UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~June~~December 3031, 2004

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

For the Transition Period From to

Commission File Number 0-21484

TARANTELLA, INC.

(Exact name of registrant as specified in this charter)

CALIFORNIA		94-2549086
California		94-2549086
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
425 Encinal Street, Santa Cruz, California		95060
(Address of principal executive office)		(Zip Code)

~~Registrant’s~~425 Encinal Street, ~~telephone~~Santa ~~number~~Cruz, ~~including~~California ~~area~~95060 ~~code (831) 427-7222~~

~~Indicate by check mark whether the registrant~~ (1)Address ~~has filed all reports required to be filed by Section 13 or 15(d)~~ of ~~the~~principal ~~Securities Exchange~~executive ~~Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports~~office), ~~and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨~~

~~Indicate~~(831) ~~by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S~~427-K7222 is not contained herein, and will not be contained, to contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment ¨

(Registrant’s telephone number, including area code)

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 ¨ No x

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as ~~July~~of January 31, ~~2004~~2005 was 27,~~535~~888,~~280~~903.

TARANTELLA, INC.

FORM 10-Q

For the Quarterly Period Ended ~~June~~December 3031, 2004

Table of Contents

			~~Page~~	Page
Part I. Financial Information
	Item 1.	Financial Statements	3
		a) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended June 30, 2004 and 2003	3
		a)	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended December 31, 2004 and 2003	3
		b) Condensed Consolidated Balance Sheets, as of June 30, 2004 and September 30, 2003	4
		b)	Unaudited Condensed Consolidated Balance Sheets, as of December 31, 2004 and September 30, 2004	4
		c) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2004 and 2003	5
		c)	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2004 and 2003	5
		d) Notes to Condensed Consolidated Financial Statements	7
		d)	Notes to Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21	18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33	36
	Item 4.	Controls and Procedures	33	36
Part II. Other Information
	Item 1.	Legal Proceedings	34	38
	Item 2.	~~Changes~~Unregistered Sales in Equity Securities and Use of Proceeds	34	38
	Item 3.	Defaults Upon Senior Securities	34	38
	Item 4.	Submission of Matters to a Vote of Security Holders	35	38
	Item 5.	Other Information	36	38
	Item 6.	Exhibits and Reports on Form 8-K	37	39
	Signatures and certifications		38	40

Part I. Financial Information

Item I. Financial Statements

TARANTELLA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE LOSS~~

AND COMPREHENSIVE LOSS

(In thousands, except per share data)

	Three Months Ended June 30,						Nine Months EndedJune 30,
	Three Months EndedDecember 31,
	2004			2003			~~2004~~			~~2003~~
	(Unaudited)						(Unaudited)
Net revenues:
Net revenues:
Licenses	$	2,871		$	2,366
Licenses	$	1,575		$	2,992		$	6,100		$	8,787
Services		1,143			1,102
Services		1,055			760			3,135			2,140
Total net revenues		4,014			3,468
Total net revenues		2,630			3,752			9,235			10,927
Cost of revenues:
Cost of revenues:
Licenses		150			168
Licenses		218			(14	)		588			124
Services		401			330
Services		434			305			1,158			854
Total cost of revenues		551			498
Total cost of revenues		652			291			1,746			978
Gross margin		3,463			2,970
Gross margin		1,978			3,461			7,489			9,949
Operating expenses:
Operating expenses:
Research and development		832			961
Research and development		1,149			1,062			3,315			2,955
Selling, general and administrative		3,923			4,536
Selling, general and administrative		5,233			3,308			14,685			10,709
Legal settlement and litigation costs		—			49
Restructuring		(26	)		101			(15	)		1,248
Restructuring charge		—			19
Total operating expenses		64,~~356~~755			45,~~471~~565			~~17,985~~			~~14,912~~
Operating loss		(41,~~378~~292	)		(12,~~010~~595	)		~~(10,496~~	)		~~(4,963~~	)
Other income (expense):
Interest income		3427			51			47			52
Interest expense		(96	)		(18	)		~~(27~~	)		(2	)
Gain on sale of investments		718			—			718			—
Other income (expense), net		32			(50	)
Impairment of investments		—			(151	)		—			(151	)
Total other income (expense)		53			(57	)
Other income (expense), net		(18	)		33			(129	)		82
Loss before provision for income taxes		(1,239	)		(2,652	)
Total other income (expense)		725			(114	)		609			(19	)
Provision for income taxes		19			98
Loss before income taxes		(3,653	)		(1,124	)		(9,887	)		(4,982	)
Net loss		(1,258	)		(2,750	)
Income tax expense		44			122			239			280
Other comprehensive income:
Net loss		(3,697	)		(1,246	)		(10,126	)		(5,262	)
Foreign currency translation adjustment		58			69
Other comprehensive income (loss):
Unrealized gain on available for sale securities		—			75
Foreign currency translation adjustment		(18	)		28			103			6
Total other comprehensive income		58			144
Unrealized gain (loss) on available for sale securities		(508	)		71			256			177
Comprehensive loss	$	(1,200	)	$	(2,606	)
Reclassification adjustment for gains included in net income		(718	)		—			(718	)		—
Net loss per share:
Total other comprehensive income (loss)		(1,244	)		99			(359	)		183
Basic and diluted	$	(0.05	)	$	(0.22	)
Comprehensive loss	$	(4,941	)	$	(1,147	)	$	(10,485	)	$	(5,079	)
Shares used in net loss per share calculation:
Net loss per share:
Basic and diluted		27,058			12,689
Basic and diluted	$	(0.13	)	$	(0.14	)	$	(0.50	)	$	(0.63	)
Shares used in net loss per share calculation:
Basic and diluted		27,392			8,764			20,077			8,403

~~See~~ The accompanying notes toare an integral part of these unaudited condensed consolidated financial statements.

TARANTELLA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)	June 30, 2004			September 30,2003
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	13,547		$	3,151
Available-for-sale equity securities		—			632
Trade receivables, net of allowances of $0.2 million at June 30, 2004 and $0.5 million at September 30, 2003		1,657			2,980
Other receivables		298			175
Prepaids and other current assets		507			720
Total current assets		16,009			7,658
Property and equipment, net		817			734
Acquired intangible assets, net		1,186			1,262
Goodwill		2,395			2,391
Other assets		263			343
Total assets	$	20,670		$	12,388
Liabilities and shareholders’ equity
Current liabilities:
Trade payables	$	972		$	1,341
Line of credit		—			319
Royalties payable		—			22
Royalties payable - former New Moon shareholders		1,713			1,725
Income taxes payable		373			549
Accrued restructuring charges		205			854
Accrued expenses and other current liabilities		3,134			3,317
Deferred revenues		2,323			1,757
Total current liabilities		8,720			9,884
Long-term deferred revenues		1,094			36
Total liabilities		9,814			9,920
Shareholders’ equity:
Preferred stock, authorized 20,000 shares; no shares issued and outstanding		—			—
Common stock, no par value, authorized 100,000 shares; issued and outstanding 27,513 at June 30, 2004 and 11,959 shares at September 30, 2003		145,985			126,749
Deferred stock compensation		(363	)		—
Accumulated other comprehensive income		194			553
Accumulated deficit		(134,960	)		(124,834	)
Total shareholders’ equity		10,856			2,468
Total liabilities and shareholders’ equity	$	20,670		$	12,388

(In thousands)

See accompanying notes to condensed consolidated financial statements.


	December 31, 2004			September 30, 2004 (1)
Assets
Current assets:
Cash and cash equivalents	$	5,581		$	9,621
Trade receivables, net of allowances of $0.1 million at December 31, 2004 and September 30, 2004		3,629			2,069
Other receivables		272			247
Prepaids and other current assets		651			622

Total current assets		10,133			12,559

Property and equipment, net		896			947
Acquired intangible assets, net		585			674
Goodwill		2,395			2,395
Other assets		19			19

Total assets	$	14,028		$	16,594

Liabilities and shareholders’ equity
Current liabilities:
Trade payables	$	907		$	832
Royalties payable - former New Moon shareholders		1,713			1,713
Income taxes payable		204			210
Accrued restructuring charges		390			1,121
Accrued expenses and other current liabilities		2,472			3,740
Deferred revenues		2,617			2,572

Total current liabilities		8,303			10,188

Long-term deferred revenues		884			794
Long-term liabilities, other		53			16

Total long-term liabilities		937			810

Total liabilities		9,240			10,998

Shareholders’ equity:
Preferred stock, authorized 20,000 shares; no shares issued and outstanding in 2004		—			—
Common stock, no par value, authorized 100,000 shares; issued and outstanding 27,889 at December 31, 2004 and 27,553 shares at September 30, 2004		146,427			146,088
Deferred stock compensation		(134	)		(187	)
Accumulated other comprehensive income		242			184
Accumulated deficit		(141,747	)		(140,489	)

Total shareholders’ equity		4,788			5,596

Total liabilities and shareholders’ equity	$	14,028		$	16,594

(1)	Amounts as of September 30, 2004 have been derived from audited financial statements as of that date.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

TARANTELLA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months EndedJune 30,
(In thousands)	2004			2003
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(10,126	)	$	(5,262	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		927			595
Foreign currency exchange loss (gain)		63			(18	)
Gain on sale of marketable security		(718	)		—
Loss on disposal of property and equipment		2			82
Amortization of deferred stock compensation		343			—
Stock compensation expense		158			—
Compensation expense to former Castream shareholders		124			—
Changes in operating assets and liabilities, net of New Moon acquisition:
Trade receivables		1,324			(298	)
Other receivables		(123	)		(92	)
Prepaids and other current assets		260			60
Other assets		33			680
Trade payables		(390	)		(227	)
Royalties payable		(22	)		(181	)
Income taxes payable		(176	)		10
Accrued restructuring expenses		(649	)		(329	)
Accrued expenses and other current liabilities		(240	)		(1,154	)
Deferred revenues		1,624			638
Net cash used in operating activities		(7,586	)		(5,496	)
Cash flows from investing activities:
Net cash received from the New Moon acquisition		—			3,323
Purchases of property and equipment		(589	)		(152	)
Additional New Moon purchase acquisition costs		(4	)		—
Change in royalties payable - former New Moon shareholders		(12	)		(43	)
Proceeds from sale of marketable securities		889			—
Net cash provided by investing activities		284			3,128
Cash flows from financing activities:
Payments on capital lease obligations		(31	)		(220	)
Line of credit payments		(319	)		—
Net proceeds from issuance of common stock and warrants		18,049			139
Net cash provided by (used in) financing activities		17,699			(81	)
Effects of exchange rate changes on cash and cash equivalents		(1	)		(12	)
Increase (decrease) in cash and cash equivalents		10,396			(2,461	)
Cash and cash equivalents at beginning of period		3,151			7,055
Cash and cash equivalents at end of period	$	13,547		$	4,594

(In thousands)

See accompanying notes to condensed consolidated financial statements.


	Three Months Ended December 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(1,258	)	$	(2,750	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		202			270
Foreign currency exchange gain		44			43
Loss on disposal of property and equipment		3			1
Stock compensation expense		215			22
Changes in operating assets and liabilities:
Trade receivables		(1,559	)		85
Other receivables		(25	)		(4	)
Prepaids and other current assets		(29	)		90
Other assets		—			(84	)
Trade payables		75			(298	)
Royalties payable		—			(22	)
Income taxes payable		(6	)		(3	)
Accrued restructuring expenses		(731	)		(223	)
Accrued expenses and other current liabilities		(1,268	)		607
Deferred revenues		135			795
Other long-term liabilities		37			—

Net cash used in operating activities		(4,165	)		(1,471	)

Cash flows from investing activities:
Purchases of property and equipment		(2	)		(6	)
Purchases of software and technical licenses		(49	)		—
Additional New Moon acquisition costs		—			(4	)
Change in royalties payable - former New Moon shareholders		—			(2	)

Net cash used in investing activities		(51	)		(12	)

Cash flows from financing activities:
Payments on capital lease obligations		—			(18	)
Line of credit payments		—			(319	)
Net proceeds from issuance of common stock and warrants		177			2,518

Net cash provided by financing activities		177			2,181

Effects of exchange rate changes on cash and cash equivalents		(1	)		1

Increase (decrease) in cash and cash equivalents		(4,040	)		699
Cash and cash equivalents at beginning of period		9,621			3,151

Cash and cash equivalents at end of period	$	5,581		$	3,850

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

TARANTELLA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	Nine Months Ended June 30,
(In thousands)	2004			2003
	(Unaudited)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes	$	444		$	305
Interest		7			2
Unrealized gain (loss) on available-for-sale equity securities		(462	)		177
Issuance of restricted stock in lieu of compensation		706			—
Issuance of stock and warrants to acquire Caststream assets		377			—

(In thousands)

See accompanying notes to condensed consolidated financial statements.


	Three Months Ended December 31,
	2004		2003
Supplemental disclosure of cash flow information:

Cash paid:
Income taxes	$	139	$	124
Interest		6		5
Non-cash financing and investing activities:
Issuance of restricted stock to employees and director in lieu of compensation		142		530

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1— - Basis of Presentation

Tarantella, Inc. (~~the~~ also referred to as “Tarantella,” “the Company,” “we,” “us” or “our”) is a leading provider of Internet infrastructure software that enables web-based access to enterprise applications from virtually any client device. ~~Headquartered~~including inpersonal ~~Santa Cruz~~computers, ~~California,~~Apple ~~Tarantella~~Macintosh ~~operates~~computers, ~~development centers~~network interminals ~~the~~known ~~United~~as ~~States,~~“thin ~~the~~clients” ~~United Kingdom~~ and ~~India~~handheld ~~with~~devices, ~~sales~~such ~~representatives~~as inpersonal ~~the~~digital Uassistants.~~S.,~~ ~~U.K.,~~The ~~Germany,~~Tarantella ~~the~~Secure ~~Netherlands,~~Global Desktop ~~Canada,~~Enterprise ~~Mexico,~~Edition ~~France,~~solution ~~Spain,~~instantly ~~Brazil,~~provides ~~and~~managed ~~Italy. Tarantella products are sold through the internet~~ and ansecure ~~integrated worldwide~~web ~~channel~~access ofto ~~Tarantella~~enterprise ~~account~~mainframe, ~~executives~~Windows, ~~distributors~~AS/400, ~~value-added resellers~~Linux, ~~systems integrators~~ and ~~computer~~UNIX ~~and software manufacturers~~applications. ~~Tarantella~~It ~~maintains~~leverages ~~exclusive~~existing ~~distribution~~information ~~relationships~~technology inassets ~~Japan~~to asprovide ~~well~~cost assavings, ~~distribution and~~improved ~~agent relationships in China~~productivity, and ~~Southeast~~the ~~Asia.~~flexibility Into ~~total,~~accommodate ~~Tarantella~~the ~~products~~rapid ~~are~~changes ~~available through resellers~~ in ~~more~~today’s ~~than 30 countries~~organizations.

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

~~The~~In ~~Company’s~~the ~~flagship~~opinion ~~product~~of management, ~~Tarantella~~the ~~Secure~~accompanying ~~Global~~unaudited ~~Desktop~~condensed consolidated ~~Enterprise~~statements ~~Edition™,~~of aoperations ~~UNIX/Linux-based~~and ~~application~~comprehensive ~~access suite~~loss, isbalance ~~installed~~sheets inand ~~corporations~~statements ~~and~~of ~~governmental~~cash ~~agencies~~flows ~~around~~include all the ~~world.~~material ~~Tarantella~~adjustments ~~Secure~~(consisting ~~Global~~of ~~Desktop~~normal ~~Enterprise~~recurring ~~Edition~~adjustments) ~~was~~which ~~introduced~~we consider necessary for a fair presentation of our tofinancial ~~the~~condition ~~marketplace~~and inresults ~~2001~~of operations as ~~Tarantella~~of ~~Enterprise~~and 3for ~~product~~the interim periods presented. ~~Earlier~~These ~~client~~unaudited ~~integration~~financial ~~products,~~statements ~~which~~include ~~are~~the ~~part~~accounts of the ~~Vision2K~~Company ~~Suite,~~and ~~were~~its ~~introduced~~wholly inowned ~~the~~subsidiaries ~~late~~after ~~1990s~~all ~~and~~material ~~are~~intercompany ~~currently~~balances ~~still~~and transactions ~~available~~have been eliminated. InThese ~~June~~unaudited ~~2003,~~condensed ~~Tarantella~~consolidated ~~acquired~~financial ~~New~~statements ~~Moon Systems~~should ~~Inc.,~~be ~~and~~read ~~added~~in ~~New~~conjunction ~~Moon~~with ~~Canaveral™~~our ~~iQ (“Canaveral~~audited ~~iQ”)~~consolidated tofinancial ~~its~~statements ~~product~~and ~~offering.~~notes ~~Canaveral~~thereto iQfor isthe afiscal ~~Windows-based~~year ~~application~~ended ~~access~~September ~~suite~~30, ~~intended~~2004, ~~for~~included in ~~small~~our to2004 ~~mid~~Annual Report on Form 10-~~sized~~K ~~business~~filed ~~customers~~on ~~and~~December ~~departmental~~29, ~~deployments~~2004 with ~~Windows-only~~the ~~infrastructure~~Securities and Exchange Commission. InThe ~~aggregate,~~unaudited ~~Tarantella boasts~~consolidated ~~over~~interim ~~12,000~~results ~~customer~~presented ~~sites~~are ~~including~~not ~~several~~necessarily indicative of results to be expected for the ~~most~~full ~~respected~~year. ~~brands~~The September in30, 2004 balance sheet was derived from the ~~Fortune~~audited ~~Magazine~~financial ~~Global~~statements, ~~2000~~and is included for comparative purposes.

InThe ~~the opinion of management, the~~ accompanying unaudited condensed consolidated financial statements ofhave ~~operations~~been ~~and~~prepared ~~comprehensive~~in ~~loss,~~accordance ~~balance~~with ~~sheets~~the ~~and~~accounting ~~statements~~principles ofgenerally ~~cash~~accepted ~~flows~~in ~~include all material adjustments (consisting of normal recurring adjustments) which~~ the ~~Company~~United ~~considers~~States ~~necessary for a fair presentation~~ of ~~its~~America ~~financial condition and results of operations as of and~~ for ~~the~~ interim ~~periods presented. The~~ financial ~~statements~~information ~~include the accounts of the Company~~ and ~~its wholly owned subsidiaries after all material intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with~~ the ~~Company’s~~instructions ~~audited~~to ~~consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on~~ Form 10-KQ and ~~Form~~Article 10~~-K/A.~~ ~~The consolidated interim results presented are not necessarily indicative~~ of ~~results~~Regulation ~~to be expected for a full year~~S-X. ~~The September 30, 2003 balance sheet was derived from audited financial statements, and is included for comparative purposes.~~

~~The~~Note ~~accompanying~~2—Continued ~~condensed~~Operations ~~consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information~~ and ~~the~~Going ~~instructions~~Concern ~~to Form 10-Q and Article 10 of Regulation S-X.~~

~~Reclassification~~We operate in the software industry, which is characterized by intense competition, rapid technological advances and evolving industry standards. Factors that could affect our future operating results and cause actual results to vary

Certain reclassifications have been made to the prior period unaudited condensed consolidated financial statements to conform to the current period presentation. These reclassifications have no impact on the previously reported net loss.

Note 2 – Significant Accounting Policies

Revenue Recognition

The Company’s revenue is derived primarily from two sources, across many industries: (i) product license revenue, derived primarily from product sales to resellers and end users, including large scale enterprises and royalty revenue, derived primarily from initial license fees, ongoing royalties from product sales by source code OEMs, and (ii) services and support revenue, derived primarily from support and education and consulting services to end users.

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

~~Software~~ materially ~~revenue~~from isexpectations ~~recognized~~include, ~~using~~but ~~the~~are ~~residual~~not ~~method.~~limited ~~Under the residual method~~to, ~~revenue~~dependence ison ~~recognized~~an ~~if vendor-specific~~industry ~~objective~~that ~~evidence~~is ofcharacterized ~~fair~~by ~~value~~rapid ~~exists~~technological ~~for~~changes, ~~all~~fluctuations ~~the undelivered elements~~ in ~~an arrangement. Vendor~~ end-~~specific~~user ~~objective~~demands, ~~evidence~~evolving ofindustry ~~fair~~standards, ~~value~~competition, isand ~~based~~risks onassociated ~~the~~with ~~price~~foreign ~~when~~currencies. ~~the~~Failure ~~element~~by isus ~~sold~~to ~~separately~~anticipate or, ifrespond ~~not~~adequately ~~sold~~to ~~separately,~~technological ~~is established~~developments byin ~~management.~~the ~~The~~software ~~fair~~industry, ~~value~~changes ofin ~~services~~customer ~~and~~or ~~post-contract~~supplier requirements ~~support~~or ischanges ~~determined~~in ~~based~~industry ~~upon~~standards ~~separate~~could ~~sales~~have ~~and~~a ~~renewal~~material ~~rates~~adverse ~~set~~effect ~~forth~~on inour ~~the~~business ~~contract,~~and ~~respectively~~operating results.

~~The~~Our ~~Company~~net ~~recognizes~~loss ~~revenue~~was ~~from~~$1.3 ~~maintenance~~million ~~fees~~ for ~~ongoing~~the ~~customer~~quarter ~~support~~ended December 31, 2004, and ~~product~~we ~~updates~~have ~~ratably~~recorded ~~over~~substantial ~~the~~net ~~period~~losses during each of the ~~maintenance~~ ~~contract~~past five fiscal years. ~~Payments~~During ~~for~~the ~~maintenance~~quarter ~~fees~~ended ~~are~~December ~~generally~~31, ~~made~~2004, inwe ~~advance~~continued ~~and~~to ~~are~~require ~~non-refundable~~funds to finance our operations. ~~For~~We ~~revenue~~have ~~allocated~~implemented a series of restructuring programs over the past several years aimed at aligning our costs to ~~education~~our revenues and ~~consulting~~increasing our ~~services~~revenues orto ~~derived~~compete ~~from~~in the ~~separate~~current ~~sale~~business ofenvironment ~~such~~and ~~services,~~over the ~~Company~~long ~~recognizes~~term. ~~revenue as~~While ~~the~~we ~~related~~believe ~~services~~we ~~are~~have ~~performed.~~made progress in these areas, we must continue to manage our costs and improve our revenues to compete in the existing business environment.

~~The~~In ~~Company~~connection ~~recognizes~~with ~~product~~the ~~revenue~~above-mentioned plan, we anticipate ~~from~~that ~~royalty~~we ~~payments~~will ~~upon~~record ~~receipt~~charges, including substantial costs required to meet the filing requirements of ~~quarterly~~a ~~royalty~~public ~~reports~~company ~~from~~including ~~OEMs~~the ~~(original~~requirements ~~equipment~~of ~~manufacturer)~~the ~~related~~Sarbanes-Oxley Act of 2002, and potential additional restructuring charges to ~~their~~further ~~product~~align ~~sales~~our costs to our revenues, possibly including asset impairments and other associated charges, the amount and timing of which cannot be fully estimated at this time.

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

~~The~~These ~~Company~~matters, ~~accounts~~among ~~for~~others, ~~stock-based~~raise substantial ~~compensation~~doubt ~~arrangements~~about ~~under~~our ~~the~~ability ~~provisions~~to ofcontinue ~~Accounting~~as ~~Principles~~a ~~Board~~going ~~(“APB”) Opinion No~~concern. ~~25,~~Our ~~“Accounting~~consolidated ~~for Stock~~financial ~~Issued~~statements tohave ~~Employees”~~been ~~for~~prepared ~~its~~on ~~fixed~~a ~~stock~~going ~~option~~concern ~~plan and employee stock purchase plan and accordingly~~basis, ~~has~~which ~~not~~contemplates ~~recognized compensation cost in~~ the ~~accompanying~~realization ~~condensed consolidated statement~~ of ~~operations~~assets and ~~comprehensive~~the ~~loss~~satisfaction ~~for options~~of ~~issued~~liabilities atin ~~fair~~the ~~value.~~normal course ~~SFAS~~of Nobusiness. ~~123~~Accordingly, ~~permits~~ the ~~use~~accompanying ofUnaudited ~~either~~Condensed aConsolidated ~~fair~~Financial ~~value~~Statements ~~based~~do ~~method~~not orinclude ~~the~~any ~~intrinsic~~adjustments ~~value~~relating ~~method~~ to ~~measure~~ the ~~expense~~recoverability ~~associated~~of ~~with~~assets ~~stock-based~~and ~~compensation~~classification ~~arrangements.~~of ~~The~~liabilities ~~Company~~that ~~has~~might ~~recognized~~be ~~stock~~necessary ~~compensation costs~~should ~~for~~we ~~stock~~be unable ~~options~~to ~~granted~~continue atas ~~less~~a ~~than~~going ~~fair value on the date of grant~~concern.

Note 3—Summary of Significant Accounting Policies

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

InWe ~~accordance~~account ~~with~~for ~~the~~revenue ~~interim~~under ~~disclosure~~the provisions of ~~SFAS~~AICPA NoStatement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended. ~~148~~Product revenue is recognized upon shipment if evidence of an arrangement exists, the ~~pro~~fee ~~forma~~is ~~effect~~fixed onand ~~the~~determinable ~~Company’s~~and ~~net~~collection ~~loss had~~of ~~compensation~~resulting ~~expense~~receivables ~~been~~is ~~recorded~~probable. ~~for~~Sales to distributors are recognized upon sale by the ~~three~~distributor ~~and~~to ~~nine~~resellers ~~months~~or ~~ended~~end ~~June~~users. ~~30,~~In ~~2004~~certain ~~and~~instances ~~2003,~~when ~~respectively~~distributors waive their right to return product, asrevenue ~~determined~~is ~~under~~recognized ~~the~~upon ~~fair~~shipment ~~value~~if ~~method~~evidence of an arrangement exists, the fee is ~~shown~~fixed ~~below:~~and determinable and collection of resulting receivables is probable. Estimated product returns are recorded upon recognition of revenue from customers having rights of return, including exchange rights for unsold products and product upgrades.

	Three Months EndedJune 30,						Nine Months EndedJune 30,
	2004			2003			2004			2003
	(In thousands, except per share data)
Net loss, as reported	$	(3,697	)	$	(1,246	)	$	(10,126	)	$	(5,262	)
Add: Stock-based employee compensation expense included in reported net loss		261			10			501			10
Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(693	)		(1,314	)		(2,458	)		(4,069	)
Pro forma net loss	$	(4,129	)	$	(2,550	)	$	(12,083	)	$	(9,321	)
Net loss per share as reported
Basic and diluted	$	(0.13	)	$	(0.14	)	$	(0.50	)	$	(0.63	)
Pro forma net loss per share
Basic and diluted	$	(0.15	)	$	(0.29	)	$	(0.60	)	$	(1.11	)

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

~~The~~We ~~fair~~recognize ~~value~~revenue from maintenance fees for ongoing customer support and product updates ratably over the period of the ~~options~~maintenance ~~granted~~contract. Payments ~~under~~for ~~the~~maintenance ~~Option~~fees ~~Plans~~are generally made in advance and ~~the~~are ~~Director~~non-refundable. ~~Plan~~For ~~were~~revenue ~~estimated~~allocated atto ~~the~~education ~~date~~and ofconsulting ~~grant~~services ~~using~~or aderived ~~Black-Scholes~~from ~~option~~the ~~pricing~~separate ~~model~~sale ~~with~~of such services, we recognize revenue as the ~~following~~related ~~weighted-average~~services ~~assumptions:~~are performed.

	Three Months EndedJune 30,				Nine Months EndedJune 30,
	2004		2003		2004		2003
Risk-free interest rate	3.71	%	2.27	%	3.23	%	3.73	%
Dividend yield	0	%	0	%	0	%	0	%
Common stock volatility factor	105.0	%	100.0	%	103.3	%	100.0	%
Expected employee option life	4 years		4 years		4 years		4 years
Expected executive option life	5 years		5 years		5 years		5 years

We recognize product revenue from royalty payments upon receipt of quarterly royalty reports from OEMs and ISVs related to their product sales.

~~The~~We ~~fair~~perform ~~value~~ongoing ~~for~~credit ~~the~~evaluations ~~Employee~~of ~~Stock Purchase~~our ~~Plan~~customers’ ~~rights~~financial ~~were~~condition ~~also~~and ~~estimated~~do atnot ~~the~~require ~~date~~collateral. ofWe ~~grant~~maintain ~~using~~allowances afor ~~Black-Scholes~~potential ~~option~~credit ~~pricing~~losses ~~model~~and ~~with~~such ~~the~~losses ~~following~~have ~~assumptions:~~been within management’s expectations.

	Three Months EndedJune 30,				Nine Months EndedJune 30,
	2004		2003		2004		2003
Risk-free interest rate	1.10	%	1.21	%	1.18	%	1.53	%
Dividend yield	0	%	0	%	0	%	0	%
Common stock volatility factor	109.0	%	94.0	%	107.7	%	94.0	%
Expected option life	6 months		6 months		6 months		6 months

Stock Based Compensation We account for stock-based compensation arrangements under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees for our fixed stock option plan and employee stock purchase plan and, accordingly, have not recognized compensation cost in the accompanying consolidated statement of operations for options issued at fair value. SFAS 123, Accounting for Stock Based Compensation, permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements. In accordance with the disclosure provisions of SFAS 148, Accounting for Stock Based Compensation—Transition and Disclosure, the pro forma effect on our net loss had compensation expense been recorded for the three months ended December 31, 2004 and 2003, respectively, as determined under the fair value method, is shown below (in thousands, except per share amounts):

Recent Accounting Pronouncements

In January 2003 the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, “Consolidation of Variable Interest Entities” and a revised interpretation of FIN No. 46 (“FIN No. 46-R”) in December 2003. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has no interest in variable interest entities, so the adoption of FIN No. 46-R had no effect on the Company’s financial position or results of operations.

Note 3 - Earnings Per Share Disclosures


	Three Months Ended December 31,
	2004			2003
Net loss, as reported	$	(1,258	)	$	(2,750	)

Add: Stock-based employee compensation expense included in reported net loss		215			22

Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(484	)		(1,125	)

Pro forma net loss	$	(1,527	)	$	(3,853	)

Basic and diluted net loss per share:

As reported	$	(0.05	)	$	(0.22	)

Pro forma	$	(0.06	)	$	(0.30	)

~~Basic~~The ~~and~~fair ~~diluted~~value ~~loss~~of ~~per~~the options ~~share~~granted ~~(“EPS”)~~under ~~were~~the ~~calculated~~Option asPlans ~~follows~~and ~~for~~ the ~~three~~Director ~~and~~Plan ~~nine~~were ~~months~~estimated ~~ended~~at ~~June~~the ~~30,~~date ~~2004~~of ~~and~~grant ~~2003~~using ~~(in thousands,~~a ~~except~~Black-Scholes ~~per~~option ~~share~~pricing ~~data)~~model with the following weighted-average assumptions:

	Three Months EndedJune 30,						Nine Months EndedJune 30,
	Three Months Ended December 31,
	2004		2003	~~2003~~			~~2004~~			~~2003~~
Basic:
Risk-free interest rate	3.32 %		2.99 %
Net loss	$	(3,697	)	$	(1,246	)	$	(10,126	)	$	(5,262	)
Dividend yield	0 %		0 %
Weighted average shares		27,392			8,764			20,077			8,403
Common stock volatility factor	105%		100%
Loss per share	$	(0.13	)	$	(0.14	)	$	(0.50	)	$	(0.63	)
Expected employee option life	4 years		4 years
Diluted:
Expected executive option life	5 years		5 years
Net loss	$	(3,697	)	$	(1,246	)	$	(10,126	)	$	(5,262	)
Weighted average shares		27,392			8,764			20,077			8,403
Common equivalent shares from stock options and warrants		—			—			—			—
Shares used in per share calculation		27,392			8,764			20,077			8,403
Loss per share	$	(0.13	)	$	(0.14	)	$	(0.50	)	$	(0.63	)
Options and warrants outstanding, not included in computation of diluted EPS because the exercise price was greater than the average market price.		1,530			1,400			1,660			2,113
Options outstanding, not included in computation of diluted EPS because their inclusion would have an anti-dilutive effect due to net loss during the period.		8,556			1,528			7,902			825

Note 4 – Accrued Restructuring Charges

Fiscal 2004

During the first quarter of fiscal 2004, the Company reduced the number of European countries in which it had a presence resulting in the implementation of a restructuring which reduced the existing workforce by one employee. The Company continued to reduce its spending levels to align its operating expenses with the Company’s lower than expected revenues. This reduction eliminated the Company’s presence in one European country. The Company recorded a charge of $19,000 for this restructuring for severance payments.

~~Fiscal~~The ~~2004~~fair ~~First~~value ~~Quarter~~for ~~Restructuring~~the ~~Accrual~~Employee Stock Purchase Plan rights were also estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

(In Thousands)	Reduction in Force			Total
	Three Months EndedDecember 31,
Restructuring charge accrued	$	19		$	19
	2004		2003
Payments/utilization of the accrual		(15	)		(15	)
Risk-free interest rate	1.73%		1.22%
Accrual at December 31, 2003		4			4
Dividend yield	0%		0%
Payments/utilization of the accrual		(4	)		(4	)
Common stock volatility factor	109%		107%
Accrual at March 31, 2004 and June 30, 2004	$	—		$	—
Expected option life	6 months		12 months

~~Fiscal~~Note ~~2003~~4—Net Loss per Share

OnBasic ~~July~~net ~~24,~~loss ~~2003,~~per ~~the~~share ~~Company~~is ~~announced~~computed aby ~~restructuring~~dividing ~~plan,~~the ~~which~~net ~~resulted~~loss for inthe aperiod ~~charge~~by ~~of $0.4~~the ~~million.~~weighted ~~The~~average ~~Company~~number ~~reduced~~of ~~its~~common ~~spending~~shares ~~levels~~outstanding tofor ~~align~~the ~~its~~period. ~~operating~~Diluted ~~expenses~~net ~~with~~loss ~~the~~per ~~Company’s~~share ~~lower~~is ~~than~~the ~~expected~~same ~~revenues.~~as ~~The~~basic ~~restructuring~~net ~~included~~loss aper ~~reduction~~share inbecause ~~staffing~~the calculating of 23diluted ~~employees,~~net ~~and~~loss ~~the~~per ~~disposal~~share excludes potential dilutive shares of common ~~fixed~~stock ~~assets~~since their effect is anti-dilutive. The potentially dilutive securities are as follows (in thousands):

The expense included a severance charge of $0.4 million for the elimination of 12 positions in the United States and 11 positions in the United Kingdom. The reductions in force affected the product development, support, sales, marketing and general and administrative functions of the Company. There was also a charge of $6,508 for the disposal of fixed assets. As of March 31, 2004, all 23 positions had been eliminated.


	Fiscal Quarter Ended December 31,
	2004	2003
Options and warrants outstanding not included in computation of diluted loss per share because the exercise price was greater than the average market price.	5,351	4,548

Options and warrants outstanding not included in computation of diluted loss per share because their inclusion would have been anti-dilutive.	5,791	1,848

~~Fiscal~~Note ~~2003~~5—Recent ~~Fourth~~Accounting Pronouncements ~~Quarter Restructuring Accrual~~

(In Thousands)	Reduction in Force			Disposal ofFixed Assets			Total
Restructuring charge accrued	$	442		$	6		$	448
Payments/utilization of the accrual		(393	)		(6	)		(399	)
Accrual at September 30, 2003		49			—			49
Payments/utilization of the accrual		(24	)		—			(24	)
Accrual at December 31, 2003		25			—			25
Payments/utilization of the accrual		(17	)		—			(17	)
Provision Adjustment		(8	)		—			(8	)
Accrual at March 31, 2004 and June 30, 2004	$	—		$	—		$	—

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

OnIn ~~June~~December 52004, ~~2003,~~ the ~~Company~~FASB ~~announced a~~issued ~~restructuring~~SFAS ~~plan~~No. 123R, Share-Based ~~which~~Payment ~~resulted~~(“SFAS in123R”), a ~~charge~~revision ofto ~~$0.2~~SFAS ~~million~~No. ~~Also,~~123 onAccounting ~~June~~for 5,Stock-Based ~~2003~~Compensation ~~the Company acquired New Moon Systems, Inc.~~ (“~~New~~SFAS ~~Moon~~123”). Inand ~~order~~superseding toAPB ~~keep~~Opinion ~~spending~~No. ~~levels~~25, ~~flat~~Accounting ~~with~~for ~~pre-acquisition~~Stock ~~levels,~~Issued ~~the~~to ~~Company~~Employees ~~assessed~~and ~~the~~its related ~~overall~~implementation ~~resource~~guidance. ~~requirements~~SFAS ~~for~~123R ~~the~~establishes ~~combined~~standards ~~business~~for ~~and~~the ~~reduced~~accounting ~~infrastructure~~for ~~accordingly.~~

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

~~Fiscal~~ transactions ~~2003~~in ~~Third~~which ~~Quarter~~an ~~Restructuring~~entity ~~Accrual~~exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. We have not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard will result in significant stock-based compensation expense. The pro forma effects on net loss per share if we had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in Note 3 of this Form 10-Q. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R.

(In Thousands)	Reduction inForce			Total
Restructuring charge accrued	$	153		$	153
Payments/utilization of the accrual		(57	)		(57	)
Accrual at June 30, 2003		96			96
Payments/utilization of the accrual		(95	)		(95	)
Provision Adjustment		(1	)		(1	)
Accrual at September 30, 2003 and June 30, 2004	$	—		$	—

SFAS 123R will be effective for our fiscal quarter beginning July 1, 2005, and requires the use of the Modified Prospective Application Method. Under this method SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS123. In addition, companies may use the Modified Retrospective Application Method. This method may be applied to all prior years for which the original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the Modified Retrospective Application Method is applied, financial statements for prior periods shall be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123.

~~During~~Note ~~the~~6—Accrued ~~first~~Restructuring ~~quarter~~Charges of fiscal 2003, the Company announced a restructuring plan, which resulted in a charge of $1.1 million. The Company reduced its spending levels to align its operating expenses with the Company’s continued lower than expected revenues.

A severance charge of $0.8 million included the elimination of 10 positions in the United States, 13 positions in the United Kingdom, and 2 positions in Italy. The reductions in work force affected the product development, sales, marketing and general and administrative functions of the Company. As of June 30, 2003, all 25 positions had been eliminated.


	December 31, 2004		September 30, 2004
	(In Thousands)
Fiscal 2004 Restructuring Plans	$	42	$	587
Fiscal 2002 Restructuring Plan		306		470
Fiscal 2001 Restructuring Plan		42		64

Total Accrued Restructuring Charges	$	390	$	1,121

AFiscal ~~facilities~~2004 Restructuring ~~charge~~Plans During the first and fourth quarters of fiscal 2004, we announced restructuring plans which resulted in charges of $019,000 and $1.31 million, ~~was~~respectively, ~~related~~in order to ~~space~~reduce ~~the~~our spending levels to align operating expenses ~~Company~~with ~~vacated~~our atlower ~~two~~than ~~locations~~expected revenues. The first quarter restructuring plan eliminated our presence in ~~the~~Austria ~~U.K.~~and ~~This~~was ~~included~~completed aby ~~non-cash~~the ~~charge~~end of ~~$89,000~~fiscal ~~related~~2004. toThe fourth quarter restructuring plan reduced the ~~write-off~~existing ofworkforce ~~leasehold~~in ~~improvements~~the atUnited States and the ~~two~~United Kingdom and vacated ~~facilities~~additional facility space at our Santa Cruz, California, headquarters. The reductions in work force affected our sales, product development and corporate services functions. We expect to complete this fourth quarter restructuring plan during fiscal 2005.

The Company completed all of the cost reduction actions initiated in the first quarter of fiscal year 2003 during the fiscal year. The lease for the final U.K. facility expired in the second quarter of fiscal 2004, and as of June 30, 2004, all payments related to this lease had been completed.


	Reduction in Force			Facilities			Total
				(In Thousands)
Restructuring charge accrued	$	1,065		$	64		$	1,129
Payments/utilization of the accrual		(542	)		—			(542	)

Accrual at September 30, 2004		523			64			587
Payments/utilization of the accrual		(523	)		(22	)		(545	)

Accrual at December 31, 2004	$	—		$	42		$	42

Fiscal ~~2003~~2002 ~~First~~Restructuring ~~Quarter~~Plan ~~Restructuring~~During ~~Accrual~~the first quarter of fiscal 2002, the Company announced a restructuring plan, which resulted in a charge of $1.6 million. The Company reduced its spending levels to align its operating expenses with the Company’s lower than expected revenues. The restructuring included a reduction in staffing, a reserve for unused facilities at the Company’s corporate headquarters, and costs associated with closing several foreign offices. The Company completed the cost reduction actions initiated in fiscal 2002, with the exception of sub-leasing excess space at the Company’s corporate headquarters in Santa Cruz, California which has been reserved for though the lease expiration date of June 30, 2005.

(In Thousands)	Reduction inForce			Facilities			Disposal ofFixed Assets			Total
	Reductionin Force			Facilities			Disposal ofFixed Assets			Total
Restructuring charge accrued	$	820		$	238		$	89		$	1,147
	(In Thousands)
Payments/utilization of the accrual		(408	)		(24	)		(89	)		(521	)
Restructuring charge accrued	$	856		$	736		$	44		$	1,636
Accrual at December 31, 2002		412			214			—			626
Payments /utilization of the accrual		(861	)		(546	)		(39	)		(1,446	)
Payments/utilization of the accrual		(240	)		(74	)		—			(314	)
Provision Adjustment		5			560			(5	)		560
Accrual at March 31, 2003		172			140			—			312
Accrual at September 30, 2002		—			750			—			750
Payments/utilization of the accrual		(113	)		(33	)		—			(146	)
Payments /utilization of the accrual		—			(590	)		—			(590	)
Provision Adjustment		~~(59~~—	)		—485			—			~~(59~~485	)
Accrual at June 30, 2003		—			107			—			107
Accrual at September 30, 2003		—			645			—			645
Payments/utilization of the accrual		—			(34	)		—			(34	)
Payments /utilization of the accrual		—			(606	)		—			(606	)
Accrual at September 30, 2003		—			73			—			73
Provision Adjustment		—			431			—			431
Payments/utilization of the accrual		—			(23	)		—			(23	)
Accrual at September 30, 2004		—			470			—			470
Accrual at December 31, 2003		—			50			—			50
Payments /utilization of the accrual		—			(164	)		—			(164	)
Payments/utilization of the accrual		—			(25	)		—			(25	)
Accrual at December 31, 2004	$	—		$	306		$	—		$	306
Accrual at March 31, 2004		—			25			—			25
Provision Adjustment		—			(25	)		—			(25	)
Accrual at June 30, 2004	$	—		$	—		$	—		$	—

Fiscal ~~2002~~2001 Restructuring Plan During the second quarter of fiscal 2001, the Company announced a restructuring plan which resulted in a charge of $1.6 million and included a reduction in personnel and a reserve for unused facilities. As part of this restructuring plan, the Company vacated additional space within its Santa Cruz, California corporate headquarters with expectations to

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

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

Also included was a facilities charge of $0.7 million related to space the Company vacated. The Company had anticipated that it would sub-lease the space by December 31, 2002. As of September 30, 2003, the Company had not secured a sub-lease tenant, so provision adjustments of $0.5 million and $0.6 million were made at the end of fiscal 2003 and fiscal 2002, respectively. The space is now reserved through October 2004. The Company believes it will be able to sub-lease the space or negotiate new terms with the landlord. The lease for this building expires on June 30, 2005. In addition, a charge was taken for expenses associated with office closures in Japan and Brazil. There was a non-cash charge of $39,000 related to fixed asset disposals at the Japan subsidiary.

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

~~Fiscal~~ sublease ~~2002~~the ~~First~~space ~~Quarter~~to ~~Restructuring~~offset ~~Accrual~~a portion of its lease obligation. In the fourth quarter of fiscal 2004 an additional provision of $64,000 was recorded because the facility was not yet sub-leased. The space is now fully reserved for through the lease expiration date of June 30, 2005.

(In Thousands)	Facilities			Total
	Reduction in Force			Facilities			Total
Accrual at September 30, 2002		750			750
	(In Thousands)
Payments/utilization of the accrual		(157	)		(157	)
Restructuring charge accrued	$	1,499		$	64		$	1,563
Accrual at December 31, 2002		593			593
Payments/utilization of the accrual		(1,460	)		(24	)		(1,484	)
Payments/utilization of the accrual		(140	)		(140	)
Provision Adjustment		(39	)		—			(39	)
Accrual at March 31, 2003		453			453
Accrual at September 30, 2001		—			40			40
Payments/utilization of the accrual		~~(158~~—	)		(~~158~~100	)		(100	)
Accrual at June 30, 2003		295			295
Provision Adjustment					166			166
Payments/utilization of the accrual		(135	)		(135	)
Accrual at September 30, 2002		—			106			106
Provision Adjustment		485			485
Payments/utilization of the accrual		—			(83	)		(83	)
Accrual at September 30, 2003		645			645
Provision Adjustment					64			64
Payments/utilization of the accrual		(158	)		(158	)
Accrual at September 30, 2003		—			87			87
Accrual at December 31, 2003		487			487
Payments/utilization of the accrual		—			(82	)		(82	)
Payments/utilization of the accrual		(142	)		(142	)
Provision Adjustment		—			59			59
Accrual at March 31, 2004		345			345
Accrual at September 30, 2004		—			64			64
Payments/utilization of the accrual		~~(164~~—	)		(~~164~~22	)		(22	)
Accrual at June 30, 2004	$	181		$	181
Accrual at December 31, 2004	$	—		$	42		$	42

~~Fiscal~~Note ~~2001~~7—Industry and Geographic Segment Information

~~During~~The ~~the~~following ~~fourth~~tables ~~quarter~~present ofinformation ~~fiscal~~on ~~2001, the Company announced a restructuring plan, which~~revenue ~~resulted~~and inlong-lived aassets ~~charge~~by ~~of $0~~geography.5 ~~million.~~Revenue ~~The~~is ~~restructuring~~allocated ~~charge~~based ~~included~~on athe ~~reduction~~location infrom ~~personnel~~which ofthe 10sale ~~employees~~is satisfied and along-lived ~~planned~~asset ~~elimination~~information ofis ~~offices~~based inon ~~Singapore~~the ~~and~~physical ~~Australia.~~location ~~Total~~of ~~cash~~the ~~expenditures were $0~~asset.4 ~~million.~~(In Thousands)

The severance charge of $0.4 million included the elimination of 4 positions in the United States and 6 positions in the United Kingdom. The reductions in work force affected the sales, marketing and general and administrative functions of the Company. At September 30, 2001, all 10 positions had been eliminated. The provision adjustment of $8,453 in the fourth quarter of fiscal 2003 was for the final costs associated with closing the Australian office.

Fiscal 2001 Fourth Quarter Restructuring Accrual


	Three Months Ended December 31,
	2004		2003
Net revenues:
United States	$	1,796	$	1,278
EMEIA (1)		1,762		1,534
Canada and Latin America		216		320
Asia Pacific		240		336

Total net revenues	$	4,014	$	3,468


	December 30, 2004		September 30, 2004
Long-lived assets:
United States	$	3,642	$	3,789
EMEIA (1)		253		246

Total long-lived assets	$	3,895	$	4,035

(In Thousands)	Facilities			Total
Accrual at September 30, 2002	$	15		$	15
Payments/utilization of the accrual		(1	)		(1	)
Accrual at December 31, 2002		14			14
Payments/utilization of the accrual		(9	)		(9	)
Accrual at March 31, 2003		5			5
Payments/utilization of the accrual		(3	)		(3	)
Accrual at June 30, 2003		2			2
Payments/utilization of the accrual		(10	)		(10	)
Provision Adjustment		8			8
Accrual at September 30, 2003 and June 30, 2004	$	—		$	—

(1)	Europe, Middle East, India and Africa

~~During~~Note the second quarter of fiscal 2001, the Company announced a restructuring plan which resulted in a charge of $1.6 million, which, when taken with a provision adjustment to a previously established restructuring reserve 8—Available-for ~~severance related to the~~ -sale ofEquity ~~divisions~~Securities ~~to Caldera, resulted in a net charge for the period of $1.1 million. The restructuring charge included a reduction in personnel of 28 employees~~ and aInvestments ~~reserve for unused facilities. Total cash expenditures were $1.6 million.~~

~~The~~At ~~$1.6~~December ~~million restructuring charge included a severance charge of $1.5 million for the elimination of 16 positions in the United States~~31, 42003 ~~positions~~we inheld ~~the United Kingdom~~505,767 ~~and~~shares 8of ~~positions~~Rainmaker’s incommon ~~various other geographies~~stock. ~~The~~We ~~reduction~~accounted infor ~~work~~these ~~force~~shares ~~affected~~as ~~the~~available-for-sale ~~sales,~~securities ~~marketing~~ and ~~general~~recorded them ~~and~~at ~~administrative~~fair ~~functions~~market ~~of the Company. As of September 30~~value, ~~2001,~~based ~~all~~on 28quoted ~~positions~~market ~~had~~prices ~~been~~with ~~eliminated.~~any ~~The~~unrealized ~~Company~~gains ~~vacated~~or ~~additional~~losses ~~space~~included ~~within~~as ~~its~~part ~~Santa~~of ~~Cruz,~~accumulated ~~California~~other ~~office~~comprehensive inincome. During the ~~first~~third quarter of fiscal ~~2002~~2004, ~~and~~we ansold ~~additional~~our ~~charge~~remaining ~~of $81~~505,~~000~~767 ~~was~~shares ~~recorded~~of ~~for~~Rainmaker ~~estimated payments~~stock onwith ~~the~~a ~~lease~~cost ~~for~~basis anof ~~additional 12 months~~$0.2 ~~In the fourth quarter of fiscal 2002~~million, ~~an additional charge of $85,000 was recorded~~ and infor ~~the~~which ~~fourth~~we ~~quarter~~received ofcash ~~fiscal~~proceeds ~~2003, an additional charge~~ of $~~64,000~~0.9 ~~was recorded because the facility was not yet sub-leased~~million. ~~The~~At ~~facility was not sub-leased as of~~ September 30, ~~2003~~2004 and ~~the~~December ~~restructuring~~31, ~~reserve~~2004, atwe ~~the~~did ~~end~~not ofhave ~~the~~any ~~fourth~~accounts ~~quarter~~receivable offrom ~~fiscal 2003 covers rents through October 2004~~Rainmaker. ~~The~~There ~~Company~~were ~~believes~~no itsales ~~will~~to beRainmaker ~~able~~in tofiscal ~~sub-lease~~years ~~the~~2005 ~~space~~ or ~~negotiate new terms with the landlord~~2004. ~~The lease for this building expires on June 30, 2005.~~

Note 9—Acquired Intangible Assets, Net

Following is a table of our acquired intangible assets summarizing their carry amounts, accumulated amortization, fiscal 2004 impairment, net carrying amounts as of December 31, 2004 and September 30, 2004 and estimated timing of future amortizations:


	December 31, 2004
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization and impairments		Intangible Assets, Net
	(In years)	(In thousands)
Amortized intangible assets
Technology	3	$	804	$	340	$	464
Patents	3		700		579		121
Trademarks	3		200		200		—
Other	3		20		20		—

Total		$	1,724	$	1,139	$	585

Fiscal 2001 Second Quarter Restructuring Accrual


	September 30, 2004
	Estimated Useful Lives	Gross Carrying Amount		Accumulated Amortization		Impairment Writedown fiscal 2004		Intangible Assets, Net
	(In years)	(In thousands)
Amortized intangible assets
Technology	3	$	804	$	273	$	—	$	531
Patents	3		700		274		283		143
Trademarks	3		200		72		128		—
Other	3		20		7		13		—

Total		$	1,724	$	626	$	424	$	674

(In Thousands)	Facilities			Total
	(In thousands)
Accrual at September 30, 2002	$	106		$	106
Amortization expense:
Payments/utilization of the accrual		(22	)		(22	)
For the three months ended December 31, 2003	$	118
Accrual at December 31, 2002		84			84
For the three months ended December 31, 2004	$	89
Payments/utilization of the accrual		(20	)		(20	)
As of December 31, 2004, estimated future amortization expense:
Accrual at March 31, 2003		64			64
Fiscal Year 2005 (remaining 9 months)	$	265
Payments/utilization of the accrual		(22	)		(22	)
Fiscal Year 2006		269
Accrual at June 30, 2003		42			42
Fiscal Year 2007		51
Payments/utilization of the accrual		(19	)		(19	)
Provision Adjustment		64			64
Accrual at September 30, 2003		87			87
Payments/utilization of the accrual		(22	)		(22	)
Accrual at December 31, 2003		65			65
Payments/utilization of the accrual		(19	)		(19	)
Accrual at March 31, 2004		46			46
Payments/utilization of the accrual		(22	)		(22	)
Accrual at June 30, 2004	$	24		$	24

~~Note~~All 5of -our ~~Industry~~acquired ~~and Geographic~~identifiable ~~Segment~~intangible ~~Information~~assets are subject to amortization. No significant residual value is estimated for the intangible assets.

The company operates and is managed internally as one operating segment in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”. Operating segments are defined as component of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer of the Company. The following table presents information on revenue and long-lived assets by geography. Revenue is allocated based on the location from which the sale is satisfied and long-lived asset information is based on the physical location of the asset.

	Three Months EndedJune 30,				Nine Months EndedJune 30,
(In Thousands)	2004		2003		2004		2003
Net revenues:
United States	$	1,305	$	1,606	$	3,940	$	5,017
Canada and Latin America		204		160		889		557
Europe, Middle East, India and Africa		949		1,488		3,555		3,904
Asia Pacific		172		489		851		1,424
Corporate adjustments		—		9		—		25
Total net revenues	$	2,630	$	3,752	$	9,235	$	10,927

Note 10—Commitments and contingencies

	June 30,2004		September 30, 2003
Long-lived assets:
United States	$	4,479	$	4,381
Europe, Middle East, India and Africa		182		349
Total long-lived assets	$	4,661	$	4,730

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

~~Note~~As 6permitted -under ~~Investments~~California law, we have agreements whereby we indemnify our officers and directors for certain events while our officer or director is, or was serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a Director’s and Officer’s insurance policy that limits our exposure and enables us to recover at least a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal.

~~Available~~Warranties We generally warrant for a period of 90 days that our software products will perform substantially in accordance with its published specifications, that the reproduction of our software on the media material provided by us is correct and that the documentation is correctly printed. In the event of any non-conformance, we agree to repair, replace or accept return of the non-conforming product and refund any fees paid by the customer for said non-~~sale~~conforming ~~equity~~product. ~~securities~~We have never incurred significant expense under our product warranties. We believe the estimated fair value of these warranty agreements is immaterial.

~~During~~Litigation ~~the~~No ~~third~~material ~~quarter~~legal ofproceedings ~~fiscal~~are ~~2004,~~pending ~~the~~to ~~Company~~which ~~sold~~we ~~505,767~~are ~~shares~~a ~~of Rainmaker stock~~party. ~~The~~ ~~Company~~We ~~accounted~~are ~~for~~responding ~~this~~to ~~investment~~claims asarising ~~available-for-sale,~~in ~~and~~the ~~accordingly,~~ordinary ~~recorded~~course itof atbusiness. ~~fair~~We ~~market~~intend ~~value~~to ~~based~~defend onourselves ~~quoted~~vigorously ~~market~~in ~~prices~~these matters. ~~The~~Our ~~Company~~management ~~received~~believes ~~cash~~that ofit ~~$0.9~~is ~~million~~unlikely ~~and~~that ~~recorded~~the aoutcome ~~gain~~of onthese ~~investments~~matters ofwill ~~$0.7~~have ~~million.~~a ~~The~~material ~~cost of~~adverse ~~the~~effect ~~investment~~on ~~was~~our ~~$0.2~~financial ~~million.~~statements, ~~The~~although ~~Company~~there nocan ~~longer~~be ~~holds~~no ~~any~~assurance ~~shares~~in ofthis ~~Rainmaker stock~~regard.

Note 7 – Business Combinations

Acquisition of New Moon Systems, Inc.

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

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

The residual purchase price of $2.4 million was recorded as goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill relating to the New Moon acquisition is not being amortized and will be carried at cost and tested for impairment annually and whenever events indicate that impairment may have occurred. As of June 30, 2004, the Company has incurred acquisition costs of $331,000.

The following unaudited pro forma information shows the results of operations for the three and nine months ended June 30, 2003 as if the New Moon acquisition had occurred at the beginning of the periods presented and at the purchase price established at the time of the acquisition:

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(in thousands, except per share data)

	Three Months Ended June 30,			Nine Months Ended June 30,
	2003			2003
	(Unaudited)			(Unaudited)
Net revenues	$	3,844		$	11,208
Net loss	$	(3,626	)	$	(11,828	)
Loss per share	$	(0.35	)	$	(1.18	)

The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition had been consummated at the beginning of the earliest period presented, nor is it necessarily indicative of future operating results.

~~Acquisition~~ Item 2. Management’s Discussion and Analysis of ~~Caststream,~~Financial ~~Inc.~~Condition and Results of Operations

OnThe ~~March~~following ~~29,~~Management’s ~~2004,~~Discussion ~~the~~and ~~Company~~Analysis ~~entered~~of ~~into~~Financial aCondition ~~Stock~~and ~~Exchange~~Results ~~Agreement~~of ~~with~~Operations ~~Caststream,~~should ~~Inc.~~be ~~(“Caststream”).~~read ~~Pursuant~~in toconjunction ~~the~~with ~~terms~~the ofCompany’s ~~the~~unaudited ~~agreement,~~condensed ~~the~~consolidated ~~Company~~financial ~~acquired~~statements ~~all~~and ofnotes ~~the~~thereto ~~capital~~included ~~stock~~elsewhere ofin ~~Caststream~~this inQuarterly ~~exchange~~Report ~~for~~on ~~100~~Form 10-Q,~~000~~ ~~shares~~as well as the Management’s Discussion and Analysis of Financial Condition and Result of Operations included in the Company’s ~~common~~Annual ~~stock~~Report ~~and~~on ~~warrants~~Form 10-K for ~~100,000~~the ~~shares~~fiscal ofyear ~~common~~ended ~~stock~~September 30, 2004. ~~The~~In ~~Company~~addition ~~also~~to ~~assumed~~historical ~~certain~~information ~~liabilities~~contained ofherein, this discussion and analysis contains forward-looking statements. These statements ~~Caststream~~involve risks and uncertainties and can be identified by the use of ~~approximately~~forward-looking ~~$40~~terminology such as “estimates,~~000.~~” ~~The~~“projects,” ~~transaction~~“anticipates,” ~~was~~“plans,” ~~considered~~“future,” a“may,” ~~related~~“will,” “should,” ~~party~~“predicts,” ~~transaction~~“potential,” ~~because~~“continue,” ~~two~~“expects,” “intends,” “believes,” and similar expressions. Examples of ~~the~~forward-looking ~~Caststream~~statements ~~shareholders~~include ~~were~~those ~~hired~~relating into financial ~~December~~risk, ~~2003~~management asactivities and the ~~Company’s~~adequacy ~~Vice~~of ~~President~~financial ofresources ~~Corporate~~for ~~Development~~operations. These and ~~Chief~~other ~~Marketing Officer.~~forward-looking Instatements ~~addition,~~are only estimates and predictions. While the Company ~~hired~~(also ~~three~~referred ~~other~~to ~~Caststream~~as ~~shareholders~~“Tarantella,” “we,” “us,” or “our”) believes that the expectations reflected in ~~December~~the ~~2003~~forward-looking statements are reasonable, our actual results could differ materially due to a number of factors, including those set forth in ~~various~~the section ~~marketing~~entitled “Risk Factors” and ~~technical~~elsewhere ~~positions~~in this Quarterly Report on Form 10-Q. ~~The~~Readers ~~Company’s~~are ~~Audit~~cautioned ~~Committee~~not ~~and~~to ~~the~~place ~~Board~~undue ofreliance ~~Directors~~on ~~approved~~these forward-looking statements, which reflect management’s expectations only as of the ~~transaction~~date hereof.

The acquisition has been accounted for as a purchase of assets by the Company for financial reporting purposes. Beginning March 30, 2004, the results of Caststream are being included in the Company’s consolidated financial statements. The purchase price has been allocated based on the fair value of the assets acquired and the liabilities assumed. Pursuant to the Emerging Issues Task Force’s Issue No. 98-3, “Determining Whether a Non-monetary Transaction Involves the Receipt of Productive Assets or of a Business”, ~~Caststream~~Overview does not meet the criteria necessary to qualify as a business. Therefore, the Company’s acquisition of Caststream does not qualify as a business combination under Statement of Financial Accounting Standards No. 141, “Business Combinations”, and no goodwill resulted from recording the transaction. Identified intangible assets with finite lives will be amortized over their respective estimated useful life. The Company is required to review long-lived assets when circumstances indicate that an impairment exists. To the extent the value of the long-lived assets are impaired, the Company will be required to record the impairment charge. The fair market value of the Company’s stock and stock warrants, issued net of liabilities assumed exceeds the fair market value of the acquired assets based upon an independent, third party appraisal. This excess value has been charged to operations upon the close of the merger as compensation expense.

~~The~~We ~~total~~are ~~purchase~~a ~~price~~leading ~~for~~provider ~~Caststream~~of isinternet ~~$432,000~~infrastructure assoftware ~~follows~~that ~~(in~~enables web-based ~~thousands):~~access to enterprise applications.

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

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

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

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

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

Applications of Critical Accounting Policies

We have prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenues, losses from operations, and net loss, as well as on the value of certain assets and liabilities on our balance sheet. These estimates, assumptions and judgments

~~Note~~ about 8future –events ~~Acquired~~and ~~Intangible~~their ~~Assets~~effects on our results cannot be determined with certainty, ~~Net~~and are made based upon our historic experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. The discussion and analysis of our financial condition and results of operations are based upon these statements. There are a number of accounting policies, methods and estimates affecting our financial statements. Areas that are particularly significant include revenue recognition, New Moon and Caststream acquisitions, goodwill and other intangible assets, restructuring charges, returns and reserves and allowance for doubtful accounts, and income taxes, which are described below. In addition, please refer to Note 3 of our Unaudited Condensed Consolidated Financial Statements for further discussion of our significant accounting policies.

~~The~~Additional ~~components~~information about these critical accounting policies may be found in the “Management’s Discussion & Analysis of ~~acquired~~Financial ~~intangible~~Condition ~~assets~~and asResults of ~~June~~Operations” section included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004. isThere ashave ~~follows:~~been no changes to these critical accounting policies subsequent to September 30, 2004.

	Gross CarryingAmount		EstimatedUsefulLives	AccumulatedAmortization		IntangibleAssets, Net
	(In thousands)		(In years)	(In thousands)
Amortized intangible assets
Technology	$	804		$	206	$	598
Patents		700	3		253		447
Trademarks		200	3		72		128
Other		20	3		7		13
Total	$	1,724		$	538	$	1,186

Revenue Recognition

We account for the licensing of software in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended. The ~~components~~application of ~~acquired~~SOP ~~intangible~~97-2 requires ~~assets~~judgment, asincluding whether (i) a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of ~~September~~fair 30value exists for those elements, ~~2003~~or (ii) the end users receive certain elements of our products over a period of time. These elements include post-delivery support and the right to receive unspecified upgrades/enhancements of our products on a when-and-if-available basis. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements and the fair value of the respective elements could materially impact the amount of our earned and unearned revenue. Judgment is asalso ~~follows:~~required (i) to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products, and (ii) in our on-going evaluation of our customer’s credit worthiness at the time of sale.

	Gross CarryingAmount		EstimatedUsefulLives	AccumulatedAmortization		IntangibleAssets,Net
	(In thousands)		(In years)	(In thousands)
Amortized intangible assets
Technology	$	500	3	$	56	$	444
Patents		700	3		78		622
Trademarks		200	3		22		178
Other		20	3		2		18
Total	$	1,420		$	158	$	1,262
Aggregate amortization expense
For three months ended June 30, 2004	$	143
For three months ended June 30, 2003	$	39
For nine months ended June 30, 2004	$	380
For nine months ended June 30, 2003	$	39
Estimated remaining amortization expense:
For remaining three months ending September 30, 2004	$	143
For year ending September 30, 2005		575
For year ending September 30, 2006		417
For year ending September 30, 2007		51
	$	1,186

New Moon and Caststream Acquisitions

~~Note~~In 9connection –with ~~Private~~the ~~Placement~~New ~~Financing~~Moon Systems, Inc. (“New Moon”) and Caststream acquisitions, we allocated the purchase price associated with each acquisition to the tangible and intangible assets acquired, liabilities assumed and in-process research and development based on their estimated fair values. We engaged two third-party appraisal firms to assist us in determining the fair values of the assets acquired and the liabilities assumed. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. The critical estimates we used in allocating the purchase price and valuing certain intangible assets included but were not limited to: future expected cash flows from customer contracts, acquired developed technologies and patents, expected costs to develop the in-process research and development into commercially viable products, estimated cash flows from the projects when completed, and the trade name and the market position of the acquired products and assumptions about the period of time the trade name will continue to be used in the New Moon product portfolio, and determining the appropriate discount rates and other assumptions. Our estimate of fair value at the time when they were made was based upon assumptions that we believed to be reasonable, but which are inherently uncertain and unpredictable.

On September 30, 2003, the Company completed a private placement of common stock and warrants to Special Situations Technology Funds and Vertical Ventures resulting in gross proceeds to the Company of approximately $2,254,200 for which the Company paid fees of $155,345. The Company issued 1,950,000 shares of common stock at a price of $1.156 per share and warrants to purchase 1,950,000 shares of common stock at $1.395 per share. The warrants have a value of $895,592, based on the relative fair value using a Black-Scholes calculation, using a volatility of 100%, an annual dividend of zero and a discount rate of 2.63%. The Company can require the warrant holders to exercise one-third of the warrants provided the shares issuable there under are registered with the SEC and the share price equals or exceeds $1.674 for a period of twenty consecutive trading days. In addition, the Company can redeem up to two-thirds of the warrants or all of the warrants for $0.01 per share should the closing bid price of the shares reach the target prices of $2.232 and $2.790, respectively. The warrant holders may exercise the warrants prior to redemption. The warrants expire on September 30, 2008. If the warrants are fully exercised, the Company would receive additional gross proceeds of approximately $2,700,000. The Company has agreed to register the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants. If the shares and warrants are not registered in a timely manner, the Company will be obligated to pay damages for the delay, in an amount equal to one-percent per month of the aggregate amount invested, until registered.

On December 26, 2003, the Company completed a private placement of common stock and warrants to Special Situations Technology Funds, Starlight Technology Partners LLC, an investment group in which the President of the Company acts as Managing Director and the Company’s Vice President of OEM sales is an investor, and an additional private investor, resulting in gross proceeds to the Company of approximately $2,750,000. In connection with the financing, the Company paid placement fees in the amount of $91,250 and issued 140,000 shares of common stock. The Company issued 2,750,000 shares of common stock at a price of $1.00 per share and warrants to purchase 550,000 shares of common stock at $1.39 per share. The warrants have a value of $310,624 based on the relative fair value using a Black-Scholes calculation, using a volatility of 100%, an annual dividend of zero and a discount rate of 3.20%. The warrants expire on December 11, 2008. If the warrants are fully exercised, the Company would receive additional gross proceeds of $764,500. The Company has agreed to register the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants.

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

OnSFAS ~~March 29~~142, ~~2004~~Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the ~~Company~~reporting ~~completed~~unit level (operating segment or one level below an ~~agreement~~operating ~~pursuant~~segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to ~~which~~reporting itunits, ~~issued~~assigning ~~140~~goodwill to reporting units,~~000~~ ~~shares~~and indetermining ~~lieu~~the fair value of ~~payment~~each reporting unit. We will perform the annual goodwill impairment test as of aJuly ~~finders~~1st ~~fee~~every ~~for~~year to determine if there is any goodwill impairment. Significant judgments required to estimate the ~~December~~fair ~~2003~~value ~~private~~of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair ~~placement~~value and/or goodwill impairment for each reporting unit.

~~Note~~Restructuring 10charges ~~– Indemnification and Warranties~~

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

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

AsOur ~~permitted~~recognition ~~under~~of ~~California~~revenue ~~law,~~from ~~the~~sales ~~Company~~to ~~has~~distributors ~~agreements~~is ~~whereby~~affected itby ~~indemnifies~~agreements ~~its~~giving ~~officers~~distributors ~~and~~the ~~directors~~right ~~for~~to ~~certain~~return ~~events~~up to ~~while~~ten percent of the ~~officer~~ oramount ~~director~~of ~~is,~~the orlast ~~was~~ninety ~~serving~~days atof the ~~Company~~distributor’s ~~request~~software insales. ~~such~~Historically, ~~capacity~~the return rate has averaged less than ten percent. ~~The~~We ~~maximum~~record ~~potential~~a ~~amount~~provision offor ~~future~~product ~~payments~~returns for related sales in the ~~Company~~same ~~could~~period beas ~~required~~the related torevenues ~~make~~are ~~under~~recorded. ~~these~~These ~~indemnification~~estimates ~~agreements~~are isbased ~~unlimited;~~on ~~however~~historical sales returns, ~~the~~analysis ~~Company has~~of acredit ~~Directors’~~memo data and ~~Officers’~~other ~~insurance~~known ~~policy~~factors. ~~that~~If ~~limits~~ the ~~Company’s~~historical ~~exposure~~data ~~and~~we ~~enables~~use it to ~~recover~~calculate atthese ~~least~~estimates adoes ~~portion~~not ofproperly ~~any~~reflect future ~~amounts~~returns, ~~paid~~revenue could be affected. AsAccordingly, aestimating ~~result~~product ofreturns ~~its~~requires ~~insurance~~significant ~~policy~~management ~~coverage~~judgment. In addition, ~~the~~different ~~Company~~return ~~believes~~rate estimates that ~~the~~we reasonably could have used would have had a material impact on our reported sales and thus have ~~expense~~had ~~from~~a ~~indemnification~~material ~~agreements~~impact ison ~~minimal~~the presentation of the results of operations.

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

The Company generally warrants for a period of 90 days that its software products will perform substantially in accordance with its published specifications, that the reproduction of the software on the media material provided by the Company is correct and that the documentation is correctly printed. In the event of any non-conformance, the Company agrees to repair, replace or accept return of the non-conforming product and refund any fees paid by the customer for said non-conforming product. The Company has never incurred significant expense under its product warranties. The Company believes the estimated fair value of these warranty agreements is immaterial.

~~Item~~As 2.of ~~Management’s~~December ~~Discussion~~31, ~~and~~2004, ~~Analysis~~our ofnet ~~Financial~~accounts ~~Condition~~receivable ~~and~~balance ~~Results~~was $3.6 million, net of ~~Operations~~allowances of $0.1 million.

~~This~~Income ~~Management’s~~Taxes Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the Management’s Discussion and Analysis of Financial Condition and Result of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003. In addition to historical information contained herein, this Discussion and Analysis contains forward-looking statements. These statements involve risks and uncertainties and can be identified by the use of forward-looking terminology such as “estimates,” “projects,” “anticipates,” “plans,” “future,” “may,” “will,” “should,” “predicts,” “potential,” “continue,” “expects,” “intends,” “believes,” and similar expressions. Examples of forward-looking statements include those relating to financial risk management activities, the adequacy of financial resources for operations, the Company’s ability to sublease our Santa Cruz, California office space and the Company’s ability to become listed on the Nasdaq SmallCap Market. These and other forward-looking statements are only estimates and predictions. While the Company (also referred to as “Tarantella”) believes that the expectations reflected in the forward-looking statements are reasonable, the Company’s actual results could differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s expectations only as of the date hereof.

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

~~Tarantella~~We ishave aoperations ~~leading~~in ~~provider~~many ofcountries ~~internet~~other ~~infrastructure~~than ~~software~~the United States. Transfer prices for services provided between the United States and these countries have been documented as reasonable, however, tax authorities could challenge these transfer prices and assess additional taxes on prior period transactions. Any such assessment could require that ~~enables~~we ~~web-based~~record ~~access~~an toadditional ~~enterprise~~tax ~~applications~~provision in our statement of operations.

~~Tarantella’s~~Income ~~products~~tax ~~provide~~assets ~~managed~~ and ~~secure~~liabilities ~~web~~are determined ~~access~~by totaxable ~~enterprise~~jurisdiction. ~~mainframe, Windows,~~We ~~AS/400,~~evaluate ~~Linux,~~net ~~and~~deferred ~~UNIX~~tax ~~applications~~assets in each tax jurisdiction by estimating the likelihood of generating future profits to realize these assets. ~~The~~When ~~Company~~necessary, ~~leverages~~a ~~existing~~valuation ITallowance is recorded to reduce tax assets to ~~provide~~an ~~cost~~amount ~~savings,~~for ~~improved~~which ~~productivity,~~realization ~~and~~is more likely than not. The provision for income taxes represents taxes payable for the ~~flexibility~~current toperiod, ~~accommodate~~plus the ~~rapid~~net ~~changes~~change in ~~today’s~~deferred ~~organizations~~tax amounts.

~~Applications~~De-Listing ofStatus ~~Critical Accounting Policies~~

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

~~The~~This ~~Company~~action ~~accounts~~followed ~~for~~our ~~the~~appeal ~~licensing~~to ofNasdaq ~~software~~for ina ~~accordance~~listing ~~with~~extension ~~American~~after ~~Institute of~~not ~~Certified~~meeting ~~Public~~the ~~Accountants~~stated ~~(“AICPA”)~~time ~~Statement~~requirements ofto ~~Position~~file ~~(“SOP”)~~SEC ~~97-2,~~Form ~~“Software Revenue Recognition”, as amended. The application of SOP 97~~10-2Q ~~requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists~~ for ~~those elements. End users receive certain elements of~~ our ~~products~~third ~~over~~quarter ~~a period~~ of ~~time~~fiscal 2002. ~~These~~The ~~elements~~Nasdaq ~~include~~Panel ~~free~~determination ~~post-delivery telephone support and the right~~ to ~~receive~~delist ~~unspecified~~our ~~upgrades/enhancements~~stock ofwas ~~our~~based ~~products~~ on aour ~~when-and-if-available~~filing ~~basis.~~delinquency, ~~Changes~~public tointerest ~~the elements in a software arrangement~~concerns, ~~the ability to identify VSOE for those elements~~ and the ~~fair~~nature ~~value~~ of ~~the~~ ~~respective elements could materially impact~~ the ~~amount~~internal ofrevenue investigation. ~~our~~On ~~earned~~December ~~and~~8, ~~unearned~~2003, ~~revenue.~~we ~~Judgment~~filed isan ~~also~~appeal ~~required~~ to ~~assess~~reverse ~~whether~~that ~~future~~portion ~~releases~~ of ~~certain~~the ~~software~~Nasdaq ~~represent~~Panel’s ~~new~~decision ~~products~~relating orto ~~upgrades~~its ~~and~~public ~~enhancements~~interest ~~to existing products~~concerns. ~~Judgment~~ isOn ~~also~~February ~~required~~27, in2004, the ~~Company’s~~Nasdaq ~~on-going~~advised ~~evaluation~~us ofthat our ~~customers’~~appeal ~~credit~~had ~~worthiness~~been ~~at the time of sale~~denied.

~~New~~On ~~Moon~~April 6, 2004, we were once again current with our periodic reporting obligations under the Securities and ~~Caststream~~Exchange ~~Acquisitions~~Act of 1934, as amended, which is required for our shares to trade on the OTC Bulletin Board. On August 25, 2004, we announced that we had received notification that our shares were approved for trading on the OTC Bulletin Board, and that trading had begun at the open of the market on August 24, 2004 under our new symbol TTLA.OB.

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

Goodwill and Other Intangible Assets

Statement of Financial Accounting Standard 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The Company will perform the annual goodwill impairment test as of July 1st every

~~year~~Now tothat ~~determine~~we ifhave ~~there~~resumed iscompliance ~~any~~with ~~goodwill impairment. Significant judgments required to estimate~~ the ~~fair~~periodic ~~value of~~ reporting ~~units~~requirements ~~include~~of ~~estimating~~the ~~future~~Exchange ~~cash flows~~Act, ~~determining~~we intend ~~appropriate~~to ~~discount~~attempt ~~rates~~to ~~and~~meet ~~other~~the ~~assumptions.~~listing ~~Changes~~requirements infor ~~these~~the ~~estimates~~Nasdaq ~~and~~SmallCap ~~assumptions~~Market, ~~could~~however ~~materially~~some ~~affect~~requirements ~~the~~such ~~determination~~as ofminimum ~~fair~~bid ~~value~~price and~~/or~~ ~~goodwill~~market ~~impairment~~capitalization ~~for each~~are ~~reporting~~outside ~~unit~~of our control.

Restructuring charges

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

Returns and Reserves

The Company’s recognition of revenue from sales to distributors is affected by agreements giving distributors the right to return up to ten percent of the amount of the last ninety days of the distributor’s software sales. Historically, the return rate has averaged less than ten percent. The Company records a provision for product returns for related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analyses of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be affected. Accordingly, estimating product returns requires significant management judgment. In addition, different return rates estimates that the Company reasonably could have used would have had a material impact on reported sales and thus have had a material impact on the presentation of the results of operations

Allowance for Doubtful Accounts

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

Accounting for Income Taxes

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

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

Income tax assets and liabilities are determined by taxable jurisdiction. The Company evaluates net deferred tax assets in each tax jurisdiction by estimating the likelihood of generating future profits to realize these assets. The Company has assumed that we will not generate sufficient future taxable income to realize these assets and have created valuation reserves to reduce the net deferred tax asset values to zero.

De-Listing Status

On October 20, 2003, the Company announced that it had received notification from the Nasdaq Listing Qualifications Panel (the “Nasdaq Panel”) that the Company’s stock would discontinue trading on the Nasdaq SmallCap Market effective with the open of business on Tuesday, October 21, 2003.

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

Tarantella’s common stock is currently quoted on the OTC Pink Sheets. The Company’s trading symbol has changed to TTLA.PK. Now that the Company has regained compliance with the periodic reporting requirements of the 1934 Exchange Act, it will attempt to meet the listing requirements for the Nasdaq SmallCap Market, however some requirements such as minimum bid price and market capitalization are outside of the Company’s control.

Management Changes

OnVarious ~~December~~executive ~~11,~~management ~~2003,~~changes ~~the~~occurred ~~Company~~during ~~announced~~fiscal ~~that the board of directors had appointed Francis E~~2004. ~~Wilde~~For asfurther ~~Chief~~information ~~Executive~~see ~~Officer,~~our ~~President~~2004 ~~and~~Annual aReport ~~member~~on ~~of the board of directors. Mr. Wilde succeeds Douglas Michels,~~Form ~~who continues with the Company as a strategic advisor~~10-K. ~~Mr. Michels will also continue as a director of Tarantella.~~

On January 6, 2004, the Company announced the appointment of John M. Greeley as Chief Financial Officer, reporting directly to Mr. Wilde. Mr. Greeley assumed the CFO responsibilities from Mr. Alok Mohan, who had been serving as acting CFO since September 8, 2003.

In December 2003, Gregory Quinn, Stephen Bannerman and E. Joseph Vitetta, Jr. joined the Company as Vice President North American Operations and Strategic Alliances, Chief Marketing Officer and Vice President Corporate Development, respectively. In January 2004, Mr. Vitetta was also appointed Corporate Secretary. Joseph Makoid joined the Company in January 2004 as Vice President OEM Sales. Messrs. Quinn, Bannerman, Vitetta and Makoid all report directly to Mr. Wilde. In January 2004, Thomas P. Rhodes joined the Company as Vice President-General Counsel. Mr. Rhodes reported to Mr. Greeley. Mr. Rhodes subsequently left the Company in July 2004.

Results of Operations

~~The~~Comparison ~~Company’s~~of ~~net~~the ~~revenues~~Three ~~are~~Months ~~derived~~Ended ~~from~~December ~~software~~31, ~~licenses~~2004 and ~~fees~~2003 ~~for software maintenance and services.~~

~~Net~~The ~~revenues~~following ~~for~~tables ~~the~~set ~~three~~forth ~~months~~selected ~~ended~~unaudited ~~June 30, 2004 decreased by 30% to $2.6 million from~~condensed ~~$3.8~~consolidated ~~million~~financial indata ~~the same period in fiscal 2003. Net revenues~~ for the ~~nine~~periods ~~months ended June 30~~indicated, ~~2004~~expressed ~~decreased by 15% to $9.2 million from $10.9 million~~ in ~~the~~thousands ~~same~~and ~~period~~as ~~of fiscal 2003. The decrease in revenue performance year to date, broken out geographically, was~~ a ~~$1.1~~percentage ~~million decrease in United States, a $0.3 million decrease in Europe and a $0.6 million decrease in Asia. These decreases were partially offset by an increase~~ of ~~$0.3~~period ~~million~~total ~~in the Canada and Latin America region. The decrease in~~ net revenues ~~for~~or ~~the~~as ~~three and nine months ended June 30, 2004 was mainly due to fewer licenses being sold caused primarily by several large customers’ deals being postponed in the quarter ended June 30, 2004~~noted.

~~License~~Net revenues: for the three months ended June 30, 2004 were $1.6 million compared to $3.0 million in the same quarter of fiscal 2003, a decrease of 47% from the prior year. License revenues for the nine months ended June 30, 2004 were $6.1 million compared to $8.8 million for the same period of fiscal 2003, a decrease of 31% from the prior year. The decrease in revenues for the three and nine months ended June 30, 2004 is attributed to the reduction in the number of licenses sold caused primarily by several large customers’ deals being postponed in the quarter ended June 30, 2004.

Service revenues increased to $1.1 million for the three months ended June 30, 2004, from $0.8 million in the same period in fiscal 2003, an increase of 39%. Service revenues were 40% of the total revenue for the third fiscal quarter of 2004, compared to 20% for the same period in the prior year. Service revenues increased to $3.1 million for the nine months ended June 30, 2004, from $2.1 million in the same period in fiscal 2003, an increase of 46%. Service revenues were 34% of the total revenue for the first nine months of 2004, compared to 20% for the same period in the prior year. The increase in service revenues for the three and nine months ended June 30, 2004 is the result of an increased percentage of customers purchasing service contracts with new product purchases, as well as an increase in the number of contracts renewed.


	Three Months Ended December 31,								Percent Change From 2003
	2004				2003				Percent Change From 2003
			(1)				(1)
Licenses	$	2,871	72	%	$	2,366	68	%	21%
Services		1,143	28	%		1,102	32	%	4%

Total net revenues	$	4,014	100	%	$	3,468	100	%	16%

~~International~~(1) ~~revenues~~percentage ~~were 50%~~ of ~~total revenues for the third quarter of fiscal 2004 and 57% for the same~~ period intotal ~~the~~net ~~prior year. For the nine months ended June 30, 2004, international~~ revenues ~~were 57%, compared to 54% for the same period in the prior year.~~

~~Costs~~Our net revenues are derived from software licenses and ~~Expenses~~fees for services, which include maintenance, support, engineering services, consulting, and training. The increase in license revenue as compared to the prior year period is due primarily to two large license sales of our Enterprise Edition product to a leader in the financial services industry and a large European OEM (original equipment manufacturer) partner, partially offset by a decrease in license contracts in the $100,000 to $250,000 revenue range. Service revenues were essentially flat as compared to prior year period.

~~Cost~~The ofincrease ~~license revenues for the three months ended June 30, 2004 increased to $0.2 million from a credit of $14,000~~ in ~~the~~net ~~same~~revenue ~~period~~performance ~~of fiscal~~is ~~2003.~~broken ~~For~~out ~~the~~geographically ~~nine months ended June 30, 2004, cost of license revenues increased by 374% to $0.6 million from $0.1 million~~ in the ~~same period of fiscal 2003. Cost of license revenues increased because of the cost of amortization for~~ ~~technology~~following ~~acquired~~table: from New Moon and Caststream. The amortization expense for the three and nine months ended June 30, 2004 was $.1 million and $0.4 million, respectively, compared with $39,000 for the three and nine months ended June 30, 2003. There was also an adjustment to a previous estimated royalty accrual in the three and nine months ended June 30, 2003, which reduced the cost of license expense by $0.1 million

Net revenues by geography:


	Three Months Ended December 31,								Percent Change From 2003
	2004				2003				Percent Change From 2003
			(1)				(1)
United States	$	1,796	45	%	$	1,278	37	%	41%
EMEIA (2)		1,762	44	%		1,534	44	%	15%
Canada and Latin America		216	5	%		320	9	%	-33%
Asia Pacific		240	6	%		336	10	%	-29%

Total net revenues	$	4,014	100	%	$	3,468	100	%	16%

(1)	Percentage of period total net revenues

(2)	Europe, Middle East, India and Africa

The increase in revenues in the United States versus the prior year period was due primarily to a $0.9 million sale of our Enterprise Edition product to a financial institution. The increase in EMEIA revenues over the prior year period was due primarily to a sale to a large European OEM partner of which $0.8 million was recognized as revenue. The decrease in revenues in Canada, Latin America and Asia Pacific was due to a lower level of license sales in these regions.

International revenues were 55% of total revenues for the first fiscal quarter of 2005 and 63% for the same period in the prior year. The change is primarily the result of the higher United States revenue in the current quarter related to a $0.9 million sale of our Enterprise Edition product to a financial institution. In total, international revenues were approximately constant between the two periods.

For the three months ended December 31, 2004, one financial company and one European software integrator accounted for 22% and 19%, respectively, of the Company’s net revenues. For the three months ended December 31, 2003, Clarity Technology, our U.K. distributor, accounted for 16% of our net revenues.

Cost of revenues and gross margin:


	Three months Ended December 31,								Percent Change from 2003
	2004				2003				Percent Change from 2003
			(1)				(1)
Cost of revenues
Licenses	$	150	4	%	$	168	5	%	-11%
Services		401	10	%		330	10	%	22%

Total cost of revenues	$	551	14	%	$	498	15	%	11%


Gross Margin
Licenses	$	2,721	68	%	$	2,198	63	%	24%
Services		742	18	%		772	22	%	-4%

Total gross margin	$	3,463	86	%	$	2,970	85	%	17%

(1)	Percentage of period total net revenues

Total cost of revenues for the three months ended December 31, 2004 increased by 11% from the prior year period primarily due to higher service revenues and related costs.

The slightly lower cost of license revenues in the first quarter of fiscal 2005 is due to lower current quarter technology costs amortization following our $0.4 million write-down during our fourth quarter fiscal 2004 relating to previously acquired New Moon intangible assets, and due to lower labor costs and facility allocations as results of our fiscal 2004 restructuring plan. These reductions were partially offset by higher technology-related expenses related to our second quarter fiscal 2004 acquisition of Caststream Technologies, plus higher royalty costs. The improvement in licenses gross margin during the current period is due to increased license revenues while our cost of license revenues decreased.

The increase in cost of service revenues of 22% for the three months ended December 31, 2004 versus the prior year period was due to higher labor costs. Services gross margin decreased from the prior year period as a result of slightly lower service revenues and a small increase in labor costs.

~~Cost~~Operating ofexpenses: service revenues for the three months ended June 30, 2004 increased by 42% to $0.4 million from $0.3 million in the same period of fiscal 2003. Cost of service revenues for the nine months ended June 30, 2004 increased by 36% to $1.2 million from $0.9 million in the same period of fiscal 2003. Cost of service revenues decreased as a percentage of service revenue, increasing service gross margin from 56% in the third quarter of fiscal 2003, to 59% in the third quarter of fiscal 2004. Service gross margin increased to 63% for the nine months ended June 30, 2004, from 56% for the same period of fiscal 2003. The improvement in the services gross margin for the nine months ended June 30, 2004 is a result of higher revenue partially offset by higher personnel costs.

Total cost of revenues as a percentage of net revenues increased to 25% in the third quarter of fiscal 2004 from 8% for the same period in fiscal 2003. For the nine months ended June 30, 2004, cost of revenues as a percentage of net revenues increased to 19% from 9% for the same period in fiscal 2003. Cost of revenues as a percentage of net revenue increased due primarily to the cost of amortization for technology acquired from New Moon and Caststream, increased support costs, and decreased revenue. The first nine months of fiscal 2003 did not include any amortization for New Moon technology since the acquisition occurred during the third quarter of fiscal 2003.


	Three Months Ended December 31,								Percent Change From 2003
	2004				2003				Percent Change From 2003
			(1)				(1)
Research and development	$	832	21	%	$	961	28	%	-13%
Selling, general and administrative		3,923	98	%		4,536	131	%	-14%
Legal settlement and litigation costs		—	0	%		49	1	%	-100%
Restructuring charge		—	0	%		19	1	%	-100%

Total operating expenses	$	4,755	119	%	$	5,565	161	%	-15%

~~Research and development expenses increased 8% to $~~(1~~.15~~) ~~million~~Percentage ~~in the third quarter~~ of fiscal 2004 from $1.06 million in the comparable quarter of fiscal 2003, and as a percentage of net revenues were 44% and 28%, respectively. The increase in research and development expenses for the three months ended June 30, 2004 can be attributed higher consulting costs of $0.1 million, increased facility costs of $0.1 million offset by a reduction of $0.1 million in salaries. For the nine months ended June 30, 2004 research and development expenses increased 12% to $3.3 from $3.0 million in the comparable period oftotal ~~fiscal 2003, and as a percentage of~~ net revenues were 36% and 27%, respectively. The increase in research and development expenses for the nine months ended June 30, 2004 can be attributed primarily to additional head count in India, one-time start-up costs for the Company’s new India development center, increased contract labor costs related to development of a new product and increased travel costs, partially offset by lower labor costs due to reductions in headcount in the UK development center.

~~Selling,~~Research ~~general~~ and ~~administrative~~development expenses ~~increased 58% to $5.2 million in the third quarter of fiscal 2004 from $3.3 million in the comparable quarter of the prior year. The increase in expenses~~ for the three ~~months~~ ended June 30, 2004 is due primarily to an increase in head count and consist of $1.0 million increase in personnel and contractor costs, $0.3 million increase in professional services of, $0.3 million increase in travel costs, $0.2 million increase in facility costs, and $0.1 million increase in marketing expenses. For the nine months ended ~~June~~December 3031, 2004, ~~selling,~~decreased ~~general~~by ~~and administrative expenses increased 37~~13% ~~to $14.7~~ from ~~$10.7 million in~~ the ~~comparable~~prior year period ofprimarily ~~fiscal 2003. The increase in expenses for the nine months ended June 30, 2004 is~~ due to anlower ~~increase~~labor costs ofrelating ~~$1.7 million in professional fees of which $0.9 million was related~~ to the ~~internal~~2004 ~~revenue~~Restructuring ~~investigation,~~Plan’s ~~$0.6~~reduction ~~million increase~~ in ~~commission~~force ~~payments,~~and ~~payouts~~lower ~~to terminated employees made under change in control agreements of $0.5 million, increased travel costs of $0.4 million, increased~~ facility costs ~~of $0.3 million~~allocations, ~~increased~~partially ~~recruiting~~offset ~~costs~~by ~~of $0.2 million, and~~ increased ~~stock~~software ~~compensation~~maintenance ~~expense of $0.2 million. Selling, general~~ and ~~administrative~~support ~~expenses as a percentage of net revenues were 199% in the third quarter of fiscal 2004 and 88% in the same period in fiscal 2003~~costs. ~~For the nine months ended June 30, 2004, selling, general and administrative expenses were 159% of net revenues compared to 98% in the same period of fiscal 2003.~~

~~There~~Selling, ~~was~~general aand ~~provision~~administrative ~~adjustment~~expenses tofor the ~~restructuring~~three ~~accrual~~months ofended ~~$26~~December 31,~~000~~ 2004 decreased by 14% from the prior year period. The significant expense decrease in the ~~third~~three months ended December 31, 2004 is attributed to lower general and administrative costs during the quarter of ~~fiscal~~$0.7 ~~2004~~million. ~~because~~This decrease is due to the ~~actual~~reversal ~~restructuring~~during ~~charges~~the ~~were~~current ~~lower~~year ~~than~~period of ~~originally~~a ~~estimated~~$0.2 Inmillion reserve for a value added taxes (“VAT”) audit that is no longer considered required as the ~~third~~potential ~~quarter~~audit period has reached its statute of ~~fiscal~~ ~~2003~~limitations, ~~there~~and ~~was~~higher ~~restructuring~~legal ~~charge~~and audit fees during the prior year period which included expenses of $0.19 million. ~~For~~related to the ~~nine~~internal ~~months~~revenue ~~ended~~investigation. ~~June~~The ~~30,~~prior ~~2004~~year ~~there~~period ~~was~~included a ~~restructuring~~one ~~charge~~time severance cost of $190.3 million,~~000~~ for one employee, ~~offset~~paid byin aaccordance ~~provision~~with ~~adjustment~~the ofCompany’s ~~$34,000~~change in control agreement. Partially ~~For~~offsetting ~~the~~these ~~nine~~expense ~~months~~decreases in the quarter ended ~~June~~December 3031, ~~2003,~~2004 ~~restructuring charges~~as compared to the prior year period were higher sales force compensation costs of $10.3 million, ~~for~~increased atravel ~~restructuring~~costs, ~~plan~~higher ~~that~~audit ~~was~~fees ~~initiated~~and inoutside ~~the~~consulting fees ~~first~~related ~~and~~to ~~third~~commencing ~~quarter~~our ofSarbanes-Oxley ~~fiscal~~compliance ~~2003~~implementation. ~~The~~Selling, ~~Company~~general ~~cannot~~and ~~assure~~administrative ~~that~~expenses ~~its~~as ~~current~~a ~~estimates~~percentage of ~~costs~~net ~~associated~~revenues ~~with~~were ~~these~~98% ~~restructuring~~in ~~actions~~the ~~will~~first ~~not~~quarter ~~change~~of ~~during~~fiscal 2005 and 131% in the ~~implementation~~ same period. in fiscal 2004.

~~Interest~~Legal ~~income~~settlement ~~was $34,000 for the third quarter of fiscal 2004~~ and ~~$5,000~~litigation ~~for~~costs ~~the same period~~ in ~~fiscal 2003. For~~ the ~~nine~~prior ~~months~~year ~~ended~~period related ~~June~~to ~~30,~~a ~~2004,~~lawsuit ~~interest~~that ~~income~~ was ~~$47,000~~filed ~~compared~~against ~~with~~us ~~$52,000 for the same period~~ in ~~fiscal~~August 2003. ~~The~~and ~~increase~~was insubsequently ~~interest~~settled ~~income~~as ~~for~~of ~~the~~October ~~three months ended June 30~~29, 2004~~, reflects the higher average cash balances held for the quarter~~. The ~~decrease~~cost inof ~~interest income for~~ the ~~nine~~legal ~~months~~settlement ~~ended~~and ~~June~~remaining ~~30,~~litigation ~~2004,~~cost ~~reflects lower average cash balances held for the nine months ended June 30, 2004. Interest income~~ was ~~also~~ ~~lower~~accrued ~~due~~in ~~to a lower average interest rate for~~ the ~~nine~~fourth ~~months~~quarter ~~ended~~of ~~June~~fiscal ~~30,~~ 2004 ~~compared to the nine months ended June 30, 2003~~.

~~Interest~~Restructuring ~~expense~~charge ~~was $9,000 for the third quarter~~ of ~~fiscal 2004 and~~ $119,000 for the ~~same~~three ~~period in fiscal 2003. For the nine~~ months ended ~~June~~December 3031, ~~2004, interest expense~~2003 ~~was~~is ~~$27,000~~related ~~as compared~~ to ~~$2,000 for~~ the ~~same~~First ~~period~~Quarter inFiscal ~~fiscal~~2004 ~~2003~~Restructuring Plan. ~~The~~There ~~increase~~were inno ~~interest~~restructuring ~~expense~~charges ~~for~~in the three ~~and nine~~ months ended ~~June~~December 3031, 2004 ~~is due to interest being accrued for deferred rent payments in the amount of $9,000 per quarter~~.

Other income and expense:


	Three Months Ended December 31,										Percent Change From 2003
	2004					2003					Percent Change From 2003
				(1)					(1)
Interest income	$	27		1	%	$	1		0	%	2600%
Interest expense		(6	)	0	%		(8	)	0	%	-25%
Other income (expense), net		32		1	%		(50	)	-1	%	-164%

Total other income (expense)	$	53		2	%	$	(57	)	-1	%	-193%

(1)	Percentage of period total net revenues

Interest income increased due to our higher cash balances during the three months ended December 31, 2004 resulting primarily from the private equity placements that occurred at the end of December 2003 and February 2004. Other income, net was $32,000 in the first quarter of fiscal 2005 and other expense, net was $50,000 in the first quarter of fiscal 2004, and primarily relates to foreign exchange translation differences.

~~Gain~~Provision ~~on sale of investments was $0.7 million~~ for ~~the~~income ~~three~~tax ~~and~~expense nine months ended June 30, 2004 compared to none for the same period of fiscal 2003. During the third quarter of fiscal 2004, the Company sold 505,767 shares of Rainmaker stock. The Company accounted for this investment as available-for-sale, and accordingly, recorded it at fair market value based on quoted market prices. The Company received cash of $0.9 million and recorded a gain on investments of $0.7 million. The cost of the investment was $0.2 million. The Company no longer holds any shares of Rainmaker stock. The Company did not record any gains or losses on investments during the nine months ended June 30, 2003.

~~Impairment~~The oftax ~~investments~~provisions ~~was $151,000~~ for the ~~three~~first ~~and~~quarters ~~nine~~of ~~months~~fiscal ~~ended~~2005 ~~June~~and ~~30,~~fiscal ~~2003.~~2004 ~~There~~reflect ~~was~~foreign ~~no investment impairments during the nine months ended June 30, 2004~~taxes. ~~The~~Provision ~~investment~~for ~~impairment,~~income ~~which~~taxes expense was ~~made~~$19,000 infor the ~~third~~first quarter of fiscal ~~2003,~~2005 ~~was~~compared ato ~~write-down~~$98,000 offor anthe ~~investment~~same period in afiscal ~~private~~year ~~company~~2004 toand ~~reflect~~is alower ~~decline~~because inof ~~stock~~lower ~~price~~European ~~from~~taxable ~~the~~income ~~last~~in ~~stock offering to~~ the ~~then~~current ~~most recent stock offering~~quarter.

~~Other~~Net ~~expense,~~loss: net was $18,000 in the third quarter of fiscal 2004, compared to other income, net of $33,000 for the same period of fiscal 2003. For the nine months ended June 30, 2004, other expense, net was $129,000 compared to other income, net of $82,000 for the same period in fiscal 2003. The other expense, net for the third quarter of fiscal 2004 was mainly for foreign exchange losses of $9,000 and bank charges of $8,000. The other income, net for the third quarter of fiscal 2003 was mainly gain on foreign exchange of $44,000, partially offset by bank charges of $16,000.

Income tax provision was $44,000 for the third quarter of fiscal 2004 compared to $122,000 for the same period in fiscal 2003. For the nine months ended June 30, 2004 and 2003 the income tax provision was $0.2 million and $0.3 million, respectively. The tax provision for the three and nine months ended June 30, 2004 and 2003, reflects foreign taxes payable. The lower expense for the three and nine months ended June 30, 2004 is due to the lower expected tax liabilities for the Company’s European branches as compared to the previous fiscal year.


	Three Months Ended December 31,								Percent Change From 2003
	2004				2003				Percent Change From 2003
			(1)				(1)
Net loss	(1,258	)	-31	%	(2,750	)	-79	%	-54%

~~Net loss for the third quarter of fiscal 2004 was $3.7 million compared to net loss of $~~(1~~.2 million~~) ~~for~~percentage ~~the same quarter~~ of ~~fiscal 2003. For the nine months ended June 30, 2004, net loss was $10.1 million compared to $5.3 million for the same~~ period oftotal ~~fiscal 2003. The increase in~~ net ~~loss is primarily due to lower~~ revenues ~~and higher costs and expenses.~~

Net loss for the three months ended December 31, 2004 was 54% lower than for the prior year period. The decrease in net loss is primarily due to higher revenues and lower operating expenses.

Liquidity and Capital Resources

We have incurred net losses from operations during periods of the first quarter of fiscal 2005, fiscal year 2004 and fiscal year 2003, of approximately $1.3 million, $15.7 million and $9.7 million, respectively. Net cash used for operating activities was $4.2 million for the three months ended December 31, 2004, $11.3 million for fiscal year 2004 and $9.3 million for fiscal year 2003. We have an accumulated deficit of $141.8 million as of December 31, 2004. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.

We have financed our operations through private offerings of our common stock and bank borrowings. As of December 31, 2004, our principal source of liquidity included cash and cash equivalents of $5.6 million, representing 40% of total assets. The decrease in cash and cash equivalents of $4.0 million in the three months ended December 31, 2004 is primarily due to our ongoing operating costs plus the costs of implementing our Fourth Quarter Fiscal 2004 Restructuring Plan. As of December 31, 2004 we have no outstanding bank borrowings or other debt instruments.

Net cash used in operating activities was $4.2 million during the three months ended December 31, 2004, compared to $1.5 million used for operating activities in the prior year period. The increase in the net cash used for operating activities in the current quarter is due to a $2.0 million decrease in current liabilities and $1.6 million increase in trade receivables due to higher sales that occurred near the end of the current quarter, partially offset by lower selling, general and administrative expenses.

Net cash used in investing activities was $51,000 during the three months ended December 31, 2004, compared to $12,000 used in investing activities in the prior year period. The current quarter’s use primarily relates to software purchases for general information technology requirements.

Net cash provided by financing activities was $0.2 million during the three months ended December 31, 2004, compared to $2.2 million provided by financing activities in the prior year period. The current period’s amount is the result of net proceeds from the issuance of common stock under our various stock option plans. The prior year amount is primarily the result of net proceeds of $2.5 million from our private placement of common stock, partially offset by paying off our line of credit of $0.3 million.

Our days sales outstanding (DSO) at December 31, 2004 was 81 days, an increase of 6 days from 75 days at December 31, 2003. The increase in DSO was due primarily to two large Enterprise sales totaling approximately $2.0 million which were invoiced during the last month of the quarter, partially offset by improved accounts receivable collections. The accounts receivable over 30 days at December 31, 2004 were $60,000, a significant decrease from the $378,000 balance as of December 31, 2003.

~~Liquidity~~On December 26, 2003, we completed a private placement of common stock and ~~Capital~~warrants ~~Resources~~to the following investors: Special Situations Technology Funds, Starlight Digital Technologies, LLC, an investment group in which Mr. Wilde acts as Managing Director, and an additional private investor, resulting in gross proceeds to us of approximately $2,750,000. In connection with the financing, we paid placement fees in the amount of $232,303.

~~The~~We ~~Company~~had ~~has~~capital ~~financed~~lease ~~its~~commitments ~~operations through private offerings~~ of ~~the Company’s common stock and bank borrowings. As of June 30, 2004, the Company’s principal source of liquidity included cash and cash equivalents of~~ $~~13.5 million~~32,000 ~~representing~~in ~~66% of total assets. During the second quarter of~~ fiscal year 2004, ~~the Company closed its available bank line of credit under~~ which ~~the~~ ~~Company~~were ~~had~~completed noby ~~outstanding~~March ~~borrowings.~~31, ~~The increase in cash and cash equivalents of $10~~2004.4 ~~million~~There inare ~~the~~no ~~first~~capital ~~nine~~lease ~~months~~commitments ofbeyond fiscal 2004 ~~is due primarily to the completion of two private placements of common stock and warrants which resulted in net proceeds to the Company of approximately $17~~.8 ~~million,~~We ~~net~~have ~~proceeds~~operating ~~from~~lease ~~issuance~~commitments of ~~common stock from stock option and purchase plans of~~ $1.24 million for ~~and,~~fiscal ~~the~~year ~~sale~~2005 of ~~505,767 shares of Rainmaker stock~~ which ~~resulted in net proceeds to the Company of approximately~~ $0.93 million. ~~The increase in cash from the proceeds from the sale of the Company’s common stock and sale of Rainmaker stock~~ was ~~partially~~incurred ~~offset~~as ~~by cash used for operating activities~~ of ~~$7.6~~December ~~million~~31, ~~the purchase of property and equipment of $0.6 million~~2004, and ~~the~~no ~~pay~~operating ~~down~~lease oncommitments ~~the~~extend ~~line~~past offiscal ~~credit~~year ~~of $0~~2007.3 ~~million.~~

~~The~~We ~~Company’s~~believe, ~~operating~~based ~~activities~~on ~~used~~our ~~cash~~current ~~of $7.6 million during the first nine months of fiscal 2004~~plans, ~~compared~~existing tocash ~~$5.5~~and ~~million used for operating activities in the first nine months of fiscal 2003. The increase in the~~ cash ~~used~~equivalents, ~~for~~and ~~operating~~expected ~~activities~~results isfrom ~~due primarily to the net loss offset by an increase in deferred revenues. Cash used in investing activities was $284~~operations,~~000~~ inthat ~~the~~our ~~first~~existing ~~nine~~funds ~~months~~may ofbe sufficient ~~fiscal 2004 compared~~ to ~~cash~~meet ~~provided~~our ofoperating ~~$3.1 million~~requirements inthrough ~~the first nine months of~~ fiscal ~~2003.~~year ~~Cash provided by financing activities was $17~~2005.7 ~~million~~However, ingiven the ~~first~~uncertainty ~~nine months~~ of ~~fiscal~~projecting ~~2004~~future ~~compared~~revenue ~~with cash used of $81~~levels,~~000~~ ~~for~~additional ~~the same nine months of fiscal 2003. Cash provided by~~ financing ~~activities~~ inmay ~~the~~be ~~first~~required ~~nine~~during ~~months of~~ fiscal ~~2004~~year ~~includes~~2005 ~~proceeds~~and ~~from two private placements of $17~~thereafter.8 ~~million,~~We ~~net~~cannot ofbe ~~expenses,~~assured ~~partially~~that additional ~~offset~~financing bywill abe ~~pay~~available ~~down~~if ~~on the line of credit of $0~~required.3 ~~million.~~

~~The~~Risk ~~Company’s days sales outstanding (“DSO”) at June 30, 2004 was 57, a~~Factors decrease of 18 days from 75 days at June 30, 2003. DSO decreased because the past due accounts receivable have decreased from $1.1 million to $0.4 million due to improved accounts receivable collections and lower revenue levels for the quarter ending June 30, 2004 as compared to the quarter ending June 30, 2003. As of June 30, 2004, 79% of the accounts receivable were current compared with 73% at June 30, 2003.

26Set forth below and elsewhere in this filing and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements in this filing. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

~~Table~~We ofmay ~~Contents~~not have adequate cash and cash equivalents to fund our operating requirements after fiscal year 2005 and it may be difficult for us to raise needed capital in the future.

OnOur net loss was $1.3 million for the quarter ended December 2631, ~~2003~~2004, and we have recorded substantial net losses during each of the ~~Company~~past ~~completed~~five afiscal ~~private~~years. ~~placement~~During the quarter ended December 31, 2004, we continued to require funds to finance our operations. We have implemented a series of ~~common~~restructuring ~~stock~~programs over the past several years aimed at aligning our costs to our revenues and ~~warrants~~increasing our revenues to compete in the ~~following~~current ~~investors: Special~~business ~~Situations~~environment ~~Technology~~and ~~Funds,~~over ~~Starlight~~the ~~Technology~~long ~~Partners~~term. ~~LLC~~While we believe we have made progress in these areas, anwe ~~investment~~must ~~group~~continue to manage our costs and improve our revenues to compete in ~~which~~the ~~Mr.~~existing ~~Wilde~~business ~~acts~~environment. asWe ~~Managing~~believe ~~Director~~that, ~~and~~unless anwe ~~additional~~effectively ~~private~~balance ~~investor~~our cost structure to our revenues, ~~resulting~~we inmay ~~gross~~not ~~proceeds~~be able to access the ~~Company~~capital ofmarkets ~~approximately~~for ~~$2,750,000.~~new Inborrowings or financings on ~~connection~~acceptable ~~with~~terms. ~~the~~Continued ~~financing,~~losses of the ~~Company~~magnitude ~~paid~~we ~~placement~~recorded ~~fees~~in fiscal 2004 are unsustainable. We have significant obligations due in ~~the~~fiscal ~~amount~~2005 ofand ~~$91~~thereafter,~~250~~ including significant financing maturities related to a business purchase we completed in fiscal 2003, operating lease payments and other on-going operating costs.

OnShould ~~February~~we ~~23,~~require ~~2004,~~additional ~~the~~capital ~~Company~~to ~~announced~~fund ~~the~~ongoing ~~completion~~operations ofbeyond afiscal ~~second~~2005, ~~private~~we ~~placement~~have oftraditionally ~~common~~raised ~~stock~~additional ~~and~~capital ~~warrants~~through topublic ~~various~~or ~~investors. In the~~ private ~~placement~~financing, ~~the~~strategic ~~investors~~relationships ~~purchased~~or ~~11,678,580~~other ~~shares of~~arrangements. ~~Tarantella~~We ~~common~~cannot ~~stock~~be atcertain athat ~~price~~such offuture ~~$1.40~~funding, ~~per~~if ~~share~~or ~~for~~when ~~gross proceeds of $16~~needed,~~350,000.~~ ~~The~~will ~~investors~~be ~~also~~available ~~acquired~~on ~~warrants~~attractive toterms, ~~purchase~~or upat toall. anFurthermore, any additional ~~2,335,714~~equity ~~shares~~financing atmay anbe ~~exercise~~dilutive ~~price~~to ofshareholders, ~~$1.70~~and ~~per~~debt ~~share.~~financing, ~~The~~if ~~warrants~~available, ~~are~~may ~~exercisable for~~involve ~~five~~restrictive ~~years~~covenants. IfStrategic ~~the warrants are fully exercised~~arrangements, ~~the~~if ~~Company~~necessary ~~would~~to ~~receive~~raise additional ~~gross proceeds of approximately $3~~funds,~~970,714.~~ ~~The~~may ~~Company~~require ~~also~~us ~~has agreed~~ to ~~register~~relinquish ~~the~~our ~~shares~~rights ~~of common stock issued~~ to ~~the~~certain ~~investors as well as the shares issuable upon exercise~~ of ~~the~~our ~~warrants~~technologies ~~for~~or ~~resale~~products. ~~once~~If ~~the~~we ~~Company~~fail ~~has~~to ~~complied~~raise ~~with~~capital ~~its~~when ~~reporting obligations under the Securities Exchange Act of 1934~~needed, asthis ~~amended.~~may Inprevent ~~connection~~us ~~with~~from ~~the financing, the Company incurred fees in the amount of~~continuing ~~$1,198,000,~~operations ~~which~~as ~~included~~a ~~placement~~going ~~agent fees, legal and accounting fees, and issued warrants to purchase 322,500 shares at $1~~concern.70 ~~per share. The warrants have lives of five years.~~

~~The~~Fluctuations ~~Company has paid~~ in ~~full~~our operating ~~its~~results ~~capital~~on ~~lease~~a ~~obligation~~quarterly inor ~~November~~annual ~~2003~~basis ~~and~~could ~~has~~cause ~~no commitments as of June 30, 2004. At June 30, 2004,~~ the ~~Company~~ ~~has~~market ~~operating~~price ~~lease commitments~~ of ~~$0.4~~our ~~million~~common ~~for~~stock ~~the~~to ~~remainder of fiscal 2004 and $1~~decline.6 ~~million, $0.4 million, and $0.3 million for fiscal 2005, fiscal 2006 and fiscal 2007 respectively.~~

The ~~Company’s~~results ~~management~~of ~~believes~~operations ~~that,~~for ~~based~~any onquarter ~~the~~or ~~Company’s~~fiscal ~~current~~year ~~plans,~~are ~~its existing~~not ~~cash~~necessarily ~~and~~indicative ~~cash~~of ~~equivalents,~~the ~~short-term~~results ~~investments,~~to ~~cash~~be ~~received~~expected ~~from~~in ~~private~~future ~~placements~~periods. ~~and~~Our ~~funds~~operating results ~~generated~~have ~~from~~in ~~operations~~the past been, and will continue to be, ~~sufficient~~subject to ~~meet~~quarterly ~~its~~and ~~operating~~annual ~~requirements~~fluctuations ~~for~~as ~~the~~a ~~next~~result ~~twelve~~of ~~months.~~a number of factors, including but not limited to:

Factors that may affect future results

Set forth below and elsewhere in this filing and in other documents the Company files with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements in this filing.

The Company’s operating results may fluctuate in future periods.

The results of operations for any quarter or fiscal year are not necessarily indicative of the results to be expected in future periods. The Company’s operating results have in the past been, and will continue to be, subject to quarterly and annual fluctuations as a result of a number of factors, including but not limited to:

•

overall technology spending;

•

changes in general economic conditions and specific market conditions in the internet infrastructure industry;

• rapid technological changes that can adversely affect the demand for ~~the~~our ~~Company’s~~ products;

• fluctuations in demand for ~~the~~our ~~Company’s~~ products and services;

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

• the long sales and implementation cycle for ~~the~~our ~~Company’s~~ products;

•

general industry trends and the potential effects of price and product competition in the internet infrastructure industry;

• the introduction and acceptance of new technologies ~~and products~~;

•

reductions in sales to, or loss of, significant customers;

•

the timing of orders, timing of shipments, and the ability to satisfy all contractual obligations in customer contracts;

•

the impact of acquired technologies and businesses;

• ~~the~~our ~~Company’s~~ ability to control spending and achieve targeted cost reductions;

• ~~the~~our ability ~~of the Company~~ to generate cash adequate to continue operations;

•

the potential loss of key employees;

• ~~the~~our ~~Company’s~~ ability to attract and retain qualified personnel; and

• ~~adverse changes in~~ the ~~value~~ability of ~~equity~~our ~~investments~~customers inand ~~third~~suppliers ~~parties~~to ~~held~~obtain byfinancing ~~the~~or ~~Company;~~to ~~and~~fund capital expenditures.

•As a consequence, operating results for any particular future period are difficult to predict, and such unpredictability may cause the ~~ability~~price of ~~the~~our ~~Company’s~~stock ~~customers~~to fluctuate or decline. We participate in a highly dynamic industry and ~~suppliers~~future results could be subject to ~~obtain~~significant ~~financing~~volatility, orparticularly on a quarterly basis. Our revenue and operating results may be unpredictable due to ~~fund~~our ~~capital~~shipment ~~expenditures~~patterns. We operate with little backlog of orders because our products are generally shipped as orders are received. In general, a substantial portion of our revenues have been booked and shipped in the third month of each fiscal quarter, with a concentration of these revenues in the latter half of that third month. In addition, the timing of closing large license contracts and the release of new products and product upgrades increase the risk of quarter to quarter fluctuations and the uncertainty of quarterly operating results. Our staffing and operating expense levels are based on an operating plan and are relatively fixed throughout the quarter. As a result, if revenues are not realized in the quarter as expected, our expected operating results and cash balances could be adversely affected, and such effect could be substantial and could result in an operating loss and depletion of our cash balances.

AsWe a consequence, operating results for a particular future period are difficult to predict. The Company participates in a highly dynamic industry and future results could be subject to significant volatility, particularly on a quarterly basis. The Company’s revenues and operating results may benever ~~unpredictable~~achieve ~~due~~profitability to the Company’s shipment patterns. The Company operates with little backlog of orders because its products are generally shipped as orders are received. In general, a substantial portion of the Company’s revenues have been booked and shipped in the ~~third month of the quarter, with a concentration of these revenues in the latter half of that third month~~future. In addition, the timing of closing of large license contracts and the release of new products and product upgrades increase the risk of quarter to quarter fluctuations and the uncertainty of quarterly operating results. The Company’s staffing and operating expense levels are based on an operating plan and are relatively fixed throughout the quarter. As a result, if revenues are not realized in the quarter as expected, the Company’s expected operating results and cash balances could be adversely affected, and such effect could be substantial and could result in an operating loss and depletion of the Company’s cash balances.

We divested our server software and professional services divisions in May 2001. Since the divestiture, we have not achieved profitability, and may never generate sufficient revenues to achieve profitability. As of December 31, 2004 we had an accumulated deficit of $141.8 million. Many of our operating expenses are relatively fixed in nature, particularly in the short term. We expect to continue to incur significant operating expenses in connection with our ongoing sales and marketing efforts. We also expect to incur noncash charges relating to amortization of intangibles related to past acquisitions. We must therefore generate revenues sufficient to offset these increased expenses in order for us to become profitable. We cannot assure you that we will successfully generate sufficient revenues or that we will ever achieve profitability. If we do achieve profitability, we may not be able to sustain our profitability.

~~The~~We ~~Company~~compete isin ~~exposed~~the tohighly ~~general~~competitive ~~economic~~internet ~~and~~infrastructure market ~~conditions~~.

~~Any~~The ~~significant~~industry ~~downturn~~has inbecome ~~the~~increasingly ~~Company’s~~competitive ~~customers’~~and, ~~markets~~accordingly, ~~or domestic and~~our ~~global~~results ~~conditions,~~may ~~which~~also ~~result~~be inadversely aaffected ~~decline~~by inthe ~~demand~~actions ~~for~~of ~~their~~existing ~~software~~or ~~and~~future ~~services~~competitors, ~~could~~including ~~harm~~ the ~~Company’s~~development ~~business.~~of ~~The~~new ~~state~~technologies, of the ~~economy~~introduction ~~has~~of ~~had~~new aproducts, ~~negative~~and ~~impact on~~ the ~~software~~reduction ~~industry.~~of ~~This~~prices ~~could~~by ~~result~~such incompetitors ~~customers continuing~~ to ~~delay~~ gain or ~~cancel~~retain ~~orders~~market ~~for software~~share. Our ~~Any~~results of ~~these~~operations ~~occurrences~~ could ~~have~~be aadversely ~~significant~~affected ~~impact~~if onwe ~~the~~are ~~Company’s~~required ~~operating~~to ~~results,~~lower ~~revenues~~our ~~and~~prices ~~costs~~significantly ~~and~~or ~~may~~our ~~cause~~products ~~the~~or ~~market~~technologies ~~price~~are ofrendered ~~the~~obsolete ~~Company’s~~or ~~common~~less ~~stock~~attractive to ~~decline or become more volatile~~customers.

~~The~~We ~~Company’s~~depend ~~future~~on ~~operating results may be affected by various uncertain trends and factors that are beyond~~ the ~~Company’s~~development ~~control. These include adverse changes in general economic conditions~~ and ~~rapid~~acceptance ~~or unexpected changes in the technologies affecting the Company’s products. The process~~ of ~~developing~~ new ~~high technology~~ products isin ~~complex~~a ~~and~~rapidly changing ~~uncertain and requires accurate anticipation of customer needs and technological trends~~market.

The ~~Company~~market ~~depends~~of our products is characterized by rapidly changing technology, evolution of new industry standards, and frequent introductions of new product enhancements. Our success will depend upon our continued ability to enhance our existing products, to introduce new products on a timely and cost-effective basis to meet the ~~development~~evolving customer requirements, to achieve market acceptance for new product offerings, and to respond to emerging industry standards and other technological changes. There can be no assurance that we will be successful in developing new products or enhancing our existing products, or that such new or enhanced products will receive market acceptance. ofOur success also depends upon our ability to license from third parties and to incorporate into our products new technologies that become industry standards. There can be no assurance that we will continue to obtain such licenses on favorable terms or at all, or that we will successfully incorporate such third-party technologies into our own products. We anticipate new releases of our products in our current fiscal year ending September 2005. There can be no assurance that such new releases will not be affected by technical problems or “bugs”, as is common in the software industry. Furthermore, there can be no assurance that these or other future product introductions will not be delayed. Delays in the availability, or a ~~rapidly~~lack ~~changing~~of market acceptance, of new or enhanced products could have an adverse effect on our business. There can be no assurance that product introductions in the future will not disrupt product revenues and adversely affect operating results.

~~The~~We ~~market~~are ~~for~~exposed the Company’s products is characterized by rapidly changing technology, evolution of new industry standards, and frequent introductions of new products and product enhancements. The Company’s success will depend upon its continued ability to ~~enhance~~general ~~its~~economic ~~existing products, to introduce new products on a timely~~ and ~~cost-effective basis to meet evolving customer requirements, to achieve~~ market ~~acceptance~~conditions ~~for new product offerings, and to respond to emerging industry standards and other technological changes. There can be no assurance~~ that affect the ~~Company~~software will be successful in developing new products or enhancing its existing products or that such new or enhanced products will receive market acceptance. The Company’s success also depends upon its ability to license from third parties and to incorporate into its products new technologies that become industry ~~standards~~. ~~There can be no assurance that the Company will continue to obtain such licenses on favorable terms or that it will successfully incorporate such third-party technologies into its own products.~~

~~The~~Any ~~Company~~significant ~~anticipates~~downturn ~~new~~in ~~releases~~our ofcustomers’ ~~products~~markets, inor ~~the~~domestic ~~fiscal~~and global ~~year~~conditions, ~~ending~~which ~~September~~results ~~30, 2004.~~in ~~There~~a ~~can~~decline bein nodemand ~~assurance~~for ~~that~~software ~~such~~and ~~new~~services ~~releases~~could ~~will~~harm ~~not~~the beCompany’s ~~affected~~business. byThe ~~technical~~recent ~~problems~~state orof ~~“bugs”,~~the aseconomy ishas ~~common~~had ina negative impact on the software industry. ~~Furthermore,~~This ~~there~~could ~~can~~result bein nocustomers ~~assurance~~continuing to ~~that~~delay ~~these~~ or ~~other~~cancel ~~future~~orders ~~product~~for ~~introductions will~~software. ~~not~~Any beof ~~delayed.~~these ~~Delays~~occurrences incould ~~the~~have ~~availability~~a significant impact on our operating results, orrevenues aand ~~lack~~costs ofand may cause the market ~~acceptance,~~price of ~~new~~our common stock to decline or ~~enhanced~~become ~~products~~more ~~could~~volatile. ~~have~~Our anfuture ~~adverse~~operating results ~~effect~~may onbe ~~the~~affected ~~Company’s~~by ~~business~~various uncertain trends and factors that are beyond our control. ~~There~~These ~~can~~include beadverse nochanges ~~assurance~~in ~~that~~general ~~product~~economic ~~introductions~~conditions and rapid or unexpected changes in the ~~future~~technologies ~~will~~affecting ~~not~~our products. The process of ~~disrupt~~developing ~~product~~new ~~revenues~~high technology products is complex and ~~adversely~~uncertain ~~affect~~and ~~operating~~requires ~~results~~accurate anticipation of customer needs and technological trends.

The Company competes in the highly competitive Internet infrastructure market.

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

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

Although the Company’s current business plan does not foresee the need for further financing activities to fund the Company’s operations for the foreseeable future, due to risks and uncertainties in the market place, the Company may need to raise additional capital. The Company may raise additional funds through public or private financing, strategic relationships or other arrangements. The Company cannot be certain that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies or products. If the Company fails to raise capital when needed, the business will be negatively affected, which could cause the stock price to decline.

The Company’s revenues may be affected by the seasonality of revenues in the European and government markets.

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

~~Cost~~Any ofinability ~~revenues~~to ~~may~~hire, beretain ~~affected~~or byintegrate ~~changes~~key inpersonnel ~~the~~will ~~mix~~impact ofour ~~products and services~~business.

~~The~~We ~~overall~~rely ~~cost~~heavily ofon ~~revenues~~the ~~may~~contributions beof ~~affected~~our bysenior ~~changes~~management inand ~~the~~other ~~mix of net revenue~~key ~~contribution~~management ~~between~~and ~~licenses~~technical ~~and~~personnel. ~~services,~~The ~~geographical~~competition ~~regions~~for ~~and~~such ~~channels~~employees ofis ~~distribution~~extremely intense, asparticularly in the ~~costs~~technology-centric ~~associated~~regions ~~with~~where ~~these~~we ~~revenues~~operate. We may ~~have~~not ~~substantially~~be ~~different~~able ~~characteristics.~~to ~~The~~hire, ~~Company~~retain ~~may~~and ~~also~~integrate ~~experience~~such akey ~~change~~personnel. inThe ~~margin~~loss asof ~~net~~any ~~revenues~~individual ~~increase~~member orof ~~decrease~~our ~~since~~management ~~technology~~team ~~costs~~or ~~and~~other ~~services~~key ~~costs~~employees ~~are~~may ~~fixed~~create ~~within~~disruptions ~~certain~~in ~~volume~~our ~~ranges~~business.

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

~~The~~Our ~~Company’s~~lease ~~results~~on ~~of operations could be adversely affected if it were to lower its prices significantly. In~~ the ~~event~~corporate ~~the~~headquarters ~~Company reduced~~building ~~its~~expires ~~prices, the Company’s standard terms for selected distributors would be to provide credit for inventory ordered~~ in ~~the~~June ~~previous 180 days~~2005, ~~such~~and ~~credits~~we tohave ~~be applied against future purchases. The Company, as a matter of policy, does~~ not ~~allow~~entered ~~product~~into ~~returns for~~ a ~~refund,~~new ~~unless the product is covered under the 90 day warranty period, the product is non-conformant and the Company cannot repair or replace the product~~lease. Product returns are generally allowances for stock balancing and are accompanied by compensating and offsetting orders. Revenues are net of a provision for estimated future stock balancing and excess quantities above levels the Company believes are appropriate in its distribution channels. The Company monitors the quantity and mix of its product sales.

IfThe ~~the~~lease ~~Company~~on ~~fails~~our corporate headquarters building in Santa Cruz, California, expires in June 2005. Our management believes it is in our best interest to ~~manage~~locate ~~the~~a ~~distribution~~new, ofappropriately-sized ~~its~~building. ~~products~~Our ~~and~~management ~~services~~is ~~properly~~looking for new office space for our corporate headquarters, orbut ifwe ~~the~~have ~~Company’s~~not ~~distributors’~~yet ~~financial~~entered ~~condition~~into ora ~~operations~~new ~~weaken~~lease, ~~the~~and ~~Company’s~~may ~~revenue~~not be able to secure space on terms that are favorable to us, if at all. Furthermore, moving from one building to another may be disruptive to our business, which could ~~suffer~~affect our results of operations.

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

~~The~~Our ~~Company~~overall iscost ~~dependent~~of ~~upon~~revenues ~~information~~may ~~received~~be ~~from~~affected ~~third~~by ~~parties~~changes in ~~order~~the tomix ~~determine~~of ~~reserves~~net ~~for~~revenue ~~product~~contribution ~~returns~~between licenses and services, geographic regions and channels of distribution, as the costs associated with these revenues may be substantially different. We may also experience a change in margin as net revenues increase or decrease since technology costs and services costs are fixed within certain volume ranges.

~~The Company depends on information received from its distribution partners in evaluating the~~Our ~~inventory~~operational ~~levels~~results atmay distribution partners in the determination of reserves for the return of materials not sold, stock rotation and price protection. Significant effort has gone into developing systems and procedures for determining the appropriate reserve level. In the event information is not received timely or accurately, the Company’s ability to monitor the inventory levels will be affected ~~and~~by ~~may~~price ~~negatively impact the Company’s business~~variations.

~~The~~Our ~~Company’s~~results ~~business~~of ~~depends~~operations ~~upon~~could ~~its~~be ~~proprietary~~adversely ~~rights~~affected ~~and~~if ~~there~~we iswere ato ~~risk~~lower ~~that~~our prices significantly. In the event we reduce our prices, our standard terms for selected distributors would be to provide credit for inventory ordered in the previous 180 days, such ~~rights~~credits ~~will~~to be ~~infringed~~applied against future purchases. As a matter of policy, we do not allow product returns for a refund. Product returns are generally allowances for stock balancing and are accompanied by compensating and offsetting orders. Revenues are net of a provision for estimated future stock balancing and excess quantities above levels we believe are appropriate in our distribution channels.

The Company attempts to protect its software with a combination of patent, copyright, trademark, and trade secret protection, employee and third party nondisclosure agreements, license agreements, and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company’s products or reverse engineer or obtain and use information the Company regards as proprietary. While the Company’s competitive position may be affected by its ability to protect its intellectual property rights, the Company believes that trademark and copyright protections are less significant to the Company’s success than other factors, such as the knowledge, ability, and experience of the Company’s personnel, name recognition, and ongoing product development and support. Further, certain provisions of the Company’s licenses, including provisions protecting against unauthorized use, copying, transfer, and disclosure of the licensed product, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company’s intellectual property rights to the same extent as do the laws of the U.S.

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

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

~~The~~Our ~~Company’s~~revenues ~~business~~ may be ~~adversely~~ affected by ~~events~~seasonality ~~outside~~of revenues in the ~~Company’s~~European ~~control.~~and government market.

~~While~~We ~~the~~experience ~~Company~~seasonality ~~has not been the target~~ of ~~software~~revenues ~~viruses~~for ~~specifically~~both ~~designed to~~the ~~impede~~European ~~the~~and ~~performance of~~ the ~~Company’s~~U.S. ~~products,~~federal ~~such~~government ~~viruses~~markets. ~~could~~European berevenues ~~created~~during ~~and deployed against~~ the ~~Company’s~~quarter ~~products~~ending inJune ~~the~~30 ~~future.~~are ~~Similarly,~~historically ~~experienced~~lower ~~computer programmers~~ or ~~hackers~~relatively ~~could~~flat ~~attempt~~compared to ~~penetrate~~ the ~~Company’s network~~prior ~~security~~quarter. orThis ~~the~~reflects ~~security~~a reduction of ~~the~~customer ~~Company’s~~purchases ~~web~~in ~~sites.~~anticipation Aof ~~hacker~~reduced selling ~~who~~activity ~~penetrates~~during the ~~Company’s~~summer ~~network~~months. orSales ~~web~~to ~~sites~~the ~~could~~US ~~misappropriate~~federal ~~proprietary~~government ~~information~~generally orincrease ~~cause~~during ~~interruptions~~the ofquarter ~~services~~ending September 30. ~~The~~This ~~Company~~seasonal ~~might~~increase beis ~~required~~primarily attributable to ~~expend~~ ~~significant~~increased ~~capital~~purchasing ~~and~~activity ~~resources~~by tothe ~~protect~~U.S. ~~against,~~federal orgovernment prior to ~~alleviate,~~the ~~problems~~close ~~caused~~of byits ~~virus~~fiscal ~~creators and/or hackers~~year. ~~In addition~~Additionally, ~~war,~~net ~~power~~revenues ~~shortage,~~for ~~natural~~the ~~disasters,~~first ~~acts~~quarter of ~~terror,~~the ~~and~~fiscal ~~regional~~year ~~and~~are ~~global~~typically ~~health~~lower ~~risks~~or ~~could~~relatively ~~impact the~~flat ~~Company’s~~compared ~~ability~~ to ~~conduct~~net ~~business~~revenues ~~in certain regions. Any~~ of ~~these events could have an adverse effect on~~ the ~~Company’s~~prior ~~business, results of operations, and financial condition~~quarter.

~~The~~We ~~Company’s~~are ~~results~~dependent ofupon ~~operations~~information ~~may~~received befrom ~~affected~~third byparties ~~fluctuations~~ in ~~foreign~~order to ~~currency~~determine ~~exchange~~reserves ~~rates~~for product returns.

~~Although~~We ~~the~~depend ~~Company’s revenues are~~on ~~predominantly~~information inreceived ~~U.S.~~from ~~dollars,~~our ~~substantial~~distribution ~~portions~~partners ofin evaluating the ~~Company’s~~inventory ~~revenues~~levels ~~are~~at ~~derived~~distribution ~~from~~partners ~~sales~~in ~~to customers outside~~ the ~~United~~determination ~~States.~~of ~~Trade~~reserves ~~sales~~for tothe ~~international~~return ~~customers represented 53%, 44% and 52%~~ of ~~total~~materials ~~revenues~~not ~~for~~sold, ~~fiscal~~stock ~~2003, 2002~~rotation and ~~2001~~price ~~respectively~~protection. ~~The~~We ~~Company’s~~have ~~revenues~~invested ~~can~~significant effort beinto ~~affected~~developing bysystems ~~general~~and ~~economic~~procedures ~~conditions~~for indetermining the ~~United~~appropriate ~~States,~~reserve ~~Europe and other international markets~~level. ~~Also~~However, ~~portions~~if ofwe ~~the~~do ~~Company’s~~not ~~operating~~receive ~~expenses~~timely ~~are~~or ~~transacted~~accurate ininformation, ~~foreign currencies.~~our ~~The~~ability ~~Company’s~~to ~~operating~~monitor ~~strategy and pricing take into account changes in exchange rates over time. However,~~ the ~~Company’s~~inventory ~~results~~levels ofwill ~~operations may~~ be ~~significantly~~ affected inand ~~the~~may ~~short~~negatively ~~term~~impact ~~by fluctuations in foreign~~our ~~currency exchange rates~~business.

~~The~~If ~~Company’s~~we ~~results~~fail ofto ~~operations~~manage ~~may~~the bedistribution of our ~~affected~~products byand ~~the~~services ~~assessment~~properly, ofor ~~additional~~if ~~taxes~~our distributors’ financial condition or operations weaken, our revenue could suffer.

~~Tarantella~~We ~~has~~market ~~operations in~~products ~~many~~directly ~~countries~~and ~~other~~through ~~than~~our ~~the~~resellers ~~United~~and ~~States~~distributors. ~~Transfer~~Since ~~prices~~direct ~~for~~sales ~~services~~may ~~provided~~compete ~~between~~with the ~~United~~sales ~~States~~made by resellers and distributors, these ~~countries~~resellers ~~have~~and ~~been~~distributors ~~documented~~may aselect ~~reasonable,~~to ~~however,~~use ~~tax~~other ~~authorities~~suppliers ~~could~~that ~~challenge~~do ~~these~~not ~~transfer~~directly ~~prices~~sell ~~and~~their ~~assess additional~~own ~~taxes~~products. onAny ~~prior~~increase ~~period~~in ~~transactions.~~our ~~Any~~commitment ~~such~~to ~~assessment~~direct sales could ~~require~~cause ~~the~~conflict ~~Company~~with tosome ~~record~~of anour ~~additional~~channel ~~tax~~partners. ~~provision~~Further, some of our resellers and distributors may have insufficient financial resources and may not be able to withstand changes in ~~its~~business ~~statement~~conditions, ofincluding ~~operations~~economic weakness and industry consolidation. Revenue from indirect sales could suffer if our distributors’ and resellers’ financial condition weakens.

~~Any~~Our ~~inability~~business depends toon ~~hire,~~our ~~retain~~proprietary orrights ~~integrate~~and ~~key~~there ~~personnel~~is ~~will~~a ~~impact~~risk ~~our~~that ~~business~~such rights will be infringed.

~~The~~We ~~Company~~attempt ~~relies~~to ~~heavily~~protect onour ~~the~~software ~~contributions~~with a combination of ~~its~~patent, ~~senior~~copyright, ~~management~~trademark, ~~and~~trade ~~other~~secret ~~key management~~protection, employee and ~~technical~~third ~~personnel.~~party ~~The~~nondisclosure ~~competition~~agreements, ~~for~~license ~~such~~agreements, ~~employees~~and isother ~~extremely~~methods ~~intense~~of protection. Despite these precautions, ~~particularly~~it inmay ~~the~~be ~~technology-centric~~possible ~~regions~~for ~~where~~unauthorized wethird ~~operate.~~parties ~~The~~to ~~Company~~copy ~~may~~certain ~~not~~portions beof ~~able~~our toproducts ~~hire,~~or ~~retain~~reverse engineer or obtain and ~~integrate~~use ~~such~~information ~~key~~that ~~personnel~~we regard as proprietary. ~~The~~Further, ~~loss~~certain provisions of our licenses, ~~any~~including ~~individual~~provisions ~~member~~protecting ofagainst ~~the~~unauthorized ~~Company’s~~use, ~~management~~copying, ~~team~~transfer, orand ~~other~~disclosure ~~key~~of ~~employees~~the licensed product, may ~~create~~be ~~disruptions~~unenforceable inunder ~~its~~the ~~business~~laws of certain jurisdictions. In ~~fact~~addition, ~~most~~the laws of some foreign countries do not protect our intellectual property rights to the ~~Company’s~~same ~~senior~~extent ~~management~~as ~~team~~do the laws of the United States. If we are unable to protect our proprietary rights, ~~including~~our competitive position may be adversely affected.

• Francis E. Wilde, its Chief Executive Officer (CEO), President and a Director,

• John M. Greeley, its Chief Financial Officer,

• Gregory Quinn, its Vice President North American Operations and Strategic Alliances,

• Stephen Bannerman, its Chief Marketing Officer,

• E. Joseph Vitetta, Jr., its Vice President Corporate Development, and

• Joseph Makoid, its Vice President OEM Sales,

joined the Company recently between December 2003 and January 2004. The Company’s ability to integrate and retain these members of its management team and other employees it hires is crucial to its success. If the Company fails to do so or if it experiences further changes in its management team, its business may be adversely affected.

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

The Company may never achieve profitability in the future.

Following the divestiture of its server software and professional services divisions in May 2001, the Company has not achieved profitability, and may never generate sufficient revenues to achieve profitability. As of June 30, 2004 the Company had an accumulated deficit of approximately $134,960,000. Many of the Company’s operating expenses are relatively fixed in nature, particularly in the short term, and it expects to continue to incur significant operating expenses in connection with the expansion of its sales and marketing efforts. The Company also expects to incur noncash charges relating to amortization of intangibles related to past acquisitions. The Company must therefore generate revenues sufficient to offset these increased expenses in order for it to become profitable. The Company cannot guarantee that it will successfully generate sufficient revenues or that it will ever achieve profitability. If it does achieve profitability, it may not be able to sustain it.

~~The~~Risks ~~outcome~~ of ~~SEC~~claims ~~inquiry~~from isthird ~~uncertain~~parties for intellectual property infringement could adversely affect our business.

~~The~~As ~~Company~~the ~~has~~number ~~been~~of insoftware ~~contact~~products ~~with~~in the industry ~~Securities~~increases and ~~Exchange~~the ~~Commission~~functionality ~~regarding~~of anthese ~~informal~~products ~~inquiry~~further ~~related~~overlaps, towe ~~the~~believe ~~Company’s restatement~~that ofsoftware ~~financial~~products ~~statements~~will ~~for~~increasingly ~~fiscal~~become ~~year~~subject ~~2002~~to infringement claims. Companies and ~~the~~inventors ~~first~~are ~~two~~more ~~quarters~~frequently seeking to patent software and business methods because of ~~fiscal~~developments ~~year~~in ~~2003.~~the Atlaw ~~this~~that ~~time,~~could extend the ~~Company~~ability ~~has~~to obtain such patents. There can be no ~~information~~assurance that ~~the~~third ~~Securities~~parties will not assert infringement claims against us and/or ~~Exchange~~against ~~Commission~~our ~~intends~~suppliers of technology. In general, our suppliers have agreed to ~~take~~indemnify us in the event any ~~action~~such ~~with~~claim ~~respect~~involves supplier-provided software or technology, but responding to ~~the~~any ~~issues~~infringement claim, whether or not involving a supplier, and regardless of its validity, could ~~related~~result in costly litigation; injunctive relief or require us to obtain a license to intellectual property rights of those third parties. Licenses may not be available on reasonable terms, on terms compatible with the ~~inquiry~~protection of our proprietary rights, or at all. In addition, attention to these claims could divert our management’s time and attention from developing our business. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be materially adversely affected.

IfOur ~~the~~business ~~Company~~may isbe ~~unable~~adversely toaffected ~~effectively~~by ~~integrate and~~events ~~develop~~outside ~~the~~our ~~operations of its recent acquisitions, its business may suffer~~control.

~~The~~From ~~Company~~time ~~acquired~~to ~~New~~time, ~~Moon~~we ~~Systems~~have experienced disruption of our internal systems due to viruses, ~~Inc~~which caused denial of service to our customers and ourselves. inWhile ~~June~~we ~~2003~~have not been the target of software viruses specifically designed to impede the performance of our products, such viruses could be created and ~~Caststream~~deployed ~~Inc.~~against our products in ~~March~~the ~~2004~~future. ~~The~~Similarly, ~~Company~~experienced computer isprogrammers inor hackers could attempt to penetrate our network security or the ~~process~~security of ~~integrating~~our ~~the~~web ~~operations~~sites. A hacker who penetrates our network or web sites could misappropriate propriety information or cause interruptions of services. We might be required to expend significant capital and resources to protect against, ~~certain~~or ~~employees~~to alleviate, ~~products~~problems caused by virus creators and/or ~~technology~~hackers. ofIn ~~both~~addition, ~~New~~war, ~~Moon~~power ~~and~~shortages, ~~Caststream~~natural ~~into~~disasters, ~~its business~~acts of terror, and itregional ~~faces~~and ~~various~~global health risks ascould aimpact ~~result~~our ability to conduct business in certain regions around the world. Any of ~~this~~these ~~acquisition~~events ~~including~~could have an adverse affect on our business, ~~but~~results ~~not~~of ~~limited~~operations, ~~to:~~and financial condition.

•Our ~~The~~results ~~ability~~of tooperations ~~retain~~may ~~and~~be ~~motivate~~affected ~~certain~~by ~~New~~international ~~Moon~~economic conditions and ~~Caststream~~fluctuations ~~employees;~~in foreign currency exchange rates.

•Although ~~The~~our ~~ability~~revenues are predominantly in U.S. dollars, substantial portions of our revenues are derived from sales to ~~retain~~customers outside the United States. Trade sales to international customers represented 58%, 53% and ~~develop~~44% ~~New~~of ~~Moon~~total revenues for fiscal 2004, 2003 and ~~Caststream~~2002, ~~customers;~~respectively. Our revenues can be affected by general economic conditions in the United States, Europe and other international markets. Also, portions of our revenue and operating expenses are transacted in foreign currencies. Our operating strategy and pricing take into account changes in exchange rates over time. However, our results of operations may be significantly affected in the short term by fluctuations in foreign currency exchange rates.

• The failure to integrate the technology, operations and certain members of the workforce of New Moon and Caststream with its business;

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

• The incurrence of substantial unanticipated integration costs;

• The disruption of the Company’s ongoing business.

If the Company is not able to successfully integrate and develop the businesses of New Moon and Caststream, its business may be negatively affected in future periods, which may cause its stock price to decline. In addition, if the value of intangible assets and goodwill acquired becomes impaired, the Company will be required to write down the value of the assets, which would negatively affect its financial results. The Company may incur liabilities from New Moon or Caststream including liabilities for IP infringement or indemnification of New Moon’s or Caststream’s customers for similar claims, which could materially and adversely affect its business.

The Company may make future acquisitions that may result in additional risks.

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

• Key personnel of the acquired company may decide not to accept employment with the Company;

• The ongoing business may be disrupted or receive insufficient management attention;

• The Company may not be able to recognize the anticipated cost savings or other financial benefits;

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

~~The~~Our ~~Company’s~~results ~~stock is subject to substantial price and volume fluctuations due to a number~~ of ~~factors,~~operations ~~many of which are beyond its control, and those fluctuations~~ may ~~prevent~~be ~~shareholders~~affected ~~from~~by ~~reselling~~the ~~their~~assessment ~~common~~of ~~stock~~additional ~~at a profit~~taxes.

~~The~~We ~~stock~~have ~~market~~operations in ~~general,~~many ~~and~~countries ~~the~~other ~~market~~than ~~for~~the ~~shares~~United ofStates. ~~technology~~Transfer prices ~~companies~~for inservices ~~particular,~~provided ~~has~~between ~~experienced~~the ~~extreme~~United ~~price~~States and ~~volume~~these ~~fluctuations,~~countries ~~which~~ have ~~often~~ been ~~unrelated~~ todocumented ~~the operating performance of the affected companies. Strategic factors such~~ as ~~new~~reasonable, ~~product introductions~~however, ~~and~~tax ~~acquisitions~~authorities orcould ~~restructurings~~challenge bythese ~~the~~transfer ~~Company~~prices orand ~~its~~assess ~~competitors~~additional ~~may~~taxes ~~have a significant impact~~ on ~~the~~prior ~~market~~transactions. ~~price~~Any ofsuch ~~the~~assessment ~~Company’s~~could ~~common~~require ~~stock. Furthermore, quarter-to-quarter fluctuations in operating results may have a significant impact on the market price of the stock. These conditions, as well as factors~~ that ~~generally~~we ~~affect~~record ~~the~~an ~~market~~additional ~~for~~tax ~~stocks~~liability ofin ~~high technology~~our ~~companies,~~statement ~~could cause the price~~ of ~~the Company’s stock to fluctuate substantially over short periods~~operations.

~~The~~If ~~Company’s~~we ~~common~~are ~~stock~~unable ~~may~~to beeffectively ~~difficult~~integrate toand ~~trade~~develop the operations of our recent acquisitions, our business may suffer.

~~The~~We ~~Company’s~~acquired ~~stock was de-listed from the Nasdaq SmallCap on October 21~~Caststream, ~~2003,~~Inc. ~~and is now quoted on the Over-the-Counter~~ (“~~OTC~~Caststream”) ~~Pink~~in ~~Sheets~~March 2004. ~~Trading~~We ~~the Company’s~~are ~~stock~~in ~~may be more difficult due to~~ the ~~limited~~process ~~trading~~of ~~activity~~integrating on the ~~OTC~~operations, certain ~~market.~~employees, ~~This~~products ~~could~~and ~~cause~~technology aof ~~further~~Caststream ~~decline~~into inour ~~the~~business, ~~Company’s~~and ~~stock~~we ~~price.~~face ~~Declines~~various inrisks ~~the~~as ~~market~~a ~~price~~result of ~~the~~these ~~Company’s~~acquisitions ~~stock~~including, ~~could~~but ~~greatly~~not ~~impair~~limited ~~the Company’s ability~~ to: ~~raise capital through equity or debt financing.~~

~~The~~• ~~Company registered 24,085,891 shares of our common stock on a registration statement on Form S-1, which was declared effective by~~ the ~~SEC~~ability onto ~~August~~retain ~~13,~~and ~~2004.~~motivate ~~Those~~certain ~~shares~~key ~~are~~Caststream ~~eligible for sale on the open market, which may cause the trading price of the Company’s common stock to fluctuate or decline.~~ employees;

~~The~~• ~~Company~~the ~~has~~ability ~~registered for sale on Form S-1 up~~ to ~~24,085,891~~retain ~~shares of its common stock~~ and ~~shares~~develop ofCaststream common stock issuable upon exercise of warrants held by investors, shareholders of acquired companies, its executive officers and directors and certain other parties. While certain of the shares and warrants are subject to trading restrictions, the majority of them are not. Therefore, the Company has little control over the timing of any sales of shares by any of the selling shareholders. As a result, the market price of the Company’s common stock may fall if a large portion of those shares is sold in the public market. If the Company issues shares of its common stock in subsequent transactions, further diluting the number of shares outstanding, the price of its common stock could continue to fluctuate or decline. customers;

~~The~~• ~~corporate~~the ~~actions~~failure ofto integrate the ~~Company~~technology, ~~are~~operations ~~substantially~~and ~~controlled~~certain bymembers ~~principal~~of ~~shareholders.~~the workforce of Caststream with our business;

~~The~~• ~~Company’s~~the ~~principal~~failure ~~shareholders~~to ~~beneficially~~realize ~~own approximately 50% of its outstanding common stock. These shareholders, if they acted together, could exert substantial control over matters requiring approval by~~ the ~~Company’s~~potential ~~shareholders, including electing directors and approving mergers~~ or ~~other~~strategic ~~business~~benefits ~~combination transactions. This concentration~~ of ~~ownership may also influence~~ the outcome of a change in control of the Company, which could deprive its shareholders of an opportunity to receive a premium for their stock as part of a sale of the Company and might reduce its stock price. These actions may be taken even if they are opposed by the Company’s other shareholders. acquisitions;

~~The~~• ~~Company will incur increased costs as a result of being a public company subject to~~ the ~~Sarbanes-Oxley~~incurrence ~~Act~~ of ~~2002,~~substantial asunanticipated ~~well~~integration ascosts; ~~new rules implemented by the Securities Exchange Commission.~~ and

As• ~~a public company,~~ the ~~Company~~disruption ~~incurs significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act~~ of ~~2002,~~our ~~as well~~ongoing ~~as new rules subsequently implemented by the Securities and Exchange Commission, have required changes in corporate governance practices of public companies~~business. The Company expects these new rules and regulations to increase its legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of being a public company, the Company has created additional board committees and adopted policies regarding internal controls and disclosure controls and procedures. The Company is currently evaluating and monitoring developments with respect to these new rules, and cannot predict or estimate the amount of additional costs it may incur or the timing of such costs.

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

InWe ~~January~~could ~~2003~~make ~~the~~future ~~FASB~~acquisitions ~~issued~~that ~~FIN~~may ~~No.~~result ~~46, “Consolidation of Variable Interest Entities” and a revised interpretation of FIN No. 46 (“FIN No. 46-R”)~~ in ~~December~~additional ~~2003.~~risks ~~FIN No. 46 requires certain variable interest entities~~ to ~~be consolidated by the primary beneficiary of the entity if the equity investors in the~~ entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other partiesus. ~~The Company has no interest in variable interest entities, so the adoption of FIN No. 46-R had no effect on the Company’s financial position or results of operations.~~

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

•

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

•

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

•

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

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

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

The stock market in general, and the market for shares of technology companies in particular, has experienced extreme price and volume fluctuations, which have often been unrelated to the operating performance of the affected companies. Strategic factors such as new product introductions, acquisitions or restructurings by us or our competitors may have a significant impact on the market price of our common stock. Furthermore, quarter-to-quarter fluctuations in operating results may have a significant impact on the market price of the stock. These conditions, as well as factors that generally affect the market for stocks of high technology companies, could cause the price of our stock to fluctuate substantially over short periods.

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

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

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

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

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

The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this Quarterly Report on Form 10-Q. In addition, the stock market in general, and technology companies in particular, have experienced extreme price and volume fluctuations. The average trading volume of our common stock is low, and current trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against companies that have experienced significant declines in share price. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Our corporate actions are substantially controlled by principal shareholders.

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

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

As a public company, we incur significant legal, accounting and other expenses. In addition, the SOA, as well as new rules subsequently implemented by the SEC, have required changes in corporate governance practices of public

companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make certain activities more time-consuming and costly. For example, as a result of the SOA and related rules adopted by the SEC, we have created additional board committees and are adopting comprehensive new policies regarding internal controls and disclosure controls and procedures. We are currently evaluating and monitoring developments with respect to these new rules and are working towards becoming SOA Section 404 compliant. However, we cannot predict or estimate the full amount of additional costs related to these activities that we are likely to incur or the timing of such costs, or if we will become SOA Section 404 compliant.

Recent Accounting Pronouncements

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

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” (“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Adoption of the provisions of SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We have not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard will result in significant stock-based compensation expense. The pro forma effects on net loss per share if we had applied the fair value recognition provisions of original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in Note 3 of this Form 10-Q. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method (as described below) chosen for adopting SFAS 123R.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market-Rate Sensitive Instruments and Risk Management

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

Interest-Rate Risk

As of ~~September~~December 3031, ~~2003~~2004 the Company had cash of $35.26 million, consisting of cash and highly liquid money market instruments with maturities of less than 90 days. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. We ~~The Company~~ would not expect operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest on ~~its~~our portfolio.

Foreign Exchange Risks

Currently, ~~the Company~~we ~~denominates~~denominate sales to some European customers in ~~Euro~~Euros ~~dollars~~ and also ~~incurs~~incur expenses related to ~~its~~our European operations in UKBritish ~~pounds~~Pounds and ~~Euro dollars~~Euros. We ~~Through~~do ~~May~~not ~~2001,~~believe the ~~Company used forward~~ foreign exchange ~~contracts~~risk tois ~~manage~~great ~~foreign exchange~~enough ~~exposures~~to ~~associated~~warrant ~~with~~the ~~underlying~~purchase ~~assets,~~of ~~liabilities~~forward ~~and~~foreign ~~anticipated~~exchange ~~transactions~~contracts. ~~Since~~A ~~the~~hypothetical ~~completion~~change of ~~the~~10% ~~transaction~~ in ~~which~~ the ~~Company~~foreign ~~sold~~currency ~~the~~exchange ~~Server~~rates ~~Software~~would ~~and~~have ~~Professional~~an ~~Services~~impact ~~divisions~~on toour ~~Caldera~~consolidated ~~International, the~~financial ~~Company~~position ~~does~~or ~~not~~results ~~believe~~of ~~the~~operations ~~foreign exchange risk is great enough to warrant the purchase~~ of ~~forward~~approximately ~~foreign~~$ ~~exchange~~0.2 ~~contracts~~million.

Equity Security Price Risk

As of December 31, 2004 the Company has investments in small number of privately held companies, the carrying value of which is now zero. Historically, we do not hedge our investments in equity securities.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

~~The~~We ~~events~~have ~~cited~~carried out inan ~~this~~evaluation, ~~report are~~under the ~~subject~~supervision and with the participation of our management, including the ~~restatement~~Chief ~~that~~Executive ~~resulted~~Officer ~~from~~and ~~material~~the ~~weaknesses~~Chief inFinancial Officer, of the ~~Company’s~~effectiveness ~~system~~of the design and operation of ~~internal~~disclosure controls and ~~operations.~~procedures ~~The~~(as defined ~~Company~~in ~~has~~Rules ~~taken~~13a-15(e) and ~~intends~~15d-15(e) tounder ~~continue~~the toExchange ~~take~~Act) ~~measures~~as toof ~~cure~~the ~~these~~end ~~weaknesses,~~of ~~which~~the ~~include changes~~period covered by this report. It should be noted that the design of any system of controls is based in ~~senior~~part ~~management~~upon ~~and~~certain ~~tightening~~assumptions ~~internal~~about ~~policies~~the likelihood of future events, and ~~procedures~~there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon their evaluation, the

~~The~~36 Company has carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that disclosure controls and procedures are effective to ensure that material information required to be disclosed in the Company reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, except as noted below with respect to the restatement.

Chief Executive Officer and the Chief Financial Officer concluded that disclosure controls and procedures are effective to ensure that material information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

(b) Changes in internal controls.

There has been no change in ~~the~~our ~~Company’s~~ internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect ~~the~~our ~~Company’s~~ internal control over financial reporting. ~~The~~We ~~Company~~ will continue to assess disclosure controls and procedures and will take any further actions that are deemed necessary.

3337

Part II. Other Information

Item 1. Legal Proceedings

On October ~~August 28~~19, ~~2003~~2004, we entered into a ~~former~~ ~~Tarantella~~Settlement ~~sales~~Agreement ~~representative~~and ~~filed~~General anRelease ~~action~~of ~~against~~all ~~Tarantella,~~Claims ~~Inc.~~with ~~and~~a ~~Tarantella~~former ~~International,~~employee ~~Inc.,~~who had filed a ~~wholly~~lawsuit ~~owned~~against ~~subsidiary~~us ofin ~~Tarantella~~August ~~Inc.~~2003, ~~(collectively,~~pursuant ~~“Tarantella”)~~to inwhich the ~~California~~plaintiff ~~Superior~~gave ~~Court~~Tarantella inand ~~Santa~~its ~~Clara~~officers, directors, ~~County~~affiliates, ~~California.~~subsidiaries, ~~The~~agents, ~~complaint~~employees, ~~purports~~attorneys, tosuccessor ~~state~~and ~~claims~~assigns ~~for~~a ~~breach~~full ofrelease ~~contract~~from all claims, ~~negligent~~rights, ~~and~~demands, ~~intentional~~actions, ~~misrepresentation~~obligations, ~~fraud~~liabilities, and ~~deceit.~~causes ~~The~~of ~~complaint~~action ~~alleges~~of ~~that~~any ~~the~~and ~~plaintiff~~every iskind, ~~owed~~nature ~~commissions~~and oncharacter ~~certain~~whatsoever, ~~sales~~whether based ofon ~~Tarantella~~a ~~products~~tort, ~~and~~ ~~seeks~~contract, anstatute, ~~unspecified~~or ~~amount~~any ofother ~~damages,~~theory ~~correction~~ of ~~the~~recovery, ~~purported~~and ~~contract,~~whether ~~prejudgment~~for ~~interest,~~compensatory or punitive damages ~~and~~which ~~costs.~~the Onplaintiff ~~September~~may ~~25,~~now ~~2003~~have, ~~Tarantella~~has ~~filed~~ever ahad, ~~response~~or ~~denying~~may in the ~~claims~~future ~~and~~have, ~~asserting~~arising ~~affirmative~~or ~~defenses.~~in ~~Both~~any way connected with the ~~parties~~plaintiff’s ~~currently~~employment ~~have~~or ~~motions~~contractual ~~pending~~relationship ~~before~~with Tarantella, or the ~~court~~manner toin ~~attempt~~which tothose ~~resolve~~relationships ~~some~~terminated in exchange for a settlement amount of ~~the~~$680,000. ~~plaintiff’s~~This ~~claims~~amount was expensed in fiscal 2004. ~~The~~A ~~case~~Notice ~~has~~of ~~been~~Settlement ~~set~~was filed October 21, 2004 and a Request for ~~trial~~Dismissal with Prejudice was filed on ~~October~~or 25around November 9, 2004 in the Superior Court of California, Santa Clara County.

~~Tarantella~~No ~~believes~~other ~~the~~material ~~allegations~~legal ~~contained~~proceedings inare ~~the~~pending ~~complaint~~to which we are ~~without~~a ~~merit~~party. ~~and~~We ~~intends~~are responding to ~~continue~~claims toarising ~~defend~~in the ~~action~~ordinary ~~vigorously~~course of business. We intend ~~Should~~to ~~the~~defend ~~plaintiff’s~~ourselves ~~claims~~vigorously ~~succeed,~~in ~~however,~~these ~~Tarantella~~matters. ~~could~~Our bemanagement ~~required~~believes tothat ~~pay~~it ~~monetary~~is ~~damages,~~unlikely ~~which~~that ~~could~~the outcome of these matters will have a material adverse effect on ~~Tarantella’s~~our ~~business~~financial statements, ~~financial~~although ~~position~~there ~~and~~can ~~results~~be ofno ~~operations.~~assurance in this regard.

No Item ~~other~~2. ~~material~~Unregistered ~~legal~~Sales ~~proceedings~~of ~~are~~Equity ~~pending~~Securities toand ~~which~~Use ~~the~~of ~~Company~~Proceeds ~~is a party.~~

~~Item~~Not 2.applicable ~~Changes in Securities and Use of Proceeds~~

On December 26, 2003, the Company completed a private placement of common stock and warrants resulting in gross proceeds to the Company of approximately $2,750,000. In connection with the financing, the Company paid fees in the amount of $91,250. In the private placement, the investors purchased 2,750,000 shares of Tarantella common stock at a price of $1.00 per share. The investors also acquired warrants to purchase up to an additional 550,000 shares at an exercise price of $1.39 per share. The warrants are exercisable for five years. The Company also has agreed to register the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants for resale. In connection with the investment, the Company also amended its existing shareholder rights plan such that Special Situations shall be permitted to acquire up to 30% beneficial ownership of the outstanding stock of the Company without triggering the Company’s shareholder rights plan, provided that for purposes of determining Special Situations’ beneficial ownership, neither the warrants nor any future exercises of warrants will be considered.

On February 19, 2004, the Company announced the completion of a second private placement of common stock and warrants to various investors. In the private placement, the investors purchased 11,678,580 shares of Tarantella common stock at a price of $1.40 per share for gross proceeds of $16,350,000. The investors also acquired warrants to purchase up to an additional 2,335,714 shares at an exercise price of $1.70 per share. The warrants are exercisable for five years. If the warrants are fully exercised, the Company would receive additional gross proceeds of approximately $3,970,714. The Company also has agreed to register the shares of common stock issued to the investors as well as the shares issuable upon exercise of the warrants for resale. In connection with the financing, the Company paid fees in the amount of $1,198,000, which included placement agent fees, legal and accounting fees and issued warrants to purchase 322,500 shares at $1.70 per share.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

~~The~~Not ~~Company~~applicable ~~held its Annual Meeting of Shareholders on May 27, 2004. At the meeting, shareholders voted upon the following actions:~~

(a) Election of Directors:

	FOR	WITHHELD
Ninian Eadie	23,583,584	183,114
Ronald Lachman	23,596,875	169,823
Douglas L. Michels	23,520,449	246,249
Alok Mohan	23,546,759	219,939
Bruce Ryan	23,588,646	178,052
Francis E. Wilde	23,569,861	196,837
Gilbert P. Williamson	23,573,695	193,003

The seven nominees who received the highest number of votes (all of the above individuals) were elected to the Board of Directors, and will serve as directors until our next annual meeting and until his or her successor is elected and qualified.

(b) Amendment of 2002 Incentive Stock Option Plan to increase the number of shares reserved for issuance thereunder by 1,500,000 shares:

FOR		AGAINST		ABSTAIN		NON-VOTES
18,600,866		786,610		35,453		4,343,769

The amendment was approved.

(c) Amendment of Employee Stock Purchase Plan to increase the number of shares reserved for issuance thereunder by 250,000 shares:

FOR		AGAINST		ABSTAIN		NON-VOTES
19,106,630		283,434		32,865		4,343,769

The amendment was approved.

(d) Ratification of the appointment of Deloitte & Touche LLP as independent public accountants of the Company for the fiscal year ending September 30, 2004:

FOR		AGAINST		ABSTAIN		NON-VOTES
23,648,884		62,966		54,848		0

The appointment was ratified.

Item 5. Other Information

Not applicable

3638

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1		Certifications of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
ExhibitNumber		Description
31.2		Certifications of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
2.1		Agreement and Plan of Reorganization by and among Tarantella, Inc., Tarantella Acquisition Corporation and New Moon Systems, Inc.(1)
32.1		Certifications of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 Of the Sarbanes-Oxley Act of 2002
3.1		Amended and Restated Articles of Incorporation of Registrant.(2)
32.2		Certifications of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 Of the Sarbanes-Oxley Act of 2002
3.2		Bylaws of Registrant, as amended.(3)
10.41		Settlement Agreement and General Release of all Claims dated October 19, 2004 among Caroline Keddy, Tarantella, Inc and Tarantella International, Inc.(4)
31.1*		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 Of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 Of the Sarbanes-Oxley Act of 2002

*	filed herewith

(1)	Incorporated by reference to the Form 8-K filed on June 9, 2003.

(2)	Incorporated by reference to the Form 10-Q filed on May 14, 2004

(3)	Incorporated by reference to the Form 10-K filed on December 22, 1995.

(4)	Incorporated by reference to the Form 8-K filed on October 25, 2004.

(b) Reports on Form 8-K

The Company filed the following Reports on Form 8-K during the quarter ended ~~June~~December 3031, 2004:

On ~~April~~October 225th, ~~2004,~~ Tarantella, Inc. filed a Report on Form 8-K announcing that onit ~~March~~had ~~29,~~entered ~~2004,~~into ~~the Company completed the acquisition of Caststream, Inc.,~~ a ~~privately-held~~Settlement ~~California~~Agreement ~~corporation~~and ~~(“Caststream”),~~General ~~pursuant~~Release todated aOctober ~~Stock Exchange Agreement (the “Agreement”)~~19, ~~dated March 29,~~ 2004. ~~Pursuant~~by toand among ~~the Agreement~~Tarantella, Tarantella ~~purchased all of the outstanding shares of Caststream in exchange for a total of 200~~International,~~000~~ ~~newly~~Inc. ~~issued shares of Tarantella common stock~~ and ~~warrants.~~Caroline ~~In addition, Tarantella assumed certain liabilities estimated to be approximately $40,000~~Keddy.

On October ~~April 2~~28th, 2004, Tarantella, Inc. filed a Report on Form 8-K/A ~~amending~~reporting ~~a Form 8-K that was filed on June 9, 2003. The original Form 8-K filing announced~~ the ~~completion~~results of ~~the~~operations ~~Company~~for Tarantella’s ~~acquisition~~fourth offiscal ~~New~~quarter ~~Moon~~for ~~Systems~~the ~~Inc.,~~period aended ~~privately-held~~September ~~California.~~30, ~~The~~2004, ~~amendment~~and ~~added pro-forma~~for ~~financial~~the ~~information~~fiscal ~~that~~year ~~was~~for ~~not available at~~ the ~~time~~period ofended ~~the~~September ~~original~~30, ~~filing~~2004.

On39 ~~April 6, 2004, Tarantella, Inc. filed a Report on Form 8-K reporting the results of operations for Tarantella’s first fiscal quarter for the period ended December 31, 2003~~

On April 6, 2004, Tarantella, Inc. filed a Report on Form 8-K announcing that on March 29, 2004, the Company completed a Purchase Agreement with Olympus Securities, LLC (the “Olympus Agreement”). Pursuant to the Agreement, the Company issued 140,000 shares of the Company’s common stock at a purchase price of $1.00 per share in lieu of payment of a finder’s fee owed to Olympus Securities, LLC for the December 2003 private placement of the Company’s securities. Further, the Company has an obligation to file a registration statement for the registration of the shares.

On April 30, 2004, Tarantella, Inc. filed a Report on Form 8-K reporting the results of operations for Tarantella’s second fiscal quarter for the period ended March 31, 2004.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TARANTELLA, INC.
By:		/s/ JOHN M. GREELEY
		John M. Greeley Vice President, Chief Financial Officer August 16, 2004
By:		/s/ ROBERT MORLEY
		Robert Morley Vice President, Corporate Controller August 16, 2004

TATARANTELLA, INC.

/s/ JOHN M. GREELEY

John M. Greeley

Vice President, Chief Financial Officer

February 11, 2005

/s/ ROBERT MORLEY

Robert Morley

Vice President, Corporate Controller

February 11, 2005

3840

Filing Compare · TARANTELLA INC