	50,000 22,500 75,000	(2) (1) (7)	2.29 1.03 3.44	% % %	$ $ $	0.90 2.50 1.78	12/10/13 04/20/14 06/28/14	$ $ $	28,300 35,375 83,957	$ $ $	71,718 89,648 212,765
Douglas L. Michels	60,000	(2)	2.75	%	$	0.94	12/08/13	$	35,470	$	89,887

(1) Options were granted under the 2002 Incentive Stock Option Plan (the “Option Plan”). The option exercise price of all stock options granted under the Option Plan is generally equal to the fair market value of the shares of Common Stock on the day prior to the date of grant. The options have a term of 10 years and generally vest at the rate 25% of the shares subject to the option per year in which the optionee remains in continuous status as an employee or consultant.

(2) Options were granted under the 2003 Stock Option Plan.

(3) The Company granted options to purchase an aggregate of approximately 2,589,000 shares to employees in fiscal year 2004.

42

(4) Potential realizable values are based on assumed annual rates of return specified by the Securities and Exchange Commission. The Company’s management cautions shareholders and option holders that such increases in values are based on speculative assumptions and should not be the basis for expectations of the future value of their holdings.

(5) In September 2004, Mr. Scheybeler resigned as our Chief Technology Officer, and assumed the role of a consultant for us. His options must be exercised on or before March 31, 2005.

(6) In September 2004, Mr. Costa resigned as our Vice President, Sales, and assumed the role of a consultant for us.

(7) Options were granted under the 2002 Incentive Stock Option Plan (the “Option Plan”). The option exercise price of all stock options granted under the Option Plan is generally equal to the fair market value of the shares of Common Stock on the day prior to the date of grant. The options have a term of 10 years and generally vest at a rate of 1/40th of the shares every quarter for forty quarters, as long as the optionee remains in continuous status as an employee or consultant.

(8) Exercise period for vested stock options may be extended pursuant to the terms of Mr. Costa’s severance agreement, but in no event shall the exercise period extend beyond September 30, 2005.

The following table provides information on option exercises in fiscal year 2004 by the Named Executive Officers and the value of such officer’s unexercised options as of September 30, 2004:

Name	Shares Acquired on Exercise	Value Realized		Number of Unexercised Option Shares On September 30, 2004		Value of Unexercised In-the-Money Option Shares On September 30, 2004 $(1)
				Exercisable	Unexercisable	Exercisable		Unexercisable
Francis Wilde	0	$	0	11,250	388,750	$	—	$	46,000
Christopher Scheybeler(2)	0	$	0	151,031	—	$	46,103	$	—
John M. Greeley	0	$	0	3,906	268,594	$	—	$	—
Edmundo Costa(3)	0	$	0	151,319	—	$	57,368	$	—
E. Joseph Vitetta	0	$	0	3,281	144,219	$	—	$	25,000
Douglas L. Michels	0	$	0	303,555	84,794	$	80,321	$	33,676

(1) Based on the market price of $1.40 per share, which was the closing price per share of our Common Stock on the Over-the-Counter Market on September 30, 2004, less the exercise price payable for such shares.

(2) In September 2002, Mr. Scheybeler resigned as our Chief Technical Officer and assumed the role as a consultant for us.

(3) In September 2004, Mr. Costa resigned as our Vice President, Sales, and assumed the role as a consultant for us.

Employment Agreements and Change of Control Arrangements

In March 1996, the board of directors approved a resolution providing that prior to or after a change in control, as defined in the 2002 Incentive Stock Option Plan, any outstanding options held by our Named Executive Officers that were granted pursuant to the 2002 Incentive Stock Option Plan that are not at such time exercisable and vested shall become fully exercisable and vested.

We have entered into change in control agreements with each of our Named Executive Officers. Pursuant to these agreements, each such officer is eligible to receive, in the event that his or her employment is involuntarily terminated within one year, without cause, following a change in control of Tarantella, an amount equal to the product of twelve (12) times his or her total monthly compensation including targeted bonuses at 100% attainment, continuation of health benefits available to him or her prior to the involuntary termination of employment for twelve (12) months thereafter and accelerated vesting on all options held. Pursuant to the terms of these agreements and the 2002 Incentive Stock Option Plan, a change in control occurs upon a 25% shift in Tarantella’s voting power for anyone entering into a change in control agreement before December 9, 2003 or a 50% shift in Tarantella’s voting power for anyone entering into a change in control agreement on or after December 9, 2003.

Benefit Plans

Director Option Plan

Our Director Option Plan, which provides for the grant of non-statutory stock options to our non-employee directors, was originally adopted by the board of directors in March 1993 and approved by the shareholders in

43

May 1993. Our board of directors renewed the Director Option Plan in November 2002, and our shareholders voted to renew it in February 2003. We have reserved a total of 300,000 shares of common stock for issuance under the Director Option Plan. The Director Option Plan is currently administered by the board of directors. Under the Director Option Plan, each non-employee director automatically receives a non-statutory option to purchase 8,000 shares of our common stock on the date upon which such person first becomes a director (the “Initial Grant”). In addition, each non-employee director who remains in continuous status as a non-employee director is automatically granted a non-statutory option (the “Annual Grant”) to purchase 1,200 shares of common stock on the first day of each fiscal year pursuant to our Director Option Plan. As of September 30, 2004, there were 193,700 shares available for issuance under the Director Option Plan.

Our outside directors may elect to receive cash compensation in lieu of an Annual Grant. Each outside director who makes such an election shall receive cash compensation each quarter payable at a rate determined by the board. In addition to the annual election of either cash compensation or stock options grants and the annual retainer payments, each outside Board member also received the following payments for meeting attendance in fiscal 2004: three hundred fifty dollars ($350) per each additional board meeting or committee meeting, (which may be attended telephonically), that occurred in addition to the regularly scheduled quarterly board and committee meeting.

Options granted under our Director Option Plan have a term of ten (10) years unless terminated sooner upon termination of the optionee’s status as a director or otherwise pursuant to the Director Plan. Such options are not transferable by the optionee other than by will or the laws of descent or distribution, and each option is exercisable during the lifetime of the director only by such director. The exercise price of each option granted under the Director Option Plan is equal to the fair market value of the common stock on the date of grant. Initial Grant options granted under the Director Plan vest cumulatively at the rate of one-twentieth (1/20^th) of the shares subject to the option for every three months after the date of grant. Annual Grant options vest at a rate of one-fourth (1/4^th) of the shares subject to the option for every three months after the date of grant.

Our outside directors are paid an annual retainer valued at $25,000. For fiscal 2004 the annual retainer was payable 25% in cash ($6,250) plus at the directors’ election, either 18,750 shares of common stock or a stock option grant of 18,750 shares that vested quarterly over the year. For fiscal 2005, the annual retainer was payable 25% in cash ($6,250) plus at the directors’ election, the value of the remaining 75% was paid in shares of common stock or a stock option grant that vests quarterly over the year

In the event we merge with or into another corporation or we are involved in a consolidation, acquisition of assets or like transaction immediately prior to occurrence of a change in control, any outstanding option under the Director Option Plan shall become fully exercisable and vested.

Unless terminated sooner, our Director Option Plan will terminate on November 14, 2012. The board has authority to amend or terminate our Director Plan provided no such action may affect options already granted and such options shall remain in full force and effect. As of September 30, 2004, options to purchase 68,400 shares of our common stock at a weighted average exercise price (per share) of approximately $22.73 per share were outstanding.

Employee Stock Purchase Plan. We have an Employee Stock Purchase Plan (“ESPP”) for all eligible employees which is administered by our board of directors. Under the ESPP, shares of our common stock may be purchased at six-month intervals at 85% of the fair market value on the first or last day of each six-month period whichever is lower. Employees may purchase shares through payroll deductions of up to 10% of gross compensation during an offering period. During 2004, 2003 and 2002, employees purchased 49,761, 81,972 and 123,814 shares at an average per share price of $1.36, $0.72 and $1.34, respectively. The number of shares reserved for issuance under the ESPP was increased by 50,000 shares in February, 2002, (as calculated on a post-reverse split basis) and by 250,000 shares in May, 2004. The number of shares reserved for future issuance as of September 30, 2004 was 283,747.

2002 Incentive Stock Option Plan. As September 30, 2004, we had authorized 5,802,733 shares of common stock for issuance under the 2002 Incentive Stock Option Plan (the “Option Plan”). Our board of directors

44

administers the Option Plan and determines the terms of the options granted under the Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004, there were 1,059,333 shares available for issuance.

The exercise price of all incentive options granted under the Option Plan must be at least equal to the fair market value. Options granted under the Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

2003 Stock Option Plan. On April 2, 2003, our board of directors adopted the 2003 Stock Option Plan and authorized 200,000 shares of common stock for issuance under the plan. An additional 1,300,000 shares were added to the 2003 Stock Option Plan in December 2003. Our board of directors administers the 2003 Stock Option Plan and determines the terms of the options granted under the 2003 Stock Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004, there were 80,966 shares available for issuance.

Options granted under the 2003 Stock Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

401(k) Plan. We maintain an employee savings plan, which qualifies under section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 50% of their pre-tax salary, up to certain statutory limits. Until December 31, 2002, we matched 50% of employee contributions up to the lower of 6% of the employee’s annual salary or $3,000. As of December 31, 2002, we no longer make any contribution. For fiscal 2003, 2002, and 2001, our total contribution towards the 401(k) plan amounted to $14,000 for the quarter ending December 31, 2002, $0.1 million for fiscal 2002 and $0.6 million for fiscal 2001.

During fiscal 2003, there was a partial plan termination of our 401(k) plan, which was triggered by our planned reductions in force. As a result, the participants that were terminated became fully vested, regardless of years of service. This did not result in us making any additional contribution. The eight employees that were impacted received additional funds from the plan of approximately $13,000.

Limitation on Liability and Indemnification Matters

As permitted under California law, we have agreements whereby we indemnify our officers and directors for certain events while the officer or director is, or was serving at our request in his capacity as a director or officer. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have Director’s and Officer’s insurance policy that limits our exposure and enables us to recover at least a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

Article IV of our Amended and Restated Articles of Incorporation authorizes us to indemnify our directors and officers to the fullest extent permissible under California law.

Article VI of our Amended and Restated Bylaws provides for mandatory indemnification of our officers and directors to the maximum extent allowable under California law. We are authorized to indemnify our employees and agents to the maximum extent allowable under California law. The rights to indemnity thereunder continue as to a person who has ceased to be our director, officer, employee or agent. In addition, the indemnity extends to persons who are or were serving at our request as a director, officer, employee or agent of another corporation, partnership, join venture, trust or other enterprise or who was a director, officer, employee or agent of a corporation which was a predecessor corporation of ours or of another enterprise at the request of such predecessor corporation.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.

45

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We describe below transactions and series of similar transactions, during our last three fiscal years, to which we were a party or will be a party, in which:

• the amounts involved exceeded or will exceed $60,000; and

• a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

We also describe below certain other transactions with our directors, executive officers and shareholders.

On March 29, 2004, we entered into a Stock Exchange Agreement with Caststream, Inc. and the shareholders of Caststream, Inc. Under the terms of the agreement, we acquired all the capital stock of Caststream in exchange for 100,000 shares of common stock and warrants for 100,000 shares. We also assumed certain liabilities of Caststream of approximately $40,000. The transaction was considered a related party transaction because two of the Caststream shareholders, E. Joseph Vitetta, Jr. and Stephen Bannerman were hired in December 2003 as Vice President Corporate Development and Chief Marketing Officer, respectively. Mr. Bannerman’s title subsequently changed to Chief Marketing Officer. In January 2004, Mr. Vitetta was appointed as Corporate Secretary, and in October 2004, he also assumed the role of Managing Director of EMEA. In addition, we hired three other Caststream shareholders in December 2003 in various marketing and technical positions. The Audit Committee of our board of directors, and our board of directors approved the transaction.

In April 1999, we entered into a consulting agreement with our Chairman, Alok Mohan, pursuant to which Mr. Mohan became our external consultant and his status as an employee ceased. The term of the agreement was for one year, commencing April 21, 1999, and was renewable by mutual agreement of both parties with approval by the Compensation Committee. As compensation for Mr. Mohan’s consulting services he received a fee target of $126,000 per year, paid as follows: $90,000 annually as a retainer; and $36,000 annually as a target incentive. Incentive payments were made solely based upon our performance against our Revenue and EPS measures, paid in accordance with the provisions of our Management Incentive Plan. The consulting agreement expired April 21, 2000, and we entered into a new consulting agreement, commencing on April 22, 2000 and continuing through the completion of the acquisition by Caldera Systems, Inc. of our Server and Professional Services business. As compensation for Mr. Mohan’s consulting services he received $5,000 per month, with no incentive bonus. With the approval of the Compensation Committee, we entered into amendments to Mr. Mohan’s consulting agreement pursuant to which, the consulting agreement continued through January 2004, upon the same terms and conditions. As compensation for Mr. Mohan’s consulting services, he received a fee targeted at $180,000 per year paid as follows: $90,000 annually as a retainer (paid monthly at $7,500); and $90,000 annually (paid quarterly) as a target incentive. Incentive payments were made solely based upon our performance against our revenue and operating income measures paid in accordance with the provisions of our Management Incentive Plan. Mr. Mohan received $76,500 for incentive payments during fiscal year 2003. For any quarter that we implement a “voluntary hour reduction” Mr. Mohan’s monthly retainer was reduced accordingly. Beginning in January 2003, his monthly retainer was $6,375.

On January 19, 2004, we entered into a new agreement that will remain in effect until December 31, 2004. Mr. Mohan will receive $22,500 annually (paid monthly) cash compensation, and he received 67,500 shares of restricted common stock. The shares are subject to a risk of forfeiture in the event of certain terminations of service relationship, which risk of forfeiture will lapse over time based on continued performance of services or earlier if we experience a change of control. Mr. Mohan will also receive $90,000 annually (paid annually) as a target incentive. Incentive payments shall be made solely based upon our performance against our revenue and operating measures paid in accordance with the provisions of the Tarantella Management Incentive Plan.

In January 2005, we will enter into a new agreement that will remain in effect until December 31, 2005. Mr. Mohan will receive $22,500 annually (paid monthly) cash compensation, and he will receive 59,211 shares of

46

restricted common stock. The shares are subject to a risk of forfeiture in the event of certain terminations of service relationship, which risk of forfeiture will lapse over time based on continued performance of services or earlier if we experience a change of control. Mr. Mohan will also receive $90,000 annually (paid annually) as a target incentive. Incentive payments shall be made solely based upon our performance against our revenue and operating measures paid in accordance with the provisions of the Tarantella Management Incentive Plan. Mr. Mohan’s stock options previously held continue to vest over the term of the agreement and convert to non-statutory options. As part of his fiscal year 2005 compensation, we will pay for certain health benefits. In addition, Mr. Mohan will receive the compensation normally accorded to members of our board of directors for participation on the board valued at $25,000 per year, which is paid 25% in cash (in quarterly payments) and 75% in restricted stock. Mr. Mohan will not be compensated for attendance at committee meetings and/or board meetings and will not be entitled to additional stock options granted to board members on an annual basis.

The J3D Family Limited Partnership and the Lawrence Michels Family Limited Partnership (both of which Douglas Michels is a general partner) are partners in Encinal Partnership No. 1 (“EP1”), which leases certain office premises located in Santa Cruz, California under two leases to us. The first lease commenced on January 1, 1989 and had a ten-year term, with two options to renew for five-year periods. The lease has been renewed through June 30, 2005. The lease covers approximately 50,830 square feet of building space at a current cost of approximately $94,587 per month, subject to an annual adjustment upward based on the Consumer Price Index. The second lease commenced on July 1, 1991 and had a seven-year term, with two options to renew for five-year periods. The second lease has been renewed through June 30, 2005. The second lease covers approximately 26,055 square feet of building space at a current cost of approximately $31,268 per month, subject to an annual adjustment based on the Consumer Price Index. Effective May 7, 2001 the second lease was assumed by Caldera.

The third partner in EP1 is Wave Crest Development, Inc. (“Wave Crest”). From time to time, Douglas Michels engages in real estate transactions with Wave Crest and its president. Until May 7, 2001, Wave Crest leased 61,500 square feet of office space in Santa Cruz, California to us under three separate leases, all of which had been renewed through June 30, 2005. The costs of the three leases were $6,473, $14,110, and $67,363 per month, subject to an annual adjustment based on the Consumer Price Index. Effective May 7, 2001, all three leases were assumed by Caldera International, Inc.

On December 10, 2003, we entered into a private placement transaction pursuant to which we sold common stock and warrants to several investors, including an investment group in which Mr. Wilde, our President, Chief Executive Officer and Director, acts as Managing Director and Joseph Makoid, our Vice President OEM Sales is an investor, resulting in gross proceeds of approximately $2,750,000.

In December 2003, we entered into an agreement with five of our senior executives and directors under which the senior executives and directors received restricted common stock in lieu of salary for portions of their calendar year 2004 compensation. The shares are valued at $0.93 per share, which was the fair market value of the shares at the time of the agreement. A total of 570,250 shares were issued to the following individuals:

•    Francis E. Wilde	50,000 shares
•    Ron Lachman	18,750 shares
•    Randy Bresee	105,000 shares
•    Alok Mohan	68,000 shares
•    Douglas Michels	328,500 shares

The shares are being held in escrow until January 2005, and are subject to a risk of forfeiture in the event of certain terminations of service relationship.

In December 2003, we entered into a Severance and Release Agreement with Randy Bresee, our former Senior Vice President Operations and Chief Financial Officer. Pursuant to the agreement, Mr. Bresee received

47

the benefits he was entitled to under our previously adopted change in control plan, which constituted a termination payment in the sum of $203,000, continuation of health benefits for twelve months from the date of his termination and all stock options become immediately exercisable. Further, in exchange for consulting services he will provide to us until the period ending January 5, 2005, Mr. Bresee received 105,000 shares of restricted common stock which we will hold in escrow for the term of the consulting services and are subject to risk of forfeiture in the event of termination of such services.

In May 2004, we entered into a transition agreement with Douglas L. Michels, our former President and Chief Executive Officer. Pursuant to the agreement, Mr. Michels will continue to serve as an employee until January 31, 2005, unless extended by mutual agreement, and will receive salary at the annual rate of $109,500. Mr. Michels’ health benefits will continue until January 31, 2006, provided, however, such benefits will cease the date Mr. Michels becomes eligible for comparable coverage under the plan of a subsequent employer. All stock options granted to Mr. Michels prior to his resignation as President and Chief Executive Officer shall become immediately exercisable. Further, Mr. Michels received 328,500 shares of restricted common stock which we will hold in escrow until January 2005 and are subject to risk of forfeiture in the event of termination of Mr. Michels’ employment.

We employ Peter Wilde, the son of our Chief Executive Officer Frank Wilde, as a sales representative. In Fiscal 2004, Mr. Peter Wilde was compensated $38,462.

In November 2004 we entered into an agreement with four of our directors under which the directors received restricted common stock in lieu of salary for portions of their Fiscal Year 2005 compensation. The shares are valued at $1.14 per share, which was the fair market value of the shares at the time of the agreement. A total of 124,999 shares will be issued to the following individuals:

•    Alok Mohan	75,658 shares
•    Ron Lachman	16,447 shares
•    Douglas Michels	16,447 shares
•    Bruce Ryan	16,447 shares

The shares are being held in escrow until the first trading day after the end of our Fiscal Year (September 30, 2005) as determined by our Insider Trading Policy, and are subject to a risk of forfeiture in the event of certain terminations of service relationship.

We believe that the transactions described above were on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions between us and any director or executive officer are subject to approval by a majority of the disinterested members of the board of directors.

Indemnification and Change in Control Agreements

We have entered into indemnification agreements with each of our directors and officers. See “Management—Limitation on Liability and Indemnification Matters.” We have also entered into Change in Control with our officers. See “Management—Employment Agreements and Change of Control Arrangements.”

Stock Option Grants

We have granted stock options to purchase shares of our common stock to our executive officers and directors. See “Management—Stock Option Grants in Our Fiscal Year 2003.”

In addition to the stock option grants disclosed in our “Management” section, we made the following grants to the new members of our executive management:

48

Option Grants to new Executive Management since September 2003

The following table sets forth each grant of stock options to our executive management since September 2003:

Name and Title	Number of Option Shares Granted		Individual Grants
			Exercise Price ($ per share)		Date Granted
Francis E. Wilde, Chief Executive Officer, President and Director	100,000 100,000 200,000 75,000	(1) (2) (3) (2)	$ $ $ $	0.94 2.50 1.78 1.14	12/9/03 4/21/04 6/29/04 11/1/04
John M. Greeley, Vice President and Chief Financial Officer	150,000 22,500 100,000 75,000	(1) (2) (3) (2)	$ $ $ $	1.60 2.50 1.78 1.14	1/6/04 4/21/04 6/29/04 11/1/04
E. Joseph Vitetta, Jr., Vice President Corporate Development and Corporate Secretary	50,000 22,500 75,000 75,000	(1) (2) (3) (2)	$ $ $ $	0.90 2.50 1.78 1.14	12/11/03 4/21/04 6/29/04 11/1/04
Steve Bannerman, Chief Marketing Officer	50,000 20,000 75,000	(1) (3) (2)	$ $ $	0.90 1.78 1.14	12/11/03 6/29/04 11/1/04
Gregory Quinn, Vice President North American Operations and Strategic Alliances	50,000 22,500 20,000	(1) (2) (3)	$ $ $	0.90 2.50 1.78	12/11/03 4/21/04 6/29/04
Joseph Makoid, Vice President OEM Sales	50,000 22,500 75,000 75,000	(1) (2) (3) (2)	$ $ $ $	1.95 2.50 1.78 1.14	1/13/04 4/21/04 6/29/04 11/1/04
Thomas P. Rhodes, Former Vice President—General Counsel	30,000	(1)	$	1.95	1/13/04

(1) The options were granted under the 2003 Stock Option Plan. The option exercise price of all stock options granted under the Option Plan is equal to the fair market value of the shares of Common Stock on the day prior to the date of grant. The options have a term of 10 years and generally vest at the rate 25% of the shares subject to the option after completion of the first year of employment, and  ¹/16^th per quarter thereafter, as long as the optionee remains in continuous status as an employee or consultant. None of the shares subject to the option granted to Mr. Rhodes vested prior to his departure from Tarantella.

(2) The options were granted under the 2002 Incentive Stock Option Plan. The option exercise price of all stock options granted under the 2002 Incentive Stock Option Plan is equal to the fair market value of the shares of Common Stock on the day prior to the date of grant. The options have a term of 10 years and generally vest at the rate of 25% of the shares subject to the option per year, as long as the optionee remains in continuous status as an employee or consultant.

(3) The options were granted under the 2002 Incentive Stock Option Plan. The option exercise price of all stock options granted under the 2002 Incentive Stock Option Plan is equal to the fair market value of the shares of Common Stock on the day prior to the grant date. The options have a term of 10 years and vest at the rate of  ¹/40^th of the shares every quarter for forty quarters, as long as the optionee remains in continuous status as an employee or consultant.

49

SELLING SHAREHOLDERS

The following table sets forth information with respect to the number of shares of common stock owned by the selling shareholders named below both prior to this offering and assuming the sale of all shares offered hereby. The information in the table below and in the related footnotes is current as of the date of this prospectus and is based on information provided to us by the selling shareholders. The shares are being registered to permit public disposition of the shares, and the selling shareholder may dispose of the shares from time to time.

Shares of common stock subject to stock options and warrants are deemed to be outstanding for computing the percentage ownership of the person holding these options and warrants and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of any other person.

The shares being covered hereby were acquired in connection with the following transactions:

• Up to 80,000 shares of our common stock issuable upon exercise of warrants issued to certain individuals in connection with a financial advisory and investment banking agreement with EarlyBirdCapital, Inc. entered into in April 2002.

• 1,468,845 shares of our common stock issued in connection with our acquisition in June 2003 of New Moon Systems, Inc.

• 1,950,000 shares of our common stock, and up to an additional 1,950,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in September 2003.

• 570,250 shares of our common stock issued in December 2003 to five of our executive officers and directors as part of their calendar year 2004 compensation.

• 2,750,000 shares of our common stock, and up to an additional 550,000 shares of our common stock issuable upon exercise of warrants issued to certain investors in a private placement transaction in December 2003.

• 90,000 shares of our common stock issued to InteSec Group LLC in January 2004 as compensation for performance as an independent contractor.

• 11,678,580 shares of our common stock, and up to an additional 2,658,216 shares of our common stock issuable upon exercise of warrants issued to certain investors and placement agents in a private placement transaction in February 2004.

• 140,000 shares of our common stock issued in March 2004 to Olympus Securities, LLC as payment for a finders fee for the December 2003 private placement.

• 100,000 shares of our common stock, and up to 100,000 shares of our common stock issuable upon exercise of warrants issued in connection with our March 2004 acquisition of Caststream, Inc.

The shares were issued pursuant to exemptions from the registration requirements of the Securities Act.

50

The shares may be disposed of from time to time by the selling shareholders named below:

	Number of Shares Owned Prior to the Offering1			Number of Shares Being Offered	Number of Shares Owned After the Offering2
Name of Selling Shareholder	Number	Percent			Number	Percent
Michael Heath Abbate	4,500	*		4,500	0	*
Karen Renee Andre3	8,100	*		8,100	0	*
Pankaj Ankam	3,600	*		3,600	0	*
Carlos Arellano4	3,600	*		3,600	0	*
Banatao Living Trust DTD 7/21/995	29,942	*		29,942	0	*
Stephen Bannerman6	160,2767	*		90,276	70,0008	*
Rajat Bhargava	987	*		987	0	*
Rhonda Kaye Beynon	1,800	*		1,800	0	*
BFS US Special Opportunities Trust PLC9	857,14310	3.12	%	857,143	0	*
Bonanza Master Fund LTD11	428,57212	1.56	%	428,572	0	*
Timothy M. Brady	5,400	*		5,400	0	*
Randall Bresee13	304,42014	1.11	%	105,000	199,42014	*
April Ann Raimundo Campbell4	26,20715	*		8,100	18,10715	*
Amy Elizabeth Carlisle	2,700	*		2,700	0	*
Caspian Capital Partners, L.P.16	85,71517	*		85,715	0	*
Navin Chaddha18	3,948	*		3,948	0	*
Raminder Singh Channe	3,600	*		3,600	0	*
Brenda R. Chastaine	2,700	*		2,700	0	*
John Cleary19	158	*		158	0	*
Scot Cohen	195,00020	*		195,000	0	*
Corsair Capital Partners, L.P.16	535,71521	1.95	%	535,715	0	*
Corsair Capital Investors, Ltd.16	36,78722	*		34,287	2,500	*
Corsair Capital Partners 100 L.P.16	21,43023	*		21,430	0	*
Corsair Long Short International, Ltd.16	32,93024	*		21,430	11,500	*
Corsair Select, L.P.16	244,28725	*		244,287	0	*
Sunford Rafael Dias	2,700	*		2,700	0	*
Lindsay Gruber Dunham	21,42826	*		21,428	0	*
Elisabeth Eisner19	395	*		395	0	*
James Elwinger	1,800	*		1,800	0	*
GCWF Investment Partners II27	987	*		987	0	*
Calvin Wah Gee	3,600	*		3,600	0	*
Susan Giangrande4	17,00028	*		2,000	15,00029	*
James Robert Gladstone	4,500	*		4,500	0	*
Ashish Goel	1,800	*		1,800	0	*
Neal I. Goldman	214,28630	*		214,286	0	*
Jon D. Gruber TTEE FBO Jonathan Wyatt Gruber	21,42831	*		21,428	0	*
Jon D. Gruber & Linda W. Gruber	150,00032	*		150,000	0	*
Gruber & McBaine International33	150,00034	*		150,000	0	*
Richard A. Hansen115	142,50035	*		142,500	0	*
Max Robert Herrmann4	35,50436	*		11,700	23,80436	*
Hitschler Enterprises, LLC37	600,00038	2.18	%	600,000	0	*
InteSec Group LLC39	90,000	*		90,000	0	*
Jeff Jameson4	53,44240	*		28,442	25,00041	*
Christopher Kawalek4	81,63242	*		51,632	30,00043	*
Daniel Y. Kikuchi, Frank C. Oliver, as Oliver Kikuchi Group Capital44	198	*		198	0	*
Tyson Kopczynski	5,400	*		5,400	0	*

51

	Number of Shares Owned Prior to the Offering1			Number of Shares Being Offered	Number of Shares Owned After the Offering2
Name of Selling Shareholder	Number	Percent			Number	Percent
Ronald Lachman45	122,35046	*		18,750	103,60046	*
Lagunitas Partners LP33	450,00047	1.64	%	450,000	0	*
Susan L. and Stephen A. Lapinski	777	*		777	0	*
Edwin J. Lau48	21,600	*		21,600	0	*
Michelle LeCornu	270	*		270	0	*
Kent Lindstrom	8,02849	*		8028	0	*
Marty B. Lorenzo19	79	*		79	0	*
Marcus D. Lowe50	36,000	*		36,000	0	*
Guillermo D. Luchangco and/or Maria Lourdes M. Luchangco	593	*		593	0	*
Harry Paul Lueders	540	*		540	0	*
Mariner Opportunity Fund, L.P.16	85,71551	*		85,715	0	*
J. Patterson McBaine	64,28652	*		64,286	0	*
Douglas Lloyd Michels53	1,138,91654	4.14	%	328,500	810,41654	2.95	%
MicroCapital Fund Ltd.55	140,57256	*		140,572	0	*
MicroCapital Fund L.P.55	288,00057	1.05	%	288,000	0	*
Lucia Liu Mikasa4	27,72158	*		8,100	19,62158	*
Mobius Technology Ventures Advisors VI, LP59	15,636	*		15,636	0	*
Mobius Technology Ventures Side Fund VI, LP59	16,413	*		16,413	0	*
Mobius Technology Ventures VI, LP59	401,323	1.46	%	401,323	0	*
Alok Mohan60	500,570	1.82	%	68,000	432,570	1.57	%
David Mojdehi	1,98061	*		1,980	0	*
Prashant Navare4	67,53462	*		21,600	45,93462	*
Robert James Nikora	11,700	*		11,700	0	*
Novell, Inc.	118,413	*		118,413	0	*
David N. Olson	2,50063	*		2,500	0	*
Olympus Securities, LLC	140,00064	*		140,000	0	*
Tienshia Tina Pan	3,600	*		3,600	0	*
Lawrence C. and/or Judy C. Qua	1,386	*		1,386	0	*
Liza Ann Raimundo	900	*		900	0	*
Nancy Raimundo	270	*		270	0	*
Douglas J. Rein19	198	*		198	0	*
Renaissance US Growth Investment Trust PLC9	857,14365	3.12	%	857,143	0	*
Renaissance Capital Growth & Income Fund III, Inc.9	857,14366	3.12	%	857,143	0	*
Roth Capital Partners, LLC67	155,00068	*		155,000	0	*
Ann Christina Rothchild	3,600	*		3,600	0	*
Ruchi Saini	1,800	*		1,800	0	*
Harmin Sainion	8,100	*		8,100	0	*
Jonathan Case Salas	6,300	*		6,300	0	*
Senvest Masterfund LP	214,28669	*		214,286	0	*
Senvest International LLC	214,28670	*		214,286	0	*
Sherleigh Associates Inc. Profit Sharing Plan71	857,14372	3.12	%	857,143	0	*
Kamaljit Singh	3,600	*		3,600	0	*
SOFTBANK US Ventures VI, LP59	430,434	1.56	%	430,434	0
Nakul Sood4	20,18773	*		8,100	12,08773	*
Special Situations Fund III, L.P.74	2,160,00075	7.85	%	2,160,000	0	*
Special Situations Cayman Fund, L.P.74	720,00076	2.62	%	720,000	0	*
Special Situations Private Equity Fund, L.P.74	720,00077	2.62	%	720,000	0	*

52

	Number of Shares Owned Prior to the Offering1			Number of Shares Being Offered	Number of Shares Owned After the Offering2
Name of Selling Shareholder	Number	Percent			Number	Percent
Special Situations Technology Fund, L.P.74	876,73178	3.19	%	871,760	4,971	*
Special Situations Technology Fund II, L.P.74	4,478,04079	16.28	%	4,453,240	24,800	*
Starlight Technology Partners, LLC80	300,00081	1.09	%	300,000	0	*
Stratford Partners L.P.82	428,57283	1.56	%	428,572	0	*
Brian G. Swift	47,50084	*		22,500	25,000	*
Tallwood Partners LLC85	29,942	*		29,942	0	*
Savio D. Tran	540	*		540	0	*
Topaz Partners86	857,14387	3.12	%	857,143	0	*
Dennis J. Topoleski	2,700	*		2,700	0	*
Valmora Investment & Management Corporation88	2,784	*		2,784	0	*
Vertex Technology Fund II89	98,342	*		98,342	0	*
Vertex Technology Fund III89	98,342	*		98,342	0	*
Vertical Ventures90	780,00091	2.84	%	780,000	0	*
E. Joseph Vitetta, Jr.92	165,14293	*		17,642	147,50094	*
Walker Smith International Fund, Ltd.95	814,44096	2.96	%	814,170	0	*
Walker Smith Capital, L.P.95	137,76097	*		137,760	0	*
WS Opportunity Fund (QP) L.P.95	245,84698	*		245,846	0	*
Walker Smith Capital (QP) L.P.95	649,20099	2.36	%	649,200	0	*
WS Opportunity Fund, L.P.95	201,480100	*		201,480	0	*
WS Opportunity Fund International, Ltd.95	265,560101	*		265,560	0	*
Francis E. Wilde102	450,000103	1.63	%	50,000	400,000103	1.45	%
Dr. Alexander Yap and/or Cristina Yap	1,066	*		1,066	0	*
Richard A. Young and Donna L. Young Trustees for the Young Trust104	1,582	*		1,582	0	*
EarlyBirdCapital, Inc.114	42,000105	*		42,000105	0	*
Anthony Stoss	24,000106	*		24,000106	0	*
Steve Levine	6,000107	*		6,000107	0	*
Robert Gladstone	1,000108	*		1,000108	0	*
Dave Karlin	2,000109	*		2,000109	0	*
Carl Wiseman	1,000110	*		1,000110	0	*
Stu Horowitz	500111	*		500111	0	*
Alan Weiss	500112	*		500112	0	*
David Nussbaum	3,000113	*		3000113	0	*

* Less than 1% of the outstanding common shares.

¹ Based on 27,513,219 shares of common stock outstanding as of July 13, 2004. Shares of common stock subject to stock options and warrants are deemed to be outstanding for computing the percentage ownership of the person holding these options and warrants and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of any other person.

² Assumes the sale of all of the shares of common stock offered by the Selling Shareholders. This registration statement shall also cover any additional shares of common stock which become issuable in connection with the shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without receipt of consideration which results in an increase in the number of our outstanding common stock.

³ Ms. Andre was the Vice President Finance at New Moon Systems prior to our acquisition of New Moon Systems.

⁴ Selling Shareholder is currently serving as our employee.

53

⁵ Mr. Banatao was the chairman of the board of directors of New Moon Systems until we acquired it in June 2003. Mr. Banatao exercises sole voting and dispositive powers over the shares held by the Banatao Living Trust DTD 7/21/99.

⁶ Mr. Bannerman is currently serving as our Chief Marketing Officer.

⁷ Includes 45,138 shares of our common stock issuable upon the exercise of warrants and 70,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁸ Includes 70,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁹ Russell Cleveland, Robert Pearson and John Schmit exercise shared voting and dispositive powers over the shares held by BFS US Special Opportunites Trust PLC, Renaissance US Growth Investment Trust PLC, and Renaissance Capital Growth & Income Fund III.

¹⁰ Includes 142,857 shares of our common stock issuable upon the exercise of warrants.

¹¹ Bernay Box exercises sole voting and dispositive powers over the shares held by Bonanza Master Fund.

¹² Includes 71,429 shares of our common stock issuable upon the exercise of warrants.

¹³ Mr. Bresee served as our Vice President Operations and Chief Financial Officer until January 2004. He currently serves as an Independent Consultant to us.

¹⁴ Includes 198,413 shares of common stock issuable upon the exercise of stock options. Mr. Bresee’s stock options are fully vested.

¹⁵ Includes 18,107 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

¹⁶ Includes 14,286 shares of our common stock issuable upon the exercise of warrants.

¹⁷ Jay Petschek and Steven Major exercise shared voting and dispositive powers over the shares held by Caspian Capital Partners, L.P., Mariner Opportunity Fund, L.P., Corsair Capital Partners, L.P., Corsair Capital Investors, Ltd., Corsair Capital Partners 100, L.P., Corsair Long Short International, Ltd. and Corsair Select, L.P.

¹⁸ Mr. Chaddha was a member of New Moon Systems board of directors prior to our acquisition of New Moon Systems in June 2003.

¹⁹ Selling Shareholder is an attorney with Gray, Cary, Ware and Freidenrich, outside counsel to New Moon Systems both before and during our acquisition of New Moon Systems in June 2003.

²⁰ Includes 97,500 shares of our common stock issuable upon the exercise of warrants.

²¹ Includes 89,286 shares of our common stock issuable upon the exercise of warrants.

²² Includes 5,715 shares of our common stock issuable upon the exercise of warrants.

²³ Includes 3,572 shares of our common stock issuable upon the exercise of warrants.

²⁴ Includes 3,572 shares of our common stock issuable upon the exercise of warrants.

²⁵ Includes 40,715 shares of our common stock issuable upon the exercise of warrants.

²⁶ Includes 3,571 shares of our common stock issuable upon the exercise of warrants.

²⁷ Selling Shareholder is an investment entity associated with Gray, Cary, Ware & Freidenrich, outside counsel to New Moon Systems both before and during our acquisition of New Moon Systems in June 2003. James M. Koshland exercises sole voting and dispositive powers over the shares held by GCWF Investment Partners II

²⁸ Includes 1,000 shares of our common stock issuable upon the exercise of warrants and 15,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally

54

vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

²⁹ Includes 15,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

³⁰ Includes 35,714 shares of our common stock issuable upon the exercise of warrants.

³¹ Includes 3,571 shares of our common stock issuable upon the exercise of warrants.

³² Includes 25,000 shares of our common stock issuable upon the exercise of warrants.

³³ Jon D. Gruber & J. Patterson McBaine exercise shared voting and dispositive powers over the shares held by Gruber & McBaine International and Lagunitas Partners, LP.

³⁴ Includes 25,000 shares of our common stock issuable upon the exercise of warrants.

³⁵ Includes 142,500 shares of our common stock issuable upon the exercise of warrants.

³⁶ Includes 23,804 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

³⁷ W.A. Hitschler exercises sole voting and dispositive powers over the shares held by Hitschler Enterprises.

³⁸ Includes 100,000 shares of our common stock issuable upon the exercise of warrants.

³⁹ John L. Kaufman exercises sole voting and dispositive powers over the shares held by InteSec Group LLC.

⁴⁰ Includes 14,221 shares of our common stock issuable upon the exercise of warrants, and 25,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁴¹ Includes 25,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁴² Includes 25,816 shares of our common stock issuable upon the exercise of warrants, and 30,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁴³ Includes 30,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁴⁴ Daniel Y. Kikuchi exercises sole voting and dispositive powers over the shares held by Daniel Y. Kikuchi, Frank C. Oliver as Oliver Kikuchi Capital Group.

⁴⁵ Mr. Lachman currently serves on our Board of Directors.

⁴⁶ Includes 89,200 shares of common stock issuable upon the exercise of stock options. Our stock option grants generally vest pursuant to our option plans: the first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest

55

every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁴⁷ Includes 75,000 shares of our common stock issuable upon the exercise of warrants.

⁴⁸ Mr. Lau was New Moon Systems’ Vice Chairman and Vice President Corporate Development. Upon our acquisition of New Moon in June 2003, Mr. Lau served as our Vice President Strategic Planning until January 15, 2004. He is currently serving as an Independent Consultant to us.

⁴⁹ Includes 4,014 shares of our common stock issuable upon the exercise of warrants.

⁵⁰ Mr. Lowe was New Moon Systems’ President and Chief Executive Officer. Upon our acquisition of New Moon in June 2003, Mr. Lowe served in a temporary employment capacity as our Executive Marketing Consultant until March 31, 2004.

⁵¹ Includes 14,286 shares of our common stock issuable upon the exercise of warrants.

⁵² Includes 10,714 shares of our common stock issuable upon the exercise of warrants.

⁵³ Mr. Michels served as our President and Chief Executive Officer until December 2003. He is currently employed by us as our Internal Strategy Consultant.

⁵⁴ Includes 15,000 shares of common stock in J3D Family Limited Partnership and 47,499 shares of common stock in Lawrence Michels Family Limited Partnership, of which Mr. Michels is General Partner in both. Includes 388,349 shares of common stock issuable upon the exercise of stock options. Mr. Michels stock options are fully vested.

⁵⁵ Ian Ellis exercises sole voting and dispositive powers over the shares held by MicroCapital Fund Ltd. and MicroCapital Fund L.P.

⁵⁶ Includes 23,249 shares of our common stock issuable upon the exercise of warrants.

⁵⁷ Includes 48,000 shares of our common stock issuable upon the exercise of warrants.

⁵⁸ Includes 19,621 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁵⁹ Designees of Mobius held two board seats on New Moon Systems’ board of directors prior to our acquisition of New Moon Systems in June 2003. D. Rex Golding, Gary Rieschel, Greg Galanos, Greg Prow, Heidi Roizen, and Brad Feld exercise shared voting and dispositive powers over the shares held by Mobius Technology Advisors VI, LP, Mobius Technology Ventures Side Fund VI, LP, Mobius Technology Ventures VI, LP, and SOFTBANK US Ventures VI, LP.

⁶⁰ Mr. Mohan is the Chairman of our Board of Directors, and serves as a consultant to us.

⁶¹ Includes 990 shares of our common stock issuable upon the exercise of warrants.

⁶² Includes 45,934 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁶³ Includes 2,500 shares of our common stock issuable upon the exercise of warrants issued as partial compensation for services rendered by Security Research Associates, Inc., of which this selling shareholder is an affiliate, as a placement agent in our February 2004 private placement, for which Security Research Associates was also paid $50,000.

⁶⁴ Represents shares issuable upon exercise of warrants issued as compensation for serving as a placement agent in our December 2003 private placement. James Carrazza exercises sole voting and dispositive powers over the shares held by Olympus Securities. Olympus Securities was also paid $118,346 and $294,000 as compensation for serving as a placement agent in our September 2003 and February 2004 private placements, respectively.

⁶⁵ Includes 142,857 shares of our common stock issuable upon the exercise of warrants.

⁶⁶ Includes 142,857 shares of our common stock issuable upon the exercise of warrants.

⁶⁷ Gordon Roth and Byron Roth Roth exercise shared voting and dispositive powers over the shares held by Roth Capital Partners LLC.

56

⁶⁸ Represents 155,000 shares of our common stock issuable upon the exercise of warrants issued as partial compensation for services rendered as a placement agent in our February 2004 private placement, for which Roth Capital was also paid $420,000.

⁶⁹ Includes 35,714 shares of our common stock issuable upon the exercise of warrants.

⁷⁰ Includes 35,714 shares of our common stock issuable upon the exercise of warrants.

⁷¹ Jack Silver exercises sole voting and dispositive powers over the shares held by Sherleigh Capital.

⁷² Includes 142,857 shares of our common stock issuable upon the exercise of warrants.

⁷³ Includes 12,087 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁷⁴ MGP Advisors Limited (“MGP”) is the general partner of Special Situations Fund III, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP and the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. SST Advisers, L.L.C. (“SSTA”) is the general partner of and investment adviser to the Special Situations Technology Fund, L.P. and the Special Situations Technology Fund II, L.P. MG Advisers, L.L.C. (“MG”) is the general partner of and investment adviser to the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the principal owners of MGP, AWM, SSTA and MG and are principally responsible for the selection, acquisition and disposition of the portfolio securities by each investment adviser on behalf of its fund.

⁷⁵ Includes 360,000 shares of our common stock issuable upon the exercise of warrants.

⁷⁶ Includes 120,000 shares of our common stock issuable upon the exercise of warrants.

⁷⁷ Includes 120,000 shares of our common stock issuable upon the exercise of warrants.

⁷⁸ Includes 304,960 shares of our common stock issuable upon the exercise of warrants.

⁷⁹ Includes 1,557,540 shares of our common stock issuable upon the exercise of warrants.

⁸⁰ Francis E. Wilde, our President, Chief Executive Officer and Director is the managing partner of Starlight Technology Partners, LLC, and Joseph Makoid, our Vice President OEM Sales in an investor in Starlight Technology Partners, LLC. Francis E. Wilde exercises sole voting and dispositive powers over the shares held by Starlight Technology Partners, LLC.

⁸¹ Includes 50,000 shares of our common stock issuable upon the exercise of warrants.

⁸² Mark Fain and Chad Comiteau exercise shared voting and dispositive powers over the shares held by Stratford Partners L.P.

⁸³ Includes 71,429 shares of our common stock issuable upon the exercise of warrants.

⁸⁴ Includes 22,500 shares of our common stock issuable upon the exercise of warrants issued as partial compensation for services rendered by Security Research Associates, Inc., of which this selling shareholder is an affiliate, as a placement agent in our February 2004 private placement, for which Security Research Associates was also paid $50,000.

⁸⁵ Diosdado Banatao exercises sole voting and dispositive powers over the shares held by Tallwood Partners LLC.

⁸⁶ Kevin Schweitzer exercises sole voting and dispositive powers over the shares held by Topaz Partners.

⁸⁷ Includes 142,857 shares of our common stock issuable upon the exercise of warrants.

⁸⁸ Leonardo Siguion Reyna exercises sole voting and dispositive powers over the shares held by Valmora Investment & Management Corporation.

⁸⁹ A designee of Vertex held one board seat on New Moon Systems’ Board of Directors prior to our acquisition of New Moon Systems in June 2003. Tay Siew Choon, Tan Mui Hong, Sum Soon Lim, Lee Kheng Nam, Lee Kwee Jee, Lim Kok Liang, and Chua Joo Hock exercise shared voting and dispositive powers over the shares held by Vertex Technology Fund II and Vertex Technology Fund III.

⁹⁰ Joshua Silverman exercises sole voting and dispositive powers over the shares held by Vertical Ventures.

⁹¹ Includes 390,000 shares of our common stock issuable upon the exercise of warrants.

⁹² Mr. Vitetta currently serves as our Vice President Corporate Development and Corporate Secretary.

⁹³ Includes 8,821 shares of our common stock issuable upon the exercise of warrants and 147,500 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally

57

vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁹⁴ Includes 147,500 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

⁹⁵ Reid S. Walker and G. Stacy Smith are the control persons with respect to investment discretion for Walker Smith International Fund, Ltd., Walker Smith Capital (QP), L.P. and Walker Smith Capital, L.P. Reid S. Walker, G. Stacy Smith and Patrick P. Walker are the control persons with respect to investment discretion for WS Opportunity Fund International, Ltd., WS Opportunity Fund(QP), L.P. and WS Opportunity Fund, L.P.

⁹⁶ Includes 135,740 shares of our common stock issuable upon the exercise of warrants.

⁹⁷ Includes 22,960 shares of our common stock issuable upon the exercise of warrants.

⁹⁸ Includes 40,974 shares of our common stock issuable upon the exercise of warrants.

⁹⁹ Includes 108,200 shares of our common stock issuable upon the exercise of warrants.

¹⁰⁰ Includes 33,580 shares of our common stock issuable upon the exercise of warrants.

¹⁰¹ Includes 44,260 shares of our common stock issuable upon the exercise of warrants.

¹⁰² Mr. Wilde currently serves as our President, Chief Executive Officer and a director on our Board of Directors.

¹⁰³ Includes 400,000 shares of common stock issuable upon the exercise of stock options. Our stock option grants to employees generally vest pursuant to our option plans: an employee’s first stock option grant has a one year cliff from the vesting commencement date,  ¹/4 of the shares vest at the conclusion of the first year; 1/16^th of the shares vest every three months thereafter. Subsequent grants typically vest 1/16^th of the shares subject to the option every three months from the vesting commencement date.

¹⁰⁴ Richard A. Young and Donna L. Young exercise shared voting and dispositive powers over the shares held by Richard A. Young and Donna L. Young Trustees for the Young Trust.

¹⁰⁵ Includes 42,000 shares of our common stock issuable upon the exercise of warrants.

¹⁰⁶ Includes 24,000 shares of our common stock issuable upon the exercise of warrants.

¹⁰⁷ Includes 6,000 shares of our common stock issuable upon the exercise of warrants.

¹⁰⁸ Includes 1,000 shares of our common stock issuable upon the exercise of warrants.

¹⁰⁹ Includes 2,000 shares of our common stock issuable upon the exercise of warrants.

¹¹⁰ Includes 1,000 shares of our common stock issuable upon the exercise of warrants.

¹¹¹ Includes 500 shares of our common stock issuable upon the exercise of warrants.

¹¹² Includes 500 shares of our common stock issuable upon the exercise of warrants.

¹¹³ Includes 3,000 shares of our common stock issuable upon the exercise of warrants.

¹¹⁴ David Nussbaum and Steven Levine exercise shared voting and dispositive powers over the shares held by Early Bird Capital Inc.

¹¹⁵ Represents shares of our common stock issuable upon the exercise of warrants issued as compensation for serving as a placement agent in our February 2004 private placement, for which Mr. Hansen was also paid $285,000.

58

PRINCIPAL SHAREHOLDERS

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 10, 2004 as to (i) each person who is known by us to own beneficially more than five percent (5%) of the outstanding shares of our common stock, (ii) each director and each nominee for our board of directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers as a group. This table is based on information provided to us or filed with the Securities and Exchange Commission by our directors, executive officers and principal shareholders. Except as otherwise indicated, we believe that the beneficial owners of the shares listed below have sole investment and voting power with respect to such shares, subject to community property laws. We do not know of any arrangements, including any pledge by any person of securities of ours, the operation of which may at a subsequent date result in a change of control of our company. Unless otherwise noted above, the address for each shareholder on this table is c/o Tarantella, Inc., 425 Encinal Street, Santa Cruz, California 95060.

Five percent shareholders, directors, and certain executive officers	Common stock outstanding	Options/Warrants exercisable within 60 days	Common stock beneficially owned	Approximate percentage owned
Austin W. Marxe (1) and David M. Greenhouse (1) 153 E. 53rd Street, 55th Floor, New York, NY 10022	6,492,271	2,462,500	8,954,771	29.8	%
Douglas L. Michels (2)	719,515	316,723	1,036,238	3.7	%
Renaissance Funds	2,142,858	428,571	2,571,429	9.2	%
Walker Smith Funds	1,928,572	385,714	2,314,286	8.3	%
Alok Mohan	202,625	220,728	423,353	1.5	%
Francis Wilde (3)	300,000	103,750	403,750	1.5	%
Christopher Scheybeler	—	151,031	151,031	*
Edmundo Costa	11,857	0	11,857	*	%
Ronald Lachman	49,597	81,700	131,297	*
Gilbert P. Williamson	—	100,250	100,250	*
Ninian Eadie	—	104,450	104,450	*
Bruce Ryan	16,447	8,612	25,059	*
Joseph Vitetta	8,821	29,289	38,110	*
John Greeley	—	46,718	46,718	*
All five percent shareholders, directors, executive officers as a group	11,887,930	4,519,142	16,407,052	51.4	%

Applicable percentage of ownership is based on 27,629,806 shares of Common Stock outstanding as of November 30, 2004 together with applicable options held by such shareholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. Shares of Common Stock subject to options currently exercisable or exercisable within sixty (60) days after November 30, 2004 are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage of any other person.

 * Less than 1% of common stock outstanding

(1) MGP Advisors Limited (“MGP”) is the general partner of Special Situations Fund III, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP and the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. SST Advisers, L.L.C. (“SSTA”) is the general partner of and investment adviser to the Special Situations Technology Fund, L.P. and the Special Situations Technology Fund II, L.P. MG Advisers, L.L.C. (“MG”) is the general partner of and investment adviser to the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are

59

the principal owners of MGP, AWM, SSTA and MG and are principally responsible for the selection, acquisition and disposition of the portfolio securities by each investment adviser on behalf of its fund.

(2) Includes 15,000 shares gifted to the J3D Family Limited Partnership, of which Douglas Michels is the general partner; Mr. Michels is also a general partner in the Lawrence Michels Family Limited Partnership, of which he disclaims any voting or dispositive power.

(3) Includes 250,000 shares owned by Starlight Technology Partners LLC, an investment group in which Mr. Wilde, our President, Chief Executive Officer and Director, acts as Managing Director, and Joseph Makoid our Vice President of OEM sales is an investor.

60

DESCRIPTION OF CAPITAL STOCK

General Matters

The following summary of certain provisions of our common stock, preferred stock, amended and restated articles of incorporation and bylaws is qualified in its entirety by reference to our amended and restated articles of incorporation and bylaws, which have been filed as exhibits to the registration statement of which this prospectus is a part. Our authorized capital stock consists of 100,000,000 shares of common stock, no par value, and 20,000,000 shares of preferred stock, no par value.

Common Stock

As of November 30, 2004, there were 27,629,806 shares of our common stock outstanding. Our common stock is currently trading on the Over-The-Counter Bulletin Board under the trading symbol “TTLA.OB.”

Dividend Rights

Subject to preferences that may be applicable to any of our preferred stock outstanding at the time, the holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available.

Voting Rights

Except with respect to the election of directors, holders of our common stock are entitled to one vote on all matters submitted to our shareholders for their approval for each share of common stock held. Under certain circumstances, holders of our common stock are entitled to cumulate votes for the election of directors. Where votes are cumulated for the election of directors, each holder of our common stock is entitled to that number of votes which is equal to the total number of our shares of our common stock held, multiplied by the number of directors being elected. The cumulative number of votes allotted to each of our shareholders using this formula may be allocated by such shareholder in any manner, including for a single director, or for two or more directors, at the discretion of such shareholder of our common stock. Under our bylaws, all matters submitted to our shareholders (including the election of directors) must be approved by a majority of the votes cast in a meeting where a quorum is present.

No Preemptive or Similar Rights

Our common stock has no preemptive or conversion rights or other subscription rights. All outstanding shares of our common stock are fully paid and non-assessable.

Right to Receive Liquidation Distributions

In the event of a liquidation, dissolution or winding-up of our company, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of our preferred stock, if any, then outstanding.

Outstanding Warrants to Purchase Common Stock

During fiscal 2001, in connection with a line of credit, we issued warrants to purchase 288,000 shares of common stock at an exercise price of $7.8125 per share. The warrants expired on January 8, 2003. We recorded a liability of $969,000 for this warrant, and amortized the related expense over one year, the vesting period of the warrant.

During fiscal 2002, in connection with financial consulting and investment banking advice, we issued warrants to purchase 80,000 shares of common stock at an exercise price of $2.20 per share. The warrants expire on April 22, 2006. We recorded a one-time charge of $138,000 in fiscal 2002 for this warrant.

61

On September 29, 2003, in connection with a private placement, we issued warrants to purchase 1,950,000 shares of common stock at $1.395 per share. The warrants have a five year term.

On December 10, 2003, in connection with a private placement, we issued warrants to purchase 550,000 shares of common stock at $1.39 per share. The warrants have a five year term.

On February 20, 2004, in connection with a private placement, we issued warrants to purchase 2,658,216 shares of common stock at $1.70 per share. The warrants have a five year term.

On March 29, 2004, in connection with the acquisition of Caststream, Inc., we issued warrants to purchase 100,000 shares of common stock at $2.10 per share. The warrants have a three year term.

Preferred Stock

Our board of directors has the authority, without further action by the shareholders, to issue from time to time the preferred stock in one or more series and to fix the number of shares, designations, preferences, powers and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock or affect adversely the rights and powers, including voting rights, of the holders of common stock, and may have the effect of delaying, deferring or preventing a change in control of our company. We currently do not plan to issue any shares of preferred stock.

Rights to Acquire Series A Participating Preferred Stock

On September 16, 1997, pursuant to a Preferred Shares Rights Agreement between us and our transfer agent, EquiServe L.P., our board of directors declared a dividend of one right to purchase one one-thousandth share of the our Series A Participating Preferred Stock for each then outstanding share of common stock. Each right entitles the registered holder our common stock to purchase one one-thousandth of a share of Series A Preferred at an exercise price of $30.00, subject to adjustment.

Under certain circumstances, including a person or group of persons becoming the beneficial owner of 20% or more of our outstanding shares of common stock (30% or more with respect to the Special Situations funds and its affiliates and associates, excluding for the purposes of such beneficial ownership calculation shares issued or issuable upon warrants acquired by Special Situations from us pursuant to private placements in September and December of 2003), each holder of the right to purchase Series A Participating Preferred will have the right to receive, upon exercise, common stock having a value equal to two times the original purchase price of $30.00 (subject to adjustment).

The rights approved by the board are designed to protect and maximize the value of the outstanding equity interests in our company in the event of an unsolicited attempt by an acquiror to acquire us, in a manner or on terms not approved by our board of directors. Takeover attempts frequently include coercive tactics to deprive a company’s board of directors and its shareholders of any real opportunity to meaningfully evaluate a transaction and determine the destiny of the company. The rights have been declared by our board in order to deter such tactics, including a gradual accumulation of our shares in the open market of a 20% or greater position to be followed by a merger or a partial or two-tier tender offer that does not treat all shareholders equally. These tactics unfairly pressure shareholders, squeeze them out of their investment without giving them any real choice and deprive them of the full value of their shares.

This summary of the principal terms of our Preferred Shares Rights Agreement is a general description only and is subject to the detailed terms and conditions of such rights agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part.

62

Certain Provisions of our Articles of Incorporation and Bylaws

Articles of Incorporation

Our articles of incorporation provide that our board of directors has the power to authorize the issuance of up to 20,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, may delay, defer or prevent a change in control of our company, may discourage bids for the common stock at a premium over the market price of the common stock and may adversely affect the market price of and the voting and other rights of the holders of the common stock.

Bylaws

Our bylaws provide for a board that consists of a range of authorized directors seven to twelve, which exact number can be set and amended from time to time by our board. The directors will be elected at the annual meeting of shareholders or any special meeting of shareholders and each director so elected will hold office until the next annual meeting or until his successor is duly elected and qualified or until his earlier resignation or removal.

Special meetings of shareholders may be called by the board of directors, the chairman of the board, the president, or by the holders of shares entitled to cast no less than 10% of the votes at the meeting.

Transactions Involving Interested Parties Under California Law

Section 1203 of the California Corporations Code requires delivery of a report of an independent appraiser to shareholders in certain reorganizations, tender offers and cash-for-asset sales proposed by an interested party. The report must include an opinion as to the fairness of the consideration. An interested party is a person who indirectly or directly controls the subject corporation, is directly or indirectly controlled by an officer or director of the subject corporation or is an entity in which a material financial interest is held by any director or executive officer of the corporation.

Registration Rights

The holders of 22,617,044 shares of common stock are entitled to rights with respect to registration of such shares under the Securities Act of 1933, as amended. These rights are provided under the terms of agreements we have with the holders of these registrable securities. These registration rights provide that once we are eligible to file a registration statement on Form S-3, to the extent such shares have not been sold in this offering or are otherwise freely sellable under Rule 144 of the Securities Act, we are required to register such shares on Form S-3.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is EquiServe, LP.

63

PLAN OF DISTRIBUTION

We will not receive any proceeds from the disposition of the shares of common stock under this prospectus. The selling shareholders will receive all of the net proceeds from the disposition of the shares under this prospectus. The shares may be sold or distributed from time to time by the selling shareholders or by pledgees, donees, transferees of, or other successors in interest to, the selling shareholders directly to one or more purchasers (including pledgees) or through brokers, dealers or underwriters who may act solely as agents or may acquire shares as principals at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices, all of which may be changed. The distribution of the shares may be effected in one or more transactions that may take place through the Over-the-Counter markets, including block trades or ordinary broker’s transactions, or through privately negotiated transactions, through put or call options transactions relating to the shares, through short sales of the shares effected as of the date of this prospectus, or through a combination of any such methods of sale, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or negotiated prices. The selling shareholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this prospectus. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling shareholders in connection with such disposition.

The aggregate proceeds to the selling shareholders from the disposition of the shares will be the purchase price of the common stock sold less the aggregate agents’ commissions, if any, and other expenses of issuance and distribution not borne by us. The selling shareholders and any dealers or agents that participate in the distribution of the shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any profit on the disposition of the shares by them and any commissions received by any such dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act.

The selling shareholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The selling shareholders or the successors in interest to the selling shareholders may enter into hedging transactions with broker-dealers who may engage in short sales of shares in the course of hedging the positions they assume with the selling shareholders. The selling shareholders or the successors in interest to the selling shareholders may also enter into option or other transactions with the broker-dealers that require the delivery to such broker-dealers of the shares, which shares may be resold thereafter by such broker-dealer pursuant to this prospectus.

Senvest International LLC, as a registered broker-dealer that did not acquire its shares as compensation for investment banking or similar services, is an underwriter with regard to the 214,286 shares of common stock held by it and covered by this prospectus. In addition, Olympus Securities, LLC and Roth Capital Partners, LLC are selling shareholders who are also registered broker-dealers, each of whom acquired their shares as compensation for investment banking or similar services.

The following other selling shareholders are affiliates of registered broker-dealers, who based on information provided to us, acquired the shares of common stock under this prospectus in the ordinary course of business, and at the time such selling shareholders acquired such shares from us, no agreement, arrangement or understanding existed between the selling shareholders and us or any other party:

• Stuart Horowitz,

• Richard A. Hansen,

64

• Steve Levine,

• David Nussbaum,

• David N. Olson,

• Richard A. Hansen,

• Anthony Stoss,

• Brian G. Swift,

• Topaz Partners,

• Vertex Technology Fund (III),

• Vertex Technology Fund (II),

• Alan Weiss; and

• Carl Wiseman.

To the extent required, the specific shares to be sold, the names of the selling shareholders, the purchase price, the public offering price, the names of any such agent, dealer or underwriter and any applicable commission or discount with respect to a particular offering will be set forth in an accompanying prospectus supplement.

We have agreed to bear all expenses of registration of the shares under federal and state securities laws and other expenses related to the registration of shares hereunder excluding expenses associated with the actual sale of such shares, such as commissions of dealers or agents and related fees, except that the former New Moon Systems shareholders will pay their pro rata portion of the expenses to register the common stock issued to the former New Moon shareholders as described in the acquisition agreement with New Moon Systems which has been filed as an exhibit to the registration statement of which this prospectus is a part. We have agreed to indemnify certain selling shareholders against certain liabilities, including potential liabilities under the Securities Act. Certain selling shareholders have also agreed to indemnify us against certain liabilities, including certain potential liabilities under the Securities Act arising from information provided by them specifically for inclusion in this prospectus.

We may suspend the effectiveness of the registration statement of which this prospectus is part upon the happening of any event that we believe, in our reasonable judgment, requires additional disclosure of material, non-public information and that immediate disclosure of such information would be materially detrimental to us. We cannot exercise this right to suspend more than 20 consecutive days or a total of not more than 45 days in any 12 month period. During any period of suspension or deferral, we are required to use our commercially reasonable efforts to amend the registration statement and/or amend or supplement the related prospectus if necessary and to take all other actions necessary to allow the proposed sale to take place as promptly as possible, subject, to our right to delay further sales of our common stock until the material, non-public information has been disclosed.

We may suspend the effectiveness of the registration statement without regard to the above time periods for periods beginning with the issuance of a press release and ending five business days after the earlier of filing or filing deadline of certain public reports for the purposes of updating the registration statement with respect to the information contained in the filed reports.

Selling shareholders who are our employees, officers, directors, consultants or contractors are required to comply with our insider trading compliance program. As a result, these selling shareholders may not be permitted to sell shares of our common stock under this prospectus or otherwise when our trading window is closed. Our

65

trading window is generally closed from the open of the market on the fifteenth day of the last calendar month of the fiscal quarter until the open of market on the third trading day after we publicly announce our operating results for that quarter. The trading window may also be closed from time to time with respect to some or all of our employees, officers, directors, consultants and contractors who have material, non-public information about the Company. We reserve the right to refuse to permit our transfer agent to effect the transfer of shares sold by any of our employees, officers, directors, consultants or contractors under this prospectus while our trading window is closed and we may take other action against such employee, officer, director, consultant or contractor.

We are required to maintain the effectiveness of the registration statement of which this prospectus is part, until the earlier of:

• the date on which all shares offered hereby have been sold by the selling shareholders; or

• date on which all the shares offered hereby are eligible for sale pursuant to Rule 144(k) of the Securities Act of 1933, as amended.

There can be no assurance that the selling shareholders will sell any or all of the shares offered by them under this prospectus.

66

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of our equity securities.

As of November 30, 2004, we have 32,968,022 shares of common stock outstanding assuming the full exercise of our warrants. Of that number, 24,085,891 shares are registered hereunder and may be immediately sold in this offering except: (i) 570,250 shares of our common stock issued to five of our executive officers and directors as part of their calendar year 2004 compensation, which are subject to lock-up agreements that expire on or about January 5, 2005, (ii) 100,000 shares of our common stock and warrants for 100,000 shares issued in our acquisition of Caststream that are subject to an indemnity escrow that expires on or about March 29, 2005.

All of the 24,085,891 shares of our common stock that are potentially to be sold in the public market pursuant to this registration statement will be eligible for immediate resale in the public market without restriction, except for any of those shares that are acquired by our “affiliates,” as defined in Rule 144 of the Securities Act, which sales will be subject to the timing, volume and manner of sale limitations of Rule 144. In general, under Rule 144 as currently in effect, each of our affiliates will be entitled to sell, without registration, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock, or the average weekly trading volume of our common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about us.

As of September 30, 2004, there were 1,617,746 shares of common stock available for grant of options and other stock-based awards under our compensation plans, and options to purchase 4,570,201 shares of common stock are outstanding. These shares have been or will be registered on Form S-8 and will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates.

67

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The financial statements as of September 30, 2004 and 2003, and for each of the three years in the period ended September 30, 2004, included in this prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein in the registration statement (which report expresses an unqualified opinion and includes an explanatory paragraph regarding a going concern uncertainty). Such financial statements have been included herein in the registration statement in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, referred to as the SEC. You may read and copy any document we file at the SEC’s public reference facilities in Room 1034, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov and at http://www.tarantella.com.

We have filed with the SEC a registration statement, which contains this prospectus, on Form S-1 under the Securities Act of 1933. The registration statement relates to the common stock offered by the Selling Shareholders. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Please refer to the registration statement and its exhibits and schedules for further information with respect to us and our common stock. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, we refer you to the copy of that contract or document filed as an exhibit to the registration statement. You may read and obtain a copy of the registration statement and its exhibits and schedules from the SEC.

You should rely on the information provided in this prospectus. We have authorized no one to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document.

68

T ARANTELLA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations and Comprehensive Loss	F-3
Consolidated Balance Sheets	F-4
Consolidated Statements of Shareholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Tarantella, Inc.

We have audited the accompanying consolidated balance sheets of Tarantella, Inc. and subsidiaries (the “Company”) as of September 30, 2004 and 2003, and the related consolidated statements of operations and comprehensive loss, cash flows, and shareholders’ equity for each of the three years in the period ended September 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

December 27, 2004

F-2

TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Fiscal Years Ended September 30
	2004			2003			2002
	(In thousands, except per share data)
Net revenues:
Licenses	$	8,169		$	10,959		$	11,354
Services		4,319			3,047			2,866
Total net revenues		12,488			14,006			14,220
Cost of revenues:
Licenses		756			324			327
Impairment of intangibles		424			—			—
Services		1,547			1,231			1,172
Total cost of revenues		2,727			1,555			1,499
Gross margin		9,761			12,451			12,721
Operating expenses:
Research and development		4,403			4,280			5,641
Selling, general and administrative		18,558			15,186			19,564
Legal settlement and litigation costs		1,166			—			—
Restructuring charges		1,584			2,246			2,299
Total operating expenses		25,711			21,712			27,504
Operating loss		(15,950	)		(9,261	)		(14,783	)
Other income (expense):
Gain/(loss) on sale of investments		718			—			(2,443	)
Loss and impairment of equity investments		(244	)		—			(4,010	)
Interest income, net		76			46			518
Other income/(expense), net		(126	)		(169	)		3,451
Total other income (expense)		424			(123	)		(2,484	)
Loss before income taxes		(15,526	)		(9,384	)		(17,267	)
Provision for (benefit from) income taxes		129			300			(1,076	)
Net loss		(15,655	)		(9,684	)		(16,191	)
Other comprehensive (loss) income:
Unrealized gain on available for sale securities		256			409			121
Reclassification adjustment for gains included in net income		(718	)		—			—
Net (loss) gain recognized in other comprehensive inc		(462	)		409			121
Foreign currency translation adjustment		93			27			163
Total other comprehensive income (loss)		(369	)		436			284
Comprehensive loss	$	(16,024	)	$	(9,248	)	$	(15,907	)
Loss per share—basic and diluted	$	(0.71	)	$	(1.10	)	$	(2.00	)
Shares used in loss per share calculation—basic and diluted		21,951			8,809			8,096

See accompanying notes to consolidated financial statements.

F-3

TARANTELLA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30,
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	9,621		$	3,151
Trade receivables, net of allowances of $0.1 million and $0.5 million, respectively		2,069			2,980
Available-for-sale equity securities		—			632
Other receivables		247			175
Prepaids and other current assets		622			720
Total current assets		12,559			7,658
Property and equipment, net		947			734
Acquired intangible assets, net		674			1,262
Goodwill		2,395			2,391
Other assets		19			343
Total assets	$	16,594		$	12,388
Liabilities and shareholders’ equity
Current liabilities:
Trade payables	$	832		$	1,341
Line of credit		—			319
Royalties payable		—			22
Royalties payable - former New Moon shareholders		1,713			1,725
Income taxes payable		210			549
Accrued restructuring charges		1,121			854
Accrued expenses and other current liabilities		3,740			3,317
Deferred revenues		2,572			1,757
Total current liabilities		10,188			9,884
Long-term deferred revenues		794			36
Long-term liabilities, other		16			—
Total long-term liabilities		810			36
Commitments and contingencies (note 11)
Shareholders’ equity:
Preferred stock, authorized 20,000 shares; no shares issued and outstanding in 2004 and 2003		—			—
Common stock, no par value, authorized 100,000 shares; issued and outstanding 27,553 and 11,959 shares at September 30, 2004 and September 30, 2003 respectively		146,088			126,749
Deferred stock compensation		(187	)		—
Accumulated other comprehensive income		184			553
Accumulated deficit		(140,489	)		(124,834	)
Total shareholders’ equity		5,596			2,468
Total liabilities and shareholders’ equity	$	16,594		$	12,388

See accompanying notes to condensed consolidated financial statements.

F-4

TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock					Deferred Stock Compensation			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount
	(In thousands)
Balances, September 30, 2001	8,023			$119,919			$—			$(167)			$(98,959)			$20,793
Common stock issuance under stock option and purchase plans	183			192			—			—			—			192
Unrealized gain on investment	—			—			—			121			—			121
Stock compensation expense	—			595			—			—			—			595
Foreign currency translation	—			—			—			163			—			163
Warrants—Early Bird Capital	—			138			—			—			—			138
Net loss	—			—			—			—			(16,191	)		(16,191	)
Balances, September 30, 2002	8,206			120,844			—			117			(115,150	)		5,811
Common stock issuance under stock option and purchase plans	211			182			—			—			—			182
Unrealized gain on investment	—			—			—			409			—			409
Stock compensation expense	—			10			—			—			—			10
Foreign currency translation	—			—			—			27			—			27
New Moon acquisition	1,592			3,614			—			—			—			3,614
Private placement of common stock and warrants	1,950			2,099			—			—			—			2,099
Net loss	—			—			—			—			(9,684	)		(9,684	)
Balances, September 30, 2003	11,959			126,749			—			553			(124,834	)		2,468
Common stock issuance under stock option and purchase plans	289			284			—			—			—			284
Reversal of unrealized gain on available-for-sale investment	—			—			—			(462	)		—			(462	)
Stock compensation expense	—			219			519			—			—			738
Deferred stock compensation	660			706			(706	)		—			—			—
Foreign currency translation	—			—			—			93			—			93
New Moon acquisition	(24	)		(54	)		—			—			—			(54	)
Common stock issuance related to Caststream acquisition	100			377			—			—			—			377
Private placement of common stock and warrants	14,569			17,807			—			—			—			17,807
Net loss	—			—			—			—			(15,655	)		(15,655	)
Balances, September 30, 2004	27,553		$	146,088		$	(187	)	$	184		$	(140,489	)	$	5,596

See accompanying notes to consolidated financial statements.

F-5

TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Years Ended September 30,
	2004			2003			2002
	(In thousands)
Cash flows from operating activities:
Net loss	$	(15,655	)	$	(9,684	)	$	(16,191	)
Adjustments to reconcile net loss to net cash used for operating activities -
Depreciation and amortization		1,142			935			953
Foreign currency exchange loss		55			15			148
Loss on disposal of property and equipment		16			97			288
Gain on sale of available-for-sale equity securities		(718	)		—			—
Impairment of investments		244			151			976
Amortization of warrant and stock compensation expense		738			10			733
Compensation expense to former Caststream shareholders		124			—			—
Impairment of New Moon purchased intangibles		424			—			—
Loss on sale of divisions to Caldera		—			—			2,443
Gain on sale of Caldera common stock		—			—			(4,491	)
Loss on equity investment in Caldera		—			—			4,010
Changes in operating assets and liabilities, net of New Moon acquisition:
Trade receivables		911			(193	)		1,017
Other receivables		(72	)		54			7
Other current assets		98			151			(227	)
Other assets		80			573			(954	)
Trade payables		(530	)		160			(378	)
Royalties payable		(22	)		(180	)		(531	)
Income taxes payable		(339	)		(32	)		207
Accrued restructuring charges		267			(17	)		527
Accrued expenses and other current liabilities		366			(2,010	)		(3,645	)
Deferred revenues		1,573			703			(298	)
Other long-term liabilities		16			—			(1,760	)
Net cash used for operating activities		(11,282	)		(9,267	)		(17,166	)
Cash flows from investing activities:
Sales of short-term investments and marketable securities		889			—			3,531
Purchases of property and equipment		(441	)		(237	)		(200	)
Purchases of software and technology licenses		(421	)		—			(9	)
Acquisition of New Moon, net of cash acquired		—			3,323			—
Changes in New Moon royalty payable		(12	)		(102	)		—
Additional New Moon acquisition costs		(4	)		—			—
Proceeds from Caldera transaction		—			—			9,042
Net cash provided by investing activities		11			2,984			12,364
Cash flows from financing activities:
Payments on capital lease obligations		(31	)		(230	)		(455	)
Line of credit (repayment) borrowings		(319	)		319			—
Net proceeds from issuance of common stock		284			182			192
Proceeds from private placement of common stock and warrants		17,807			2,099			—
Net cash provided by (used for) financing activities		17,741			2,370			(263	)
Effects of exchange rate changes on cash and cash equivalents		—			9			20
Increase (decrease) in cash and cash equivalents		6,470			(3,904	)		(5,045	)
Cash and cash equivalents at beginning of year		3,151			7,055			12,100
Cash and cash equivalents at end of year	$	9,621		$	3,151		$	7,055

See accompanying notes to consolidated financial statements.

F-6

TARANTELLA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	Fiscal Years Ended September 30,
	2004			2003		2002
	(In thousands)
Supplemental disclosure of cash flow information:
Cash paid during year for:
Income taxes	$	490		$	370	$	565
Interest		7			4		21
Non-cash financing and investing activities:
Unrealized (loss) gain on available-for-sale equity securities		(462	)		409		121
Issuance of stock and warrants to acquire Caststream		377			—		—
Stock compensation expense		738			10		595
Assets acquired under capital leases		—			259		—
Warrants issued to Early Bird Capital		—			—		138
Reconciliation of proceeds from Caldera transaction:
Loss on sale of divisions to Caldera	$	—		$	—	$	(2,443	)
Discounted note receivable		—			—		7,466
Write off of tax reserve related to Caldera transaction		—			—		(150	)
Write off of royalty reserves related to Caldera transaction		—			—		(345	)
Write off of commission receivable related to Caldera transaction		—			—		23
Sale of Caldera International common stock		—			—		4,491
Cash proceeds from Caldera transaction	$	—		$	—	$	9,042

See accompanying notes to consolidated financial statements.

F-7

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—The Company

Tarantella, Inc. is a provider of Internet infrastructure software that enables web-based access to enterprise applications from virtually any client device including personal computers, Apple Macintosh computers, network terminals known as “thin clients” and handheld devices, such as personal digital assistants. The Tarantella Secure Global Desktop Enterprise Edition solution instantly provides managed and secure web access to enterprise mainframe, Windows, AS/400, Linux, and UNIX applications. It leverages existing information technology assets to provide cost savings, improved productivity, and the flexibility to accommodate the rapid changes in today’s organizations.

We were incorporated as The Santa Cruz Operation, Inc. (SCO) in California in 1979. On May 4, 2001, SCO completed the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc., retaining the Tarantella Division. A new company, Caldera International, was formed which combined the assets acquired from SCO with the assets of Caldera Systems. Upon the completion of the sale, SCO changed its corporate name to Tarantella, Inc.

Note 2—Continued Operations and Going Concern

We operate in the software industry, which is characterized by intense competition, rapid technological advances and evolving industry standards. Factors that could affect our future operating results and cause actual results to vary materially from expectations include, but are not limited to, dependence on an industry that is characterized by rapid technological changes, fluctuations in end-user demands, evolving industry standards, competition, and risks associated with foreign currencies. Failure by us to anticipate or respond adequately to technological developments in its industry, changes in customer or supplier requirements or changes in industry standards could have a material adverse effect on our business and operating results.

Our net loss was $15.7 million for the year ended September 30, 2004, and we have recorded substantial net losses during each of the past five fiscal years. During the year ended September 30, 2004, we continued to require funds to finance our operations. We have implemented a series of restructuring programs over the past several years aimed at aligning our costs to our revenues and increasing our revenues to compete in the current business environment and over the long-term. While we believe we have made progress in these areas, we must continue to manage our costs and improve our revenues to compete in the existing business environment.

In connection with the above plan, we anticipate that we will record charges, including substantial costs required to meet the filing requirements of a public company including the requirements of the Sarbanes-Oxley Act of 2002, and potential additional restructurings charges to further align our costs to our revenues, possibly including asset impairments and other associated charges, the amount and timing of which cannot be fully estimated at this time.

We believe that, unless we effectively balance our cost structure to our revenues, we may not be able to access the capital markets for new borrowings or financings on acceptable terms. Continued losses of the magnitude we recorded in fiscal 2004 and fiscal 2003 are unsustainable. We have significant obligations due in 2005 and thereafter, including significant financing maturities related to a business purchase we had during fiscal 2003, operating lease payments and other on-going operating costs. We are intensively engaged in an effort to implement our new strategic business rebranding initiatives in order to affect a successful expansion of our product’s market penetration and growing to a profitable company, but there can be no assurance this effort will succeed. If we do not make substantial progress in the near-term toward achieving profitable growth in our competitive market we may not succeed as a going concern.

F-8

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

These matters, among others, raise substantial doubt about our ability to continue as a going concern. Our Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Note 3—Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“generally accepted accounting principles”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include the allowances for bad debt, product returns and certain accrued expenses and liabilities, and a valuation allowance for deferred tax assets. Actual results could differ from those estimates.

Reclassifications

Certain prior year reclassifications have been made for consistent presentation.

Cash Equivalents

We consider all highly liquid investments with a maturity of 90 days or less at the date of acquisition to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Components of this account are primarily allowances for returns on sales and doubtful accounts.

Available-for-sale Equity Securities

We classify our investments in certain equity securities in publicly traded companies as available-for-sale. Such investments are recorded at fair market value based on quoted market prices, and unrealized gains and losses are included in other comprehensive income. In fiscal 2004 we sold our interest in all publicly traded companies and as a result we had no unrealized gains or losses on such investments as of September 30, 2004. We had unrealized gains of $461,000 and $52,000 as of September 30, 2003, and September 30, 2002, respectively. We have investments in privately held companies that are classified as other assets. Realized gains and losses, which are calculated based on the specific identification method, are recorded in operations as incurred. Investments in privately held companies with less than 20% ownership are carried at the lower of cost or realizable value.

F-9

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. Cash and cash equivalents consist primarily of cash accounts held at various banks, money market funds held at several financial institutions and a certificate of deposit. We sell our products to various organizations in different industries and geographies, and do not require collateral or other security to support accounts receivable. Credit risk is mitigated by our credit evaluation process and limited payment terms. In addition, we maintain an allowance for potential credit losses.

Property and Equipment

Property and equipment are stated at cost and, except for assets recorded under capital lease and leasehold improvements, are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements and assets recorded under capitalized leases are amortized using the straight-line method over the lesser of the remaining term of the lease or the estimated life of the asset, ranging from one to ten years.

Purchased Software and Technology Licenses

Purchased software consists of core intellectual property rights owned by us. Technology licenses represent payments for the rights to use and integrate third party technology into our product offerings. Amounts capitalized are amortized on a straight-line basis over the estimated product life, ranging from three to ten years.

Accounting for Long-Lived Assets

We review property, equipment, purchased software and technology licenses for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of its carrying amount to estimated future net cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the asset exceeds the projected discounted future operating cash flows.

Goodwill and Intangible Assets

As part of the New Moon Systems, Inc. (“New Moon “) acquisition in the third quarter of fiscal 2003, we allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values (see Note 16—Business Combinations, Acquisition of New Moon Systems, Inc.). A third-party appraisal firm assisted management in determining the fair values of the assets acquired and the liabilities assumed. Such valuations required management to make estimates and assumptions, especially with respect to intangible assets. Estimates associated with the accounting for the acquisition may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Critical estimates in valuing certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; and the trade name and the market position of the acquired products and assumptions about the period of time the trade name will continue to be used in the New Moon product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable.

F-10

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In June 2001, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The provisions of SFAS No. 142 also require an annual goodwill impairment test. Management will perform the annual goodwill impairment test as of July 1^st, to determine if there is any goodwill impairment. Under SFAS 142, goodwill and intangible assets of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We believe that there has been no event as of September 30, 2004, that reduced the fair value of our reporting unit below the goodwill carrying amounts. Based on management’s assessments certain of the intangible assets were determined to be impaired as of July 1, 2004 and appropriate write-down in the judgment of management have been recognized against the related intangible assets carrying amounts in fiscal 2004. (See Note 16—Acquired Intangible Assets, net, regarding current year evaluation of intangible assets test for impairment.)

Software Development Costs

SFAS No. 86 provides for the capitalization of certain software development costs once technological feasibility is established. Capitalized costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. Through September 30, 2004, we believe our process for developing software was essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date.

Revenue Recognition

Our revenue is derived primarily from two sources, across many industries: (i) products license revenue, derived primarily from product sales to distributors and end users, and royalty revenue, derived primarily from initial license fees and ongoing royalties from product sales by source code OEMs (original equipment manufacturers) and ISVs (independent software vendors); and (ii) services and support revenue, derived primarily from providing software updates, support, education and consulting services to end users.

We account for revenue under the provisions of AICPA Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended. Product revenue is recognized upon shipment if evidence of an arrangement exists, the fee is fixed and determinable and collection of resulting receivables is probable. Sales to distributors are recognized upon sale by the distributor to resellers or end users. In certain instances when distributors waive their right to return product, revenue is recognized upon shipment if evidence of an arrangement exists, the fee is fixed and determinable and collection of resulting receivables is probable. Estimated product returns are recorded upon recognition of revenue from customers having rights of return, including exchange rights for unsold products and product upgrades.

F-11

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Until May 2001, the Company sold two types of software products, UNIX-based operating system software, which was sold under the UnixWare and OpenServer names, and application broker software sold under the Tarantella name. In May 2001, the Company sold the UNIX-based business to Caldera Systems, Inc.

For multiple element contracts involving the sale of our products we use the residual value method to allocate revenue to each component. Vendor specific objective evidence of the fair value of maintenance of license agreements is based on stated renewal rates, and for contracts that do not include stated renewal rates, vendor specific objective evidence of the fair value is determined by reference to the price paid by our customers when maintenance is sold separately. Past history has shown that the rate we charge for maintenance for license agreements with a stated renewal rate is similar to the rate we charge for maintenance on license agreements without a stated renewal rate.

We recognize revenue from maintenance fees for ongoing customer support and product updates ratably over the period of the maintenance contract. Payments for maintenance fees are generally made in advance and are non-refundable. For revenue allocated to education and consulting services or derived from the separate sale of such services, we recognize revenue as the related services are performed.

We recognize product revenue from royalty payments upon receipt of quarterly royalty reports from OEMs (original equipment manufacturers) and ISVs (independent software vendors) related to their product sales.

We perform ongoing credit evaluations of our customers’ financial condition and do not require collateral. We maintain allowances for potential credit losses and such losses have been within management’s expectations.

Advertising

We classify advertising costs as incurred in operating expenses, in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s products). The majority of advertising expense relates to our reimbursing certain qualified customers for a portion of the advertising costs related to their promotion of our products. Our maximum liability for reimbursement is accrued at the time revenue is recognized as a percentage of the qualified customer’s net revenue derived from our products. For fiscal 2004, fiscal 2003 and fiscal 2002, advertising expense totaled approximately $0.3 million, $0.4 million, and $0.2 million, respectively.

Income Taxes

We record income taxes using an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactment of changes in tax laws are considered. When necessary, a valuation allowance is recorded to reduce tax assets to an amount for which realization is more likely than not. The provision for income taxes represents taxes payable for the current period, plus the net change in deferred tax amounts.

Stock Based Compensation

We account for stock-based compensation arrangements under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees for our fixed stock option plan and employee stock purchase plan and accordingly, have not recognized compensation cost in the accompanying consolidated statement of operations for options issued at fair value. SFAS 123, Accounting for Stock Based Compensation, permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements. In accordance with the disclosure provisions of

F-12

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SFAS 148, Accounting for Stock Based Compensation—Transition and Disclosure, the pro forma effect on our net loss had compensation expense been recorded for the fiscal years ended September 30, 2004, 2003 and 2002, respectively, as determined under the fair value method, is shown below (in thousands, except per share amounts):

	Fiscal Years Ended September 30,
	2004			2003			2002
	(In thousands, except per share)
Net loss, as reported	$	(15,655	)	$	(9,684	)	$	(16,191	)
Add: Stock-based employee compensation expense included in reported net loss		738			10			595
Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(3,006	)		(5,238	)		(6,069	)
Pro forma net loss	$	(17,923	)	$	(14,912	)	$	(21,665	)
Basic and diluted net loss per share:
As reported	$	(0.71	)	$	(1.10	)	$	(2.00	)
Pro forma	$	(0.82	)	$	(1.69	)	$	(2.68	)

The fair value of the options granted under the Option Plans and the Director Plan were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Fiscal Years Ended September 30,
	2004	2003	2002
Risk-free interest rate	3.23%	2.64%	3.73%
Dividend yield	0%	0%	0%
Common stock volatility factor	105%	100%	94%
Expected employee option life	4 years	4 years	4 years
Expected executive option life	5 years	5 years	5 years

The fair value for the Employee Stock Purchase Plan rights were also estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

	Fiscal Years Ended September 30,
	2004		2003		2002
Risk-free interest rate		1.06%		1.42%		2.09%
Dividend yield		0%		0%		0%
Common stock volatility factor		109%		107%		94%
Expected option life		6 months		6 months		6 months
Weighted average fair value of rights	$	0.83	$	0.37	$	0.27

Computation of Loss Per Share

Basic loss per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by giving effect to all dilutive potential common shares that were outstanding during the period. For the Company, dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options

F-13

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and warrants for all periods. All potentially dilutive securities have been excluded from the computation of diluted loss per share as their affect is anti-dilutive on the loss from operations for all periods presented. The potentially dilutive securities are as follows:

	Fiscal Year Ended September 30,
	2004	2003	2002
	(In thousands)
Options and warrants outstanding not included in computation of diluted loss per share because the exercise price was greater than the average market price.	3,839	4,033	1,823
Options and warrants outstanding not included in computation of diluted loss per share because their inclusion would have been anti-dilutive.	5,117	1,203	737

Segment Information

We operate and are managed internally as one operating segment in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer.

Recent Accounting Pronouncements

In January 2003 the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable Interest Entities (“FIN 46”) and a revised interpretation of FIN No. 46 (“FIN 46R”) in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46R was effective for us during the quarter ended March 31, 2004. We have no interest in variable interest entities, so the adoption of FIN 46R had no affect on our financial position or results of operations.

In July 2004, the FASB ratified Emerging Issues Task Force (“EITF”) consensus on Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock,” which provides guidance regarding application on the equity method of accounting to investments other than common stock. EITF Issue No. 02-14 will be effective beginning in our first quarter of fiscal 2005. We do not believe the adoption of EITF Issue No. 02-14 will have a material impact on our financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” (“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Adoption of the provisions of SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Tarantella is currently in the process of evaluating the potential impact that the adoption of SFAS 123R will have on its consolidated financial position and results of operations.

F-14

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign Currency Translation

The functional currency of our foreign branches and subsidiaries is the local currency. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate prevailing on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments resulting from translation of the branches and subsidiaries’ accounts are accumulated as a separate component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and have not been significant.

Fair Value of Financial Instruments

Carrying amounts of certain of our financial instruments, including cash and cash equivalents, receivables, accounts payable, accrued payroll and other accrued liabilities, approximate fair value because of their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments. The fair value of other long-term liabilities approximates the carrying value due to the market interest rates that these obligations bear.

Note 4—Cash and Cash Equivalents

	September 30,
	2004		2003
	(In thousands)
Bank demand deposits	$	2,056	$	3,151
Money market accounts		7,565		—
		$9,621	$	3,151

Note 5—Allowance for Doubtful Accounts

Description		Balance at Beginning of Period		Charged to Revenues or Expenses			Write-offs and other			Balance at End of Period
		(In thousands)
Year Ended September 30,
2004	Allowance for returns	$	209	$	467		$	613		$	63
	Allowance for doubtful accounts		323		(9	)		271			43
	Total allowance	$	532	$	458		$	884		$	106
2003	Allowance for returns	$	111	$	907		$	809		$	209
	Allowance for doubtful accounts		229		(16	)		(110	)		323
	Total allowance	$	340	$	891		$	699		$	532
2002	Allowance for returns	$	920	$	27		$	836		$	111
	Allowance for doubtful accounts		1,415		371			1,557			229
	Total allowance	$	2,335	$	398		$	2,393		$	340

Note 6—Available-for-sale Equity Securities and Investments

During fiscal 2004 we had realized gain on sale of equity securities of $0.7 million. There were no realized gains or losses from investments in fiscal 2003. In fiscal 2002, the Company had realized gains from sale of investments of $4.5 million.

F-15

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In November 1996, we purchased $2.0 million of convertible debentures from a domestic distribution channel partner. In February 1999, we elected to convert, in its entirety, the debenture into shares of preferred stock. In January 2000 we redeemed 68,805 shares at their cost of $2.181 per share. After the redemption the Company had 848,259 shares of preferred stock at a cost of $1.85 million. On January 4, 2001 the channel distribution partner was purchased by Ebiz Enterprises, Inc., and we received 2,367,999 shares of Ebiz common stock.

In March 2000, we purchased $2.0 million of preferred stock in a private Linux distribution company. On October 5, 2000 this company was purchased by Ebiz Enterprises, Inc. We received 2,208,749 shares of Ebiz common stock and 787,878 warrants to purchase shares.

During the quarter ended June 30, 2001, we determined the decline in the fair value of our investment in Ebiz was other than temporary and thus required a permanent write-down of the investment by $1.5 million.

At September 30, 2001, the Company had gross accounts receivable with Ebiz of $1.1 million. This amount was fully reserved as Ebiz declared bankruptcy on September 7, 2001, and did not have the ability to pay. At September 30, 2002, we had written off all receivables related to Ebiz as they were no longer in business. There were no sales to this related party in fiscal 2004 or fiscal 2003. Sales to this related party were $25,398 for fiscal 2002.

At September 30, 2003 and September 30, 2002 we held 505,767 shares of Rainmaker’s common stock. We accounted for these shares as available-for-sale securities and recorded them at fair market value, based on quoted market prices with any unrealized gains or losses included as part of accumulated other comprehensive income. During fiscal 2003 and fiscal 2002, we did not sell any shares of Rainmaker stock. During fiscal 2004, we sold our remaining 505,767 shares of Rainmaker stock with a cost basis of $0.2 million, and for which we received cash proceeds of $0.9 million. At September 30, 2004 and September 30, 2003, we did not have any accounts receivable from Rainmaker. There were no sales to Rainmaker in fiscal 2004, 2003 or 2002.

As of September 30, 2004 we determined that our equity investment in Netilla Networks, Inc. had become fully impaired and wrote-off our remaining net book value investment of $244,000.

Note 7—Related Parties

	Fiscal Year Ended September 30,
	2004		2003		2002
	(In thousands)
Net Revenues:
License, third parties	$	8,169	$	10,959	$	10,808
License, related parties		—		—		546
Service, third parties		4,319		3,047		2,556
Service, related parties		—		—		310
Total net revenues	$	12,488	$	14,006	$	14,220

There were no related party revenues for fiscal 2004 or 2003. Related party revenues for fiscal 2002 were sales to two companies in which we had significant investments. There were no related party receivables at September 30, 2004, 2003 or 2002.

F-16

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Below are transactions and series of similar transactions during the last three fiscal years to which we were a party or will be a party, in which:

• The amounts involved exceeded or will exceed $60,000; and

• A director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

Described below are also certain other transactions with our directors, executive officers and shareholders.

On March 29, 2004, we entered into a Stock Exchange Agreement with Caststream, Inc. and the shareholders of Caststream, Inc. Under the terms of the agreement, we acquired all the capital stock of Caststream in exchange for 100,000 shares of common stock and warrants for 100,000 shares. We also assumed certain liabilities of Caststream of approximately $40,000. The transaction was considered a related party transaction because two of the Caststream shareholders, E. Joseph Vitetta, Jr. and Stephen Bannerman were hired in December 2003 as Vice President Corporate Development and Chief Marketing Officer, respectively. Mr. Bannerman’s title subsequently changed to Chief Marketing Officer. In January 2004, Mr. Vitetta was appointed as Corporate Secretary, and in October 2004, he also assumed the role of Managing Director of EMEA. In addition, we hired three other Caststream shareholders in December 2003 in various marketing and technical positions. The Audit Committee of our board of directors, and our board of directors approved the transaction.

The J3D Family Limited Partnership and the Lawrence Michels Family Limited Partnership (both of which Douglas Michels, one of our directors and our former CEO, is a general partner) are partners in Encinal Partnership No. 1 (“EP1”), which leases certain office premises located in Santa Cruz, California under one lease to us. The lease commenced on January 1, 1989 and had a ten-year term, with two options to renew for five-year periods. The lease has been renewed through June 30, 2005. The lease covers approximately 50,830 square feet of building space at a current cost of approximately $97,587 per month on a straight line basis, which includes an annual adjustment based on the Consumer Price Index. An addendum to this lease was entered into granting us a 50% rent abate for the period commencing August 1, 2003 and ending March 31, 2004 amounting to $0.4 million and requiring us to repay the abatement plus interest at 10% per annum on the sooner of certain circumstances or June 30, 2005. The abatement has not yet been repaid, and we expect to repay the abatement plus accrued interest on June 30, 2005. Rents paid to these related parties were $1.2 million, $1.0 million and $1.1 million for the fiscal years 2004, 2003 and 2002, respectively.

On December 10, 2003, we entered into a private placement transaction pursuant to which we issued common stock and warrants to the following investors: Special Situations Technology Funds, Starlight Technology Partners, LLC, an investment group in which Mr. Wilde, our President, Chief Executive Officer and director, acts as Managing Director and Joseph Makoid, our Vice President OEM Sales is an investor, and an additional private investor, resulting in gross proceeds to us of approximately $2,750,000.

We employ Peter Wilde, the son of our Chief Executive Officer Frank Wilde, as a sales representative. In fiscal 2004, Mr. Peter Wilde was compensated $38,462.

We believe that the transactions described above were on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions between us and any director or executive officer are subject to approval by a majority of the disinterested members of our board of directors.

F-17

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 8—Property and Equipment

	September 30,
	2004			2003
	(In thousands)
Computer and office equipment	$	1,502		$	2,429
Furniture and fixtures		695			760
Leasehold improvements		776			1,582
Purchased software and technology licenses, at cost		921			855
		3,894			5,626
Less accumulated depreciation and amortization		(2,947	)		(4,892	)
	$	947		$	734

Depreciation and amortization expense was $0.7 million, $0.9 million and $1.0 million during fiscal 2004, 2003 and 2002, respectively. During fiscal 2004 the decrease in computers and office equipment primarily resulted from a physical inventory of our remaining assets and disposal of surplus assets. The decrease in leasehold improvements is a result of closing of one of our UK offices. During fiscal 2003, the Company purchased property and equipment of $0.1 million as part of the acquisition of New Moon. The majority of the assets purchased had useful lives of one year or less at the time of purchase.

There were no assets recorded under capital leases as of September 30, 2004. As of September 30, 2003 the cost of assets recorded under capital leases was $64,754 and accumulated amortization was $38,152.

Note 9—Line of Credit

As of September 30, 2004, we had retired our bank line of credit. As of September 30, 2003, the Company had a $1.5 million bank line of credit, against which $0.3 million was outstanding.

Note 10—Accrued Expenses and Other Current Liabilities

	September 30,
	2004		2003
	(In thousands)
Accrued wages, commissions, bonuses	$	1,026	$	1,176
Accrued fringe benefits		333		250
Accrued advertising		227		467
Customer deposits		198		353
Capital lease obligations		—		31
Other accrued expenses		1,956		1,040
	$	3,740	$	3,317

Note 11—Commitments and Contingencies

Lease Commitments As of September 30, 2004 we had no future minimum capital lease payments commitments. Future minimum lease payments under non-cancelable operating leases as of September 30, 2004 were as follows: fiscal 2005 of $1.4 million, fiscal 2006 of $0.1 million, fiscal 2007 of $0.1 million and no such obligations after fiscal 2007.

F-18

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We had no assets recorded under capital leases at September 30, 2004. The cost of assets recorded under capital leases was $64,754 at September 30, 2003. Accumulated amortization on September 30, 2003 was $38,152. Rent expense amounted to approximately $1.6 million, $1.6 million and $2.0 million in fiscal 2004, 2003, and 2002, respectively.

Included in the Company’s operating lease commitments are facilities leased from Encinal Partnership No. 1, a partnership which includes Doug Michels, the Company’s former President and Chief Executive Officer, and currently a director of the Company (see Note 7). The remaining lease term of this facility is through June 2005. Rent expense for this facility amounted to approximately $1.2 million in fiscal 2004, $1.0 million in fiscal 2003, and $1.1 million in fiscal 2002.

Litigation As of September 30, 2004 we had an accrued liability of $0.9 million in settlement costs and the related legal costs for a suit against us. On August 28, 2003, a former Tarantella sales representative filed an action against Tarantella, Inc. and Tarantella International, Inc., a wholly owned subsidiary of Tarantella (collectively, “Tarantella”), in the California Superior Court in Santa Clara County, California. The complaint purported to state claims for breach of contract, negligent and intentional misrepresentation, fraud, and deceit. The complaint alleged that the plaintiff was owed commissions on certain sales of Tarantella products, and sought an unspecified amount of damages, correction of the purported contract, prejudgment interest, punitive damages and costs. On October 29, 2004, the parties entered into a Settlement Agreement and General Release of all Claims with the plaintiff, pursuant to which the plaintiff gave Tarantella and its officers, directors, affiliates, subsidiaries, agents, employees, attorneys, successor and assigns a full release from all claims, rights, demands, actions, obligations, liabilities, and causes of action of any and every kind, nature and character whatsoever, whether based on a tort, contract, statute, or any other theory of recovery, and whether for compensatory or punitive damages which the plaintiff may now have, has ever had, or may in the future have, arising or in any way connected with the plaintiff’s employment or contractual relationship with Tarantella, or the manner in which those relationships terminated in exchange for a settlement amount of $680,000. A Notice of Settlement was filed October 21, 2004 and a Request for Dismissal with Prejudice was filed on or around November 9, 2004 in the Superior Court of California, Santa Clara County.

Note 12—Shareholders’ Equity

Preferred Stock We are authorized to issue 20,000,000 shares of Preferred Stock. As of September 30, 2004, there were no shares of Preferred Series stock either issued or outstanding.

Employee Stock Purchase Plan. We have an Employee Stock Purchase Plan (“ESPP”) for all eligible employees which is administered by our board of directors. Under the ESPP, shares of our common stock may be purchased at six-month intervals at 85% of the fair market value on the first or last day of each six-month period whichever is lower. Employees may purchase shares through payroll deductions of up to 10% of gross compensation during an offering period. During fiscal 2004, fiscal 2003 and fiscal 2002, employees purchased 49,761, 81,972 and 123,814 shares at an average per share price of $1.36, $0.72 and $1.34, respectively. The number of shares reserved for issuance under the ESPP was increased by 50,000 shares in February, 2002, (as calculated on a post-reverse split basis) and by 250,000 shares in May 2004. The number of shares reserved for future issuance as of September 30, 2004 was 283,747.

2002 Incentive Stock Option Plan As of September 30, 2004, we had authorized 5,802,733 shares of Common Stock for issuance under the 2002 Incentive Stock Option Plan (the “Option Plan”). Our Board of Directors administers the Option Plan and determines the terms of the options granted under the Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004 there were 1,059,333 shares available for issuance.

F-19

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The exercise price of all incentive options granted under the Option Plan must be at least equal to the fair market value. Options granted under the Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

2003 Stock Option Plan. On April 2, 2003, our board of directors adopted the 2003 Stock Option Plan and authorized 200,000 shares of common stock for issuance under the plan. An additional 1,300,000 shares were added to the 2003 Stock Option Plan in December 2003. Our board of directors administers the 2003 Stock Option Plan and determines the terms of the options granted under the 2003 Stock Option Plan, including the exercise price, number of shares subject to each option and the exercisability thereof. As of September 30, 2004, there were 80,966 shares available for issuance. Options granted under the 2003 Stock Option Plan generally become exercisable over a four-year period. The term of each option is ten years.

Director Option Plan The Company’s Director Option Plan (the “Director Plan”) provides for the granting of non-statutory stock options to non-employee directors of the Company and is administered by the Board of Directors. As of September 30, 2004 there were 193,700 shares available for issuance. Options granted under the Director Plan have a term of ten (10) years unless terminated sooner upon termination of the optionee’s status as a director or otherwise pursuant to the Director Plan. Such options are not transferable by the optionee other than by will or the laws of descent or distribution, and each option is exercisable during the lifetime of the director only by such director. The exercise price of each option granted under the Director Plan is equal to the fair market value of the Common Stock on the date of grant. Initial Grant options granted under the Director Plan vest over five years and annual Grant options vest over one year.

In fiscal 2002 there were 4,470,880 options granted at below fair value. A summary of the status of our stock option plans as of September 30, 2004, 2003, and 2002, and changes during the years then ended is presented below:

(Options in thousands)	2004					2003				2002
Option and Director Plans	Shares			Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Outstanding at beginning of year		2,736		$	10.90	2,294		$	14.28	1,793		$	22.10
Granted		2,589			1.43	998			1.19	910			1.20
Exercised		(239	)		0.91	(129	)		0.95	(58	)		0.45
Cancelled		(516	)		11.63	(427	)		5.93	(351	)		22.70
Outstanding at end of year		(4,570	)		5.99	2,736			10.90	2,294			14.28
Options exercisable at end of year		2,450			9.71	2,058			12.96	1,449			16.60
Weighted-average fair value of options granted during the year, using black-scholes calculation	$				1.07			$	0.81			$	1.40

F-20

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about stock options outstanding at September 30, 2004:

(Options in thousands)
Range of Exercise Price	Outstanding	Weighted-Avg Remaining Contractual Life	Weighted-Avg Exercise Price		Exercisable	Weighted-Avg Exercise Price
$    0.45 -     0.45	251	4.8 years	$	0.45	251	$	0.45
0.70 -     0.94	1,396	6.7		0.92	622		0.92
1.10 -     1.60	525	8.0		1.30	308		1.12
1.70 -     2.50	1,414	8.4		1.96	325		1.95
2.80 -     2.80	1	1.2		2.80	1		2.80
6.41 -     9.50	254	4.6		8.33	220		8.31
12.34 -   18.44	187	3.7		14.23	182		14.24
19.06 -   28.13	310	2.8		23.16	310		23.16
29.38 -   41.88	106	2.5		32.49	106		32.49
44.38 -   65.94	90	3.1		47.43	90		47.44
81.56 -   92.50	36	3.6		82.67	34		82.67
$    0.45 -   92.50	4,570	6.6 years	$	5.99	2,450	$	9.71

Common Stock Repurchases We repurchase our common stock on the open market, both systematically and non-systematically. Under the systematic stock repurchase plan, shares of common stock are repurchased to help negate the dilutive effects of the Incentive Stock Option Plan and the Employee Stock Purchase Plan. Under the non-systematic repurchase plan, the Company may repurchase up to 1,200,000 shares of its common stock. During the fiscal years ended September 30, 2004, 2003 and 2002, the Company did not repurchase any shares under either plan.

Shareholder Rights In September 1997, we adopted a Shareholder Rights Plan which provides existing shareholders with the right to purchase a partial share of preferred stock for each share of common stock owned by the shareholder in the event of certain changes in the Company’s ownership. These rights may serve as a deterrent to certain takeover attempts not approved by the Company’s Board of Directors. The rights expire in September 2007.

Stock Issuance to Directors and Officers In December 2003, we entered into an agreement with five of our senior executives and directors under which the senior executives and directors received restricted common stock in lieu of salary for portions of their calendar 2004 compensation. The shares are valued at $0.93 per share, which was the fair market value of the shares at the time of the agreement. A total of 570,250 shares were issued and for which we recognized compensation expense of $0.5 million which is amortized over one year. At September 30, 2004, we had a deferred compensation balance of $0.1 million.

Stock Issuance to Independent Contractors In January 2004, we issued 90,000 shares of our common stock as compensation for performance as an independent contractor. The shares are valued at $1.95 per share, which was the fair market value of the shares at the time of the agreement. We recognized marketing expense of $0.2 million which is amortized over one year. At September 30, 2004, we had a deferred compensation balance of $0.1 million.

Warrants Issued in Fiscal 2002 During fiscal 2002, in connection with financial consulting and investment banking advice, we issued warrants to purchase 80,000 shares of common stock (calculated on a post-reverse split basis) at an exercise price of $2.20 per share. The warrants expire on April 22, 2006. The Company recorded a one-time charge of $138,000 in fiscal 2002 for this warrant.

F-21

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Private Placement Financing On September 30, 2003, we completed a private placement of common stock and warrants to Special Situations Technology Funds and Vertical Ventures resulting in gross proceeds to the Company of approximately $2,254,200 for which we paid fees of $155,345. The Company issued 1,950,000 shares of common stock at a price of $1.156 and warrants to purchase 1,950,000 shares of common stock at $1.395 per share. The warrants have a value of $895,592, based on the relative fair value using a Black-Scholes calculation, using a volatility of 100%, an annual dividend of zero and a discount rate of 2.63%. The Company can require the warrant holders to exercise one-third of the warrants provided the shares issuable hereunder are registered with the SEC and the share price equals or exceeds $1.674 for a period of twenty consecutive trading days. In addition, the Company can redeem up to two-thirds of the warrants or all of the warrants for $0.01 per share should the closing bid price of the shares reach the target prices of $2.232 and $2.790, respectively. The warrant holders may exercise the warrants prior to redemption. The warrants have a five year term. If the warrants were fully exercised, the Company would receive additional gross proceeds of approximately $2,700,000. The Company has registered the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants.

On December 10, 2003, the Company entered into a private placement transaction pursuant to which it issued common stock and warrants to Special Situations Technology Funds, Starlight Technology Partners, LLC, an investment group in which Mr. Wilde acts as Managing Director and Mr. Makoid is an investor, and an additional private investor, resulting in gross proceeds to the Company of approximately $2,750,000. In connection with the financing, we paid placement fees in the amount of $91,250 and issued 140,000 shares of common stock. The Company issued 2,750,000 shares of common stock at a price of $1.00 per share and warrants to purchase 550,000 shares of common stock at $1.39 per share. The warrants have a value of $310,624 based on the relative fair value using a Black-Scholes calculation, using a volatility of 100%, an annual dividend of zero and a discount rate of 3.20%. The warrants have a five year term. If the warrants were fully exercised, the Company would receive additional gross proceeds of $764,500. The Company has registered the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants

On February 23, 2004, the Company completed a private placement of common stock and warrants to various investors. In the private placement, the investors purchased 11,678,580 shares of Tarantella common stock at a price of $1.40 per share for gross proceeds of $16,350,000. The investors also acquired warrants to purchase up to an additional 2,335,716 shares at an exercise price of $1.70 per share. The warrants are exercisable for five years. If the warrants were fully exercised, the Company would receive additional gross proceeds of approximately $3,970,714. The Company has registered the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants. In connection with the financing, the Company incurred fees in the amount of $1,198,000 which included private placements, legal and accounting fees. In addition the Company issued warrants to the placement agents to purchase up to 322,500 shares of common stock at $1.70 per share. The warrants have a five year term.

Including the warrants issued in fiscal 2002 and those issued in the private placement transactions described above, as of September 30, 2004, we had warrants outstanding pursuant to which warrant holders may purchase up to an aggregate of 5,338,216 shares of our common stock at prices ranging from $1.39 to $2.20 per share.

On March 29, 2004, we completed an agreement pursuant to which it issued 140,000 shares in lieu of payment of a finder’s fee for the December 2003 private placement.

F-22

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13—Income Taxes

Loss before income taxes includes foreign pretax profit of approximately $0.1 million, $0.1 million, and $0.1 million for fiscal 2004, fiscal 2003 and fiscal 2002, respectively.

The components of income taxes are as follows:

	Fiscal Year Ended September 30,
	2004		2003		2002
	(In thousands)
Current:
Federal	$	—	$	—	$	(259	)
State		—		—		—
Foreign		129		300		(817	)
Total current		129		300		(1,076	)
Deferred		—		—		—
Total	$	129	$	300	$	(1,076	)

Income taxes differ from the amount computed by applying the statutory federal income tax rate to loss before income taxes as follows:

	Fiscal Year Ended September 30,
	2004			2003			2002
	(In thousands)
Statutory federal income tax (benefit) at 34%	$	(5,279	)	$	(3,191	)	$	(5,871	)
State income tax, net of federal effect		—			—			—
Foreign taxes (benefit) less related tax benefit, if any		85			317			(619	)
Losses and expenses without tax benefit, including valuation allowances		5,323			3,174			5,414
Net deferred tax asset charge		—			—			—
Total	$	129		$	300		$	(1,076	)

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

F-23

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	September 30,
	2004			2003
	(In thousands)
Deferred tax assets:
Investment basis differences	$	546		$	644
Accruals and reserve accounts		1,679			1,587
Property and equipment		5,046			5,783
Net operating loss carryforward (federal & state)		14,990			42,924
Capital loss carryforward (federal & state)		—			24,496
Research credit		919			8,850
Other credits		373			669
Total gross deferred tax assets		23,553			84,953
Less valuation allowance		(23,553	)		(84,953	)
Net deferred assets		—			—
Deferred tax liabilities:
Unrealized Investment Gain Amortization		—			—
Total deferred tax liabilities		—			—
Net tax assets and liabilities	$	—		$	—

The net change in the total valuation allowance for fiscal year 2004 was a decrease of approximately $61.4 million due primarily to the loss of tax attributes under Internal Revenue Code Section 382 relating to a change in control of the Company. The net change in the total valuation allowance for fiscal years 2003 and 2002 was an increase of approximately $2.1 million and $5.0 million, respectively. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets at September 30, 2004 will be allocated to income tax benefit.

Our management believes the uncertainty regarding the timing of the realization of net deferred tax assets requires a full valuation allowance.

At September 30, 2004, we had net operating loss carry forwards of approximately $41.8 million that will expire in fiscal years 2012 through 2024, of which approximately $6.9 million can be used against taxable income in any year and the remaining $34.9 million can be used at the rate of $1.7 million annually due to section 382 limitation. The amount of the loss carryover that can be used to reduce the future income taxes may be limited or eliminated depending on the extent of ownership changes within any three-year period.

At September 30, 2004, our cumulative unremitted foreign earnings were not material. We intend to reinvest these earnings indefinitely.

Note 14—Transactions with Caldera

On May 4, 2001, we consummated the sale of our Server Software and Professional Services divisions to Caldera Systems, Inc. Under the terms of the transaction, Caldera Systems, Inc. acquired the assets of the Server and Professional Services groups. A new company, Caldera International, Inc. (“Caldera International”), was formed which combined the assets acquired from us with the assets of Caldera Systems, Inc. Upon the completion of the sale, we continued to operate our Tarantella business, and accordingly, changed we corporate name to Tarantella, Inc. and our trading symbol to TTLA to reflect the new corporate name. We were subsequently de-listed from the Nasdaq and our trading symbol is now changed to TTLA.OB

F-24

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As consideration for the transaction, we received 16 million common stock shares of Caldera International (representing approximately 28.2% of Caldera International), $23 million in cash (of which $7 million was received on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that was originally to be received in quarterly installments of $2 million beginning in August 2002.

As part of the original transaction, if the OpenServer line of business of the Server and Professional Services groups generated revenues in excess of specified thresholds during the three-year period following the completion of the combination, we had earn-out rights entitling us to receive 45% of these excess revenues. The transaction was treated as a disposal of Server and Professional Services groups and a gain of $53,267,000 was recorded upon completion of the transaction.

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

During the first fiscal quarter of 2002, our net loss included equity losses of $4.0 million for our share of Caldera International losses. After recording this loss, the carrying value of the shares of Caldera International stock was reduced to zero, in accordance with APB opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

During the second quarter of fiscal 2002, the Company signed an agreement with Caldera International to redeem the $8 million note receivable held by the Company for $5 million. The note was originally payable in four quarterly installments of $2 million each, beginning in August 2002. A loss of $3,038,000 was recorded against the gain on the sale of divisions to Caldera for the redemption of the note receivable.

Additionally, Caldera International agreed to the buyout of certain licenses for products bundled in older releases of The Santa Cruz Operation, Inc.’s software, and the buyback of 500,000 post split shares of Caldera International stock held by us for $555,000. On March 7, 2002, Caldera International executed a 1 for 4 reverse stock split. Accordingly, the shares held by us were adjusted to reflect the stock split.

During the third quarter of fiscal 2002, Tarantella announced an agreement with Caldera International for Caldera International to repurchase the remaining 3,289,401 shares of Caldera International common stock held by Tarantella. Tarantella recorded other income of $3,059,250 from this transaction in the third fiscal quarter and subsequently received the cash in July 2002. For the fiscal year ended September 30, 2002, we sold 4,010,417 post split shares of Caldera International stock for total proceeds of $4,360,938. As of September 30, 2002, we did not own any securities in Caldera International. During the third quarter of fiscal 2002, Caldera International also bought out the remaining term of the OpenServer revenue sharing plan that was part of the original transaction, for $100,000, which was recorded as a gain on the sale of divisions to Caldera. In addition, royalty reserves of $345,000 related to the original transaction were written off and recorded as a gain on the sale of divisions to Caldera.

As part of the agreement between us and Caldera International, various building leases were assigned to Caldera International, however, we were a guarantor under such leases which expire in 2005. In the fourth quarter of fiscal 2002 we were released from its obligation as guarantor. There were also building leases, related to the agreement between us and Caldera International, that were assigned to us, for which Caldera International

F-25

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

was a guarantor, and for which we had $0.5 million of restricted cash in escrow. During the third quarter of fiscal 2003 Caldera International was released from its obligation as guarantor and the $0.5 million restricted cash that was in escrow was returned to us.

Note 15—Reverse Stock Split

On November 14, 2002, the Board of Directors unanimously adopted resolutions approving and recommending to the shareholders for their approval a series of amendments to our Amended and Restated Articles of Incorporation to affect a reverse stock split of our Common Stock at a ratio to be determined by our Board of Directors. On February 27, 2003, the stockholders approved amendments to our Amended and Restated Articles of Incorporation to affect a reverse stock split. On May 19, 2003, the Board of Directors unanimously approved the implementation of a reverse split with a ratio of one for five. On June 6, 2003, we implemented a one-for-five reverse split and our outstanding common shares were reduced from 49.7 million shares to approximately 9.9 million shares. The reverse stock split has been retroactively reflected in the accompanying consolidated financial statements and notes thereto for all periods presented.

Note 16—Business Combinations

Acquisition of New Moon Systems, Inc.

On June 5, 2003, Tarantella completed the acquisition of New Moon Systems, Inc., a privately-held California corporation (“New Moon”), pursuant to an Agreement and Plan of Reorganization (the “Agreement”), dated May 29, 2003. New Moon, headquartered in San Jose, CA, develops software to simply and cost-effectively manage and deploy Windows-based applications to end-user desktops in small and medium-sized businesses, as well as enterprise departmental customers. New Moon Canaveral^™ iQ from Tarantella^® (“Canaveral iQ”) extends the capabilities of Microsoft’s Windows Terminal Services and answers the demand for a simple and intelligent means of centrally managing remote applications.

Pursuant to the Agreement, Tarantella issued a total of 1,592,000 shares of Tarantella common stock valued at $3.6 million in exchange for all of the outstanding shares of New Moon and to satisfy its obligations to the former employees of New Moon. The fair value of our common stock was determined based on the average closing price per share of our common stock over the five day period including the two days before and after the terms of the acquisition were agreed to and announced. The New Moon shareholders shall also receive a minimum cash earnout of approximately $1.7 million over a period from January 1, 2004 to December 31, 2006 based on a royalty of 30% of New Moon product revenues, net of direct costs. After the shareholders have been paid the minimum earnout, they would be entitled to an additional royalty of 15% of New Moon product revenues, net of direct costs, during this period. In the event the minimum earnout is not achieved by the conclusion of the quarter ending December 31, 2006, Tarantella shall pay along with the final earnout payment an amount equal to the minimum earnout less all aggregate earnouts paid to date, less any off-sets and any escrow claim deficiencies. We also incurred approximately $0.3 million of direct merger costs, for a total purchase price of approximately $5.7 million as of September 30, 2003. In December 2003, we incurred additional acquisition costs of $4,000 which was allocated as an increase to goodwill in fiscal 2004.

The results of operations of New Moon subsequent to June 5, 2003, have been included in our consolidated financial statements for the year ended September 30, 2003.

Under the purchase method of accounting, the estimated total price of $5.7 million is allocated to New Moon’s net tangible and intangible assets based upon their estimated fair market value as of the date of acquisition, June 5, 2003. The allocation of the purchase price to goodwill and intangibles is based upon an independent, third-party appraisal and management’s estimates.

F-26

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net tangible assets acquired as of June 5, 2003 of approximately $1.9 million represent the net tangible assets of New Moon. $1.4 million of the purchase price was allocated to identifiable intangible assets in fiscal 2003. The income approach, which includes an analysis of cash flows and risks associated with achieving such cash flows, was used to estimate the fair value of the Company’s existing technology and subscription/maintenance agreements. The royalty savings approach, which estimates the value of an asset by capitalizing the royalties saved because the Company owns the asset, was used to estimate the fair value of the Company’s patents/core technology and trade name/trademarks. The cost approach, which uses the concept of replacement cost as an indicator of fair value, was used to estimate the fair value of the Company’s value-added reseller (“VAR”) relationships. The Company is amortizing all identifiable intangible assets on a straight-line basis over an estimated useful life of three years. (See Note 17—Acquired Intangible Assets, Net)

The residual purchase price of $2.4 million was recorded as goodwill in fiscal 2003. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill relating to the New Moon acquisition is not being amortized and will be carried at cost and tested for impairment annually and whenever events indicate that impairment may have occurred. It is our policy to reassess goodwill annually as of July 1^st. As a result of our analysis during our fourth fiscal quarter of 2004, management has determined that no impairment of goodwill has occurred. (See Note 3—Summary of Significant Accounting Policies, Goodwill and Intangible Assets).

New Moon had approximately 27 employees at the date of the acquisition. Prior to June 6, 2003, and in connection with the merger, the Company gave redundancy notices to 15 former New Moon employees, and accrued $0.3 million related to their severance benefits. The estimated cost of terminating the employees was accounted for as part of the purchase price. Of the total number of employees to be terminated, 7 were in research and development, 3 were in sales and marketing and 5 in general and administration. During the quarter ended June 30, 2003, 8 of the redundant employees left the Company and the remainder left at various dates through September 30, 2003. During the quarter ended June 30, 2003, $0.1 million was paid out as termination benefits and the remaining $0.2 million was paid out during the quarter ended September 30, 2003.

Acquisition of Caststream, Inc.

On March 29, 2004, we entered into a Stock Exchange Agreement with Caststream, Inc (“Caststream”). Pursuant to the terms of the agreement, we acquired all the capital stock of Caststream in exchange for 100,000 shares of our common stock and warrants for 100,000 shares of common stock. We also assumed certain liabilities of Caststream of approximately $40,000. The transaction was considered a related party transaction because two of the Caststream shareholders were hired in December 2003 as our Vice President of Corporate Development and Chief Marketing Officer. In addition, we hired three other Caststream shareholders in December 2003 in various marketing and technical positions. Our Audit Committee and our Board of Directors approved the transaction.

The acquisition has been accounted for as a purchase of assets by us for financial reporting purposes. Beginning March 30, 2004, the results of Caststream are being included in our consolidated financial statements. The purchase price has been allocated based on the fair value of the assets acquired and the liabilities assumed. Pursuant to the Emerging Issues Task Force’s Issue No. 98-3, “Determining Whether a Non-monetary Transaction Involves the Receipt of Productive Assets or of a Business”, Caststream does not meet the criteria necessary to qualify as a business. Therefore, our acquisition of Caststream does not qualify as a business combination under Statement of Financial Accounting Standards No. 141, “Business Combinations”, and no goodwill resulted from recording the transaction. Identified intangible assets with finite lives will be amortized over their respective estimated useful life. We are required to review long-lived assets when circumstances

F-27

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

indicate that an impairment exists. To the extent the value of the long-lived assets are impaired, we will be required to record the impairment charge. The fair value of our stock and stock warrants, issued net of liabilities assumed, exceeds the fair market value of the acquired assets based upon an independent, third party appraisal. This excess value has been charged to operations upon the close of the merger as compensation expense.

The total purchase price for Caststream is $432,000, as follows (in thousands):

Fair value of Tarantella common stock	$	227
Fair value of Tarantella common stock warrants		150
Liabilities assumed		40
Acquisition costs		15
Total consideration	$	432

The allocation of the purchase price is based upon an independent, third-party appraisal and management’s estimates as follows (in thousands):

Technology	$	304
Compensation expense		124
Computer equipment		4
Total purchase price	$	432

Note 17—Acquired Intangible Assets, Net

During fiscal 2003 we acquired intangible assets as part of our purchase of New Moon Systems, Inc. and during fiscal 2004 we acquired intangible assets as part of our purchase of Caststream, Inc. (See Note 16—Business Combinations) Annually, during our fiscal fourth quarter, we test our intangible assets for impairment, as required by our accounting policy (See Note 3—Summary of Significant Accounting Policies, Goodwill and Intangible Assets). In addition, we will test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

As of our annual test date of July 1, 2004, we determined that certain events and circumstances have occurred by our fourth fiscal quarter that have reduced the fair value carrying amount of certain of our acquired intangible assets. Based on our evaluation, appropriate write-downs have been recognized against the related intangible assets carrying amounts for fiscal 2004. Following is a table of our intangible assets summarizing their carry amounts, accumulated amortization, fiscal 2004 impairment, net carrying amounts as of September 30, 2004 and 2003 and estimated timing of future amortizations:

		September 30, 2003
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Intangible Assets, Net
	(In years)	(In thousands)
Amortized intangible assets
Technology	3	$	500	$	56	$	444
Patents	3		700		78		622
Trademarks	3		200		22		178
Other	3		20		2		18
Total		$	1,420	$	158	$	1,262

F-28

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

		September 30, 2004
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Impairment Writedown fiscal 2004		Intangible Assets, Net
	(In years)	(In thousands)
Amortized intangible assets
Technology	3	$	804	$	273	$	—	$	531
Patents	3		700		274		283		143
Trademarks	3		200		72		128		—
Other	3		20		7		13		—
Total		$	1,724	$	626	$	424	$	674
Aggregate amortization and impairment writedown expense:
For year ended September 30, 2003		$	158
For year ended September 30, 2004		$	892
Estimated amortization expense:
For year ending September 30, 2005		$	354
For year ending September 30, 2006			269
For year ending September 30, 2007			51
		$	674

Note 18—Indemnification and Warranties

Indemnification The Company licenses its software and services pursuant to a software license agreement, in which the Company agrees to indemnify, hold harmless and defend the customer against damages arising out of claims filed by third parties that the Company’s products infringe any copyright or other intellectual property right. The term of the indemnification is generally perpetual, limited by applicable statutes of limitations. The license agreement generally limits the scope of the remedies for such indemnification obligation, including but not limited to certain product usage limitations and the right to replace an infringing product or modify it to make it non-infringing. If the Company cannot address the infringement by replacing or repairing the product, the Company is allowed to cancel the license and return the fees paid by the customer. The Company has never incurred expense under such indemnification provisions. The Company believes the estimated fair value of these indemnification agreements is minimal.

As permitted under California law, the Company has agreements whereby it indemnifies its officers and directors for certain events while the officer or director is, or was serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director’s and Officer’s insurance policy that limits the Company’s exposure and enables it to recover at least a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

Warranties The Company generally warrants for a period of 90 days that its software products will perform substantially in accordance with its published specifications, that the reproduction of the software on the media material provided by the Company is correct and that the documentation is correctly printed. In the event of any

F-29

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

non-conformance, the Company agrees to repair, replace or accept return of the non-conforming product and refund any fees paid by the customer for said non-conforming product. The Company has never incurred significant expense under its product warranties. The Company believes the estimated fair value of these warranty agreements is immaterial.

As discussed in Note 14, as part of the agreement between the Company and Caldera International, various building leases were assigned to Caldera International. However, the Company was a guarantor under such leases which expire in 2005. In the fourth quarter of fiscal 2002 the Company was released from its obligation as guarantor. There were also building leases, related to the agreement between the Company and Caldera International, that were assigned to the Company, for which Caldera International was a guarantor, and for which the Company had $0.5 million of restricted cash in escrow. During the third quarter of fiscal 2003 Caldera International was released from its obligation as guarantor and the $0.5 million restricted cash that was in escrow was returned to the Company.

Note 19—Accrued Restructuring Charge

Fiscal 2004

During July 2004, we announced a restructuring plan which resulted in a charge of $1.1 million in the fourth quarter of fiscal 2004 in order to reduce our spending levels to align operating expenses with our lower than expected revenues. This restructuring plan reduced the existing workforce by 10 employees in the United States and 5 employees in the United Kingdom, and vacated additional facility space at our Santa Cruz, California, headquarters. The reductions in work force affected our sales, product development and corporate services functions. We expect to complete this plan during fiscal 2005.

Fiscal 2004 Fourth Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Facilities		Total
Restructuring charge accrued	$	1,046		$	64	$	1,110
Payments/utilization of the accrual		(523	)		—		(523	)
Accrual at September 30, 2004	$	523		$	64	$	587

In addition, estimates were updated for restructuring accruals related to our restructuring plans initiated in fiscal 2002 and fiscal 2001 to account for our inability during fiscal 2004 to sublease previously vacated facilities. As a result, during September 2004, we recognized additional restructuring expenses of $431,000 and $59,000, respectively, against these ongoing lease costs to the end of their term in June 2005. (See Restructuring Accruals for Fiscal 2002 and Fiscal 2001, respectively.) In the first quarter of fiscal 2004, the Company implemented a restructuring which reduced the existing workforce by one employee. The Company recorded a charge of $19,000 for this restructuring in fiscal 2004.

Fiscal 2004 First Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Total
Restructuring charge accrued	$	19		$	19
Payments/utilization of the accrual		(19	)		(19	)
Accrual at September 30, 2004	$	—		$	—

F-30

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fiscal 2003

On July 24, 2003, we announced a restructuring plan which resulted in a charge of $0.4 million. We reduced our spending levels to align our operating expenses with our lower than expected revenues. The restructuring included a reduction in staffing of 23 employees, and the disposal of fixed assets.

A severance charge of $0.4 million included the elimination of 12 positions in the United States and 11 positions in the United Kingdom. The reductions in force affected the product development, support, sales, marketing and general and administrative functions of the Company. There was also a charge of $6,508 for the disposal of fixed assets. As of September 30, 2003, 22 positions had been eliminated. The last employee under this plan was terminated during the 2nd quarter of fiscal 2004.

Fiscal 2003 Fourth Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Disposal of Fixed Assets			Total
Restructuring charge accrued	$	442		$	6		$	448
Payments/utilization of the accrual		(393	)		(6	)		(399	)
Accrual at September 30, 2003		49			—			49
Payments/utilization of the accrual		(41	)		—			(41	)
Provision Adjustment		(8	)		—			(8	)
Accrual at September 30, 2004	$	—		$	—		$	—

On June 5, 2003, the Company announced a restructuring plan, which resulted in a charge of $0.2 million. Also, on June 5, 2003 the Company acquired New Moon. In order to keep spending levels flat with pre-acquisition levels, the Company assessed the overall resource requirements for the combined business and reduced infrastructure accordingly.

The entire restructuring charge of $0.2 million was for severance, related to the elimination of 12 positions. The positions eliminated were 9 in the US, 2 in the UK and 1 in Germany. The reductions in work force affected the product development, sales, marketing and general and administrative functions of the Company. As of September 30, 2003, all 12 employees were terminated.

Fiscal 2003 Third Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Total
Restructuring charge accrued	$	153		$	153
Payments/utilization of the accrual		(152	)		(152	)
Provision Adjustment		(1	)		(1	)
Accrual at September 30, 2003	$	—		$	—

During the first quarter of fiscal 2003, the Company announced a restructuring plan, which resulted in a charge of $1.1 million. The Company reduced its spending levels to align its operating expenses with the Company’s continued lower than expected revenues.

A severance charge of $0.8 million included the elimination of 10 positions in the United States, 13 positions in the United Kingdom, and 2 positions in Italy. The reductions in work force affected the product

F-31

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

development, sales, marketing and general and administrative functions of the Company. As of December 31, 2002, all 25 positions had been eliminated.

A facilities charge of $0.3 million was related to space the Company vacated at two locations in the U.K. This included a non-cash charge of $89,000 related to the write-off of leasehold improvements at the two vacated facilities.

The Company completed all of the cost reduction actions initiated in the first quarter of fiscal year 2003 during the fiscal year.

Fiscal 2003 First Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Facilities			Disposal of Fixed Assets			Total
Restructuring charge accrued	$	820		$	238		$	89		$	1,147
Payments/utilization of the accrual		(761	)		(165	)		(89	)		(1,015	)
Provision Adjustment		(59	)		—			—			(59	)
Accruals at September 30, 2003		—			73			—			73
Payments/utilization of the accrual		—			(47	)		—			(47	)
Provision Adjustment		—			(26	)		—			(26	)
Accruals at September 30, 2004	$	—		$	—		$	—		$	—

Fiscal 2002

During the first quarter of fiscal 2002, the Company announced a restructuring plan, which resulted in a charge of $1.6 million. The Company reduced its spending levels to align its operating expenses with the Company’s lower than expected revenues. The restructuring included a reduction in staffing of 52 employees, a reserve for unused facilities at the Company’s corporate headquarters, and costs associated with closing several foreign offices.

This included a severance charge of $0.9 million for the elimination of 19 positions in the United States, 23 positions in the United Kingdom, and 10 positions in Japan. The reductions in force affected the product development, support, sales, marketing and general and administrative functions of the Company. As of March 31, 2002, all 52 positions had been eliminated.

Also included was a facilities charge of $0.7 million related to space the Company vacated. The Company had anticipated that it would sub-lease the space by December 31, 2002. As of September 30, 2004, the Company had not secured a sub-lease tenant, so provision adjustments of $0.4 million, $0.5 million and $0.6 million were made at the end of fiscal 2004, fiscal 2003 and fiscal 2002, respectively. The non-cancelable operating lease and related costs for this space are now fully reserved for through expiration of the lease on June 30, 2005. In addition, charges were taken for expenses associated with office closures in Japan and Brazil and a noncash expense of $39,000 related to fixed asset disposals at the Japan subsidiary.

The Company completed the cost reduction actions initiated in fiscal 2002, with the exception of sub-leasing excess space at the Company’s corporate headquarters in Santa Cruz, California.

F-32

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fiscal 2002 First Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Facilities			Disposal of Fixed Assets			Total
Restructuring charge accrued	$	856		$	736		$	44		$	1,636
Payments/utilization of the accrual		(861	)		(546	)		(39	)		(1,446	)
Provision Adjustment		5			560			(5	)		560
Accrual at September 30, 2002		—			750			—			750
Payments/utilization of the accrual		—			(590	)		—			(590	)
Provision Adjustment		—			485			—			485
Accrual at September 30, 2003		—			645			—			645
Payments/utilization of the accrual		—			(606	)		—			(606	)
Provision Adjustment		—			431			—			431
Accrual at September 30, 2004	$	—		$	470		$	—		$	470

Fiscal 2001

During the fourth quarter of fiscal 2001, the Company announced a restructuring plan, which resulted in a charge of $0.5 million. The restructuring charge included a reduction in personnel of 10 employees and a planned elimination of offices in Singapore and Australia. Total cash expenditures were $0.4 million.

The severance charge of $0.4 million included the elimination of 4 positions in the United States and 6 positions in the United Kingdom. The reductions in work force affected the sales, marketing and general and administrative functions of the Company. At September 30, 2001, all 10 positions had been eliminated. A provision adjustment of $64,000 was made to release excess restructuring reserve, which resulted from the fact that the Company had not anticipated that the Australian office would be sub-leased. The provision adjustment of $8,453 in the fourth quarter of fiscal 2003 was for the final costs associated with closing the Australian office.

Fiscal 2001 Fourth Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Facilities			Total
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	)		(23	)		(225	)
Provision Adjustment		—			(64	)		(64	)
Accrual at September 30, 2002		—			15			15
Payments/utilization of the accrual		—			(23	)		(23	)
Provision Adjustment		—			8			8
Accrual at September 30, 2003 and 2004	$	—		$	—		$	—

During the second quarter of fiscal 2001, the Company announced a restructuring plan which resulted in a charge of $1.6 million, which when taken with a provision adjustment to a previously established restructuring

F-33

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

reserve for severance related to the sale of divisions to Caldera, resulted in net charge for the period of $1.1 million. The restructuring charge included a reduction in personnel of 28 employees and a reserve for unused facilities. Total cash expenditures were $1.6 million (see table below).

The $1.6 million restructuring charge included a severance charge of $1.5 million for 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 work force affected the sales, marketing and general and administrative functions of the Company. As of September 30, 2001, all 28 positions had been eliminated. The Company vacated additional space within its Santa Cruz, California office in the first quarter of fiscal 2002, and an additional charge of $81,000 was recorded for estimated payments on the lease for an additional 12 months. In the fourth quarter of fiscal 2002, an additional charge of $85,000 was recorded and in the fourth quarter of fiscal 2003, an additional charge of $64,000 was recorded and in the fourth quarter of fiscal 2004 an additional charge of $59,000 was recorded because the facility was not yet sub-leased. The space is now fully reserved for through the lease expiration date of June 30, 2005.

Fiscal 2001 Second Quarter Restructuring Accrual

(In Thousands)	Reduction in Force			Facilities			Total
Restructuring charge accrued	$	1,499		$	64		$	1,563
Payments/utilization of the accrual		(1,460	)		(24	)		(1,484	)
Provision Adjustment		(39	)		—			(39	)
Accrual at September 30, 2001		—			40			40
Payments/utilization of the accrual		—			(100	)		(100	)
Provision Adjustment					166			166
Accrual at September 30, 2002		—			106			106
Payments/utilization of the accrual		—			(83	)		(83	)
Provision Adjustment					64			64
Accrual at September 30, 2003		—			87			87
Payments/utilization of the accrual		—			(82	)		(82	)
Provision Adjustment		—			59			59
Accrual at September 30, 2004	$	—		$	64		$	64

F-34

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 20—Industry and Geographic Segment Information

Tarantella operates as one reportable segment.

For the fiscal year ended September 30, 2004, no single customer accounted for 10% or more of revenue. For the fiscal year ended September 30, 2003, one customer accounted for 13.7% of our net revenues. For the fiscal year ended September 30, 2002, one customer accounted for approximately 10% of net revenues.

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.

	Fiscal Year Ended September 30,
	2004		2003		2002
	(In thousands)
Net revenues by geography:
United States	$	5,263	$	6,544	$	8,011
Canada and Latin America		1,338		821		769
EMEIA (1)		4,748		5,012		4,044
Asia Pacific		1,139		1,629		1,396
Total net revenues	$	12,488	$	14,006	$	14,220
Net revenues by product:
Enterprise Edition	$	10,942	$	11,588	$	12,210
Vision 2K		1,057		2,002		2,010
Terminal Services Edition		445		416		—
cast:stream		44		—		—
Total net revenues	$	12,488	$	14,006	$	14,220
Long-lived assets:
United States	$	3,789	$	4,381		1,810
EMEIA (1)		246		349		471
Total long-lived assets	$	4,035	$	4,730		2,281

(1) Europe, Middle East, India and Africa

Note 21—Employee Benefit Plan

The Company maintains an employee savings plan, which qualifies under section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 50% of their pre-tax salary, up to certain statutory limits. Until December 31, 2002, the Company matched 50% of employee contributions up to the lower of 6% of the employee’s annual salary or $3,000. As of December 31, 2002, the Company no longer makes any contribution. For fiscal 2003, and 2002, the Company’s total contributions towards the 401(k) plan amounted to $14,000, and $0.1 million, respectively.

During fiscal 2003, there was a partial plan termination of the Company’s 401(k) plan, which was triggered by the Company’s planned reductions in force. As a result, the participants that were terminated became fully vested, regardless of years of service. This did not result in any additional contribution from the Company. The eight employees that were impacted received additional funds from the plan of approximately $13,000.

F-35

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 22—Quarterly Reporting (unaudited)

The following tables present Tarantella’s condensed operating results for each of the eight fiscal quarters in the period ended September 30, 2004. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements included in this Registration Statement on Form S-1. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present the unaudited quarterly results. This data should be read together with Tarantella’s consolidated financial statements and the notes to those statements included in this Registration Statement on Form S-1.

TARANTELLA, INC.

QUARTERLY RESULTS OF OPERATIONS

(Unaudited)

	Fiscal Year Ended September 30, 2004
	Q4			Q3			Q2			Q1
	(In thousands, except per share data)
Net revenues	$	3,253		$	2,630		$	3,137		$	3,468
Cost of revenues		981			652			596			498
Gross margin		2,272			1,978			2,541			2,970
Operating expenses		7,726			6,356			6,064			5,565
Operating loss		(5,454	)		(4,378	)		(3,523	)		(2,595	)
Other income (expense):
Gain (loss) on sale of investments		—			718			—			—
Impairment of investments		(244	)		—			—			—
Interest income/(expense), net		56			25			2			(7	)
Other income (expense), net		3			(18	)		(61	)		(50	)
Loss before income taxes		(5,639	)		(3,653	)		(3,582	)		(2,652	)
Income tax (benefit) expense		(110	)		44			97			98
Net loss	$	(5,529	)	$	(3,697	)	$	(3,679	)	$	(2,750	)
Comprehensive loss	$	(5,539	)	$	(1,244	)	$	(2,938	)	$	(2,606	)
Loss per share—basic and diluted	$	(0.20	)	$	(0.13	)	$	(0.18	)	$	(0.22	)
Shares used in per share calculation—basic and diluted		27,533			27,392			20,232			12,689

F-36

TARANTELLA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

TARANTELLA, INC.

QUARTERLY RESULTS OF OPERATIONS

(Unaudited)

	Fiscal Year Ended September 30, 2003
	Q4			Q3			Q2			Q1
	(In thousands, except per share data)
Net revenues	$	3,079		$	3,752		$	4,230		$	2,945
Cost of revenues		577			291			373			314
Gross margin		2,502			3,461			3,857			2,631
Operating expenses		6,800			4,471			4,646			5,795
Operating loss		(4,298	)		(1,010	)		(789	)		(3,164	)
Other income (expense):
Interest income (expense), net		(4	)		4			14			32
Other income (expense), net		(100	)		(118	)		63			(14	)
Loss before income taxes		(4,402	)		(1,124	)		(712	)		(3,146	)
Income tax expense		20			122			98			60
Net loss	$	(4,422	)	$	(1,246	)	$	(810	)	$	(3,206	)
Comprehensive loss	$	(4,169	)	$	(1,147	)	$	(1,005	)	$	(2,927	)
Loss per share—basic and diluted	$	(0.44	)	$	(0.14	)	$	(0.10	)	$	(0.39	)
Shares used in per share calculation—basic and diluted		10,014			8,764			8,240			8,206

F-37

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth all expenses to be paid by the registrant in connection with the sale of common stock being registered. All amounts shown are estimates except for the SEC registration fee.

	Amount to be Paid
SEC registration fee	$	4,999.68
Printing expenses	$	45,000.00
Legal fees and expenses	$	65,000.00
Accounting fees and expenses	$	87,000.00
Miscellaneous	$	35,000.00
Total	$	236,999.68

Item 14. Indemnification of Officers and Directors.

As permitted under California law, the Company has agreements whereby it indemnifies its officers and directors for certain events while the officer or director is, or was serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director’s and Officer’s insurance policy that limits the Company’s exposure and enables it to recover at least a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

Article IV of the Company’s Amended and Restated Articles of Incorporation authorizes the Company to indemnify its directors and officers to the fullest extent permissible under California law.

Article VI of the Company’s Amended and Restated Bylaws provides for mandatory indemnification of its officers and directors to the maximum extent allowable under California law. The Company is authorized to indemnify its employees and agents to the maximum extent allowable under California law. The rights to indemnity thereunder continue as to as person who has ceased to be a director, officer, employee or agent of the Company. In addition, the indemnity extends to persons who are or were serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, join venture, trust or other enterprise or who was a director, officer, employee or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation.

Item 15. Recent Sales of Unregistered Securities.

Since June 2001, the Registrant has sold the following securities without registration under the Securities Act of 1933:

On June 5, 2003 we issued 1,592,014 unregistered shares of our common stock valued at $3.6 million in connection with our acquisition of all of the outstanding capital stock of New Moon Systems, Inc. and to satisfy New Moon’s obligations to the former employees of New Moon. The New Moon shareholders shall also receive a minimum cash earnout of approximately $1.7 million over a period from January 1, 2004 to December 31, 2006 based on a royalty of 30% of New Moon product revenues, net of direct costs. After the shareholders have been paid the minimum earnout, they will be entitled to an additional royalty of 15% of New Moon product revenues, net of direct costs, during this period. In the event the minimum earnout is not achieved by the conclusion of the quarter ending December 31, 2006, Tarantella shall pay along with the final earnout payment

II-1

an amount equal to the minimum earnout less all aggregate earnouts paid to date, less any off-sets and any escrow claim deficiencies. We also incurred approximately $0.3 million of direct merger costs, for a total purchase price of approximately $5.7 million. Our common stock issued to the New Moon Systems shareholders in the acquisition was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On December 9, 2003, we entered into an agreement whereby we issued 570,250 shares of our restricted and unregistered common stock at $0.93 per share to five of our senior executives and directors in lieu of a substantial portion of their calendar year 2004 cash compensation. The aggregate value of the shares issued to the executives and directors is $530,332.50, based on the market price of our common stock as of the date of the issuance. Our common stock issued to the five senior executives was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) thereof.

On January 23, 2004, we entered into an Independent Contractor Agreement whereby we issued 90,000 shares of our unregistered common stock at a value of $1.95 per share to InteSec Group LLC. InteSec will perform certain services for us in consideration for the issuance of the shares. The aggregate value of the shares issued to InteSec is $175,500, based on the market price of our common stock as of the date of the issuance. Our common stock issued to InteSec was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) thereof.

On September 30, 2003, we issued 1,950,000 unregistered shares of our common stock at a price of $1.156 per share, and warrants to purchase an additional 1,950,000 shares of our common stock at $1.395 per share. The warrants carry a five-year term. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On December 10, 2003, we entered into a private placement transaction pursuant to which we issued 2,750,000 unregistered shares of our common stock at a price of $1.00 per share, and warrants to purchase an additional 550,000 shares of our common stock at $1.39 per share. The warrants carry a five year term. The shares and warrant shares were issued under two separate purchase agreements. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On February 23, 2004, we completed a private placement transaction pursuant to which we issued 11,678,580 shares of our common stock at a price of $1.40 per share, and warrants to purchase an additional 2,335,716 shares of our common stock at $1.70 per share. The shares and warrant shares were issued under two separate purchase agreements. The warrants carry a five-year term. Additional warrants were issued in the February 2004 private placement as consideration for the placement agents, and are exercisable for up to 322,500 shares of our common stock at $1.70 per share, and carry a five-year term. Our common stock and warrants issued to the selling shareholders and the placement agents were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On March 29, 2004, we issued 140,000 unregistered shares of our common stock to Olympus Securities LLC at a price of $1.00 per share in lieu of payment of a finders fee for the December 2003 private placement. The aggregate price of the shares issued to Olympus Securities is $140,000. Our common stock issued to Olympus was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

On March 29, 2004, we acquired all of the outstanding capital stock of Caststream, Inc. in exchange for 100,000 shares of our common stock at a price of $2.27 per share, and warrants to purchase up to 100,000 shares of our common stock at a price of $2.10. Our common stock and warrants issued to the selling shareholders were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

II-2

On November 1, 2004, we entered into an agreement whereby we issued 124,999 shares of our restricted and unregistered common stock at $1.14 per share to four members of our board of directors in lieu of a substantial portion of their fiscal year 2005 cash compensation. The aggregate value of the shares issued to directors is $142,498.86, based on the market price of our common stock as of the date of the issuance. Our common stock issued to the directors was issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D promulgated thereunder.

Item 16. Exhibits and Financial Statement Schedules.

2.1	Agreement and Plan of Reorganization by and among Tarantella, Inc., Tarantella Acquisition Corporation and New Moon Systems, Inc. (5)
3.1	Amended and Restated Articles of Incorporation of Registrant. (8)
3.2	Bylaws of Registrant, as amended. (2)
4.1	Specimen Common Stock Certificate of Registrant. (1)
4.2	Purchase Agreement by and between Tarantella, Inc. and certain investors. (7)
4.3	Registration Rights Agreement by and between Tarantella, Inc. and certain investors. (7)
4.4	Form of Warrants by and between Tarantella, Inc. and certain investors. (7)
4.5	Purchase Agreement by and between Tarantella, Inc. and Hitschler Enterprises, LLC and by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.6	Registration Rights Agreement by and between Tarantella, Inc. and Hitschler Enterprises, LLC and by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.7	Form of Warrants by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.8	Form of Warrants by and between Tarantella, Inc. and Hitschler Enterprises, LLC. (7)
4.9	Purchase Agreement by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
4.10	Registration Rights Agreement by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
4.11	Form of Warrants by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
5.1*	Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.
10.13	Lease with Encinal Partnership No. 1 commencing January 1, 1989 (425 Encinal Street). (1)
10.17	Form of Indemnification Agreement. (1)
10.18	Master Registration Rights Agreement as amended. (6)
10.19	Employee Stock Purchase Plan. (7)
10.20	2002 Incentive Stock Option Plan and form of Incentive Stock Option Agreement. (9)
10.21	401(k) Plan, as amended. (1)
10.24	2003 Director Stock Option Plan. (7)
10.34	Shareholders’ Rights Agreement. (3)
10.35	Change-in-control agreement between the Company and certain key management. (4)
10.36	Revised Consulting Agreement with Alok Mohan. (7)

II-3

10.37	Michels transition agreement (8)
10.38	Bresee Severance Agreement (10)
10.39	Scheybeler Severance Agreement (9)
10.40	Costa Severance Agreement (9)
14.1	Form of Tarantella, Inc. Financial Code of Ethics for Chief Executive Officer, Chief Financial Office, Vice Presidents and Employees with Financial Reporting Responsibilities, as amended November 2004 (9)
21.1	Subsidiaries of Registrant. (7)
23.1†	Consent of Independent Registered Public Accounting Firm.
23.2*	Consent of WSGR (Included in Exhibit 5.1)
24.1*	Power of Attorney (see page II-6 of the Registration Statement on Form S-1 333-115812 filed on May 24, 2004)

* Previously filed.

† Filed herewith.

(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.

(2) Incorporated by reference to the Form 10-K filed on December 22, 1995.

(3) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.

(4) Incorporated by reference to the Form 10-K filed on December 23, 1998.

(5) Incorporated by reference to the Form 8-K filed on June 9, 2003.

(6) Incorporated by reference to the Form 8-K filed on December 12, 2003.

(7) Incorporated by reference to the Form 10-K filed on March 8, 2004.

(8) Incorporated by reference to the Form 10-Q filed on May 14, 2004.

(9) Incorporated by reference to the Form 10-K filed on December 29, 2004.

(10) Incorporated by reference to the Registration Statement on Form S-1 333-115812 filed on May 24, 2004.

Item 17. Undertakings.

We hereby undertake:

1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(a) To include any prospectus required by Section 10(a)(3) of the Securities Act;

(b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;

(c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a) and (b) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by us pursuant to Section 13 or Section 15(d) of the 1934 Act that are incorporated by reference in the Registration Statement.

2. That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

II-4

4. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the 1934 Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to the registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Cruz, County of Santa Cruz, State of California, on the 30th day of December, 2004.

TARANTELLA, INC.
By:	/s/    FRANCIS E. WILDE
	Francis E. Wilde
	(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
/s/    FRANCIS E. WILDE         Francis E. Wilde	President, Chief Executive Officer and Director (Principal Executive Officer)	December 30, 2004
/s/    JOHN M. GREELEY         John M. Greeley	Vice President and Chief Financial Officer (Principal Financial Officer)	December 30, 2004
/s/    ROBERT MORLEY         Robert Morley	Vice President, Corporate Controller (Principal Accounting Officer)	December 30, 2004
* Alok Mohan	Chairman	December 30, 2004
* Douglas Michels	Director	December 30, 2004
* Gilbert Williamson	Director	December 30, 2004
* Ronald Lachman	Director	December 30, 2004
* Bruce Ryan	Director	December 30, 2004
* Ninian Eadie	Director	December 30, 2004

By:	/s/    JOHN M. GREELEY
	John M. Greeley Attorney-in-Fact

II-6

EXHIBIT INDEX

2.1	Agreement and Plan of Reorganization by and among Tarantella, Inc., Tarantella Acquisition Corporation and New Moon Systems, Inc. (5)
3.1	Amended and Restated Articles of Incorporation of Registrant. (7)
3.2	Bylaws of Registrant, as amended. (2)
4.1	Specimen Common Stock Certificate of Registrant. (1)
4.2	Purchase Agreement by and between Tarantella, Inc. and certain investors. (7)
4.3	Registration Rights Agreement by and between Tarantella, Inc. and certain investors. (7)
4.4	Form of Warrants by and between Tarantella, Inc. and certain investors. (7)
4.5	Purchase Agreement by and between Tarantella, Inc. and Hitschler Enterprises, LLC and by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.6	Registration Rights Agreement by and between Tarantella, Inc. and Hitschler Enterprises, LLC and by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.7	Form of Warrants by and between Tarantella, Inc. and Starlight Technology Ventures, LLC. (7)
4.8	Form of Warrants by and between Tarantella, Inc. and Hitschler Enterprises, LLC. (7)
4.9	Purchase Agreement by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
4.10	Registration Rights Agreement by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
4.11	Form of Warrants by and between Tarantella, Inc. and Special Situations Technology Fund II, LP. (7)
5.1*	Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.
10.13	Lease with Encinal Partnership No. 1 commencing January 1, 1989 (425 Encinal Street). (1)
10.17	Form of Indemnification Agreement. (1)
10.18	Master Registration Rights Agreement as amended. (6)
10.19	Employee Stock Purchase Plan. (7)
10.20	2002 Incentive Stock Option Plan and form of Incentive Stock Option Agreement. (9)
10.21	401(k) Plan, as amended. (1)
10.24	2003 Director Stock Option Plan. (7)
10.34	Shareholders’ Rights Agreement. (3)
10.35	Change-in-control agreement between the Company and certain key management. (4)
10.36	Revised Consulting Agreement with Alok Mohan. (7)
10.37	Michels transition agreement (8)
10.38	Bresee Severance Agreement (10)
10.39	Scheybeler Severance Agreement (9)
10.40	Costa Severance Agreement (9)
14.1	Form of Tarantella, Inc. Financial Code of Ethics for Chief Executive Officer, Chief Financial Officer, Vice President and Employees with Financial Reporting Responsibilities, as amended November 2004 (9)
21.1	Subsidiaries of Registrant. (7)
23.1†	Consent of Independent Registered Public Accounting Firm.
23.2*	Consent of WSGR (Included in Exhibit 5.1)
24.1*	Power of Attorney (see page II-6 of the Registration Statement on Form S-1 333-115812 filed on May 24, 2004)

* Previously filed.

† Filed herewith.

(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.

(2) Incorporated by reference to the Form 10-K filed on December 22, 1995.

(3) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.

(4) Incorporated by reference to the Form 10-K filed on December 23, 1998.

(5) Incorporated by reference to the Form 8-K filed on June 9, 2003.

(6) Incorporated by reference to the Form 8-K filed on December 12, 2003.

(7) Incorporated by reference to the Form 10-K filed on March 8, 2004.

(8) Incorporated by reference to the Form 10-Q filed on May 14, 2004.

(9) Incorporated by reference to the Form 10-K filed on December 29, 2004.

(10) Incorporated by reference to the Registration Statement on Form S-1 333-115812 filed on May 24, 2004.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement of Tarantella, Inc. and its subsidiaries (the “Company”) on the Post-Effective Amendment No. 1 Form S-1 of our report dated December 27, 2004 relating to the consolidated financial statements of the Company as of September 30, 2004 and 2003, and for each of the three years in the period ended September 30, 2004 (which expresses an unqualified opinion and includes an explanatory paragraph regarding a going concern uncertainty), appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading “Experts” in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

December 27, 2004