CALDERA INTERNATIONAL INC/UT - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2001

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

For the transition period from ____________ to ____________ .

Commission file number: 0-29911

CALDERA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 87-0662823
(State of (I.R.S. Employer
incorporation) Identification No.)

240 WEST CENTER STREET
OREM, UTAH 84057 (801)765-4999
(Address of principal executive (Registrant's telephone
offices, including zip code) number, including area code)

SECURITIES PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.001 PER SHARE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference on Part III of this Form
10-K or any amendment to this Form 10-K. / /

The aggregate market value of the common stock beneficially owned by
non-affiliates of the Registrant, as of January 15, 2002, was approximately
$13.0 million based upon the last sale price reported for such date on The
Nasdaq Stock Market. For purposes of this disclosure, shares of Common Stock
held by persons who hold more than 5% of the outstanding shares of Common
Stock and shares held by officers and directors of the Registrant have been
excluded because such persons may be deemed to be affiliates. The number of
shares of the Registrant's Common Stock outstanding as of January 15, 2002,
was 57,491,440.

Documents Incorporated by Reference

Portions of the Registrant's definitive proxy statement relating to the
Registrant's 2002 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K where indicated.

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PART I

ITEM 1. BUSINESS

THE FOLLOWING DISCUSSION OF CALDERA'S BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" IN THIS ITEM 1, AND THE OTHER DOCUMENTS WE FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR RECENT FILINGS ON FORM 10-Q
AND FORM S-4 AND AMENDMENTS THERETO.

OVERVIEW

Caldera's business is focused on serving the small to medium business
market's need to have reliable, cost effective Linux and UNIX operating
systems and software products to power computers. Caldera also provides web-
based applications and products and services to facilitate connections to the
internet for its customer base. Caldera is seeking to expand its business by
providing products and services to businesses in its core market strengths
which are retail, manufacturing, hospitality, banking and finance. Most of
these markets and customers are accessed through an indirect, leveraged
channel of partners, which includes distributors and solution providers
(collectively, "resellers"). This system is extended to a global level, with
Caldera offices worldwide, locally supporting customers and resellers with
minor modifications to fit the particular country's unique needs.

INDUSTRY BACKGROUND

The internet has accelerated the introduction of processes for managing
information, providing services and solutions and handling customers and has
changed the way software applications are developed, deployed and managed.
These processes enable companies to utilize the internet to extend their
businesses closer to and begin to better interact with their customers,
partners and suppliers and to communicate more effectively with employees.
The internet has also enabled and accelerated a trend towards distributed,
even collaborative software applications. With a distributed application,
instead of installing and running software on an individual computer,
end-users can access the application from remote locations using the
internet. The internet makes the physical location of a software application
or service irrelevant to the end-user. Rather than individually installing
programs on a number of personal computers, businesses can use the internet
to allow users to access a single server maintaining the software. As a
result of this trend, application service providers, or ASPs, have emerged.
An ASP is a service provider that centrally hosts services and software
applications and leases them to companies. Companies can access these
applications for a fee through the internet, rather than buying and
installing the programs. However, operating under previous computing models,
many companies have already invested tremendous amounts of capital in their
existing legacy computer systems and applications. Therefore, new software
applications must be developed to allow seamless integration between existing
legacy systems and applications being offered by ASPs over the internet.

Another trend in distributed applications is the advent of thin
appliance servers, or specialized servers. These specialized servers perform
specific applications, such as file and print sharing, secure internet
services, backup services and electronic mail services. Companies are
realizing that they can deploy efficient, discrete applications on
specialized servers and do not need to install massive, costly,
multi-functional systems merely to install a new application or to add a
particular function. Companies have started using specialized servers to
administer these new software applications that are emerging. Having separate
servers for each application improves performance and increases stability,
while decreasing overall operating and

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maintenance costs. This trend creates a growing opportunity to provide more
customized operating system environments to fit specific hardware or
application requirements.

The trend towards distributed software applications and specialized
servers and the proliferation of internet access devices have increased
companies' ability to conduct eBusiness and given consumers' increased access
to the internet. The dynamic and fast changing nature of eBusiness requires
an operating system, the software that enables a computer and its various
components to interact, that can change with the accelerated evolution of
eBusiness. The optimal operating system must enable companies to connect
specialized servers and internet access devices to the internet network to
conduct eBusiness. It must be customizable to adapt to the changing software
applications environment, shifting hardware infrastructures and the emergence
of new internet access devices. It must be scalable to accommodate the
growing number of users and the ways that they access the internet. The
optimal operating system must be highly stable and easy to maintain to
minimize overall operating and maintenance costs. It must allow for rapid
deployment and development and be easily upgradeable to keep pace with the
changing needs of eBusiness. Finally, this operating system must interface
with existing systems and embrace open technical and communications standards
like Java and extensible mark-up language, or XML, to take full advantage of
the internet.

Linux is an internet specialized operating system. Created through
collaborative coding by a global open source development community, Linux can
be used to power many of the current and future internet software needs of
businesses, academics and technical institutions around the world.
Specifically, the benefits of Linux include:

o comprehensive internet functionality;

o flexibility and customizability;

o stability;

o interoperability with multiple systems and networks;

o multi-appliance capability, including internet access devices;

o low acquisition and maintenance costs; and

o compliance with technical and communications standards.

Despite these benefits, Linux as an open source system is not without
drawbacks. Linux has not yet been widely adopted by business due to:

o the fragmentation of Linux offerings;

o inadequate education and training;

o the lack of proper distribution channels for Linux solutions;

o the lack of technical knowledge and support;

o difficulty in management and deployment; and

o the limited number of applications available for use on Linux.

Historically, business users have lacked a Linux solution that suits
their needs. For Linux to fully support eBusiness, a solution must consist
not only of advanced technology but also should be enhanced and tailored for
business. This solution must promote the benefits of Linux

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for eBusiness and provide the proper education and training to facilitate
adoption. Proper distribution channels are required to facilitate access to
the business user. The Linux for eBusiness solution must be able to
accommodate business applications and be able to interoperate properly with
the diverse environment of internal corporate information systems and the
internet. It must have the flexibility to be maintained centrally or managed
remotely. Finally, a solution must adhere and conform to commercial standards
to incorporate the latest technological advancement and ensure wide
acceptance.

The UNIX(TM) operating system complements Linux and addresses many of
the drawbacks noted above for Linux. UNIX, the precursor to Linux, has had a
long history of business implementation, and has attracted a robust list of
both customers and vendors that provide solutions. Sun, Hewlett Packard, IBM,
Tarantella (formerly The Santa Cruz Operation) and others have developed a
large base of UNIX business applications to conduct internet and local
transactions. On the Intel platform, Caldera's OpenServer and OpenUNIX
represent the only tangible low cost Intel UNIX available for business (HP
and Sun being the only other providers), and these offerings have permitted
businesses, particularly small to medium businesses, to take advantage of the
reliability of this operating system at a relatively low cost.

In comparison to Linux, UNIX has had almost a 20-year advantage in
deployment. However, Linux is already overtaking UNIX in the growth and
development of new software as Linux is increasingly viewed as an
internet-friendly operating system that excels in price and quality and is
seen as an alternative development platform. Caldera's efforts to unify Linux
and UNIX provides the business customer the ideal option of developing a
single application that can now scale from the smallest device to the most
comprehensive operating environment available on Intel.

THE CALDERA SOLUTION

Caldera provides operating systems and web-enabled software products
that enable solution providers servicing small to medium businesses to build
reliable, replicatable solutions. These solutions are built on the Linux and
UNIX operating systems, and are delivered through a global channel of
resellers. Key benefits of our solution include:

FOCUSED BUSINESS FRAMEWORK. Caldera has always had a business focus
with Linux, and now with UNIX, and has created a system that fosters product
development, deployment, management, support, and services for business
clients. The Company is focused on sound commercial engineering practices,
with the appropriate quality and documentation requirements, and a solid
support infrastructure to not only take care of technical needs, but to
provide a pragmatic approach to enabling partnered products and solutions to
be delivered through a well-trained, targeted channel model of solution
providers. Caldera understands the need to provide an application environment
that remains consistent across multiple releases of the environment.

EFFECTIVE DISTRIBUTION CHANNEL. We provide products and services to the
people who serve the business community with a particular focus on small to
medium businesses. Most of our products that are purchased by corporate
information systems departments are sold through our distribution channel to
electronic solution providers. We define electronic solution providers to
include value added resellers, or VARs, vertical solution providers, or VSPs,
original equipment manufacturers, or OEMs, internet service providers, or
ISPs and corporate information technology managers ranging from independent
local technical specialists to large system integrator organizations, that
offer value-added solutions for eBusiness. Business customers often rely on
solution providers to either provide a complete solution or recommend which
technology to purchase. We provide solution providers with products,
third-party applications, education, training and tools to effectively
facilitate or offer a Caldera solution for eBusiness.

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Solution providers benefit from the lower maintenance and support costs
necessary to maintain our solutions. We offer our services to solution
providers on a worldwide basis.

COMPREHENSIVE PRODUCT OFFERINGS. We provide unique products that are
operating systems based - OpenLinux, Open UNIX and OpenServer - and
applications that directly interface with operating systems to facilitate
more effective development and deployment of third-party applications. We
offer focused options that allow our business partners to develop one
application and then to implement Linux or UNIX depending on their business
needs, and provide a common software interface to enable security software,
management software or web-enabled software to be run in addition to
conventional applications. The development of these products are broken up
within different teams spread out between Germany, New Jersey, Utah and
California. We also offer our products in multiple language versions. With
the addition of Volution Online, we are expanding this base platform of
operating system environments with the first of several online services that
can begin to augment the solution provider's offerings to their small to
medium business customers.

COMPLEMENTARY VALUE-ADDED SERVICES. In order to assist businesses in
implementing our product offerings, we provide a wide range of valuable
services. We believe that our service offerings provide significant benefits
for eBusiness. These service offerings include:

o technical support - our technical support provides assistance during
installation and operation of our Linux and UNIX products;

o consulting and custom development - our consultants have extensive
technological and business knowledge, which allows us to assist our
customers to implement Linux and UNIX solutions;

o hardware optimization and certification - our consultants can optimize
solutions for a specific hardware platform and provide a rigorous
testing and certification process;

o documentation - we provide consistent and up-to-date documentation on
Linux that is not readily available in the open source development
community; and

o online software provisioning and management - we provide the capability to
manage Linux and Caldera's UNIX solutions via the internet, and the
ability to allow our channel partners to either facilitate this online
service or to build a business as a provider of such service themselves.

COMPREHENSIVE, DISTRIBUTION-NEUTRAL EDUCATION AND TRAINING. Many
companies are delivering different versions of Linux called distributions. We
provide a comprehensive distribution-neutral training program for Linux and
for Caldera's UNIX. Our courses focus on educating and training the business
community on the benefits of these operating systems for business use. We
offer a comprehensive set of courses designed to prepare students to develop,
deploy and manage Linux and UNIX in a business environment, including system,
network and internet administration and programming. We offer high-quality
instructor-led training through our own training center at our headquarters
and also offer our educational programs indirectly through our Caldera Open
Learning Providers around the world.

OPEN SOURCE ADVOCATE. We fully embrace the open source model and
continuously contribute tools and technology to the open source community to
the betterment of our products. We foster, and regularly contribute to,
multiple open source development projects that enhance the capability of our
products and services. These efforts serve to collaboratively enhance the
capability and quality of the technology to foster greater market growth.

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SOFTWARE PRODUCTS

In addition to our operating systems, OpenLinux, OpenServer and Open
UNIX, we develop, market and support a layered product, Volution, that
directly interfaces with the operating system to enable utilization of the
internet and more effective development and deployment of third party
applications. Our products and solutions integrate both commercial and open
source software products developed by third parties and us. We apply
development and testing procedures to the open source code included in our
products similar to those procedures applied to traditional commercial
products. Our rigorous development procedures result in a highly consistent
product that enables easier and more rapid customization, integration and
support. Our products are designed to work both individually and together to
provide a rapidly expandable platform as enterprises extend their eBusiness
infrastructure.

OPERATING SYSTEMS

Caldera's operating system offerings consist of two Linux application
deployment platforms (OpenLinux and Open UNIX) as well as a legacy platform,
OpenServer.

OPENLINUX

OpenLinux is an ideal product for building internet-enabled business
solutions. Based on the Linux 2.4 kernel, the product is a fully integrated
and stable Linux operating system. OpenLinux comes with default
configurations for secure web, file, print and network infrastructure
servers. OpenLinux saves users significant time and money in the
installation, configuration, deployment, and management of business solutions
by providing default working configurations. Each configuration is
out-of-the-box secure, easily deployed and manageable, using browser-based
remote management and configuration utilities bundled in each system.
OpenLinux is targeted to small to medium businesses, Fortune 1000 companies
with remote connected sites and OpenServer customers migrating to Linux.
OpenLinux is easy to manage and maintain using any of the management tools
that are bundled with the product. The tools include: Webmin(TM), a secure
browser-based management capability; a Caldera(R) Volution(TM) Manager agent
which allows easy configuration and management of Linux systems; and Volution
Online, a browser-based decision tool and update service used to assess the
impact of and enable the easy deployment of software updates. OpenLinux 3.1
began shipping June 2001.

OPEN UNIX

Open UNIX 8 is the most advanced deployment platform for industry
standard Intel(R) processor systems. Open UNIX 8 is the trusted foundation
for solutions where proven scalability, reliability and affordability are
critical. Whether powering a data center or running a small to medium
business, Open UNIX 8 delivers the complete flexibility of Linux, with the
same scalability and reliability that is synonymous with UNIX systems. Open
UNIX 8 allows Caldera to deliver on the commitment to unify UNIX with Linux
for business. Open UNIX 8 incorporates the Linux Kernel Personality (LKP)
technology, which enables customers to run Linux applications and UNIX
applications simultaneously. Open UNIX 8 is an evolution of and maintains
compatibility with the SCO(R) UNIXWare(R) operating system acquired by
Caldera. Open UNIX 8 includes enhancements and refinements to the UNIX
platform, representing significant added value for existing UNIXWare 7
customers who can easily upgrade to this new release. Open UNIX 8 began
shipping June 2001.

OPENSERVER

OpenServer is Caldera's UNIX-based legacy offering, directed at many of
the installed customers acquired from Tarantella, Inc. Businesses use
OpenServer to simplify and speed

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business operations, better understand and respond to their customers' needs,
and achieve a competitive advantage. OpenServer excels at running multi-user,
transaction-based DBMS and business applications, communications gateways,
mail and messaging servers in both host and client/server environments.
Caldera continues to support existing uses of OpenServer, keeping it current
with hardware platforms available in the market. The latest release,
OpenServer 5.0.6 began shipping in March 2001.

VOLUTION

The Volution products build on Caldera's operating systems to enable
customers to utilize the internet effectively. The initial products in the
Volution family are Volution Manager and Volution Messaging Server. Caldera
will add to these products with other management products in the future.

VOLUTION MANAGER

Caldera Volution(TM) Manager is a secure, web-based, systems management
solution that reduces the cost of managing and maintaining established
versions of Linux and Caldera's UNIX. Volution Manager does this by enabling
secure, remote management, monitoring and updating of multiple systems
through a browser. Volution Manager's key components include asset
management, software distribution, and health monitoring with proactive
response capabilities. Volution Manager's architecture is based on open
standards/technologies (e.g., XML, LDAP, SNMP, Apache, HTTPS) and
interoperates with all SNMP-based management frameworks. Volution Manager
saves time and resources, and eases deployments and does so in a
cost-effective manner. Volution Manager began shipping in January 2001.

VOLUTION MESSAGING SERVER

Caldera Volution Messaging Server is a secure, manageable, and
easy-to-use messaging server delivering superior application compatibility
for small to medium businesses. Based on open standards for mail and
directory services, Volution Messaging Server supports Outlook, browsers, and
other popular mail clients. Additionally, it interoperates with popular
anti-virus, backup, and fax server software. The Volution Messaging Server is
compatible with other Caldera products. For platforms it supports either
OpenLinux or Open UNIX operating systems, ReliantHA clustering solution, and
Volution Manager system administration products. Volution Messaging Server
began shipping in November 2001.

SERVICES

TECHNICAL SUPPORT

Caldera provides a full range of pre and post-sales technical support
for all products included on the Caldera price list, including our Linux and
UNIX for Intel operating systems, OpenLinux, OpenServer, UNIXWare and Open
UNIX.

Caldera provides technical support to all of our partners, including
resellers, hardware and software vendors and solution providers, as well as
directly supporting our end-user customers. Our partners have the option to
direct their customers to Caldera technical support, or to provide
first-level customer support themselves, and utilize Caldera's technical
expertise for second-tier support.

Technical Support services include a range of options from single
incident email and telephone support, to dedicated "enterprise" level support
agreements. Customers seeking additional technical support directly from
Caldera may enter into service agreements that best suit their needs.

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PROFESSIONAL CONSULTING AND CUSTOM DEVELOPMENT SERVICES

Our UNIX and Linux consulting services include project management,
software development and programming, migration tools and services, and
development of customized Linux operating systems. We assist our end-user
customers, ISVs and solution providers in planning, creating, implementing
and deploying business application solutions.

EDUCATION AND TRAINING SERVICES

Our educational programs and products are designed to help our
customers learn to develop, deploy and administer both Linux and UNIX
operating environments for Intel systems. Our courses provide preparation for
UNIX and Linux certification. Linux certification tests are provided by an
independent organization named "The Linux Professional Institute".

Caldera develops comprehensive training curriculum for both UNIX and
Linux. Caldera has a program to authorize independent training centers around
the world, named the Caldera Open Learning Provider program. Authorized Open
Learning Providers use the Caldera supplied UNIX and Linux curriculum to
customize and deliver instructor led training classes.

ON-LINE SERVICES

Caldera has invested in creating an on-line service capability known as
Volution Online. This service provides an on-line subscription service for
Linux system administrators and end users for software knowledge, updates and
decision support.

Caldera is expanding its on-line services to include on-line UNIX and
Linux training service named eLearning.

AWARDS AND RECOGNITION

During 2001, Caldera and its products have received recognition and
awards, including:

o November 2001 - Caldera Volution Manager won Network World's Category
Breaker Award;

o July 2001 - Caldera's computer-based training course, `Quick Start to
Linux', won a Silver AXIEM Award from Mentergy, Inc.;

o May 2001 - Caldera OpenLinux wins CNET's Editor's Choice Award;

o January 2001 - Caldera Volution wins Show Favorite for Best Network/Server
Application at LinuxWorld Expo in New York.

STRATEGIC TECHNOLOGY ALLIANCES

We have business alliances with key global industry partners, including
Unisys, Fujitsu, Fujitsu-Siemens, IBM, Intel, Novell, Oracle, Informix,
Progress, BEA, Computer Associates, Compaq, HP and Sun Microsystems. These
relationships encompass product integration, two-way technology transfers,
channel partnerships and revenue generating initiatives in areas of product
bundles and training and education. The objectives of these partnerships
include:

o providing complete hardware and software UNIX and Linux solutions;

o licensing our education materials to be used in our partners' training
centers;

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o supporting our partners' Linux engineering efforts as well as their
end-user customers; and

o mutually developing our sales and distribution channel by coordinating
marketing initiatives in creating demand for our products.

During fiscal 2001, we made significant progress with our strategic
partners, which included:

o Oracle 9i database for Linux was certified, announced and supported for
Open UNIX 8. Additionally, Oracle 9i AppServer for Linux was certified
for Open UNIX 8;

o Informix, Silverstream, Willow, Microlite, Dell, HP, IBM Xseries,
Compaq, HP, Fujitsu Siemens, Unisys all certified products on Open
UNIX 8;

o J2SE source code license access was renewed with Sun Microsystems for an
additional three years, enabling Caldera to continue to provide the only
Linux Java development code optimized on OpenLinux and supportable with
direct engineers at the company;

o executives from Intel, IBM-Informix, Sun, Computer Associates, Software
AG, Borland and Compaq were keynote speakers and exhibitors at Caldera's
annual Forum conference; and

o Caldera and Compaq continued their investment in a co-marketing fund to
drive solutions through their mutual small to medium business focused
channels.

INDUSTRY PARTICIPATION

We participate as a key member of many industry standard, partner and
open source initiatives, including the following:

o Linux Professional Institute, an independent organization dedicated to
the establishment of professional certification standards for Linux
professionals;

o Linux Standards Base, a Linux community initiative coordinated by the
Free Standards Group which is dedicated to defining industry standards
for Linux operating system products that are vendor neutral. The adoption
of these standards by Linux vendors would result in a common application
environment supported by all Linux products encouraging more broad
industry support from application developers;

o Linux Internationalization Group, a voluntary Linux community working
group, of which we are one of the founding members, dedicated to
addressing interoperability, internationalization and localization of
Linux applications in the international context;

o IA64 Linux Project, an Intel-sponsored initiative to port the Linux
kernel to the Intel Itanium processor;

o Distributed Management Task Force, an independent organization including
most of the largest software and systems vendors in the world, dedicated
to creating new standards for computer systems management. We are working
with this task force to incorporate into our Linux products commonality
standards already in place among enterprise-level businesses;

o Software and Information Industry Association, an industry association
specific to corporations that build products and services for information
technology;

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o Open Source Development Lab, whose goal is to foster and support the
development of additional open-source and Linux enhancements; and

o The Open Group, an organization that specializes in specification of and
certification for open standards - UNIX primary among those.

SALES AND MARKETING

Caldera's customers are primarily resellers who serve small to medium size
businesses, or replicated site or branch operations of major corporations. Our
primary method to access these customers has been to distribute our products and
services through our indirect channel model working with a worldwide network of
distribution partners, horizontal value add resellers, or VAR's, and industry
specific vertical solution providers, or VSP's. Caldera currently has over
13,000 active resellers, over 400 direct and indirect vertical solution
providers and over 8,000 active developers. We also work closely with OEM's to
ensure our products and services are meeting the unique needs of these partners.
Our sales force is organized to support our customers and partners by having
dedicated channel sales, corporate sales, OEM and service sales managers.

A partial list of our customers include:

Ford Motor Company Safeway Michael's
BMW Eckerd Cendant
McDonalds Lucent Deutsche Bahn
Kentucky Fried Chicken IBM Siemens KWU
Holiday Inn Costco RZF NRW
Walgreens CVS China Petroleum
Chrysler NASDAQ Argos
Kmart Pizza Hut Dixons
Kroeger Marconi Russian Savings Bank

Our marketing efforts support our sales and distribution efforts,
promotions and product introductions and include marketing development funds to
push Caldera products. Pull marketing, apart from delivering quality products
and services needed in the marketplace, is focused on branding, solutions,
advertising, tradeshows, press releases, white papers and marketing literature.
We focus our marketing on public relations and press relations extensively to
communicate the progress we are making in the business arena. In particular, our
marketing strategy consists of:

o branding Caldera through public relations announcements and advertising;

o announcing technology solution awards;

o creating an effective partner program to generate brand awareness and
promote our products; and

o increasing public awareness through speaking engagements at strategic
tradeshows and conferences worldwide and participating in technology
forums.

Our web site, www.caldera.com, is focused on strengthening our strategy.
In addition to allowing visitors to download free software, our web team is
expanding our current web strategy of branding, direct sales through our online
store, and linking customers to channel partners. Through our web site, we plan
to join together ISVs, hardware partners, customers, developers,

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ISPs and others who want to connect for business reasons and to generate
increased business based on introductions, advertising and transactions.

COMPETITION

The market for business solutions, particularly web-enabled applications
and web services solutions, is evolving. We face direct competition from other
providers of web-enabled applications and web services solutions and face
competition from traditional, non-Linux and non-UNIX operating systems, other
Linux and UNIX operating systems, technical support providers and professional
services organizations.

Companies currently offering competitive non-Linux operating systems
include providers of hardware-independent multi-user operating systems for Intel
platforms, such as Microsoft, IBM and Novell. These competitors often bundle
their operating systems with their hardware products, creating an additional
barrier for us to overcome in penetrating their customer bases. There are also
significantly more user applications available for competing operating systems,
such as Windows NT and Windows 2000 due to their significant marketing presence.

As the internet continues to be a more integral component of our
customer's business, new models for application development and deployment are
being created that introduce both potential risk and opportunity for our
business. This new development model, known most commonly as "Web Services",
forms the basis of a new era of internet enabled applications that can be used
to bind individual corporations into what some have called "Virtual
Enterprises". The promise of web services is to utilize open internet standards
for data communication and interchange to enable the electronic integration of
organizations. This new model is primarily being driven by large industry
participants who have invested millions of dollars to establish their
implementation of standards and are independently courting the application
development communities to utilize their frameworks. Two of the most prominent
are Microsoft's .Net and Sun Microsystems's SunOne. While both of these
frameworks support and utilize the open standard of XML, the business models
built around them are dramatically different.

Sun's approach has been to establish a solid technical framework on which
to build broad industry partnerships to drive the technology in much the same
manner they formed the movement around the Java programming language. As a
result, Sun has enlisted partners in a broad range of industries such as
banking, wireless communications and internet services to support their
initiative. Microsoft's .Net is a very ambitious plan to not only provide a new
internet-centric environment for application development and deployment, but to
alter the way in which the software market itself works.

Key to the success of .Net is a set of Microsoft-delivered internet
services known as My Net Services (formerly Hailstorm) that delivers both a
common login environment and a yellow pages of available web application
services that are available for use. The Windows XP desktop is key to
Microsoft's effort in establishing its framework as the defacto standard. The
acceptance of Sun and Microsoft product offerings and services may adversely
affect our current product development efforts.

In the Linux operating system market, our competitors include Red Hat,
SuSE and TurboLinux and smaller regional Linux companies. Several of these
competitors have established customer bases, strong brand names and continue to
attract new customers, but with the recent economic slowdown and constriction of
financial markets, most of the regional companies have had to return to their
regional areas of strength. In fact, with only Red Hat and Caldera successfully
completing initial public offerings, our only other Linux specific competitor

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on a global basis is Red Hat. However, Red Hat has had more visibility and a
stronger brand worldwide than Caldera.

The Linux market is not characterized by the traditional barriers to entry
that are found in most other markets, due to the open source nature of many of
our products. New competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Our Linux products, however, are
specifically suited for and targeted toward the requirements of business.

In the Intel UNIX operating system market, our competitors include
Microsoft, Hewlett Packard and Sun. Linux and Windows 2000 are aggressively
seeking after the current UNIX operating system market.

We also compete for service revenue with a number of companies that
provide technical support, training, education and other professional services
to users of Linux and UNIX operating systems, including some original equipment
manufacturers with which we have agreements. Many of these companies have larger
and more experienced service organizations than we do. We also face competition
from companies with larger customer bases and greater financial resources and
name recognition, such as Corel, Cygnus Solutions and Sun, which have indicated
interest in the Linux operating systems market. Traditional Linux service
providers have decreased significantly during this past year as they have not
been able to compete effectively. Other companies such as IBM Global Services
and Accenture are now developing stronger service offerings in Linux and UNIX,
but they are mainly focused on the enterprise customer.

We believe that we compete favorably with many of our competitors in a
number of respects, including product performance, functionality and price,
networking capability and breadth of hardware compatibility. To solidify and
improve our competitive ability, our near-term strategy is to strengthen our
existing strategic relationships and enter into new ones in an effort to
increase our name recognition as well as expand our distribution capabilities,
which in turn should create additional incentives for software developers to
write more applications for OpenLinux, Open UNIX and the Volution platform.
Unlike most of our Linux competitors, Caldera now has global infrastructure and
can focus its resources at marketing solutions with its partners through a
worldwide channel and improve its brand recognition around the world.

SOFTWARE ENGINEERING AND DEVELOPMENT

The acquisition of the server and professional services divisions from
Tarantella increased both the size and breadth of skill in Caldera's engineering
group to support Caldera's existing Linux and Volution products in addition to
the UNIX products. Our engineering team is highly regarded in our industry as
having some of the most talented individuals in delivering trusted computing
technology, specifically for Intel-architecture systems. These skills have been
put to good use in the delivery of our latest products as well as a number of
professional services engagements with Intel and others.

The engineering group has delivered a number of key products and
technologies that provide a broader range of platforms on which they can deliver
their solutions, whether Linux or UNIX based. Additionally, the delivery of the
Volution Messaging Server and the upcoming release of Volution Manger v.1.1
represent our intent to extend our product reach beyond the operating system
into core deployment applications that add value to our existing products.

Our delivery of Open UNIX 8.0 with the Linux Kernel Personality was a
milestone in the Intel UNIX world as it established a bridge between the well
established UNIX environment and the new world of Linux by creating an
environment on which Linux applications can run

13

unchanged on UNIX. A key proof point for this capability was established when
the Linux version on Oracle's 9i database was fully certified on Open UNIX 8.
This capability ultimately allows our customers to run the same applications
on either Linux or UNIX and provides a means to support Linux applications on
much larger hardware platforms, such as the UNISYS ES7000 with 32 Intel
Pentium Xeon CPUs, than the Linux operating system can effectively support
today. Looking forward, we will leverage our UNIX expertise to collaborate
with our partners and the Linux community to attain similar capability as
demand for Linux on the next generation Itainium processor increases.

We have invested and will continue to invest in the development of
innovative new product features and technologies in response to the evolving
market for Linux and UNIX solutions and seek input from key customers. We visit
customers, application developers, and integrators on a regular basis to
understand how effectively our products suit their needs. We collaborate with
hardware and software industry partners to insure that the combination of our
collective technology will create the most stable and cost effective solution we
can deliver.

We are training our technical staff and developing new ways in which new
web-based services can be both delivered and deployed by our operating system
platforms. The value that our products have always provided to our customers
will continue to be of value in this new environment and, coupled with our
current and future Volution products, we will be well positioned to deliver
these solutions to our current and new customers.

Our product development process is modeled to standard, commercial
software engineering practices. We apply these practices to both documentation
and procedures to ensure consistent product quality. As a result, we are able to
offer our platform products to OEM customers in several configurations without
significant effort. We are also able to move our platform products efficiently
to new processor platforms as new business opportunities arise.

INTELLECTUAL PROPERTY

Our success depends in part on our ability to protect our trademarks,
trade secrets, and certain proprietary technology. To accomplish this, we rely
primarily on a combination of trademark and copyright laws and trade secrets. We
also require that our employees and consultants sign confidentiality and
nondisclosure agreements. We generally regulate access to, and distribution of,
our documentation and other proprietary information.

Certain components of OpenLinux have been developed and made available for
licensing under the GNU General Public License and similar licenses, which
generally allow any person or organization to copy, modify and distribute the
software. The only restriction is that any resulting or derivative work must be
made available to the public under the same terms.

We own the registered trademark "CALDERA(R)" and also have license rights
relating to "CALDERA SYSTEMS(TM)", a pending trademark application. In September
1999, the United States Patent and Trademark Office rejected our applications
for "OpenLinux(TM)" and "Linux for Business(TM)". We filed our response with
respect to the rejection of the "OpenLinux" trademark on March 28, 2000. Our
trademark application for "Linux for Business" was suspended on April 24, 2000,
pending disposition of prior applications. We have recently been informed that
resolution of these applications will remain pending until a determination has
been made by the United States Patent and Trademark Office as to the treatment
of LINUX related trademark applications generally. In Europe, the European
Community Trade Marks Office has approved our application for registration of
the trademark "OpenLinux(TM)".

Despite our efforts to protect our trademark rights, unauthorized third
parties have in the past attempted and in the future may attempt to
misappropriate our trademark rights. We

14

cannot be certain that we will succeed in preventing the misappropriation of
our trade name and trademarks in these circumstances or that we will be able
to prevent this type of unauthorized use in the future. The laws of some
foreign countries do not protect our trademark rights to the same extent as
do the laws of the United States. In addition, policing unauthorized use of
our trademark rights is difficult, expensive and time consuming. The loss of
any material trademark or trade name could have a significant negative effect
on our business, operating results and financial condition.

We do not believe that our products infringe the rights of third parties.
However, our products are comprised of many distinct software components,
developed by many independent parties, and third parties have in the past
asserted, and may in the future assert infringement claims against us which may
result in costly litigation or require us to obtain a license to third-party
intellectual rights. There can be no assurance that such licenses will be
available on reasonable terms or at all, which could have a negative effect on
our business, operating results and financial condition.

GOVERNMENT REGULATION

Our success depends on the Linux and UNIX operating systems industry,
which in turn depends on increased use of the internet for eBusiness and other
commercial and personal activities. Laws and regulations have been proposed in
the United States and Europe to address privacy and security concerns related to
the collection and transmission of information over the internet. Our current
practices with regards to the collection and transmission of information over
the internet do not violate these proposed regulations.

Under the proposed FTC regulations, businesses that violate the
regulations could face monetary fines. At the international level, the European
Union, or EU, has adopted a directive that imposes restrictions on the
collection and use of personal data from individuals in EU member countries.
This EU directive could affect internet businesses elsewhere that have users in
one or more EU member countries.

In addition to government regulations related to internet privacy
concerns, it is possible that any number of additional laws and regulations may
be adopted with respect to the internet covering issues such as obscenity,
freedom of expression, pricing, content and quality of products and services,
copyright and other intellectual property issues and taxation. As an example, a
number of proposals have been made at the federal and local level and by various
foreign governments to impose taxes on the sale of goods and services and other
internet activities. Recently, the U.S. Internet Tax Information Act was
enacted, which places a three-year moratorium on new state and local taxes on
internet commerce. However, the moratorium does not prevent the U.S. federal
government or foreign governments from adopting laws that impose taxes on
internet commerce.

The law of the internet still remains largely unsettled, even in areas
where legislative action has already been undertaken. The passage of new laws or
changes to existing laws intended to address use of the internet could create
uncertainty in the marketplace, increase the cost of doing business on the
internet, increase legal liabilities from doing business on the internet or in
some other manner have a negative impact on internet commerce and substantially
impair its growth. In addition, the growth and development of the market for
online commerce may initiate more stringent consumer protection laws, both in
the United States and abroad, which may impose additional restrictions on
companies conducting business online.

Because many of our customers conduct much of their business over the
internet, if use of the internet decreases, our customers may see a decreased
demand for their products. In that

15

event, our customers may purchase fewer licenses for our products, which
would cause our license and services revenue to fall.

EMPLOYEES

As of October 31, 2001, we had a total of 545 employees. Of the total
employees, 146 were in software engineering, 117 in sales, 58 in marketing, 87
in customer service and technical support, 34 in customer delivery, and 103 in
administration. From time to time we also employ independent contractors to
support our professional services, product development, sales, marketing and
business development organizations. Our employees are not represented by any
labor union and are not subject to a collective bargaining agreement, and we
have never experienced a work stoppage. We believe our relations with our
employees are good.

RISK FACTORS

WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT
DIFFICULT FOR YOU TO ASSESS THE RISKS RELATED TO OUR BUSINESS.

Although we began operations in 1994, during the past 24 months we have
substantially revised our business plan, made additions to our product line,
hired a significant number of new employees, including key members of our
management team, and completed two acquisitions. In May 2001, we acquired the
server software and professional services groups of Tarantella, which had
employees, operations, revenue and expenses significantly greater than our
historical operations. Prior to the acquisition from Tarantella, our sales were
primarily from our OpenLinux products, which were historically developed for
first-time Linux users who predominantly had experience using Windows desktop
environments. We do not anticipate that these sales will continue to be a
significant part of our business. As a company in a new and rapidly evolving
industry, we face risks and uncertainties relating to our ability to
successfully implement our strategy. You must consider the risks, expenses and
uncertainties that a company like ours, operating with an unproven business
model, faces in a new and rapidly evolving market such as the market for Linux
and UNIX software. These risks also include our ability to:

o broaden awareness of the Caldera brand;

o maintain our current, and develop new, strategic relationships with
technology partners and solution providers;

o attract, integrate and retain qualified management personnel;

o attract, integrate and retain qualified personnel for the expansion of our
sales, professional services, engineering, marketing and customer support
organizations;

o continue to develop and upgrade product offerings tailored for business;

o respond effectively to competitive pressures; and

o generate revenue from the sale of our software products, services,
education programs and training.

If we cannot address these risks and uncertainties or are unable to
execute our strategy, we may not be successful.

WE MIGHT FAIL TO SUCCESSFULLY INTEGRATE THE BUSINESS RECENTLY ACQUIRED FROM
TARANTELLA.

In May 2001, we completed the acquisition of certain assets and operations
from Tarantella. This acquisition significantly increased our personnel,
products, operations, and

16

geographic locations. One of our key issues is the integration of the
business, personnel, and operations acquired from Tarantella, including the
integration of our historical Linux product offerings with UNIXWare product
offerings acquired from Tarantella. This product line integration will
involve consolidation of products with duplicative functionality,
coordination of research and development activities, and convergence of the
technologies supporting the various products.

Other business integration issues could arise, including:

o maintaining brand recognition for key products of the server business,
such as UNIXWare and OpenServer, while migrating customer identification
to our brands;

o resolving channel conflicts that may arise between historical third-party
distributor and our electronic solution provider channels and the channels
of the UNIX-based business;

o coordinating, integrating and streamlining geographically dispersed
operations; and

o coping with customers' uncertainty about continued support for duplicative
products.

Management and employee integration issues could also arise, including:

o resolving differences between the corporate cultures of our company and
the newly acquired operations;

o employee turnover; and

o integrating the management teams of both companies successfully.

Operational issues could arise, including potential problems in
integrating:

o management information systems;

o telephone systems; and

o customer data.

The integration is also expensive. In addition, management's focus on the
integration may interrupt other business activities, including the development
of products and technologies integrating the Linux and UNIX product offerings.
Any of these risks could harm future revenue and results of operations.

WE HAVE NOT BEEN PROFITABLE AND WE EXPECT OUR LOSSES TO CONTINUE.

We have not been profitable. The operations recently acquired from
Tarantella have not recently been profitable and their revenue has been
declining. If our revenue declines or grows at a slower rate than anticipated or
we are unable to efficiently reduce operating expenses, we may not achieve or
sustain profitability or generate positive cash flow. For the year ended October
31, 2001, we incurred a net loss of approximately $131.4 million, of which $73.7
million was attributed to the write-down of goodwill and intangible assets
recorded in connection with prior acquisitions. The asset write-down is the
result of significant unanticipated decreases in actual and forecasted revenue
of the acquired operations, a significant decline in market valuations and
general conditions, particularly in the information technology sector, a
weakening of certain partner relationships, the loss of certain key executives
and other factors. As a result of the acquisition of the operations from
Tarantella, we expect to continue to incur net losses because those operations
have incurred losses in the recent past and we anticipate incurring expenses in
connection with the integration of the businesses, developing our products,

17

expanding our market reach, building awareness of our brand and integrating the
products formerly offered by Tarantella. We may find it necessary to accelerate
expenditures relating to product development and support and our sales and
marketing efforts beyond our current expectations or otherwise increase our
financial commitment to creating and maintaining brand awareness among potential
customers. If we are unable to achieve positive cash flow from operations, we
will not be able to implement our business plan or we will need additional
funding, which may not be available to us.

OUR PRODUCT AND SERVICE OFFERINGS MAY NOT BE ACCEPTED.

We face risks and uncertainties relating to our ability to successfully
implement our strategy. Our business model is based on an expectation that we
can create and develop demand from the corporate community for product and
service offerings, which will include both UNIX and Linux products and services.
There is no current market for business solutions combining both Linux and
UNIX-based products and services. At present, the business community favors
Microsoft and other non-Linux operating systems. Our success will depend on
market acceptance of the products we currently offer and the development of
additional products that are accepted by the market.

In order for our product offering to be accepted we must:

o broaden awareness of the Caldera brand;

o maintain our current, and develop new, strategic relationships with
technology partners and solution providers;

o continue to develop and upgrade product offerings tailored for
business; and

o respond effectively to competitive pressures.

OUR WORKFORCE HAS INCREASED SIGNIFICANTLY AND WE WILL FACE MANY DIFFICULTIES IN
MANAGING A LARGER COMPANY.

On completion of the Tarantella transaction, our workforce increased
significantly. Key personnel have little experience managing this type of
growth. This growth is likely to strain our management control systems and
resources, including decision-making, responsibility and accountability,
support, accounting and financial reporting, and management information systems.
We must continue to improve our financial and management controls and our
reporting systems and procedures to manage our employees and expanded
operations.

IF WE ARE UNABLE TO RETAIN KEY PERSONNEL IN AN INTENSELY COMPETITIVE
ENVIRONMENT, OUR OPERATIONS COULD BE ADVERSELY AFFECTED.

We will need to retain our management, technical, and support personnel.
Competition for qualified professionals in the software industry is intense, and
we may be unable to retain sufficient professionals to operate our business.
Departures of existing personnel could be disruptive to our business and can
result in the departure of other employees.

The loss or departure of any officers or key employees could harm our
ability to implement our business plan and could adversely affect our
operations. Our future success depends to a significant extent on the continued
service and coordination of our management team, particularly Ransom H. Love,
our President and Chief Executive Officer. We do not maintain key person
insurance for any member of our management team.

18

YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
FLUCTUATIONS IN OUR OPERATING RESULTS OR THE FAILURE OF OUR OPERATING RESULTS TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS MAY NEGATIVELY
IMPACT OUR STOCK PRICE.

Our quarterly operating results have varied in the past. Fluctuations in
our quarterly operating results or our failure to meet the expectations of
analysts or investors, even in the short-term, could cause our stock price to
decline. You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. Factors that may affect our
quarterly results include:

o the interest level of electronic solution providers in recommending our
Linux and UNIX business solutions to end users;

o the introduction, development, timing, competitive pricing and market
acceptance of our products and services and those of our competitors;

o changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux environment in particular;

o the magnitude and timing of marketing initiatives;

o changing business attitudes toward Linux and UNIX as viable operating
systems compared to other competing systems;

o the maintenance and development of our strategic relationships with
technology partners and solution providers;

o the attraction, retention and training of key personnel; and

o our ability to manage our expanded operations.

We also experience fluctuations in operating results in interim periods in
Europe and the Asia Pacific regions due to seasonal slowdowns and economic
conditions in these areas. These periods typically occur during the summer
months.

As a result of the factors listed above and elsewhere, it is possible that
our results of operations may be below the expectations of public market
analysts and investors in any particular period. This could cause our stock
price to decline. If revenue falls below our expectations and we are unable to
quickly reduce our spending in response, our operating results would be lower
than expected and our stock price may fall.

WE RELY ON OUR INDIRECT SALES CHANNEL FOR DISTRIBUTION OF OUR PRODUCTS, AND ANY
DISRUPTION OF OUR CHANNEL AT ANY LEVEL COULD ADVERSELY AFFECT THE SALES OF OUR
PRODUCTS.

We have a two-tiered distribution channel. The relationships we have
developed with resellers allow us to offer our Linux and UNIX products and
services to a much larger customer base than we would otherwise be able to reach
through our own direct sales and marketing efforts. Some electronic solution
providers also purchase solutions through our resellers, and we anticipate they
will continue to do so as we expand our product offerings. Because we usually
sell indirectly through resellers, we cannot control the relationships through
which solution providers or equipment integrators purchase our products. In
turn, we do not control the presentation of our products to end-users.
Therefore, our sales could be affected by disruptions in the relationships
between our resellers and electronic solution providers or between electronic

19

solution providers and end users. Also, resellers and electronic solution
providers may choose not to emphasize our products to their customers. Any of
these occurrences could diminish the effectiveness of our distribution channel
and lead to decreased sales.

OUR BUSINESS MODEL, WHICH RELIES ON A COMBINATION OF OPEN SOURCE SOFTWARE AND
PROPRIETARY TECHNOLOGY, IS UNPROVEN.

Our business model incorporates as integral elements of our product
offerings both commercial products and open source software. We know of no
company that has built a profitable business based in whole or in part on open
source software. By incorporating open source components in our product
offerings, we face many of the same risks that other open source companies
experience, including the inability to offer warranties and indemnities on
products and services. The open source components included in our products are
available for free from other sources. In addition, by including proprietary
technology in our products that is not freely downloadable we may run counter to
the perception of Linux as an open source model and may alienate the Linux
community. Negative reaction such as this, if widely shared by our customers,
developers or the open source community, could harm our reputation, diminish our
brand and decrease our revenue. Our business will fail if we are unable to
successfully implement our business model.

Our business model also depends upon incorporating contributions from the
open source community into our products. The viability of our product offerings
depends upon the efforts of the open source community in enhancing products and
making them compatible for use across multiple software and hardware platforms.
There are no guarantees that the open source community will embrace these
products such that programmers will contribute sufficient resources for their
development. If the open source community does not embrace products that we view
as integral to providing eBusiness solutions, we will be required to devote
significant resources to develop these products on our own.

WE RELY ON INDEPENDENT DEVELOPERS IN THE OPEN SOURCE COMMUNITY, SUCH AS LINUS
TORVALDS, IN ORDER TO RELEASE UPGRADES OF OUR LINUX-BASED PRODUCTS.

Many of the components of our software products, including the Linux
kernel, the core of the Linux operating system, are developed by independent
developers in the open source community and are available for inclusion in our
products without cost. Linus Torvalds, the original developer of the Linux
kernel, and a small group of independent engineers have in the past developed
and upgraded the Linux kernel. Neither Mr. Torvalds nor any significant
contributor to the Linux kernel is an employee of ours, and none of these
individuals are required to further update the Linux kernel. If these
independent developers and others in the open source community do not further
develop the Linux kernel and other open source software included in our products
on a timely basis, or at all, our ability to enhance our product offerings will
suffer. As a consequence, we will be forced to rely to a greater extent on our
own development efforts or license commercial software products as replacements,
which would increase our expenses and delay enhancements to our products. For
example, in the past we have sometimes been unable to upgrade all open source
components of a product in connection with a proposed release because these
independent developers had not yet made enhancements. Any failure on the part of
the kernel developers to further develop and enhance the kernel could also
stifle the development of additional Linux applications.

IF THE MARKET FOR LINUX BUSINESS SOLUTIONS DOES NOT GROW AS WE ANTICIPATE, WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS PLAN AND GROW OUR BUSINESS.

Our strategy for marketing Linux solutions to businesses depends in part
upon our belief that many businesses will follow a trend away from the use of
networked computers linked by

20

centralized servers and move toward the use of distributed applications
through thin appliance servers, or specialized servers, Internet access
devices and application service providers. We also are relying on electronic
solution providers making these technologies available on Linux and Linux
then becoming a desirable operating system under these circumstances.
However, if businesses, which at present favor Microsoft and other non-Linux
operating systems, do not adopt these trends in the near future, or if Linux
is not viewed as a desirable operating system in connection with these
trends, a significant market for our products may not develop. Factors that
may keep businesses from adopting these trends include:

o costs of installing and implementing new hardware devices;

o costs of porting legacy systems into new platforms;

o security concerns regarding manipulation of data through application
service providers;

o limited adoption of Linux among businesses generally;

o previous significant investments in competing systems;

o lack of adequate Linux-trained professionals and support services;

o lack of standards among Linux products and applications; and

o lack of acceptance of the Internet as a medium for distributing
business applications.

Even if these trends toward distributed applications are adopted, if the
development of Linux products and Linux applications is not sufficient, a
significant market for Linux business solutions such as ours may not
materialize.

WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND FACE SIGNIFICANT COMPETITION FROM
A VARIETY OF CURRENT AND POTENTIAL SOURCES, INCLUDING RED HAT AND SUN
MICROSYSTEMS; MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE GREATER
FINANCIAL AND TECHNICAL RESOURCES THAN WE DO; THUS, WE MAY FAIL TO COMPETE
EFFECTIVELY.

Our principal competitors in the Linux market include:

o Red Hat;

o Sun; and

o SuSE.

In addition, due to the open source nature of Linux, anyone can freely
download Linux and many Linux applications and modify and re-distribute them
with few restrictions. For example, solution providers upon whom we depend for
the distribution of our products could instead create their own Linux solutions
to provide to their customers. Also, established companies and other
institutions could easily produce competing versions of Linux software.

Additionally, we have a number of competitors outside the Linux market
that offer server products that are more established than ours. Many of these
competitors have access to greater resources that we do. These competitors
include Novell, Sun, and Microsoft. More recently, the major competitive
alternative to our UNIX and Linux products is Microsoft's NT. While we believe
that our server products retain a competitive advantage in a number of targeted
application areas, the expansion of Microsoft's and our other competitors'
offerings may restrict the overall market available for our server products,
including some markets where we have been successful in the past.

21

OUR FOREIGN-BASED OPERATIONS AND SALES CREATE SPECIAL PROBLEMS, INCLUDING THE
IMPOSITION OF GOVERNMENTAL CONTROLS AND FLUCTUATIONS IN CURRENCY EXCHANGE RATES
THAT COULD HURT OUR RESULTS.

As a result of the purchase of the assets and operations from Tarantella,
we have significantly more foreign operations than we have had in the past,
including development facilities, sales personnel and customer support
operations in Europe, Latin America and Southeast Asia. These foreign operations
are subject to certain inherent risks, including:

o potential loss of developed technology through piracy, misappropriation,
or more lenient laws regarding intellectual property protection;

o imposition of governmental controls, including trade restrictions;

o fluctuations in currency exchange rates and economic instability;

o longer payment cycles for sales in foreign countries;

o difficulties in staffing and managing the foreign operations;

o seasonal reductions in business activity in the summer months in Europe
and other countries; and

o political unrest, particularly in areas in which we have facilities.

In addition, certain operating expenses will be denominated in local
currencies, creating risk of foreign currency translation losses that could harm
our financial results and cash flows. If we generate profits or losses in
foreign countries, our effective income tax rate could also be increased.

In Latin America and Southeast Asia in particular, several countries have
suffered and may be especially susceptible to recessions and economic
instability which may lead to increased governmental ownership or regulation of
the economy, higher interest rates, increased barriers to entry such as higher
tariffs and taxes, and reduced demand for goods manufactured in the United
States.

THE FORMATION OF THE EURO CURRENCY MAY ADVERSELY IMPACT OUR OPERATIONS IN
EUROPE.

As a result of the introduction of the Euro we are continuing to modify
our internal systems that will be affected by the conversion. We may not be able
to implement and test all of these systems by January 1, 2002, and this may harm
our current operations. We also face the risk that many suppliers and banks that
we rely on may not have made appropriate modifications to their systems to
support our operations with respect to transactions denominated in Euros.

WE ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS, PARTICULARLY BECAUSE OUR PRODUCTS ARE COMPRISED OF MANY
DISTINCT SOFTWARE COMPONENTS DEVELOPED BY THOUSANDS OF INDEPENDENT PARTIES.

We may be exposed to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that most of the code in our products is developed by independent
parties over whom we exercise no supervision or control and who, themselves,
might not have the same financial resources as us to pay damages to a successful
litigant. Claims of infringement could require us to re-engineer our products or
seek to obtain licenses from third parties in order to continue offering our
products. In addition, an adverse legal decision affecting our intellectual
property, or the use of significant resources to

22

defend against this type of claim could place a significant strain on our
financial resources and harm our reputation.

FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY WOULD RESULT IN
SIGNIFICANT HARM TO OUR BUSINESS.

While much of the code for our products is open source, our success
depends significantly on our ability to protect our trademarks, trade secrets
and certain proprietary technology contained in our products. We rely on a
combination of copyright and trademark laws, and on trade secrets and
confidentiality provisions and other contractual provisions to protect our
proprietary rights. These measures afford only limited protection. Some
trademarks that have been registered in the United States have been licensed to
us, and we have other trademark applications pending in the United States.
Effective trademark protection may not be available in every country in which we
offer our products and services. Our means of protecting our proprietary rights
in the United States or abroad may not be adequate, and competitors may
independently develop similar technologies. Our future success will depend in
part on our ability to protect our proprietary rights. Despite our efforts to
protect our proprietary rights and technologies, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. Legal proceedings to enforce
our intellectual property rights could be burdensome and expensive and could
involve a high degree of uncertainty. These legal proceedings may also divert
management's attention from growing our business. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the United States. If we do not enforce and protect our intellectual
property, our business may suffer substantial harm.

WE COULD LOSE REVENUE AS A RESULT OF SOFTWARE ERRORS OR DEFECTS.

Software programs frequently contain errors or defects, especially when
first introduced or when new versions are released. We could lose revenue as a
result of errors or defects in our software products. We cannot assure you that
errors will not be found in new products or releases. Although we have both
product liability and errors and omissions insurance, we might incur losses in
excess of the dollar limits or beyond the scope of coverage of our policies.
While we test our products prior to release, the fact that most of the
components of our software offerings are developed by independent parties over
whom we exercise no supervision or control makes it particularly difficult to
identify and remedy any errors or defects that could exist. Any errors could
result in loss of revenue, or delay in market introduction or acceptance,
diversion of development resources, damage to our reputation or increased
service costs.

OUR COMPETITIVE POSITION COULD DECLINE IF WE ARE UNABLE TO OBTAIN ADDITIONAL
FINANCING TO ACQUIRE BUSINESSES OR TECHNOLOGIES THAT ARE STRATEGIC FOR OUR
SUCCESS, OR OTHERWISE EXECUTE OUR BUSINESS STRATEGY, OR IF WE FAIL TO
SUCCESSFULLY INTEGRATE ANY ACQUISITIONS WITH OUR CURRENT BUSINESS.

We believe that our current cash and cash equivalents will be sufficient
to fund our working capital and capital expenditure requirements for at least
the next twelve months. However, we may need to raise additional funds to
support more rapid expansion, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. We cannot assure you that additional funding will be available to
us in amounts or on terms acceptable to us. If sufficient funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of acquisition opportunities, develop or enhance our
services or products, or otherwise respond to competitive pressures would be
significantly limited.

If appropriate opportunities arise, we intend to acquire businesses,
technologies, services or products that we believe are strategic for our
success. The market for eBusiness solutions for

23

Linux and UNIX products is new and rapidly evolving and our competitive
position could decline if we are unable to identify and acquire businesses or
technologies that are strategic for our success in this market.

THE GROWTH OF OUR BUSINESS WILL BE DIMINISHED IF THE INTERNET IS NOT ACCEPTED AS
A MEDIUM FOR COMMERCE AND BUSINESS NETWORKING APPLICATIONS.

An important part of our business strategy is to develop and market our
products for the support of secure business networks hosted on the internet. In
addition, we plan to sell our products and provide a significant amount of
technical support and education via our website. If the internet is not accepted
as a medium for commerce and business networking applications, demand for our
products and services will be diminished. A number of factors may inhibit
Internet usage, including:

o inadequate network infrastructure;

o lack of knowledge and training on internet use and benefits;

o consumer concerns for internet privacy and security;

o lack of availability of cost-effective, high-speed service;

o interruptions in internet commerce caused by unauthorized users;

o changes in government regulation relating to the internet; and

o internet taxation.

If internet usage grows, the infrastructure may not be able to support the
demands placed on it by that growth and its performance and reliability may
decline. Websites have experienced interruptions as a result of delays or
outages throughout the internet infrastructure. If these interruptions continue,
internet usage may decline.

THE IMPACT OF DOMESTIC AND GLOBAL ECONOMIC CONDITIONS MAY ADVERSELY IMPACT OUR
OPERATIONS.

During the last several quarters the U.S. economy has experienced an
economic slowdown that has affected the purchasing habits of many consumers
across many industries and across many geographies. This has caused the delay,
or even cancellation of technology purchases. The impact of the slowdown in the
United States is difficult to predict, but may result in decreased sales of our
products, longer sales cycles and lower prices. As a result, if the current
slowdown continues, our revenue and results of operations may be lower than
expected. In addition, the slowdown may also affect the end-user market making
it more difficult for our reseller channel to sell our products.

Our operations are vulnerable to fires, earthquakes, power loss,
telecommunications failure, and other events outside our control. The occurrence
of any one of these events may have a material adverse impact on our results of
operations.

FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.

The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock in the market, or the perception
that such sales could occur. As a result of the registration that occurred in
connection with the Tarantella transaction, we have a large number of shares of
common stock outstanding and available for resale. This also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. Certain holders of our common stock also have
certain demand and

24

piggyback registration rights obligating us to register their shares under
the Securities Act for sale, including the rights held by the selling
stockholders.

ITEM 2. PROPERTIES

The Company is headquartered in Orem, Utah, where it leases
administrative, sales and marketing and product development facilities. The
Company leases additional facilities for administration, sales and marketing,
product development and distribution in Santa Cruz, California, Murray Hill, New
Jersey and Watford, England. The leases for the Company's facilities expire at
various dates through 2008.

The Company's field operations occupy leased facilities in several
locations in the United States, and have international offices in Canada, China,
France, Japan, Germany, India, Italy, and Spain. The Company believes that its
existing facilities are adequate to meet current business and operating
requirements and that additional office space will be available to meet its
needs if required.

ITEM 3. LEGAL PROCEEDINGS

In July 2001, Caldera and certain of its officers and directors were named
as defendants in lawsuits filed in the United States District Court for the
Southern District of New York (the "Actions"). The first lawsuit was filed on
July 11, 2001, and entitled E. Adams v. Caldera Systems, Inc. (Case #
01-CV-6271). Based on comments made in open court by attorneys representing
certain plaintiffs, over two hundred similar cases have been filed against other
issuers. The Court has indicated that it is in the process of considering a
consolidation of the Actions. Certain of the plaintiffs have sought appointment
as a lead plaintiff with approval of their respective law firms as lead
plaintiffs' counsel. The various complaints allege claims against Caldera,
certain of our officers and directors, and the underwriters of our initial
public offering under the Securities Act of 1933, as amended. The complaints
also allege claims solely against the underwriters under the Securities Act of
1933 and the Securities Exchange Act of 1934, as amended. We believe that the
claims against Caldera and any of its officers and directors are without legal
merit and we intend to defend them vigorously. On August 8, 2001, all pending
cases against all underwriters and issuers were reassigned to a U.S. District
Court Judge, Southern District of New York. The time for Caldera to answer or to
move to dismiss the complaint is presently adjourned pending further instruction
from the court.

The Company is not aware of any improper conduct by the Company, its
officers and directors, or its underwriters, and the Company denies any
liability relating thereto. The Company has notified its underwriters and
insurance companies of the existence of the claims.

On September 17, 2001 Caldera was named as a defendant in a matter
entitled K. McCrabb v. Caldera Systems, Inc. (Case # CV801505), on October 5,
2001 Caldera was named as a defendant in a matter entitled N. Maabadi v. Caldera
Systems Inc. (Case # 802043), and on October 11, 2001 Caldera was named as a
defendant in a matter entitled A. Milligan v. Caldera Systems, Inc. (Case #
802190). All three lawsuits were filed by former employees in the Superior Court
of California, County of Santa Clara, claiming breach of contract regarding the
payment of bonuses and severance payments. All three matters are in discovery
stage, and the ultimate outcomes are not yet determinable. The Company believes
that it has viable defenses in each of the three matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2001.

25

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Caldera's common stock has traded on the Nasdaq National Market under the
symbol "CALD" since March 21, 2000.

The table below sets forth the range of high and low closing prices of
Caldera common stock as reported on the Nasdaq National Market since March 21,
2000, the date of Caldera's initial public offering.

As of October 31, 2001, Caldera had over 18,000 beneficial stockholders.
Caldera has not declared or paid any cash dividends on shares of its common
stock and plans to retain its future earnings, if any, to fund the development
and growth of its business.

ITEM 6. SELECTED FINANCIAL DATA

The following tables present information based on our financial
statements. You should read the selected financial data set forth below in
conjunction with the consolidated financial statements and the related notes
included elsewhere in this Form 10-K and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K. The selected statement of operations data
for the years ended October 31, 2001, 2000 and 1999 and the selected balance
sheet data as of October 31, 2001 and 2000 are derived from, and are qualified
by reference to, the audited financial statements and related notes appearing
elsewhere in this Form 10-K. The selected statement of operations data for the
years ended October 31, 1998 and 1997 and the selected balance sheet data as of
October 31, 1999, 1998 and 1997 are derived from audited financial statements
not appearing in this Form 10-K.

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-K, AND CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. CALDERA'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.

OVERVIEW

We began operations in 1994 as Caldera, Inc. In July 1996, through an
asset purchase, Caldera, Inc. acquired an additional business unit that was not
engaged in developing and marketing Linux software. Caldera, Inc. subsequently
made the strategic determination to separate its two business lines into
separate entities and, under an Asset Purchase Agreement dated as of September
1, 1998, as amended, sold the assets relating to its business of developing and
marketing Linux software to Caldera Systems, Inc., a newly formed corporation.
Caldera Systems subsequently completed an initial public offering in March 2000.
On May 7, 2001, Caldera Systems completed its acquisition of the assets and
operations of the server and professional services groups of Tarantella Inc.,
formerly known as The Santa Cruz Operation, Inc., pursuant to an Agreement and
Plan of Reorganization, dated August 1, 2000, as subsequently amended (the
"Tarantella Acquisition"). In order to facilitate this acquisition, Caldera
International, Inc. was formed and Caldera Systems became a wholly owned
subsidiary

27

of Caldera International. Former holders of shares and options to purchase
shares of Caldera Systems received an equal number of shares and options to
purchase shares in Caldera International. As used herein, Caldera, or the
Company, refers to Caldera International, its subsidiaries, and its two
predecessors, Caldera Systems and the portion of Caldera, Inc. related to the
Linux software business.

Prior to the acquisition of the UNIX and OpenServer product lines from
Tarantella, substantially all of our revenue was derived from sales of Linux
products and related services. Currently, over 90 percent of our revenue is
derived from sales of products acquired from Tarantella.

RESULTS OF OPERATIONS

The Tarantella Acquisition significantly increased the net revenue and
operating expenses of the Company. Consequently, fiscal 2001 is not directly
comparable to fiscal 2000 and prior years because of the significant changes in
the operations of the Company as a result of the acquired operations. During the
third and fourth quarters of fiscal 2001, the Company implemented cost cutting
measures related to personnel and excess facilities in an effort to reduce
overall operating expenses.

Fiscal 2002 will also not be directly comparable to fiscal 2001 because
the acquired operations will be included in our financial results for the full
year. As a result, we expect that operating expenses relating to sales and
marketing, research and development and general and administrative will increase
for fiscal 2002 in absolute dollars, but will decrease as a percentage of
revenue.

Fiscal Years Ended October 31, 2001, 2000 and 1999

REVENUE

Revenue was $40.4 million for fiscal 2001, $4.3 million for fiscal 2000
and $3.1 million for fiscal 1999. During fiscal 2001, approximately 84 percent
of our revenue was generated from the sale of products. During fiscal 2000,
approximately 70 percent of our revenue was generated from the sale of products
and during fiscal 1999 approximately 91 percent of our revenue was generated
from the sale of products. Revenue from international customers was
approximately 52 percent of revenue in fiscal 2001, 30 percent in fiscal 2000
and 7 percent in fiscal 1999. The increases in international revenue are the
result of operations acquired from Tarantella and the Company's increased focus
on customers and markets outside the United States. The significant increase in
revenue from fiscal 2001 over fiscal 2000 as well as the increase in the
percentage of product revenue to total revenue, was attributable almost solely
to the operations acquired from Tarantella.

PRODUCTS. Product revenue was $33.9 million in fiscal 2001, $3.0 million
in fiscal 2000 and $2.8 million in fiscal 1999, representing an increase of
$30.9 million from fiscal 2000 to fiscal 2001 and $0.2 million from fiscal 1999
to fiscal 2000. The increase in product revenue in fiscal 2001 over fiscal 2000
was attributable to the sale of OpenServer and UNIXWare products acquired from
Tarantella. The increase in product revenue in fiscal 2000 over fiscal 1999 was
due to improved internal sales and marketing strategies and increased sales to
customers in international locations.

SERVICES. Service revenue was $6.6 million in fiscal 2001, $1.3 million in
fiscal 2000 and $0.3 million in fiscal 1999, representing an increase of $5.3
million from fiscal 2000 to fiscal 2001 and $1.0 million from fiscal 1999 to
fiscal 2000. The increase in service revenue in fiscal 2001 over fiscal 2000 was
attributable to revenue generated by the support and professional services
groups

28

acquired from Tarantella. The increase in service revenue from fiscal 2000
over fiscal 1999 was attributable to the formal introduction of our education
and training-related offerings as well as to promotional fees received from
our Linux training program.

COST OF REVENUE

COST OF PRODUCTS REVENUE. Cost of products revenue was $7.0 million in
fiscal 2001, $2.1 million in fiscal 2000 and $2.4 million in fiscal 1999,
representing an increase of $4.9 million from fiscal 2000 to fiscal 2001 and a
decrease of $0.3 million, from fiscal 1999 to fiscal 2000. Cost of products
revenue as a percentage of products revenue was 21 percent in fiscal 2001, 69
percent in fiscal 2000 and 86 percent in fiscal 1999. The decrease in the cost
of products revenue percentage in fiscal 2001 was attributable to the large
number of internet and electronic distribution orders for products sold by the
operations acquired from Tarantella. The decrease in the cost of products
revenue percentage in fiscal 2000 from fiscal 1999 was due to increased
efficiencies in the production and fulfillment process as well as from reduced
charges for excess and obsolete inventory. For fiscal 2002, we expect the cost
of products revenue as a percentage of products revenue to remain similar to
that experienced in fiscal 2001.

COST OF SERVICES REVENUE. Cost of services revenue was $8.0 million in
fiscal 2001, $2.0 million in fiscal 2000 and $0.5 million in fiscal 1999,
representing an increase of $6.0 million from fiscal 2000 to fiscal 2001 and an
increase of $1.5 million from fiscal 1999 to fiscal 2000. Cost of services
revenue as a percentage of services revenue was 121 percent in fiscal 2001, 153
percent in fiscal 2000 and 194 percent in fiscal 1999. The higher cost of
services revenue as a percentage of services revenue in fiscal 2000 and fiscal
1999 was attributed to initial infrastructure and other costs of establishing
our services offerings. For fiscal 2002, we expect the cost of services revenue
as a percentage of services revenue to decrease, and anticipate that the costs
of services revenue may decrease to approximately the revenue realized from
services.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses were $33.9 million in
fiscal 2001, $14.8 million in fiscal 2000 and $4.8 million in fiscal 1999,
representing an increase of $19.1 million from fiscal 2000 to fiscal 2001 and an
increase of $10.0 million from fiscal 1999 to fiscal 2000. Sales and marketing
expenses represented 84 percent of total revenue in fiscal 2001, 345 percent of
total revenue in fiscal 2000 and 156 percent of total revenue in fiscal 1999.
The increase in sales and marketing expense in fiscal 2001 over fiscal 2000 was
attributable to increased personnel and related costs as a result of the
acquisition of the operations from Tarantella, increased spending related to the
branding of Caldera International and costs incurred for product launches.
During fiscal 2000 and fiscal 1999, the Company significantly expanded its
internal sales and marketing staff as well as increased its marketing programs
and campaigns, advertising, channel and marketing development and trade show
participation.

RESEARCH AND DEVELOPMENT. Research and development expenses were $16.8
million in fiscal 2001, $5.0 million in fiscal 2000 and $2.3 million in fiscal
1999 representing an increase of $11.8 million from fiscal 2000 to fiscal 2001
and an increase of $2.7 million from fiscal 1999 to fiscal 2000. Research and
development costs represented 41 percent of total revenue in fiscal 2001, 116
percent of total revenue in fiscal 2000 and 76 percent of total revenue in
fiscal 1999. The increase in research and development expenses from fiscal 2000
to fiscal 2001 was attributable to increased personnel and related costs as a
result of the acquisitions of the WhatiIfLinux technology from Acrylis and
operations from Tarantella as our personnel focused on the development of Linux
and UNIX operating systems. The increase in research and development expenses
from fiscal 1999 to fiscal 2000 was due to an increased investment in the number
of software developers, quality assurance personnel and outside contractors to
support the

29

Company's product development and testing activities including the
development of training courses and technical support offerings.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.3
million in fiscal 2001, $6.4 million in fiscal 2000 and $1.7 million in fiscal
1999, representing an increase of $2.9 million from fiscal 2000 to fiscal 2001
and an increase of $4.7 million from fiscal 1999 to fiscal 2000. General and
administrative expenses represented 23 percent of total revenue in fiscal 2001,
150 percent of total revenue in fiscal 2000 and 57 percent of total revenue in
fiscal 1999. The increase from fiscal 2000 to fiscal 2001 was primarily
attributable to increased personnel and related costs to support the expanded
operations as a result of the acquisition of the operations from Tarantella. The
significant increase from fiscal 1999 to fiscal 2000 is the result of increased
salaries and related costs associated with additional employees in finance,
administration, legal and human resources consistent with our growth in
headcount and overall business. Other increases in general and administration
expense were for increased professional services and facilities costs.

WRITE-DOWN OF GOODWILL AND INTANGIBLES. During the fourth quarter of
fiscal 2001 we determined that various assets related to the operations acquired
from Tarantella and Acrylis were impaired and that the book value as of October
31, 2001 exceeded the current estimates of fair value. As a result, we recorded
a $73.7 million write-down of goodwill and intangible assets. The asset
write-down is the result of significant unanticipated decreases in actual and
forecasted revenue of the acquired operations, a significant decline in market
valuations and general economic conditions, particularly in the information
technology sector, a weakening of certain partner relationships, the loss of
certain key executives and other factors. During fiscal 2000 and 1999 the
Company did not have any write-down of goodwill and intangible assets.

AMORTIZATION OF GOODWILL AND INTANGIBLES. The Company recorded $10.7
million in non-cash charges in fiscal 2001 for the amortization of goodwill and
intangible assets in connection with the acquisition of the assets and
operations from Tarantella and the WhatIfLinux technology acquired from Acrylis,
Inc. As a result of the asset write-down discussed above and the Company's
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
effective November 1, 2001, the beginning of fiscal year 2002, the amortization
of goodwill and intangible assets is expected to decrease to approximately $0.8
million per quarter beginning in the first quarter of fiscal 2002. During fiscal
2000 and 1999 the Company did not have any goodwill and intangible assets to
amortize.

WRITE-DOWN OF INVESTMENTS. During fiscal 2001, the Company determined that
the current carrying value of certain of its investments would most likely not
be realized and write-downs were necessary. The Company recorded write-downs of
approximately $8.3 million related to these investments. The Company did not
have any impairment charges during fiscal 2000 or fiscal 1999. As of October 31,
2001, the Company's remaining investment balance was approximately $1.2 million
and was related to Lineo, Inc. During fiscal 2000 and 1999 the Company did not
record any write-down of its investments.

RESTRUCTURING CHARGE. During fiscal 2001, the Company recorded a
restructuring charge of approximately $3.1 million related to worldwide
corporate restructurings. The restructuring included a reduction in personnel
and the elimination of non-essential facilities.

IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
the assets and operations from Tarantella, the Company recorded a charge of $1.5
million in fiscal 2001 for the fair value of in-process research and
development. The write-off was necessary because the acquired in-process
research and development had not yet reached technological feasibility and had
no future alternative uses. Engineering efforts are focused on developing the
UNIXWare 8

30

and Messaging Server products. UNIXWare 8 is expected to deliver
purpose-built operating system configurations designed to power departmental
databases, application servers, intranet servers, mail and messaging servers and
other environments specifically tailored to run telecommunications and other
embedded environments. At the time of the acquisition, Tarantella had invested
approximately 76 man-months of effort (or approximately $0.8 million) in the
UNIXWare 8 product and anticipated 122 man-months of effort (or approximately
$1.2 million) to complete UNIXWare 8. UNIXWare 8 was estimated to be
approximately 38 percent complete at the time of the acquisition.

The Messaging Server product is an entirely new product, which provides
messaging functionality on top of existing UNIXWare products. At the time of the
acquisition, Tarantella had invested approximately 36 man-months of effort (or
approximately $0.4 million) in the Messaging Server product and anticipated 12
man-months of effort (or $0.1 million) to complete Messaging Server. Messaging
Server was estimated to be approximately 75 percent complete at the time of the
acquisition.

NON-CASH COMPENSATION. In connection with stock options granted to
employees, the Company recorded non-cash compensation of $1.4 million in fiscal
2001, $5.2 million in fiscal 2000 and $0.4 million in fiscal 1999. The
significant decrease in non-cash compensation from fiscal 2000 to fiscal 2001 is
a result of lower compensation amounts related to recent option grants and the
amortization of previously recorded deferred compensation on an accelerated
basis.

COST-SHARING ARRANGEMENT WITH TARANTELLA, INC. During August 2000 and
after entering into the reorganization agreement with Tarantella to acquire the
server software and professional services groups, the Company and Tarantella
agreed that Caldera would reimburse Tarantella for certain employee payroll and
related costs. The costs for which the Company agreed to reimburse Tarantella
were related to employees that Tarantella had identified for termination in a
company-wide layoff in September 2000. The Company viewed these employees as a
critical part of the success of the new combined company and Tarantella agreed
to retain the employees if the Company would reimburse Tarantella for a portion
of their payroll and related costs. At the time the Company committed to
reimburse Tarantella for these employee costs, the ultimate amount was not
determinable and both parties agreed that the amount would be determined prior
to the completion of the acquisition. During December 2000, both parties agreed,
pursuant to an amendment to the reorganization agreement, that Caldera would
reimburse Tarantella $1.5 million relating to services rendered from August
though December 2000. Accordingly, during fiscal 2001 and fiscal 2000 the
Company recorded $0.6 million and $0.9 million, respectively, for the
cost-sharing arrangement.

EQUITY IN LOSS OF AFFILIATE

Until January 5, 2001, the Company had been accounting for its investment
in Ebiz Enterprises, Inc. ("Ebiz") using the equity method of accounting. Under
the equity method, the Company recognized its portion of the net income or net
loss of Ebiz in its consolidated statement of operations. During fiscal 2001 and
fiscal 2000, the Company recognized $0.6 million and $0.4 million, respectively,
related to its portion of Ebiz's net loss and the amortization of the difference
between the Company's investment and the amount of underlying equity in the net
assets of Ebiz. Subsequent to January 5, 2001, the investment in Ebiz was
accounted for under the cost method, and has been written down to $0 as of
October 31, 2001.

OTHER INCOME (EXPENSE), NET

Other income (expense), net, which consists principally of interest
expense, interest income and other income, was $3.5 million in fiscal 2001, $5.5
million in fiscal 2000 and ($0.2) million in fiscal 1999. The decrease in fiscal
2001 from fiscal 2000 is attributable to less interest

31

earned due to lower cash, cash equivalents and available-for-sale security
balances. The significant increase from net other expense in fiscal 1999 to
net other income in fiscal 2000 was attributed to $3.2 million in total
interest income earned on the proceeds from our Series B preferred stock
offering and the initial public offering and a $2.3 million gain recognized
on the sale of the electronic Linux marketplace assets.

PROVISION FOR INCOME TAXES

The provision for income taxes was $0.6 million in fiscal 2001, $0.1
million in fiscal 2000 and $35,000 in fiscal 1999. The provision for income
taxes was primarily related to earnings in foreign subsidiaries. As of October
31, 2001, Caldera had net operating loss carryforwards for federal and state
income tax reporting purposes of approximately $46.3 million that expire at
various dates between 2018 and 2021. The Internal Revenue Code contains
provisions that likely could reduce or limit the availability and utilization of
the Company's net operating loss carryforwards if certain ownership changes have
taken place or will take place. As of October 31, 2001, an ownership change had
occurred and our net operating loss carryforwards may be reduced or limited.

The Company had net deferred tax assets, including net operating loss
carryforwards and other temporary differences between book and tax deductions,
totaling approximately $39.4 million as of October 31, 2001. A valuation
allowance in the amount of $39.4 million has been recorded as of October 31,
2001 as a result of uncertainties regarding the realizability of the net
deferred tax asset balance.

DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK

During the year ended October 31, 2000, the Company recorded preferred
stock dividends of $12.3 million. The preferred stock dividends were comprised
of (i) a warrant that was sold to Egan-Managed Capital, an investor in the
Company's Series B preferred stock, by Canopy and (ii) a beneficial conversion
feature related to the issuance of 5.0 million shares of Series B convertible
preferred stock. The estimated fair market value of the warrant was determined
to be $2.3 million using the Black-Scholes option-pricing model and the value of
the beneficial conversion feature was determined to be $10.0 million.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly statement of
operations data for the last eight quarters. This information has been derived
from the Company's unaudited consolidated financial statements, which, in
management's opinion, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
audited financial statements and related notes included elsewhere in this annual
report. Historically, the Company has experienced fluctuations in operating
results from quarter to quarter. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.

32

FLUCTUATIONS IN QUARTERLY RESULTS

Factors that may affect quarterly results include:

o the interest level of solution providers in recommending Linux and UNIX
business solutions to end users;

o the introduction, development, timing, competitive pricing and market
acceptance of the Company's products and services and those of its
competitors;

o changes in general economic conditions, such as recessions, that could
affect capital expenditures and recruiting efforts in the software
industry in general and in the Linux and UNIX environments in particular;

o the magnitude and timing of marketing initiatives;

o changing business attitudes toward Linux and UNIX as viable operating
system alternatives to other competing systems;

33

o the maintenance and development of the Company's strategic
relationships with technology partners and solution providers;

o the attraction, retention and training of key personnel; and

o the Company's ability to manage our recent growth and expansion.

As a result of the factors listed above and elsewhere in the "Risk
Factors" section of this Form 10-K, it is possible that in some future periods
the Company's results of operations may fall below management's expectations as
well as the expectations of public market analysts and investors. If revenue
falls below management's expectations in any quarter and the Company is unable
to reduce spending quickly in response, operating results would be lower than
expected.

LIQUIDITY AND CAPITAL RESOURCES

Since inception as a separate legal entity in August 1998, the Company has
funded its operations primarily through loans from its major stockholder and
through sales of common and preferred stock.

As of October 31, 2001, the Company had cash, cash equivalents and
available-for-sale securities of $28.4 million and working capital of $14.4
million. Decreases in cash and cash equivalents and working capital from October
31, 2000 were primarily the result of cash used in operations of $38.2 million
and cash paid for the acquisitions of Tarantella and Acrylis of $23.0 million,
which were offset by sales of available-for-sale securities, net of purchases,
of $47.8 million.

Net cash used in operations during fiscal 2001 was $38.2 million. Cash
used in operations was primarily attributed to the net loss of $131.4 million,
which was offset by non-cash charges for the write-down of goodwill and
intangible assets of $73.7 million, the write-down of investments of $8.3
million, the amortization of goodwill and intangibles of $10.7 million,
depreciation and amortization of $2.2 million, non-cash compensation of $1.4
million, and other non-cash charges of $2.5 million. Cash used in operating
activities from the changes in operating assets and liabilities was
approximately $5.6 million.

Net cash used in operating activities during fiscal 2000 was $21.8
million. Cash used in operating activities was primarily attributed to the net
loss of $26.9 million. Caldera also paid $1.25 million to Sun Microsystems, Inc.
for certain rights to license software. These uses of cash were partially offset
by non-cash charges for the amortization of deferred compensation of $5.2
million and depreciation and amortization of approximately $0.6 million. Net
cash used in operating activities was $7.6 million in fiscal 1999. Cash used in
operating activities was primarily attributed to the net loss of $9.4 million in
fiscal 1999.

Investing activities have historically consisted of purchases of property
and equipment, investments in strategic partners as well as a $15.0 million
payment during fiscal 1999 to our predecessor, in connection with the
reorganization of our predecessor and Caldera's own incorporation. Cash provided
by investing activities was $23.2 million during fiscal 2001. This consisted of
$23.0 million paid, net of cash acquired, for the assets and operations from
Tarantella and the WhatIfLinux technology from Acrylis as well as $1.5 million
paid for the purchase of equipment. The cash uses were more than offset by
proceeds from sales of available-for-sale securities, net of purchases, of $47.8
million.

During fiscal 2000, cash used in investing activities was $47.0 million.
Approximately $53.8 million was used in purchases, net of sales of
available-for-sale securities to maximize the

34

yield on available cash balances. Additionally, during the year ended
October 31, 2000, Caldera invested $2.0 million in the common stock of Evergreen
Internet, Inc., a strategic partner, paid $3.0 million to Ebiz Enterprises,
Inc. for 3.0 million shares of common stock and paid $1.4 million for
property and equipment. Caldera also received $15.0 million from the sale of
2.0 million shares of Lineo common stock. During fiscal 1999 capital
expenditures totaled approximately $0.6 million and the Company also invested
approximately $0.1 million in certain intangible technology.

During fiscal 2001 our financing activities provided approximately $0.6
million as a result of the exercise of vested stock options, the purchase of
shares of common stock through Caldera's employee stock purchase program and
from minority stockholders in Caldera KK, Caldera's Japanese subsidiary.

Financing activities provided $105.3 million during fiscal 2000. The
primary sources of cash during the year ended October 31, 2000 included net
proceeds of $29.8 million received in connection with the Series B preferred
stock financing completed in January 2000 and net proceeds of $71.8 million
received in connection with the initial public offering in March 2000. Caldera
also received $3.0 million from a stock subscription receivable.

Financing activities provided $23.3 million in fiscal 1999. During fiscal
1999, cash provided by financing activities consisted primarily of $15.5 million
of equity funding received from The Canopy Group and $3.0 million of equity
funding from MTI Technology Corporation. Additionally, Caldera received $4.8
million from The Canopy Group under a secured convertible promissory note
agreement that accrued interest at the prime rate less one-half percent that was
calculated at 7.25 percent. Caldera accrued approximately $0.1 million in
interest associated with these borrowings. These proceeds plus accrued interest
were converted to equity during fiscal 1999.

As of October 31, 2001, the Company had one outstanding non-interest
bearing debt obligation with a face amount of $8.0 million to Tarantella. This
note is payable in four quarterly installments starting in the Company's third
quarter of fiscal 2002. As of October 31, 2000, the Company had no outstanding
debt obligations.

Caldera's accounts receivable balance increased from $1.2 million as of
October 31, 2000 to $16.7 million as of October 31, 2001. The significant
increase was attributable directly to increased revenue as a result of our
acquisition of assets and operations from Tarantella. The allowance for doubtful
accounts was $0.4 million as of October 31, 2001, which represented 2 percent of
the total accounts receivable balance.

Management believes that the Company's current liquidity position,
including approximately $28.4 million of cash and available-for-sale
securities, will be sufficient to meet the Company's operating requirements
for at least the next twelve months. Management is continuing to implement
cost cutting measures in its effort to achieve profitability. However, there
can be no assurance that the Company will be successful in achieving
management's projections. Accordingly, the Company may be required to obtain
additional equity or debt funding to finance its operations. Management
cannot provide any assurance that additional funding will be available in
amounts or on terms acceptable to the Company. If sufficient funds are not
available or are not available on acceptable terms, the Company's current
operations could be adversely impacted and the Company's ability to fund
expansion, take advantage of acquisition opportunities, develop or enhance
our services or products, or otherwise respond to competitive or operational
pressures would be significantly limited.

35

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142, which supercedes Accounting
Principles Board ("APB") Opinion No. 17, "Intangible Assets", establishes new
standards for goodwill acquired in a business combination and eliminates
amortization of goodwill and indefinite lived intangible assets and instead sets
forth methods to periodically evaluate goodwill for impairment. The adoption of
SFAS No. 142 will require the Company to test its goodwill for impairment under
the new standard beginning in the first quarter of fiscal 2002. The Company will
adopt SFAS No. 141 and SFAS No. 142 effective November 1, 2001, the beginning of
fiscal year 2002, and as a result amortization of goodwill will cease and
amortization of intangible assets will decrease to approximately $0.8 million
per quarter beginning in the first quarter of fiscal 2002. As a result of the
goodwill and intangible asset write-down recorded as of October 31, 2001,
management does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have
an adverse impact on the Company's financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. This pronouncement
resolves significant implementation issues related SFAS No. 121 and establishes
a single accounting model for long-lived assets to be disposed of by sale. The
Company does not expect the adoption of SFAS No. 144 to have an adverse impact
on the Company's financial position and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

The Company has maintained many of the foreign offices and operations
associated with the assets and operations acquired in May 2001 from Tarantella.
As a result, a substantial portion of the Company's revenue is derived from
sales to customers outside the United States. A significant portion of this
international revenue is denominated in U.S. dollars. However, a substantial
portion of the operating expenses related to the foreign-based sales are
denominated in foreign currencies and therefore operating results are affected
by changes in the U.S. dollar exchange rate in relation to foreign currencies
such as the U.K. pound sterling and the Euro, among others. If the U.S. dollar
weakens compared to the U.K. pound sterling and the Euro, then operating
expenses of foreign operations will be higher when translated back into U.S.
dollars and additional funds may be required to meet these obligations. The
Company's revenue can also be affected by general economic conditions in the
United States, Europe and other international markets. The Company's results of
operations may be significantly affected in the short term by fluctuations in
foreign currency exchange rates or general economic conditions.

The Company is aware of the issues associated with the new European
economic and monetary union (the "EMU"). One of the changes resulting from this
union required EMU member states to irrevocably fix their respective currencies
to a new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the subsequent two
years, business in the EMU member states will have been conducted

36

in both the 25 existing national currencies, such as the franc or deutsche
mark, and the Euro. As a result, companies operating in or conducting
business in EMU member states will need to ensure that their financial and
other software systems are capable of processing transactions and properly
handling these currencies, including the Euro. Management has revised its
current business practices and products to address Europe's conversion to the
Euro. However, there can be no assurance that this issue and its related
costs will not have a materially adverse affect on the Company's business,
operating results and financial condition.

Because the EMU member states fixed the value of their respective national
currencies to the Euro, the dispositive exchange rate for determining the
effects of foreign currency fluctuation on the results of operations of a U.S.
company earning significant revenues from Europe is the U.S. dollar-Euro
exchange rate. The overall trend since the adoption of the Euro in January 1999
has been a devaluation compared to the U.S. dollar. Historically, the Company
has not been materially affected by fluctuations in the U.S. dollar-Euro
exchange rates because the level of activity denominated in Euros has not been
significant.

INTEREST RATE RISK

The primary objective of the Company's cash management strategy is to
invest available funds in a manner that assures maximum safety and liquidity and
maximizes yield within such constraints. A portion of the securities in which
the Company invests may be subject to market risk, which means that a change in
prevailing rates or market conditions may adversely affect the principal amount
of the investment. To minimize this risk, the Company invests in a broad range
of short-term fixed income securities with varying maturities. The Company does
not borrow money for short-term investment purposes. We anticipate that the
amounts we hold in interest rate sensitive instruments will decrease as our cash
and cash equivalents and amounts held in available-for-sale securities are
utilized in our business.

INVESTMENT RISK

The Company has invested in equity instruments of privately held and
public companies in the high-technology industry for business and strategic
purposes. Investments in privately held companies are included under the caption
`other assets' in the consolidated balance sheet and are accounted for under the
cost method if the Company's ownership is less than 20 percent and the Company
is not able to exercise influence over operations. The Company's only investment
to date in a public company is in Ebiz Enterprises, Inc. The Company's
investment policy is to regularly review the assumptions and operating
performance of these companies and to record impairment losses when events and
circumstances indicate that these investments may be impaired. During fiscal
2001, the Company recorded impairment charges of approximately $8.3 million for
investments that were deemed to have experienced other than temporary declines
in market value.

The stock market in general, and the market for shares of technology
companies in particular, has experienced extreme price fluctuations. In
addition, factors such as new product introductions by the Company or its
competitors may have a significant impact on the market price of the Company's
common stock. Furthermore, quarter-to-quarter fluctuations in the Company's
results of operations caused by changes in customer demand may have a
significant impact on the market price of the Company's stock. These conditions
could cause the price of the Company's stock to fluctuate substantially over
short periods of time.

37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANNUAL FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

38

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Caldera International, Inc.:

We have audited the accompanying consolidated balance sheets of Caldera
International, Inc. (a Delaware corporation) and subsidiaries as of October 31,
2001 and 2000, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caldera
International, Inc. and subsidiaries as of October 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2001 in conformity with accounting principles
generally accepted in the United States.

Arthur Andersen LLP

Salt Lake City, Utah
November 30, 2001

39

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands)

See accompanying notes to consolidated financial statements.

40

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)

See accompanying notes to consolidated financial statements.

41

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

See accompanying notes to consolidated financial statements.

42

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

See accompanying notes to consolidated financial statements.

43

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

See accompanying notes to consolidated financial statements.

44

CALDERA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

Caldera International, Inc. ("Caldera" or the "Company") was originally
incorporated as Caldera Systems, Inc. ("Caldera Systems"), a Utah corporation on
August 21, 1998, and reincorporated as a Delaware corporation on March 6, 2000.
Caldera Systems began operations in 1994 as Caldera, Inc. (the "Predecessor").
The Predecessor developed and marketed Linux operating system software and
related products.

In July 1996, through an asset purchase, the Predecessor acquired an
additional business line that was not engaged in developing and marketing Linux
software and related products. The Predecessor subsequently made the strategic
determination to separate its two business lines into separate entities and,
under an asset purchase agreement dated as of September 1, 1998, as amended,
sold the assets relating to its business of developing and marketing Linux
software and related products to Caldera Systems. In March 2000, Caldera Systems
completed the sale of an aggregate of 5.0 million shares of common stock at a
price of $14.00 per share in its initial public offering. On April 17, 2000, the
underwriters exercised their over allotment option for an additional 750,000
shares of common stock at $14.00 per share.

Caldera Systems developed and marketed software and provided related
services that enabled the development, deployment and management of Linux-based
specialized servers and internet devices that extended the eBusiness
infrastructure. Caldera Systems sold and distributed its software and related
products indirectly through distributors and solutions providers, which include
value-added resellers ("VARs"), original equipment manufacturers ("OEMs"), and
systems integrators, as well as directly to end-user customers. These sales
occurred throughout the United States and in certain international locations.

On May 7, 2001, Caldera Systems was acquired by a newly formed holding
company, Caldera International, Inc. Each share of existing Caldera Systems
common stock, as well as options to purchase shares of Caldera Systems common
stock, were converted into an equal number of shares of Caldera common stock and
options to purchase shares of Caldera common stock. Additionally on May 7, 2001,
Caldera acquired substantially all of the assets, liabilities and operations of
the server and professional services groups of Tarantella, Inc. ("Tarantella"),
formerly The Santa Cruz Operation, Inc., pursuant to an Agreement and Plan of
Reorganization (the "Agreement"), dated as of August 1, 2000 as amended. Under
the Agreement, Caldera acquired the tangible and intangible assets used in the
server and professional services groups, including all of the capital stock of
certain Tarantella subsidiaries.

The acquired operations of Tarantella provide server software for
networked business computing and are a leading producer of UNIX server operating
systems. In addition, these operations provide professional services to
implement and maintain UNIX system software products. The acquisition provided
Caldera with international offices and a Linux/UNIX distribution channel with
thousands of resellers worldwide.

Caldera's business is focused on serving the small to medium business
market's need to have reliable, cost effective Linux and UNIX operating systems
and software products to power computers. Caldera also provides web-based
applications and products and services to facilitate connections to the internet
for its customer base. Caldera is seeking to expand its business by providing
products and services to businesses outside its core market strengths in retail,
manufacturing, hospitality, banking and finance. Most of these markets and
customers are

45

accessed through an indirect, leveraged channel of partners, which includes
distributors and solution providers (collectively, "resellers"). This system
is extended to a global level, with Caldera offices worldwide, locally
supporting customers and resellers with minor modifications to fit the
particular country's unique needs.

The Company is subject to significant risks including the uncertainty
of market acceptance and demand for Linux-related products and services,
competition from larger, more established companies, short product life
cycles, the decline in demand for UNIX-related products and services, the
Company's ability to develop and bring to market new products on a timely
basis, dependence on key employees, the ability to attract and retain
additional qualified personnel and the ability to obtain adequate financing
to support potential growth.

Management believes that the Company's current liquidity position,
including approximately $28.4 million of cash and available-for-sale
securities, will be sufficient to meet the Company's operating requirements
for at least the next twelve months. Management is continuing to implement
cost cutting measures in its effort to achieve profitability. However, there
can be no assurance that the Company will be successful in achieving
management's projections. Accordingly, the Company may be required to obtain
additional equity or debt funding to finance its operations. Management
cannot provide any assurance that additional funding will be available in
amounts or on terms acceptable to the Company. If sufficient funds are not
available or are not available on acceptable terms, the Company's current
operations could be adversely impacted and the Company's ability to fund
expansion, take advantage of acquisition opportunities, develop or enhance
our services or products, or otherwise respond to competitive or operational
pressures would be significantly limited.

(2) SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the accompanying consolidated
financial statements for cash, accounts receivable, other receivables and
accounts payable approximate fair values because of the immediate or
short-term maturities of these financial instruments. The carrying amounts of
the Company's debt obligations approximate fair value based on current
interest rates. The fair values of available-for-sale securities are
determined using quoted market prices for these securities.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its wholly and majority-owned subsidiaries after all intercompany
balances and transactions have been eliminated. The following table lists our
subsidiaries, location and ownership interest:

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's foreign subsidiaries is the local
foreign 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. Revenue and expenses are

46

translated at average rates of exchange prevailing during the period.
Translation adjustments resulting from translation of the subsidiaries'
accounts are recorded in accumulated comprehensive income. Gains and losses
resulting from foreign currency transactions are included in the consolidated
statements of operations.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with
original maturities of three or fewer months to be cash equivalents. Cash
equivalents primarily consist of investments in money market mutual funds,
commercial paper or other short-term debt instruments.

AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities include investments in debt securities
such as commercial paper, treasury notes and bonds. These investments are
recorded at fair market value, based on quoted market prices and unrealized
gains and losses are recorded as a component of comprehensive income (loss).
Realized gains and losses, which are calculated based on the specific
identification method, are recorded in operations as incurred. As of October
31, 2001, debt securities with original maturity dates less than one year
totaled approximately $5.9 million.

INVENTORIES

Inventories consist primarily of completed products and raw materials.
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. As of October 31, 2001, inventories consisted of
finished goods of approximately $0.2 million. As of October 31, 2000,
inventories consisted of raw materials of approximately $0.2 million and
finished goods of approximately $0.2 million. Inventories are included in the
`other current assets' caption in the accompanying consolidated balance
sheets.

Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to competitive
pressures and technological innovation, it is possible that estimates of the
net realizable value could change in the near term.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated
depreciation and amortization. Computer equipment is depreciated using the
straight-line method over the estimated useful life of the asset, which is
typically three years. Furniture and fixtures and office equipment are
depreciated using the straight-line method over the estimated useful life of
the asset, typically three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful life of the improvement or the remaining term of the applicable lease.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments that extend the
useful lives of existing equipment are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.

Depreciation and amortization expense was $2.2 million, $0.6 million and
$0.3 million during fiscal 2001, 2000 and 1999, respectively.

47

CAPITALIZED SOFTWARE COSTS

In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
development costs incurred in the research and development of new software
products to be sold, leased or otherwise marketed are expensed as incurred
until technological feasibility in the form of a working model has been
established. Internally generated capitalizable software development costs
have not been material for the years ended October 31, 2001, 2000 and 1999.
The Company has charged its software development costs to research and
development expense in the accompanying consolidated statements of operations.

OTHER ASSETS

Other assets consist of deposits, investments and purchased technology
licenses. The purchased technology licenses represent payments for the right
to use and integrate third party technology into the Company's products and
are amortized using either the straight-line method over the estimated
product life or on a per unit basis as products are sold.

INTANGIBLE ASSETS AND GOODWILL AND RELATED IMPAIRMENT

The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether
events and circumstances have occurred which indicate possible impairment.
The carrying value of a long-lived asset is considered impaired when the
anticipated cumulative undiscounted cash flows of the related asset or group
of assets is less than the carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the
estimated fair market value of the long-lived asset.

Subsequent to the acquisition of certain assets and operations from
Tarantella (see Note 3), the Company has experienced significant
unanticipated decreases in actual and forecasted revenue of the acquired
operations, a significant decline in market valuations and general
conditions, particularly in the information technology sector, a weakening of
partner relationships, the loss of certain key executives and other factors
which indicate the recorded values of the long-lived assets were impaired. As
a result, the Company performed a valuation of its long-lived assets as of
October 31, 2001 and concluded that a $73.7 million write-down of goodwill
and intangible assets was necessary.

The following table summarizes the write-down for each of the Company's
intangible assets and goodwill as of October 31, 2001 (in thousands):

48

REVENUE RECOGNITION

The Company's revenue is primarily from two sources: (i) product
license revenue, primarily from product sales to resellers and end users,
including large scale enterprises, and royalty revenue, primarily from
initial license fees and ongoing royalties from product sales by source code
OEMs; and (ii) service and support revenue, primarily from providing software
updates, support, education, and consulting services to end users.

The Company recognizes product revenue upon shipment if a signed
contract exists, the fee is fixed and determinable, collection of resulting
receivables is probable and product returns are reasonably estimable, except
for sales to distributors, which are recognized upon sale by the distributor
to resellers or end users.

For contracts involving multiple obligations (e.g. deliverable and
undeliverable products, maintenance and other services), the Company
allocates revenue to each component of the contract based on objective
evidence of its fair value, which is specific to the Company. The fair value
of each element is based on the price if sold separately. The Company
recognizes revenue allocated to undelivered products that have been deferred
when the criteria for product revenue set forth above have been met.

The Company recognizes 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, the
Company recognizes revenue as the related services are performed.

The Company recognizes royalty revenue upon receipt of quarterly
royalty reports from OEMs related to their product sales.

The Company performs ongoing credit evaluations of its customers'
financial condition and does not require collateral. The Company maintains
allowances for potential credit losses and such losses have been within
management's expectations.

ROYALTY COSTS

Royalties paid by the Company on applications licensed from third
parties that are incorporated into the software products sold by the Company
are expensed as cost of revenue on a per unit basis as software products are
sold. Royalties paid in advance of product sales are included in prepaid
expenses and recorded as cost of revenue when the related products are sold.
During the years ended October 31, 2001, 2000 and 1999, the Company incurred
$2.0 million, $0.3 million and $0.4 million, respectively, of royalty expense.

SALES AND MARKETING EXPENSES

Sales and marketing expenses consist of the following: advertising,
channel promotions, marketing development funds, promotional activities,
public relations, trade shows and the salaries, commissions and related
expenses of all personnel involved in the sales process. The Company expenses
the cost of advertising the first time the advertising takes place.
Advertising expenses totaled approximately $3.0 million, $1.5 million and
$1.2 million for the years ended October 31, 2001, 2000 and 1999,
respectively.

COOPERATIVE ADVERTISING

The Company reimburses certain qualified customers for a portion of the
advertising costs related to their promotion of the Company's products. The
Company's liability for

49

reimbursement is accrued at the time revenue is recognized as a percentage of
the qualified customer's net revenue derived from the Company's products. For
the years ended October 31, 2001, 2000 and 1999, cooperative advertising
expense totaled approximately $2.3 million, $1.2 million and $0.2 million,
respectively.

INCOME TAXES

The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred tax assets or liabilities are measured using the
enacted tax rates that will be in effect when the differences are expected to
reverse. Deferred tax assets are reviewed periodically for recoverability and
valuation allowances are provided as necessary.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The Company offers credit terms on the sale of its software products to
certain customers. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for uncollectable accounts receivable
based upon the expected collectibility of all accounts receivable. As of
October 31, 2001, no customer accounted for more than ten percent of the
total accounts receivable balance. As of October 31, 2000, four distributors
accounted for approximately 35 percent of the gross accounts receivable
balance. As of October 31, 2001 and 2000, the allowance for bad debts was
$0.4 million and $0.3 million, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142, which
supercedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible
Assets", establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and indefinite lived
intangible assets and instead sets forth methods to periodically evaluate
goodwill for impairment. The adoption of SFAS No. 142 will require the
Company to test its goodwill for impairment under the new standard beginning
in the first quarter of fiscal 2002. The Company will adopt SFAS No. 141 and
SFAS No. 142 effective November 1, 2001, the beginning of fiscal year 2002,
and as a result amortization of goodwill will cease and amortization of
intangible assets will decrease to approximately $0.8 million per quarter
beginning in the first quarter of fiscal 2002. As a result of the goodwill
and intangible asset write-down recorded as of October 31, 2001, management
does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have an
adverse impact on the Company's financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This pronouncement supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a
business. This pronouncement resolves significant implementation issues
related SFAS No. 121 and establishes a single accounting model for long-lived
assets to be

50

disposed of by sale. The Company does not expect the adoption of SFAS No. 144
to have an adverse impact on the Company's financial position and results of
operations.

COMPREHENSIVE INCOME

Comprehensive income consists of net loss, foreign currency translation
adjustments and unrealized gain (loss) on available for sale securities and
is presented in the accompanying consolidated statements of operations and
comprehensive loss.

HEDGING OF FOREIGN CURRENCY TRANSACTIONS

The Company utilizes foreign currency forward exchange contracts to
hedge foreign currency market exposures of underlying assets, liabilities and
other obligations. The Company does not use forward exchange contracts for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include the instrument's effectiveness in risk
reduction and one-to-one matching of forward exchange contracts to underlying
transactions. Gains and losses on currency forward contracts that are
designated and effective as hedges of firm commitments are deferred and
recognized in income in the same period that the underlying transactions are
settled. Gains and losses on currency forward contracts that are designated
and effective as hedges of existing transactions are recognized in income in
the same period as losses and gains on the underlying transactions are
recognized and generally offset. Gains and losses on any instruments not
meeting the above criteria would be recognized in income in the current
period. The Company transacts business in various foreign currencies. At
October 31, 2001, the Company had two foreign exchange contracts with
maturities of nine and 40 days, respectively, to purchase an aggregate of
approximately 1.4 million U.K. pounds for $2.0 million U.S. dollars.

NET LOSS PER COMMON SHARE

The Company computes net loss per share in accordance with SFAS No.
128, "Earnings Per Share", and SAB No. 98. Under the provisions of SFAS No.
128 and SAB No. 98, basic net loss per common share ("Basic EPS") is computed
by dividing net loss available to common stockholders by the weighted average
number of common shares outstanding. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss by the sum of the weighted
average number of common shares and the dilutive potential common share
equivalents then outstanding. Potential common share equivalents consist of
shares issuable upon the exercise of stock options and shares issuable upon
the conversion of Series A and Series B convertible preferred stock for
periods during which they were outstanding. For the years ended October 31,
2001, 2000 and 1999, 12.4 million, 6.3 million and 1.2 million common share
equivalents, respectively, were not included in the computation of diluted
net loss per common share as their effect would have been anti-dilutive,
thereby decreasing the net loss per common share.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation. The reclassifications had no effect
on net loss for the prior years.

(3) ACQUISITIONS

TARANTELLA, INC.

On May 7, 2001, the Company acquired certain assets, liabilities and
operations from Tarantella, Inc. in exchange for: (i) the issuance of 16
million shares of common stock (1.6 million of which are being held in escrow
for a one-year period); (ii) the issuance of options to purchase

51

up to an aggregate of 1.7 million shares of Caldera common stock in exchange
for options to purchase Tarantella common stock previously held by
individuals who became employees of Caldera; (iii) $23 million in cash,
including the forgiveness of $7 million previously advanced to Tarantella;
and (iv) a non-interest bearing promissory note in the amount of $8 million
that will be paid in quarterly installments of $2 million beginning July
2002. In addition, if the OpenServer line of business generates revenue in
excess of specified thresholds during the three-year period following the
acquisition, Caldera will pay Tarantella 45% of such excess revenue. The
following table summarizes the components of the consideration paid to
Tarantella (in thousands, except per share data):

Consideration paid:
Fair value of Caldera common stock (16,000 shares at $3.47 per share) $ 55,520
Fair value of options to purchase 1,661 shares of common stock issued in exchange
for 3,323 outstanding Tarantella options 4,201
Cash 23,000
Note payable (discounted at 6.5%) 7,322
Direct expenses 3,744
-----------------
Total consideration $ 93,787
=================

The Company calculated the $3.47 per share price used in the
computation of total consideration for the common stock by taking the closing
stock price for the two days before, the day of, and the two days after the
signing of the final amendment to the Agreement. The per share value
calculated for each option exchanged was $2.53 and was calculated using the
Black-Scholes option pricing model using the following assumptions: term of
2.5 years, volatility of 134 percent, dividend yield of 0 percent and a
discount rate of 5 percent.

The Company has accounted for the acquisition of the assets and
operations from Tarantella using the purchase method of accounting. Under
this method, the total purchase price, including direct fees and expenses,
was allocated to the tangible and intangible assets acquired and the
liabilities assumed based upon their respective fair values. The following
table summarizes the allocation of the consideration to the tangible and
intangible assets acquired and liabilities assumed (in thousands):

Purchase price allocation:
Liabilities assumed net of tangible assets acquired $ (5,482)
Accrual for severance payments, non-essential facilities and related costs (3,011)
Intangible assets acquired:
Distribution/reseller channel 26,700
Existing technology (consisting primarily of UNIXWare and OpenServer) 5,800
Acquired in-process research and development 1,500
Trade name and trademarks 800
Distribution agreement 1,400
Goodwill 66,080
-----------------
Total $ 93,787
=================

A one-time charge of $1.5 million related to the fair value of the
in-process research and development was recorded during fiscal 2001. The
write-off was necessary because the acquired in-process research and
development had not yet reached technological feasibility and had no future
alternative uses. Engineering efforts are focused on developing the UNIXWare
8 and Messaging Server products. UNIXWare 8 is expected to deliver
purpose-built operating system configurations designed to power departmental
databases, application servers, intranet servers, mail and messaging servers
and other environments specifically tailored to run telecommunications and
other embedded environments. At the time of the acquisition,

52

Tarantella had invested approximately 76 man-months of effort (or
approximately $0.8 million) in the UNIXWare 8 product and anticipated 122
man-months of effort (or approximately $1.2 million) to complete UNIXWare 8.
UNIXWare 8 was estimated to be approximately 38 percent complete at the time
of the acquisition.

The Messaging Server product is an entirely new product, which provides
messaging functionality on top of existing UNIXWare products. At the time of
the acquisition, Tarantella had invested approximately 36 man-months of
effort (or approximately $0.4 million) in the Messaging Server product and
anticipated 12 man-months of effort (or $0.1 million) to complete Messaging
Server. Messaging Server was estimated to be approximately 75 percent
complete at the time of the acquisition.

As discussed above in Note 2, the Company determined that various
assets related to the acquired operations from Tarantella were impaired and
these assets were written-down to their current fair value.

WHATIFLINUX TECHNOLOGY FROM ACRYLIS, INC.

On May 3, 2001, the Company acquired the WhatIfLinux technology from
Acrylis, Inc. WhatIfLinux technology provides Open Source users and system
administrators with Internet-delivered tools and services for faster, more
reliable software management. In consideration for the assets acquired from
Acrylis, the Company issued 1.25 million shares of common stock with a market
price of $1.95 per share, or approximately $2.4 million, paid $1.0 million in
cash and incurred approximately $0.1 million in direct expenses. The Company
has accounted for the acquisition of the WhatIfLinux technology using the
purchase method of accounting. The allocation of the consideration paid for
the WhatIfLinux technology consisted of assigning approximately $3.0 million
to purchased technology and $0.5 million to goodwill. The acquired technology
is being amortized over a three-year life.

The following table sets forth certain pro forma financial information
had the acquisitions discussed above been completed as of November 1, 1999
(in thousands):

Charges to operations for fiscal 2001 for the amortization of goodwill
and other intangible assets were approximately $10.7 million. In July 2001,
the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS 142, goodwill and other intangible assets with indefinite lives are no
longer amortized, but rather are assessed annually for impairment. Caldera
adopted SFAS 142 effective November 1, 2001, the beginning of its fiscal year
2002. All of Caldera's remaining identifiable intangible assets other than
goodwill are deemed to have finite lives and will continue to be amortized
over their remaining useful lives.

As discussed above in Note 2, the Company determined that various
assets related to the acquired operations from Acrylis, Inc. were impaired
and these assets were written-down to their current fair value.

53

(4) EQUITY INVESTMENT IN EBIZ ENTERPRISES, INC.

On September 15, 2000, the Company sold to Ebiz Enterprises, Inc.
("Ebiz") the rights, title and interest in and to all of the intellectual
property and assets comprising the Company's Electronic Linux Marketplace
concept (the "ELM assets"). The Company transferred assets with a net book
value of $38,000 as well as cash of $3.0 million for 4.0 million shares of
Ebiz common stock. The Company could also receive up to 4.0 million
additional shares of Ebiz common stock, depending upon the amount of gross
revenue generated by the ELM assets during the twelve-month period ending
December 15, 2001; however, the Company does not expect to receive any
additional shares.

The Company accounted for its interest in Ebiz using the equity method
of accounting due to its ability to exercise influence on Ebiz. Under the
equity method, the Company recognized its portion of the net income or net
loss of Ebiz in its consolidated statement of operations. For the years ended
October 31, 2001 and 2000, the Company recognized approximately $0.4 million
and approximately $0.2 million, respectively, in its statements of
operations that represented its portion of Ebiz's net losses. In addition,
because Ebiz had a stockholders' deficit at the time of the Company's
investment, the Company was amortizing on a straight-line basis, the
difference between its investment and the amount of underlying equity in the
net assets of Ebiz, which was calculated as follows (in thousands, except per
share amounts):

Fair value of Ebiz shares received (4,000 shares at $1.60 per share) $ 6,400
Less portion of gain deferred due to the Company's continuing ownership interest (1,056)
----------------
Basis of recorded investment 5,344
Caldera's portion of Ebiz deficit 1,162
----------------
$ 6,506
================

The Company allocated this difference to goodwill and was amortizing
this amount on a straight-line basis over five years. At the time of the
investment, Ebiz had no other substantial identifiable intangible assets. For
the years ended October 31, 2001 and 2000, the Company recognized
approximately $0.2 million and approximately $0.2 million, respectively, in
its statements of operations that represented this amortization.

On January 5, 2001, the Company's ownership interest in Ebiz was
diluted to approximately 12 percent as a result of Ebiz issuing new shares in
connection with an acquisition and the conversion of convertible securities.
As a result of these transactions, on January 5, 2001, the Company
discontinued the use of the equity method of accounting for its investment in
Ebiz. Subsequent to January 5, 2001, the Company accounted for the investment
in Ebiz as an available-for-sale security in accordance with SFAS 115. Under
SFAS 115, the Company carried its investment at fair market value using
quoted trading prices and recorded any unrecognized gains or losses as a
component of other comprehensive income (loss).

During the year ended October 31, 2001, the Company determined that
the quoted trading price of the Ebiz common stock on the Over the Counter
Bulletin Board was not reflective of the realizable value of the Company's
investment in Ebiz. During fiscal 2001, Ebiz's financial condition declined
and on September 7, 2001, Ebiz filed for Chapter 11 bankruptcy protection.
Accordingly, the investment was written down to $0 resulting in an impairment
charge of approximately $4.3 million.

(5) INVESTMENTS IN NON-MARKETABLE SECURITIES

The Company is accounting for each of its investments in non-marketable
securities under the cost method, as the Company has no ability to exercise
significant influence over the

54

entities. The Company's investments to date have consisted of investments in
the common stock of other technology companies, including Evergreen Internet,
Inc. ("Evergreen"), Troll Tech AS ("Troll Tech") and Lineo, Inc ("Lineo").

EVERGREEN

In January 2000, the Company and Evergreen entered into a master agreement
which set forth the terms and conditions of a business alliance. The Company
acquired approximately 0.4 million shares of common stock of Evergreen for $2.0
million and Evergreen transferred approximately 0.2 million additional shares of
its common stock to the Company in exchange for 0.2 million shares of the
Company's common stock.

The Company recorded its investment in Evergreen at cost, based on the
cash consideration paid by the Company and the estimated fair market value of
the Company's common stock on the date of the agreement of $8.00 per share. The
Company determined that the estimated fair value of the Company's common stock
was more clearly evident of the value of the transaction since Evergreen is a
privately owned company. In management's opinion, the consideration exchanged by
the Company for the common shares of Evergreen was equal to the fair value of
the shares acquired.

TROLL TECH

In December 1999, the Company and Canopy entered into an agreement with
Troll Tech AS and its stockholders. Pursuant to the agreement, the Company
acquired 159 shares of common stock of Troll Tech (approximately 2 percent of
Troll Tech's outstanding common stock) in exchange for approximately 0.1 million
shares of the Company's common stock and Canopy acquired 398 shares of common
stock of Troll Tech in exchange for $1.0 million, payable in monthly
installments of $0.1 million.

The Company recorded its investment in Troll Tech's common stock at
approximately $0.4 million, based on the cash price per share paid by Canopy.
The Company determined that the cash price per share paid by Canopy was the most
reliable evidence of the value of Troll Tech's common stock. The difference
between the estimated fair value of the 0.1 million shares of the Company's
common stock at $8.00 per share of approximately $0.9 million and the $0.4
million investment was recorded as a license fee. The license fee was classified
as contra-equity and was subsequently reflected as a distribution to Canopy
because the license rights were used by Canopy and its affiliates.

LINEO

In January 2000, the Company and Lineo entered into a stock purchase and
sale agreement. Lineo is the successor entity to the operations of the
Predecessor, which were not acquired by Caldera in the reorganization discussed
in Note 1. As of January 2000, Lineo was majority owned by Canopy. Pursuant to
the stock purchase agreement, the Company acquired approximately 3.2 million
shares of common stock of Lineo (approximately 17 percent of Lineo's outstanding
voting stock) in exchange for approximately 1.3 million shares of the Company's
common stock.

Because Lineo is also majority owned by Canopy, the investment in Lineo
was accounted for as a transaction between entities under common control with
the transfer being reflected in the Company's financial statements at Lineo's
carry over basis. At the date of the agreement, Lineo had a stockholders'
deficit of which approximately $0.2 million would be associated with the 17
percent interest the Company acquired. Accordingly, the investment was recorded
at a nominal value of $1.00 because the Company does not have any obligation to
provide additional

55

funding to Lineo. The Company recorded the estimated fair value of the shares
of its common stock issued to Lineo at $10.0 million with the difference
between the $10.0 million and the $1.00 investment recorded as a distribution
to Canopy.

On May 11, 2000, Canopy transferred approximately 1.8 million shares of
Lineo's common stock held by Canopy to the Company. This transfer was reflected
as a capital contribution by Canopy at Lineo's carry over basis of approximately
$2.0 million. As a result of this transaction, the Company had a total of 5.0
million shares of Lineo's common stock (approximately 14 percent of Lineo's
outstanding voting stock).

On August 31, 2000, the Company, Canopy and Metrowerks Holdings, Inc.
("Metrowerks"), an affiliate of Motorola, Inc., entered into a Stock Purchase
and Sale Agreement whereby the Company and Canopy sold 2.0 million and 1.0
million shares, respectively, of common stock of Lineo to Metrowerks at $7.50
per share. Prior to this transaction, Caldera, Canopy and Lineo had no
relationship with Metrowerks; however, Motorola, Inc. is a preferred stockholder
of Lineo. The Company received the $15.0 million net proceeds of the sale in
October 2000.

In conjunction with the sale of the common stock of Lineo, the Company
also entered into a stockholder agreement by and among Canopy, Lineo, and
certain other stockholders of Lineo that provides for a right of first refusal
for the benefit of Metrowerks with respect to Lineo shares held by the Company
and other Lineo stockholders. The Company has also agreed to indemnify
Metrowerks for any damages sustained by Metrowerks as a result of breaches by
the Company under the stock purchase and sale agreement and the stockholder
agreement or for breaches by Lineo under a warrant agreement between Lineo and
Metrowerks. The Company's indemnification obligation is limited to the amount of
proceeds received by the Company in its sale to Metrowerks.

Management routinely assesses the Company's investments for impairment and
adjusts the carrying amount to estimated realizable values when impairment has
occurred. During fiscal 2001, management determined that the carrying value of
the investment in Evergreen of $3.6 million and Troll Tech of $0.4 million would
most likely not be realized and both investments were written down to $0. As of
October 31, 2001, the Company's remaining investment balance was approximately
$1.2 million and was related to Lineo, Inc.

(6) NOTE PAYABLE TO TARANTELLA, INC.

As discussed in Note 3, the Company issued to Tarantella an unsecured,
non-interest bearing promissory note in the amount of $8.0 million. Four
quarterly payments of $2.0 million are payable to Tarantella beginning in the
Company's third fiscal quarter of 2002. Because the promissory note was
non-interest bearing, the promissory note has been recorded at a discount using
an interest rate of 6.5 percent. As of October 31, 2001, the current portion of
the note payable was $3.8 million, which represented the discounted value of the
two payments to be paid during fiscal 2002. The remaining two payments will be
made during fiscal 2003.

(7) STOCKHOLDERS' EQUITY

REINCORPORATION AS A DELAWARE CORPORATION

On March 6, 2000, Caldera reincorporated in Delaware. The reincorporation
into Delaware was effected by way of a merger with a newly formed Delaware
subsidiary and the associated issuance of one share of common stock of the
subsidiary for each share of common stock of the Company held by stockholders of
record. Additionally, stockholders of record of Series A and Series B of the
Company received shares of Series A and Series B preferred stock of

56

the subsidiary. All share and per share amounts in the accompanying
consolidated financial statements have been adjusted to give effect to the
reincorporation.

STOCK SPLIT

On December 29, 1998, Caldera's board of directors approved a two-for-one
stock split for holders of common stock. This stock split has been retroactively
reflected in the accompanying consolidated financial statements for all periods
presented.

PREFERRED STOCK

On December 30, 1999, the stockholders approved articles of amendment to
the Company's articles of incorporation. The amended articles of incorporation
authorized the Company to issue 25 million shares of no par value preferred
stock and 75 million shares of no par value common stock. The Company's board of
directors is authorized, without stockholder approval, to designate and
determine the preferences, limitations and relative rights granted to or imposed
upon each share of preferred stock, which are not fixed by the amended articles
of incorporation. The amended articles of incorporation designated approximately
6.6 million shares as Series A Convertible Preferred Stock ("Series A") and 5
million shares as Series B Convertible Preferred Stock ("Series B").

The Series A and B shares had initial stated values per share of $4.03 and
$6.00, respectively, and ranked on parity with each other and prior to any other
class or series of capital stock of the Company with respect to dividend rights,
rights upon liquidation, winding up or dissolution, and redemption rights. The
Series A and B shares were entitled to receive, when, as and if declared by the
board of directors, cumulative and accruing preferential dividends at eight
percent per annum, compounded annually, based on the stated value per share;
provided, however, solely for dividend purposes the Series A stated value per
share was deemed to be $6.00. Any holder of Series A or B shares could convert
all or any shares of Series A or B into common shares and each share of Series A
or B automatically converted into common shares immediately prior to the closing
of a firm commitment underwritten public offering of at least $25 million, as
defined. Each Series A and B share initially converted into one share of common
stock. The holders of Series A and B shares were entitled to vote on all matters
submitted to the stockholders of the Company, including the election of
directors, together with the holders of common stock voting together as a single
class. Each share of Series A and B was entitled to one vote for each share of
common stock that would be issuable upon conversion of such share.

In connection with the Company's initial public offering, all outstanding
preferred stock was converted to common stock on March 20, 2000.

CONVERSION OF COMMON SHARES INTO SERIES A SHARES

Prior to the offering of Series B shares discussed below, on December 30,
1999, the Company entered into a Conversion Agreement with its two major
stockholders, The Canopy Group ("Canopy") and MTI Technology Corporation
("MTI"). These two stockholders held 99 percent of the outstanding shares of the
Company's common stock at December 30, 1999. Pursuant to the Conversion
Agreement, the Company converted approximately 6.6 million shares of outstanding
common stock held by Canopy and MTI into approximately 6.6 million shares of
Series A.

ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK

On December 30, 1999, the Company's board of directors authorized the
issuance of 5 million shares of Series B convertible preferred stock at $6 per
share with the rights, preferences,

57

privileges and restrictions as described above. On January 10, 2000, the 5
million shares were sold for net proceeds of $29.8 million.

Each share of Series B convertible preferred stock was immediately
convertible to one share of common stock upon issuance. During the year ended
October 31, 2000, the Company recorded a dividend related to the Series B
convertible preferred stock in the amount of $10 million representing the value
of the beneficial conversion feature. The beneficial conversion feature was
calculated based on the difference between the conversion price of $6.00 per
share and the estimated fair value of the common stock of $8.00 per share for
financial reporting purposes based on the estimated price range for the
Company's IPO. The Company's board of directors determined that the $6.00 per
share price for the Series B preferred stock represented their estimate of the
fair value of the Series B preferred stock at the time sold and that the Series
B preferred shares were not issued for other consideration or goods and
services.

WARRANT AGREEMENT BETWEEN CANOPY AND SERIES B PREFERRED STOCKHOLDER

In connection with the Series B preferred stock offering, Canopy and
Egan-Managed Capital, L.P. ("EMC"), one of the investors in the Series B
preferred stock offering, entered into an agreement wherein Canopy agreed to
purchase the shares of Series B convertible preferred stock purchased by EMC if
EMC did not receive a warrant in a satisfactory form to EMC to purchase
approximately 0.4 million shares of the Company's common stock from Canopy. On
March 13, 2000, Canopy sold to EMC a warrant for $10,000 to purchase
approximately 0.4 million shares of the Company's common stock held by Canopy at
$5.98 per share for a two-year period. Upon exercise of the warrant, all
proceeds will be paid to Canopy. Since the sale of this warrant directly related
to the issuance of the Series B preferred stock, the Company accounted for this
transaction as if the Company had sold the warrant to EMC with an offsetting
contribution to capital. Accordingly, the Company recorded the fair value of the
warrant of $2.3 million, determined using the Black-Scholes option-pricing
model, as a beneficial conversion feature reflected as a dividend related to the
Series B preferred stock during the year ended October 31, 2000. Assumptions
used in the Black-Scholes option-pricing model were the following: estimated
fair value of common stock of $8.00 per share; risk-free interest rate of 6
percent; expected dividend yield of 0 percent; volatility of 118 percent; and
expected exercise life of two years.

STOCK OPTION PLANS

During fiscal year 1998, the Company adopted the 1998 Stock Option Plan
(the "1998 Plan") that provided for the granting of nonqualified stock options
to purchase shares of common stock. Under the 1998 Plan, the Company could grant
up to 5 million options to employees, non-employee members of the board of
directors or consultants who provide services to the Company. Options granted
under the 1998 Plan are subject to expiration and vesting terms as determined by
a committee of the Company's board of directors. No options can expire more than
ten years from the date of grant. The exercise price for the options may be paid
in cash or in shares of the Company's common stock valued at fair market value
on the exercise date. The options may also be exercised through a same-day sale
program without any cash outlay by the optionee. At October 31, 2001, there are
no shares of common stock available for future grants under the 1998 Plan.

On December 1, 1999, the Company's board of directors approved the 1999
Omnibus Stock Incentive Plan (the "1999 Plan"), which is intended to serve as
the successor equity incentive program to the 1998 Plan. The compensation
committee of the board of directors administers the 1999 Plan. The 1999 Plan
allows for the grant of awards in the form of incentive and non-qualified stock
options, stock appreciation rights, restricted shares, phantom stock and stock
bonuses. Awards may be granted to individuals in the Company's employ or
service. The

58

1999 Plan initially increased the aggregate number of shares available for
issuance under both plans to 6.7 million and designated that 0.7 million
shares be used as director incentives. On March 10, 2000, the Company's board
of directors authorized an additional 0.5 million shares to be issued under
the 1999 Plan and during July 2000 the board of directors approved an
additional 2.3 million shares to be issued under the 1999 Plan. In April
2001, the board of directors approved, and the stockholders of the Company
ratified, an additional increase of 6.8 million shares available for grant
under the 1999 Plan. In December 2001, the board of directors approved an
additional 2.5 million shares to be available for grant.

In addition, the board has approved amendments to the 1999 Plan which the
stockholders approved on April 27, 2001, that effected the following changes:
(i) established an automatic share increase feature pursuant to which the number
of shares available for issuance under the 1999 Plan will automatically
increase, beginning with the 2000 calendar year, as of November 1 of each year,
by 3% of the total number of shares of common stock outstanding on the previous
October 31st, and (ii) added a formula awards program pursuant to which
directors of the Company are automatically granted options to purchase shares of
common stock at specified times. All amendments are subject to approval by the
stockholders of Caldera.

A summary of stock option activity under the stock option plans for the
years ended October 31, 2001, 2000 and 1999 is as follows (in thousands, except
per share amounts):

During fiscal 2001, the Company did not grant any stock options with
exercise prices that were less than the quoted market price of the Company's
common stock. A summary of stock option grants with exercise prices equal to or
less than the estimated fair market value on the date of grant during the two
years ended October 31, 2000 is as follows:

A summary of stock options outstanding and exercisable under the
Company's stock option plans as of October 31, 2001 is as follows (in thousands,
except per share amounts):

Subsequent to October 31, 2001, the Company granted approximately 3.8
million stock options at a weighted average exercise price of $0.28 per share.

STOCK-BASED COMPENSATION

The Company accounts for its stock options issued to directors, officers
and employees under APB 25 and related interpretations ("APB 25"). Under APB 25,
compensation expense is recognized if an option's exercise price on the
measurement date is below the fair market value of the Company's common stock.
During the year ended October 31, 1999, the Company granted 2.5 million stock
options with exercise prices that were below the estimated fair market value on
the measurement date resulting in $3.1 million in deferred compensation. This
deferred compensation has been recorded as a component of stockholders' equity
and will be expensed consistent with the vesting of the underlying stock options
on an accelerated amortization method. During the year ended October 31, 2000,
the Company granted 3.9 million stock options with exercise prices below the
fair market value on the measurement date resulting in $6.8 million of deferred
compensation to be recognized as expense over the vesting period of the options.

Non-cash compensation was $1.4 million, $5.2 million and $0.4 million
during the years ended October 31, 2001, 2000 and 1999, respectively.

SFAS 123, "Accounting for Stock-Based Compensation" requires pro forma
information regarding net loss as if the Company had accounted for its stock
options granted under the fair value method. The fair market value of the stock
options is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions for grants during the years ended October
31, 2001, 2000 and 1999: risk-free interest rate of 3.5 percent, 6.1 percent and
5.5 percent, respectively; expected dividend yield of 0 percent; volatility of
112 percent, 132

60

percent and 0 percent, respectively; and expected exercise lives of three
years, four years and five years, respectively. For purposes of the pro forma
disclosure, the estimated fair market value of the stock options is amortized
over the vesting periods of the respective stock options. The following is
the pro forma disclosure and the related impact on net loss for the years
ended October 31, 2001, 2000 and 1999 (in thousands, except per share
amounts):

2000 EMPLOYEE STOCK PURCHASE PLAN

The 2000 Employee Stock Purchase Plan was adopted by the board of
directors on February 15, 2000 and was approved by the stockholders on March 1,
2000. The plan became effective upon the closing of the Company's initial public
offering. The plan is designed to allow eligible employees of Caldera and its
participating subsidiaries to purchase shares of Caldera common stock, at
semi-annual intervals, through periodic payroll deductions. A total of 0.5
million shares of common stock have been reserved for issuance under the plan.
The share reserve will increase on the first trading day of each fiscal year
beginning with the 2001 fiscal year by 1% of the total number of shares of
common stock outstanding on the last day of the immediately preceding year but
no such annual increase will exceed 750,000 shares. In no event, however, may a
participant purchase more than 750 shares, nor may all participants in the
aggregate purchase more than 125,000 shares on any semi-annual purchase date.

In July 2000, the board of directors amended the plan to increase the
maximum number of shares of common stock authorized for issuance over the term
of the plan by an additional 1.5 million shares. The stockholders approved this
increase on April 27, 2001. The board of directors also amended the plan to
eliminate the cap on the number of shares each participant may purchase in each
offering period, increased the aggregate shares that may be purchased by all
employees on any semi-annual purchase date to 350,000 shares from 125,000
shares, and changed the purchase interval date to May 31 and November 30,
starting with the May 31, 2001 purchase interval.

The plan has a series of successive offering periods, each with a maximum
duration of 24 months. The initial offering period began on the date of the
Company's initial public offering and will end on the last business day in April
2002. The next offering period will begin on May 1, 2002. The compensation
committee of the board of directors will set subsequent offering periods. Shares
will be purchased on semi-annual purchase dates (the last business day of April
and October each year) during the offering period. The first purchase date was
October 31, 2000. Should the fair market value of the Company's common stock on
any semi-annual purchase date be less than the fair market value on the first
day of the offering period, then the current offering period will automatically
end and a new offering period will begin, based on the lower fair market value.

Individuals who are eligible employees on the start date of any offering
period may enter the Plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or

61

November 1 each year). Individuals who become eligible employees after the
start date of the offering period may join the plan on any subsequent
semi-annual entry date within that period.

A participant may contribute up to 10 percent of his or her cash earnings
through payroll deductions and the accumulated payroll deductions will be
applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date (the last business day in April and October of each
year). The purchase price per share will be 85 percent of the lower of the fair
market value of our common stock on the participant's entry date into the
offering period or the fair market value on the semi-annual purchase date.

The board may at any time amend or modify the plan. The plan will
terminate no later than the last business day in April 2010.

On October 31, 2000, 61,807 shares of common stock of the Company were
purchased through the plan at a price of $2.98 per share. On April 30, 2001,
approximately 54,000 shares of common stock of the Company were purchased
through the plan at a price of $1.68 per share and on May 31, 2001,
approximately 21,000 shares were purchased at a price of $1.55 per share.

Subsequent to year-end, on November 30, 2001, approximately 350,000 shares
of common stock of the Company were purchased through the plan at a price of
$0.66 per share.

(8) INCOME TAXES

The net loss before income taxes consisted of the following components
for the years ended October 31, 2001, 2000 and 1999 (in thousands):

The components of the provision for income taxes for the years ended
October 31, 2001, 2000 and 1999 are as follows (in thousands):

Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities. They are measured by applying the enacted tax rates and laws in
effect for the years in which such differences are expected to reverse. The
significant components of the Company's deferred income tax assets and
liabilities at October 31, 2001 and 2000 are as follows (in thousands):

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The amount of and ultimate realization of the deferred income tax assets
is dependent, in part, upon the tax laws in effect, Caldera's future earnings,
and other future events, the effects of which cannot be determined. The Company
has established a full valuation allowance against its net deferred income tax
assets. Management believes that as of October 31, 2001, based on a number of
factors, the available objective evidence creates sufficient uncertainty
regarding the realizability of these deferred income tax assets.

As of October 31, 2001, the Company had net operating loss carryforwards
for federal income tax reporting purposes totaling approximately $46.3 million
that expire between 2018 and 2021. The Company considers the basis difference in
the investment in its foreign subsidiaries to be permanent and has not recorded
and deferred tax liabilities related to these differences.

The Internal Revenue Code contains provisions that likely could reduce or
limit the availability and utilization of net operating loss carryforwards if
certain changes in ownership have taken place or will take place. As of October
31, 2001, an ownership change had occurred and our net operating loss
carryforwards may be reduced or limited.

The differences between the provision for income taxes at the U.S.
statutory rate and the Company's effective tax rate is as follows:

63

(9) COMMITMENTS AND CONTINGENCIES

LITIGATION

In July 2001, Caldera and certain of its officers and directors were
named as defendants in lawsuits filed in the United States District Court for
the Southern District of New York (the "Actions"). Based on comments made in
open court by attorneys representing certain plaintiffs, over two hundred
similar cases have been filed against other issuers. The Court has indicated
that it is in the process of considering a consolidation of the Actions.
Certain of the plaintiffs have sought appointment as a lead plaintiff with
approval of their respective law firms as lead plaintiffs' counsel. The
various complaints allege claims against the Company, certain of its officers
and directors, and the underwriters of our initial public offering under the
Securities Act of 1933, as amended. The complaints also allege claims solely
against the underwriters under the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended. Management believes that the claims against
Caldera and any of its officers and directors are without legal merit and
management intends to defend them vigorously. On August 8, 2001, all pending
cases against all underwriters and issuers were reassigned to a U.S. District
Court Judge, Southern District of New York. The time for Caldera to answer or
to move to dismiss the complaint is presently adjourned pending further
instruction from the court.

The Company is not aware of any improper conduct by the Company, its
officers and directors, or its underwriters, and the Company denies any
liability relating thereto. The Company has notified its underwriters and
insurance companies of the existence of the claims.

In September and October 2001, Caldera was named as a defendant in
three different actions filed by former employees in the Superior Court of
California, County of Santa Clara, claiming breach of contract regarding the
payment of bonuses and severance payments. All three matters are in discovery
stage, and the ultimate outcomes are not yet determinable. The Company
believes that it has viable defenses in each of the three matters.

The Company is a party to certain other legal proceedings arising in
the ordinary course of business. Management believes, after consultation with
legal counsel, that the ultimate outcome of all legal proceedings will not
have a material adverse effect on the Company's financial position, liquidity
or results of operations.

OPERATING LEASE AGREEMENTS

Future minimum lease payments under non-cancelable operating leases as
of October 31, 2001 were as follows (in thousands):

Total rent expense for all of the Company's operating leases was $3.2
million, $0.7 million and $0.2 million for the years ended October 31, 2001,
2000 and 1999, respectively.

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(10) RELATED PARTY TRANSACTIONS

TARANTELLA, INC.

As discussed in Note 3, the Company acquired certain assets,
liabilities and operations from Tarantella, Inc. during fiscal 2001. Prior to
the acquisition, the Company and Tarantella had entered into a strategic
business agreement that provided for certain joint marketing activities
between the parties. Additionally, both parties entered into a distribution
agreement to sell each other's products. During the six months ended April
30, 2001, Caldera paid to Tarantella approximately $1.1 million for the
purchase of products that were sold to Caldera customers.

Subsequent to the acquisition, Caldera and Tarantella have paid certain
operating costs on each other's behalf, mostly pertaining to activities in
foreign operations. On a monthly basis, each party submits the actual
operating costs for reimbursement. As of October 31, 2001, the Company owed
Tarantella approximately $0.5 million for these operating costs.

CANOPY

Canopy was the sole stockholder of Caldera upon incorporation and was
the majority stockholder of the Predecessor. The chairman of the Company's
board of directors is the president and chief executive officer and a
director of Canopy. Additionally, another director of the Company is the
chairman of Canopy's board of directors.

Prior to fiscal 2001, the Company entered into certain transactions
with Canopy and other entities that are majority-owned by Canopy. These
transactions consisted mainly of participating in joint insurance coverage,
training and testing services, and rent. For fiscal 2000 and 1999, these
charges were approximately $0.2 million. The Company believes that the terms
of these related-party transactions are at least as favorable as the terms
that could have been obtained from an unaffiliated third party in similar
transactions. During fiscal 2000, the Company also had sales to other
entities that are majority-owned by Canopy of approximately $47,000. During
fiscal 2001, the Company did not enter into any transactions with Canopy or
its affiliates.

LINEO

In January 2000, the Company acquired an ownership interest in Lineo,
Inc., the successor entity to the operations of the Predecessor that were not
acquired by Caldera in the reorganization discussed in Note 1. The chairman
of the Company's board of directors and one other director are also directors
of Lineo. During fiscal 2000 and 1999, the Company had sales to Lineo of
approximately $34,000 and $2,000, respectively.

MTI TECHNOLOGY CORPORATION

A director of the Company is the chairman of the board of MTI
Technology Corporation ("MTI"). Additionally, another Company director is the
current president and chief executive officer of MTI. During fiscal 2000 and
1999, the Company had sales to MTI of approximately $31,000 and $3,000,
respectively.

(11) EMPLOYEE BENEFIT PLAN

Until June 30, 2000, Caldera utilized a 401(k) plan sponsored by Canopy
for its employees, through which Caldera made matching contributions. In June
2000, Caldera adopted its own 401(k) plan through which eligible participants
can elect to make contributions to the plan, subject to certain limitations
under the Internal Revenue Code. Under the terms of the new plan, the Company
may make discretionary matching contributions up to predetermined limits

65

to partially match employee contributions to the plan. During the years ended
October 31, 2001 and 2000, the Company contributed approximately $0.3 million
and $0.1 million to the plan for matching contributions.

(12) SIGNIFICANT CUSTOMERS

During fiscal 2001, no single customer accounted for more than ten
percent of the Company's total revenue. During fiscal 2000, the Company had
sales to one customer that accounted for approximately 19 percent of total
revenue and during fiscal 1999 the Company had sales to two customers that
accounted for approximately 33 percent and 20 percent of total revenue,
respectively.

(13) SEGMENT INFORMATION

In June 1998, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
disclosures related to components of a company for which separate financial
information is available and evaluated regularly by the Company's chief
operating decision makers in deciding how to allocate resources and in
assessing performance. It also requires segment disclosures about products
and services as well as geographic areas. In connection with the
restructuring in the fourth quarter of fiscal 2001, the Company has organized
into two operating business units. These business units include the Platform
division and the Services division. The Platform division provides products
and operating systems solutions to customers and the Services division
provides support, education and professional services implementation to
provide a total solution. During the fourth quarter, management began to
allocate resources and review operating results for both of these divisions.
Resources are allocated and reviewed to the operating income (loss) level for
both of these divisions. Because it is impractical to provide the historical
information for these divisions as they did not exist prior to the fourth
quarter of 2001, no disclosures have been provided and the Company will begin
to report operating results for both divisions beginning in the first quarter
of fiscal 2002.

The Company generates products and services revenue in geographic
locations outside of the United States. Revenue attributed to individual
countries or regions is based on the location of sales to unaffiliated
customers for the years ended October 31, 2001, 2000 and 1999 is as follows
(in thousands):

Long-lived assets, which includes property and equipment as well as
goodwill and intangible assets, by location consists of the following as of
October 31, 2001 and 2000 (in thousands):

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To Caldera International, Inc.:

We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of
Caldera International, Inc, and subsidiaries and have issued our report
thereon dated November 30, 2001. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole.
Schedule II -- Valuation and Qualifying Accounts is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.

ARTHUR ANDERSEN LLP

Salt Lake City, Utah
November 30, 2001

67

CALDERA INTERNATIONAL, INC.
AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999

(IN THOUSANDS)

- -----------------------------
(a) Represents write-offs of uncollectable accounts receivable

(b) Represents inventory destroyed or scrapped

(c) Represents product returns, or product sell-through

(d) Represents cash payments

68

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to this item may be found in the section
titled "Executive Officers and Directors" appearing in the definitive proxy
statement to be delivered to stockholders in connection with the 2002 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item may be found in the section
titled "Historical Compensation of the Company" appearing in the definitive
proxy statement to be delivered to stockholders in connection with the 2002
Annual Meeting of Stockholders. Such information is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this item may be found in the section
titled "Security Ownership of Certain Beneficial Owners and Management"
appearing in the definitive proxy statement to be delivered to stockholders
in connection with the 2002 Annual Meeting of Stockholders. Such information
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item may be found in the section
titled "Certain Relationships and Related Transactions" appearing in the
definitive proxy statement to be delivered to stockholders in connection with
the 2002 Annual Meeting of Stockholders. Such information is incorporated
herein by reference.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements: See Index to Consolidated
Financial Statements at Item 8 on page 38 of this report.

(2) Financial Statement Schedule: See Index to Consolidated
Financial Statements at Item 8 on page 38 of this report.

(3) Exhibits are incorporated herein by reference or are filed with
this report as indicated below:

- -----------------------------
+ Confidential treatment was granted by the Commission for certain provisions.
Omitted material for which confidential treatment has been granted has been
filed separately with the Commission.

(b) Reports on Form 8-K

On September 6, 2001, the Company submitted a current report on form 8-K
that discussed a proposed stock consolidation of the Company's common stock as
well as updated the status of a class action lawsuit filed against the Company
in the Southern District of New York.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 16 2002.

CALDERA INTERNATIONAL, INC.

By: /s/ Robert K. Bench
--------------------------------------

Robert K. Bench
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.