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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended September 30, 2003

Commission File Number 0-21484

TARANTELLA, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (831) 427-7222

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Preferred Share Purchase Rights Common Stock, no par value

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 aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on December 31, 2003 was approximately $18,089,805. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of December 31, 2003, registrant had 15,279,271 shares of Common Stock outstanding.

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TARANTELLA, INC.

Form 10-K

For the Fiscal Year Ended September 30, 2003

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PART I

Item 1.    Business

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements include, but are not limited to, statements concerning future liquidity and financing requirements, potential price erosion, plans to make acquisitions, dispositions or strategic investments, expectations of sales volume to customers, and plans to improve and enhance existing products and develop new products.

Certain information and statements contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this report, including statements containing words such as “could”, “expects”, “may”, “anticipates”, “believes”, “estimates”, “plans”, and similar expressions, are forward-looking statements. The forward-looking statements of Tarantella, Inc. (also referred to as “Tarantella” or “The Company”) are subject to risks and uncertainties. Some of the factors that could cause future results to materially differ from the recent results or those projected in the forward-looking statements include, but are not limited to, significant increases or decreases in demand for the Company’s products, increased competition, lower prices and margins, changes in customer buying patterns, failure to successfully develop and market new products and technologies, competitor introductions of superior products, continued industry consolidation, instability and currency fluctuations in international markets, product defects, failure to secure intellectual property rights, results of litigation, failure to retain and recruit key employees, adverse economic conditions, acts of war or global terrorism, and unexpected natural disasters.

Actual results could differ materially from those projected in the forward-looking report and those described in other reports under the Securities Exchange Act of 1934. Readers are referred to the “Sales and Distribution,” “Customer Support and Service”, “Product Development,” “Competition,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and sections contained in this Annual Report on Form 10-K, which identify some of the important factors or events that could cause actual results of performances to differ materially from those contained in the forward-looking statements.

The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

Available Information

The Company’s website is http://www.tarantella.com. Through a link on the Investor Relations section of the website, the Company makes available the following filings as such reports become available on the Securities and Exchange Commission website: the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings (Form 4) and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site http://www.sec.gov. Information contained on the Company’s website is not part of this report.

Company Background

Tarantella is a leading provider of Internet infrastructure software that enables web-based access to enterprise applications from virtually any client device. Headquartered in Santa Cruz, California, Tarantella operates development centers in the United States, the United Kingdom and India with sales representatives in

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the U.S., U.K., Germany, Mexico, Canada, France, Spain and Italy. Tarantella products are sold through an integrated worldwide channel of Tarantella account executives, distributors, value-added resellers, systems integrators and computer and software manufacturers. Tarantella maintains exclusive distribution relationships in Japan as well as distribution and agent relationships in China, Northern and Southeast Asia. In total, Tarantella products are available through resellers in more than 30 countries.

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

The company’s flagship product, Tarantella Enterprise 3, a UNIX/Linux-based application access suite, is installed in corporations and governmental agencies around the world. Tarantella Enterprise 3 was introduced to the marketplace in 2001. Earlier client integration products, which are part of the Vision2K Suite, were introduced in the late 1990s and are currently still available. In June 2003, Tarantella acquired New Moon Systems Inc, and added New Moon Canaveral^™ iQ from Tarantella^® to its product offering. Canaveral iQ is a Windows-based application access suite, intended for small to mid-sized business customers and departmental deployments with Windows-only infrastructure. In aggregate, Tarantella boasts over 12,000 customer sites including several of the most respected brands in the Forbes Magazine Global 2000.

Subsequent to the issuance of the Company’s consolidated financial statements for the fiscal year ended September 30, 2002, the three months ended December 31, 2002 and the three and six months ended March 31, 2003, the Company’s management determined that the accounting treatment initially afforded to certain transactions was not correct. As a result, the accompanying consolidated financial statements for the fiscal year ended September 30, 2002 have been restated.

The effects of the restatement are presented in note 2 of the Notes to the Consolidated Financial Statements.

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

Tarantella’s vision is that application access will play an increasingly prominent role in a ubiquitously wired world. The Company believes server-based application hosting will be the most practical way of delivering applications to businesses, homes and mobile users regardless of time or location. Tarantella’s mission is to become the world’s leading provider of managed, secure and adaptive application access software for Global 2000 companies and government agencies.

Corporate Strategy

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

Importance of Web-Based Application Access

Organizations today need secure, managed access to business-critical systems for employees, customers and partners. Mobile and remote worker numbers continue to grow and more companies are consolidating, often requiring diverse computer systems to work together immediately. Workers are dispersed, needing access to data from remote locations. Home workers and extended day workers require efficient, secure access to corporate data

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outside the office. The Internet offers a cost-effective and reliable way for businesses to gain access to their data. This method, however, brings with it an urgent need for high-level security and manageability.

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

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

Key Customer Benefits: Application Access and Server-Centric Computing

Target Markets

Tarantella software products provide horizontal network infrastructure solutions, which are used across all types and sizes of companies. However, several target markets have emerged in which the Tarantella value proposition is particularly compelling, including large financial institutions, government agencies (federal, local, defense departments), utilities and telecommunications.

These enterprises generally employ heterogeneous or mixed information systems architectures, are often geographically dispersed with remote access requirements and are under operational pressures to reduce costs while optimizing a return on assets. Large companies with diverse application platforms and a widely distributed user base are an excellent fit for a Tarantella solution. The scalability and flexibility features of Tarantella’s software differentiate it from competitors who cannot scale to meet the demanding heterogeneous architectures of the largest enterprises.

Products Overview

Tarantella offers a comprehensive, server-centric computing product line serving a broad cross-section of customers. This is accomplished by market bifurcation and by addressing distinct customer segments with purpose-built software solutions: Tarantella Enterprise 3 and Canaveral iQ. As a result, Tarantella’s software solutions deliver the benefits of application access and server-centric computing to organizations with the simplest computing and network environments as well as to those with the largest and most complex.

Product Offerings

Tarantella’s product offerings include the flagship Tarantella Enterprise 3 software products, Canaveral iQ from Tarantella, as well as the established Vision2K Suite, as described below:

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Tarantella Enterprise 3

Tarantella Enterprise 3 is focused on organizations with large, heterogeneous and complex IT environments with overriding requirements for flexibility, scalability and application and data security. Tarantella Enterprise 3 customers generally have well-developed UNIX support infrastructure and capabilities. Tarantella’s patented technology was designed for the Internet and enterprise intranets. Tarantella’s Adaptive Internet Protocol (AIP) is designed to optimize the tradeoffs between bandwidth and application performance to give users the best possible experience over any speed connection.

The Tarantella architecture is based on a three-layer approach, whereby the Tarantella server sits in between the application layer (server) and the client layer (user). The non-intrusive nature of Tarantella Enterprise 3 allows installation in the network infrastructure without impacting existing applications or clients.

Tarantella Enterprise 3 software provides universal access to corporate applications, whether modern or legacy, including those that run on Microsoft^® Windows^®, UNIX^®, Linux^®, mainframe or midrange servers. With Tarantella Enterprise 3 software, users access applications remotely from a client device (anything from a thin client to a top-of-the-range PC). Users need only a web browser (such as a current version of Microsoft Internet Explorer or Netscape Navigator), with Java technology enabled. A native client version is also available to operate without a web browser. The centralized management capabilities of Tarantella Enterprise 3 scales to accommodate rapid corporate change, technological advancement and expanding remote access needs. The product can span global multi-site IT architectures, unifying and simplifying IT complexity and diversity, providing an enhanced level of business continuity via increased application availability.

Tarantella Enterprise 3’s elegant, three-tier “drop-in” architecture means there is no need to modify clients, networks, applications or the servers on which they run, making the software ideal for heterogeneous platform environments and large-scale deployment scenarios. Users access all applications through a single, unified and familiar web-based interface. Global resources are opened up without increasing vulnerability, change is managed rapidly and complex IT infrastructures can be simplified without major disruption, expensive development or costly administration.

Tarantella Enterprise 3 software enables users to access business applications over the network, without jeopardizing corporate security, affecting the end user, disrupting the existing infrastructure or requiring costly alternatives, such as a VPN. Tarantella Enterprise 3 software offers SSL security, encryption technology and firewall and proxy server traversal.

New Moon Canaveral^™ iQ from Tarantella^®

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

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

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Canaveral iQ’s two-tier architecture easily integrates into existing Microsoft environments, providing an affordable solution to centralize the hosting of applications, both over a LAN or to remote users.

Vision2K UNIX Integration Products

Integrating the Windows and UNIX worlds, Tarantella’s established Vision2K software suite extends the power and dependability of UNIX servers to the Windows desktop environment and provides character-based and GUI access to UNIX applications.

The Vision2K Suite consists of:

Competition

The Tarantella Enterprise 3 and Canaveral iQ software solutions face strong competition from a range of point products from companies that include Citrix Systems, Inc., Hummingbird Ltd., and Attachmate Corporation. For example, Citrix is the market leader in providing remote access to Windows applications, while Hummingbird and Attachmate are market leaders for UNIX and mainframes, respectively.

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

The scalability and flexibility of the solution in heterogeneous and demanding architectures differentiates Tarantella Enterprise 3 from its competitors. Tarantella Enterprise 3 installs on all major UNIX and Linux platforms and delivers Windows, UNIX, Linux, Mainframe and web-based applications. Tarantella products can also be used in place of, or to augment, VPN or extranet products.

Canaveral iQ was designed expressly to satisfy the needs of small and medium-sized enterprises and departments of larger enterprises seeking a simple and cost-effective alternative to such products as Citrix’s Metaframe XP. Canaveral iQ seamlessly installs in an organization’s existing Microsoft infrastructure to host Windows-based client software on centralized Microsoft Windows servers.

Strategic Relationships

Strong industry partners augment the Tarantella enterprise value proposition. Sun Microsystems, Inc. and Microsoft Corporation are two of Tarantella’s most valued industry partners.

Tarantella Enterprise 3 software is Sun Tone Certified. Tarantella is a featured technology/development partner for Sun Ray, Java Desktop System, SPARC Solaris and the Java Enterprise Server. Sun Professional Services has a worldwide contract to resell Enterprise 3. Tarantella has a worldwide joint marketing agreement with Sun and has signed distribution agreements with some of the largest Sun distributors in the world including GE Access in the USA, Clarity in the UK and ICOS in Italy.

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Tarantella is a Microsoft Gold Certified ISV Partner and licensee of the RDP specification. Canaveral iQ from Tarantella is viewed as an important complement to Microsoft Windows Terminal Services. Canaveral iQ completes the Terminal Services experience for end users. Tarantella’s relationships with Microsoft span development and executive relationships in Redmond, Washington, to field sales and marketing relationships around the world.

Tarantella also has built strategic relationships with IBM, Oracle and Computer Associates. Additionally, Tarantella partners with a variety of thin client vendors as well as software and hardware vendors. The Technology Alliance Group, or TAG program, enforces the Company’s dedication to forging strong alliances with these vendors and a TAG certification ensures compatibility with either Enterprise 3 or Canaveral iQ. Members of the Tarantella TAG Program include: Aventail, Sun Microsystems, Neoware, Wyse, Fujitsu Siemens, CodeWeavers and Hewlett Packard. These strategic relationships, both new and ongoing, provide Tarantella additional credibility and leverage in selling to the enterprise market.

Sales and Distribution

Tarantella’s target customers comprise the Global 2000 and government agencies worldwide. With more than 12,000 current customers, Tarantella has developed an integrated, two-pronged sales and distribution strategy. Utilizing an extremely focused direct sales force, as well as enterprise distribution channels, its sales force effectively leverages value-added distributors and resellers, systems integrators, Original Equipment Manufacturers (OEMs) and independent software vendors (ISVs). Tarantella selects channel partners based on expertise, experience and access to the target markets. In most large opportunities, channel partners and Tarantella sales representatives work together on identifying, selling and closing these targeted accounts.

In addition to its enterprise sales process, Tarantella sells to small to medium businesses through the PartnerConnect program, with registered and associate partners primarily managed by value-added distributors. Tarantella’s sales network includes the support of over 500 resellers and channel partners globally.

Customer Support and Services

Tarantella’s products are used in business-critical environments that require customer support and services to be essential to the full product offering. Tarantella’s services are designed to support customers ranging from small businesses to large enterprises, both at the end user and reseller levels. The Company offers a variety of support programs and services through its worldwide customer support and services staff as well as its authorized third-party education staff, support and channel partners:

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

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

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

The Company sells support services to end users on an annual contract basis. Options are available for customers to tailor support solutions to meet their specific needs. Electronic access to support services is available via the Internet. Software updates, enhancements and bug fixes are also available electronically. Tarantella also supports end users via Authorized Tarantella Service Providers. In addition, the Company provides support services to distributors, Value Added Resellers, OEMs and integrators.

Product Development

Tarantella product development is comprised of one integrated organization with three sites located in Santa Cruz, California, Leeds, United Kingdom, and Pune, India. Tarantella has developed or acquired skills in complex Internet infrastructure areas including web-based technologies, communications, security, Java^™

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technology, virtual user interfaces, networking, adaptive protocols, as well as deep expertise in Microsoft platforms such as Windows Terminal Services, Active Directory, and Microsoft Windows Server 2000 and 2003, Microsoft SQL, COM, and DCOM. The combined product team has developed strong links with application server vendors, including Microsoft, IBM, Sun and Oracle, as well as with client vendors manufacturing a range of products from traditional desktop and complex workstation clients to thin clients and wireless handheld devices.

Tarantella holds five patents entitled “Method of Displaying an Application on a Variety of Client Devices in a Client/Server Network”, “Universal Application Server for Providing Applications on a Variety of Client Devices in a Client/Server Network”, “Network Traffic by Instruction Packet Size Reduction”, “Detection of Peripheral Input Activity and Dynamic System Response”, “System and Method for Virtualizing and Controlling I/O of Applications”. Tarantella also has a number of patent applications pending, including “Color Quality and Packet Shaping Features for Displaying an Application on a Variety of Client Devices”, “System and Method for Dynamic Allocation of Computing Tasks”, “System and Method for Dynamic Content Allocation”, “Improved Client Server Technique for Distributed Computing”, and “System and Method for Managing Access of Distributed Resources”.

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

Employees

As of September 30, 2003, Tarantella had 90 full time equivalent employees, including 24 in product development, 35 in sales and marketing, 8 in customer support services and 23 in distribution services and administration. In addition, Tarantella employs 18 product development contractors in Pune, India.

Brief Company History

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Geographic Information

Information about the geographies in which we operate can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements at Note 19, “Segment Information and Geographic Data.”

Item 2.    Properties

The Company occupies leased office space in the United States, the United Kingdom, Germany, Spain and Italy, consisting of an aggregate of approximately 32,000 square feet. The Company believes that these facilities are adequate for its needs in the foreseeable future.

Item 3.    Legal Proceedings

On August 28, 2003, a former Tarantella sales representative, filed an action against Tarantella, Inc. and Tarantella International, Inc., a wholly owned subsidiary of Tarantella, (collectively, “Tarantella”) in the California Superior Court in Santa Clara County, California. The complaint purports to state claims for breach of contract, negligent and intentional misrepresentation, fraud, and deceit. The complaint alleges that the plaintiff is owed commissions on certain sales of Tarantella products, and seeks an unspecified amount of damages, correction of the purported contract, prejudgment interest, punitive damages and costs. On September 25, 2003, Tarantella filed a response denying the claims and asserting affirmative defenses. The case is presently in the discovery stage.

Tarantella believes the allegations contained in the complaint are without merit and intends to defend the action vigorously. Should the plaintiff’s claims succeed, however, Tarantella could be required to pay monetary damages, which could have a material adverse effect on Tarantella’s business, financial position and results.

No other material legal proceedings are pending to which the Company is a party.

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

Not applicable.

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PART II

Item 5.    Market for Registrant’s Common Stock and Related Stockholder Matters

The following required information is filed as a part of the report:

The Company’s common stock is quoted on the Over-the-Counter (“OTC”) Pink Sheets, under the symbol “TTLA.PK”. The following table sets forth the range of high and low closing sale prices for the Common Stock for the periods indicated:

On January 22, 2004, there were approximately 12,800 holders of record of the Company’s common stock, and 15,279,271 shares issued and outstanding.

The information required by this Item regarding equity compensation is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.

Dividend Policy

The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

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 $2,250,000 for which the Company will pay placement fees of $118,345. The Company issued 1,950,000 shares of common stock at a price of $1.156 and warrants to purchase 1,950,000 shares of common stock at $1.395 per share. Such shares of common stock and warrants were issued pursuant to an exemption from registration under Section 4(2) and/or Regulation D promulgated under the Securities Act of 1933, as amended. See Note 11 to the Company’s Consolidated Financial Statements. See Note 23 for details on private placements completed after September 30, 2003.

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Item 6.    Selected Financial Data

TARANTELLA, INC.

SELECTED FIVE YEAR FINANCIAL INFORMATION