SANTA CRUZ OPERATION INC, DEF 14A, 1998-01-16

SANTA CRUZ OPERATION INC
DEF 14A, 1998-01-16
PREPACKAGED SOFTWARE

Previous: SANTA CRUZ OPERATION INC, 8-K/A, 1998-01-16

Next: AZCO MINING INC, DEF 14A, 1998-01-16

<PAGE>

================================================================================

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

THE SANTA CRUZ OPERATION, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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

(2) Form, Schedule or Registration Statement No.:

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

(3) Filing Party:

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

(4) Date Filed:

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

Notes:

<PAGE>

[LOGO OF SCO]

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD FEBRUARY 17, 1998

TO THE SHAREHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of THE SANTA
CRUZ OPERATION, INC., a California corporation (the "Company"), will be held
on Tuesday, February 17, 1998, at 3:00 p.m., local time, at the Cocoanut Grove
Banquet and Conference Center, located at 400 Beach Street, Santa Cruz,
California, 95060, for the following purposes:

1. To elect directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected.

2. To approve an amendment to the Company's 1994 Incentive Stock Option
Plan (the "Option Plan") to increase the number of shares reserved for
issuance under the Option Plan by 2,000,000 shares.

3. To approve an amendment to the Company's 1993 Director Option Plan (the
"Director Plan") to increase the number of shares reserved for issuance
under the Director Plan by 200,000 shares.

4. To approve an amendment to the Company's 1993 Employee Stock Purchase
Plan (the "Purchase Plan") to increase the number of shares reserved for
issuance under the Purchase Plan by 750,000 shares.

5. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
public accountants of the Company for the fiscal year ending September
30, 1998.

6. To transact such other business as may properly come before the meeting
or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

Only shareholders of record at the close of business on December 31, 1997
are entitled to notice of and to vote at the meeting.

All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if he or she has returned a Proxy.

Sincerely,

Steven M. Sabbath
Secretary

Santa Cruz, California
January 16, 1998

YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND RETURN
IT IN THE ENCLOSED ENVELOPE.

<PAGE>

THE SANTA CRUZ OPERATION, INC.

PROXY STATEMENT FOR 1998
ANNUAL MEETING OF SHAREHOLDERS

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed Proxy is solicited on behalf of the Board of Directors of THE
SANTA CRUZ OPERATION, INC., a California corporation (the "Company"), for use
at the Annual Meeting of Shareholders to be held Tuesday, February 17, 1998,
at 3:00 p.m., local time, or at any adjournment thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting of Shareholders.
The Annual Meeting will be held at the Cocoanut Grove Banquet and Conference
Center, 400 Beach Street, Santa Cruz, California, 95060. The Company's
principal executive offices are located at 400 Encinal Street, Santa Cruz,
California, 95061-1900, and its telephone number at that location is (408)
425-7222.

These proxy solicitation materials and the Annual Report to Shareholders for
the year ended September 30, 1997, including financial statements, were first
mailed on or about January 16, 1998 to all shareholders entitled to vote at
the meeting.

RECORD DATE AND PRINCIPAL SHARE OWNERSHIP

Shareholders of record at the close of business on December 31, 1997 (the
"Record Date"), are entitled to notice of and to vote at the meeting. At the
Record Date, 36,167,625 shares of the Company's Common Stock, no par value,
were issued and outstanding. No shares of the Company's authorized Preferred
Stock were outstanding.

The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of the Record Date as to (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the outstanding shares of its Common Stock, (ii) each director and
each nominee for director of the Company, (iii) each of the executive officers
named in the Summary Compensation Table below and (iv) all directors and
executive officers as a group.

1
<PAGE>

<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE
FIVE PERCENT SHAREHOLDERS, DIRECTORS BENEFICIALLY PERCENTAGE
AND CERTAIN EXECUTIVE OFFICERS OWNED OWNED(1)
------------------------------------ ------------ -----------
<S> <C> <C>
Gilbert P. Williamson(6)........................... 78,500 *
Jean-Francois Heitz(7)............................. 63,500 *
R. Duff Thompson(8)................................ 37,000 *
Ninian Eadie(9).................................... 35,000 *
Ronald Lachman(10)................................. 115,900 *
Enzo Torresi(11)................................... 44,500 *
Glenn Ricart....................................... -0- *
Edwin Adams(12).................................... 98,141 *
Scott McGregor(13)................................. 190,236 *
Steven M. Sabbath(14).............................. 85,432 *
John H. Moyer (15)................................. 22,268 *
All directors, directors elect, and executive
officers as a group
(19 persons)(16).................................. 5,938,292 15.9%
</TABLE>
- --------
* Less than one percent
(1) Applicable percentage of ownership is based on shares of Common Stock
outstanding as of the Record Date together with applicable options held by
such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting
and investment power with respect to shares. Shares of Common Stock
subject to options currently exercisable or exercisable within sixty (60)
days after the Record Date are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 12,999 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date. Douglas Michels is the son of Lawrence Michels.
(3) Lawrence Michels is the father of Douglas Michels.
(4) Includes 224,996 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(5) Includes 78,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(6) Includes 78,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(7) Includes 63,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(8) Represents 37,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(9) Represents 35,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(10) Includes 37,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date. Includes 7,600 shares held by the Ronald and Mary Ann
Lachman Foundation of which Mr. Lachman is a director. Mr. Lachman
disclaims beneficial ownership of these shares. Also includes 30,900
shares in trust accounts established for the benefit of his minor
children of which Mr. Lachman is a trustee.
(11) Includes 38,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(12) Includes 92,123 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(13) Includes 150,150 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(14) Includes 70,998 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(15) Includes 17,461 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(16) Includes 1,127,073 shares issuable upon exercise of options to purchase
shares of Common Stock granted to executive officers and directors of the
Company that are exercisable within sixty (60) days after the Record
Date.

2
<PAGE>

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a
later date or by attending the meeting and voting in person.

VOTING AND SOLICITATION

Each shareholder is entitled to one vote for each share held. Every
shareholder voting for the election of directors (Proposal One) may cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares that such
shareholder is entitled to vote, or distribute such shareholder's votes on the
same principle among as many candidates as the shareholder may select,
provided that votes cannot be cast for more than nine (9) candidates. However,
no shareholder shall be entitled to cumulate votes unless the candidate's name
has been placed in nomination prior to the voting and the shareholder, or any
other shareholder, has given notice at the meeting, prior to the voting, of
the intention to cumulate the shareholder's votes. On all other matters, each
share of Common Stock has one vote.

This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners.
Proxies may also be solicited by certain of the Company's directors, officers
and regular employees, without additional compensation, personally or by
telephone.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.

While there is no definitive statutory or case law authority in California
as to the proper treatment of abstentions in the counting of votes with
respect to a proposal, the Company believes that abstentions should be counted
for purposes of determining both (i) the presence or absence of a quorum for
the transaction of business and (ii) the total number of Votes Cast with
respect to the proposal. In the absence of controlling precedent to the
contrary, the Company intends to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote against the
proposal. Broker non-votes will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business, but will not
be counted for purposes of determining the number of Votes Cast with respect
to the proposal.

DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS

Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's next Annual Meeting of Shareholders must
be received by the Company no later than September 30, 1998 in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.

3
<PAGE>

PROPOSAL ONE
ELECTION OF DIRECTORS

NOMINEES

A board of nine (9) directors is to be elected at the Annual Meeting of
Shareholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's nine (9) nominees named below,
eight of which are presently directors of the Company. In the event that any
nominee of the Company is unable or declines to serve as a director at the
time of the Annual Meeting of Shareholders, the proxies will be voted for any
nominee who shall be designated by the present Board of Directors to fill the
vacancy. The Company is not aware of any nominee who will be unable or will
decline to serve as a director. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner (in accordance with cumulative
voting) as will assure the election of as many of the nominees listed below as
possible, and, in such event, the specific nominees to be voted for will be
determined by the proxy holders. The term of office for each person elected as
a director will continue until the next Annual Meeting of Shareholders or
until a successor has been elected and qualified.

VOTE REQUIRED

If a quorum is present and voting, the nine (9) nominees receiving the
highest number of votes will be elected to the Board of Directors (the
"Board"). Votes withheld from any nominee are counted for purposes of
determining the presence or absence of a quorum. Abstentions and shares held
by brokers that are present but not voted because the brokers were prohibited
from exercising discretionary authority ("broker non-votes") will be counted
as present for the purposes of determining if a quorum is present.

NOMINEES

The names of the nominees and certain information about them are set forth
below:

<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION WITH THE COMPANY SINCE
--------------- --- ------------------------- --------
<S> <C> <C> <C>
Alok Mohan.............. 49 President and Chief Executive Officer and 1994
Director
Douglas L. Michels...... 43 Executive Vice President, Chief Technical 1979
Officer and Director
Robert M. McClure(2).... 62 Director 1993
Gilbert P.
Williamson(1).......... 60 Director 1993
Jean-Francois Heitz(2).. 48 Director 1994
R. Duff Thompson(1)..... 47 Director 1995
Ronald Lachman(1)....... 41 Director 1996
Ninian Eadie(2)......... 60 Director 1996
Glenn Ricart............ 48 Director Elect N/A
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee

Mr. Mohan has served as President since December 1994 and as Chief Executive
Officer since July 1995. In December 1994, he was elected as a director and
assumed the position of President and Chief Operating Officer. Prior to this
appointment, beginning in May 1994, Mr. Mohan served as Senior Vice President,
Operations and Chief Financial Officer. Prior to joining the Company, Mr.
Mohan was employed with NCR Corporation, where he served as Vice President and
General

4
<PAGE>

Manager of the Workstation Products Division, from January 1990 until July
1993 before assuming the position of Vice President of Strategic Planning and
Controller, with responsibility for financial planning and analysis as well as
worldwide reporting from, July 1993 to May 1994.

Mr. Michels has served as the head of product development since June 1997
and as Chief Technical Officer since February 1993. Mr. Michels has served as
a director of the Company since 1979. Mr. Michels has served as the Executive
Vice President since he co-founded the Company in 1979. Mr. Michels is one of
the founders of UniForum, a UNIX(R) user consortium, and served as its
President from 1989 to 1990.

Dr. McClure became a director of the Company in May 1993. Since 1978 he has
served as President of Unidot, Inc., which he founded to specialize in the
design of sophisticated computer software and hardware for equipment
manufacturers world-wide. Dr. McClure also serves as a director of General
Automation, Inc., and IPT Corporation.

Mr. Williamson became a director of the Company in May 1993. From September
1991 until May 1993, he served as Chairman of the Board and Chief Executive
Officer of NCR Corporation, and also served as a member of the Board of
Directors of AT&T. He retired from NCR and the AT&T board in May 1993. From
January 1989 until September 1991, he served as President of NCR and as a
director, and prior to that time served as Executive Vice President for
marketing at NCR for three years. Mr. Williamson is also a director of
Roberds, an Ohio-based retailer; Retix, a California-based communications
technology company; and Citizens Federal Bank, F.S.B. headquartered in Dayton,
Ohio.

Mr. Heitz became a director of the Company in September 1994. Since August
1994 he has served as the Assistant Treasurer at Microsoft Corporation. From
July 1991 to July 1994, he served as the General Manager, Business Operations
for Microsoft France, and from May 1989 until June 1991 he served as Deputy
General Manager of Microsoft France.

Mr. Thompson was appointed as a director of the Company in December 1995.
Mr. Thompson is Managing General Partner of EsNet, Ltd., an investment group
which is active in both technology and real estate ventures. From June 1994 to
January 1996, he served as Senior Vice President of the Corporate Development
Group of Novell, Inc. ("Novell"). Prior to that time, he served as Executive
Vice President and General Counsel for WordPerfect Corporation, and before
joining WordPerfect Corporation in 1986, he was a partner with the Salt Lake
City law firm of Callister, Duncan & Nebeker. Mr. Thompson is a former
Chairman of the Board of the Business Software Alliance, the principal
software industry association dealing with software industry issues, including
copyright protection and public policy.

Mr. Lachman became a director of the Company in February 1996. He is the
Chairman and founder of Internet Dynamics, Inc., a developer of Internet
software for PC-based servers. Prior to founding Internet Dynamics in April
1995, he founded Lachman Associates in January 1975 and served as its
President from January 1975 until June 1989, and in January 1993 he founded
Lachman Technology, serving as its President from January 1993 until May 1994.
Both Lachman companies developed networking software shipped with most UNIX
servers. Mr. Lachman served as Executive Vice President of Interactive
Systems, a Kodak Company, from June 1989 through the end of 1992. Mr. Lachman
is a director of UniForum, a UNIX consortium, and is on the Industrial
Advisory Board of the College of Engineering at the University of Illinois at
Chicago. He is a director of several other private networking/software
companies.

Mr. Eadie became a director of the Company in April 1996. He retired from
International Computers Limited. ("ICL") in April 1997. Mr. Eadie served as
ICL's Group Executive Director, Technology, from January 1994 until July 1996,
responsible for research, development, manufacturing and third party
distribution of all ICL products. Prior to that he served as

5
<PAGE>

President of ICL Europe from January 1990 until January 1994 and from May 1988
until January 1990, as President, ICL International. Mr. Eadie served on ICL's
Board of Directors from 1984 until 1997, and was a member of ICL's Executive
Management Committee from 1988 until 1997. He was a member of the SCO (UK)
Advisory Board from June 1994 until his appointment to SCO's Board in April
1996.

Mr. Ricart has served as Senior Vice President, Corporate Research and
Development of Novell since August 1995. In February 1996 he became the Chief
Technology Officer of Novell. Prior to joining Novell, he served at the
University of Maryland since 1982 in various capacities including, Director of
the Computer Science Department from February 1982 until August 1995 and as
the Assistant Vice Chancellor for Academic Information Technology from January
1989 until September 1994. In September 1994 he began a sabbatical at the
Advanced Research Projects Agency, a branch of the United States Department of
Defense. Mr. Ricart is Novell's representative on the Board of Directors. See
"Certain Transactions."

Enzo Torresi, a director since February 1996, will not be standing for re-
election this year. The Company appreciates Mr. Torresi's service and will
miss his presence and contributions.

There is no family relationship between any director or executive officer of
the Company.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of ten (10) meetings
during fiscal 1997, three (3) of which were held by telephone conference call.
No director attended fewer than seventy-five percent (75%) of the cumulative
meetings of the Board of Directors and committees thereof, if any, upon which
such director served. The Board of Directors has a Compensation Committee, an
Audit Committee and a Stock Option Committee. The Board of Directors has no
nominating committee or any committee performing such functions.

The Compensation Committee, which consisted of directors Ronald Lachman, R.
Duff Thompson and Gilbert Williamson at the end of fiscal 1997, met two (2)
times and acted by written consent nine (9) times during the fiscal year.
Their successors on the Compensation Committee shall be determined at the
February 17, 1998 Board meeting. This Committee is responsible for determining
salaries, incentives and other forms of compensation for directors and
officers of the Company and administers various incentive compensation and
benefit plans.

The Audit Committee, which consisted of directors Ninian Eadie, Jean-
Francois Heitz, Robert McClure and Enzo Torresi at the end of fiscal 1997, met
four (4) times during the fiscal year. Their successors on the Audit Committee
shall be determined at the February 17, 1998 Board meeting. This Committee is
responsible for overseeing actions taken by the Company's independent auditors
and reviewing the Company's internal financial controls.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for directors and officers of
the Company. Mr. Mohan, who served as President and Chief Executive Officer of
the Company, is not a member of the Compensation Committee and cannot vote on
matters decided by the Committee. Mr. Mohan has participated in the
discussions and decisions regarding salaries and incentive compensation for
all employees of and consultants to the Company, except that Mr. Mohan has
been excluded from discussions and decisions regarding his own salary and
incentive compensation. There are no interlocks between the Company's Board of
Directors or Compensation Committee and boards of directors or compensation
committees of other companies.

6
<PAGE>

PROPOSAL TWO
APPROVAL OF AMENDMENT TO THE 1994 INCENTIVE STOCK OPTION PLAN

At the Annual Meeting, the shareholders are being asked to approve an
amendment to the Company's 1994 Incentive Stock Option Plan (the "Option
Plan") to increase the number of shares of Common Stock reserved for issuance
thereunder by 2,000,000 shares.

The foregoing amendment was approved by the Board of Directors in November
1997. The adoption of the 1994 Plan, the successor to the Company's 1984
Incentive Stock Option Plan, was approved by the Board of Directors and by the
shareholders in February 1994. As of the Record Date, options to purchase an
aggregate of 8,304,167 shares were outstanding and 1,635,324 shares were
available for future grant. In addition, 3,074,174 shares had been purchased
pursuant to the exercise of stock options granted under the Option Plan. The
Option Plan authorizes the Board of Directors to grant incentive and
nonstatutory stock options to eligible employees and consultants of the
Company. The Option Plan is structured to allow the Board of Directors broad
discretion in creating equity incentives in order to assist the Company in
attracting, retaining and motivating the best available personnel for the
successful conduct of the Company's business.

During fiscal year 1997, the Board of Directors granted options to purchase
8,302,717 shares under the Option Plan, including options to purchase
4,174,738 shares granted in connection with an option exchange program
instituted by the Company on July 18, 1997 (the "Option Exchange Program"), of
Common Stock to a total of 927 optionees. The Board of Directors believes that
equity incentives in the form of stock options or stock purchase rights are an
integral part of the Company's overall compensation program and an effective
way to provide incentives to employees. The Company's standard vesting program
provides that options become exercisable at a rate of twenty-five (25%) of the
shares subject to such option per year. This results in long term incentives
for the employees, which benefit the Company because the employees' stock
options are earned over a four-year period.

VOTE REQUIRED AND BOARD OF DIRECTOR RECOMMENDATION

The affirmative vote of a majority of the Votes Cast will be required under
California law to approve the amendment to the Option Plan. An abstention or
non-vote is not an affirmative vote and, therefore, will have the same effect
as a vote against the proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT TO
THE OPTION PLAN.

SUMMARY OF THE OPTION PLAN

The essential features of the Option Plan are outlined below.

Purpose

The purposes of the Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees and consultants of the Company and to promote the
success of the Company's business.

Eligibility

The Option Plan provides that options may be granted to any director,
officer, employee or consultant of the Company or any of its designated
subsidiaries. Incentive stock options may be

7
<PAGE>

granted only to employees (including officers and employee-directors). The
Board of Directors or a committee of the Board (for the purposes of this plan
description, "Board" shall mean either the Board or a committee appointed by
the Board) selects the recipients of awards under the Option Plan and
determines the number of shares to be subject to each option.

Administration; Limits on Grants

The Option Plan provides for administration by the Board. The Option Plan is
administered so as to satisfy certain requirements under the federal
securities laws, including under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), applicable California corporate law, and the
Internal Revenue Code of 1986, as amended (the "Code"). Except as noted below,
the Board has full power to select, from among the employees and consultants
eligible for awards, the individuals to whom awards will be granted, to make
any combination of awards to any participant and to determine the specific
terms of each grant, subject to the provisions of the Option Plan. The
interpretation and construction of any provision of the Option Plan is within
the sole discretion of the Board, whose determination is final and conclusive.

The Option Plan places specific limitations on the discretion allowed to the
Board in granting options and stock purchase rights to officers. These
limitations are intended to preserve the Company's ability to deduct for
federal income tax purposes the compensation expense relating to stock options
and stock purchase rights granted to certain executive officers under the
Option Plan. Without these provisions in the Option Plan, the federal income
tax legislation enacted in August 1993 would limit the Company's ability to
deduct such compensation expense. The limitations provide that no officer
shall be granted, in any fiscal year or over the remaining term of the Option
Plan options and stock purchase rights to purchase more than the number of
shares issuable under the Option Plan.

The limits imposed by the August 1993 tax legislation on the Company's
ability to deduct compensation paid to certain of the Company's executive
officers apply not only to the persons currently serving in the effected
group, but also may be interpreted to apply to any person who in the future
becomes one of the effected group of executive officers. However, the limits
on deductibility do not apply to compensation attributable to stock options or
stock purchase rights if, among other things, the plan under which the options
or rights are granted includes limits on the discretion to make grants such as
those described above. The limits on the discretion of the Board as to
individual grants have been included in the Option Plan solely to preserve the
Company's ability to deduct such compensation. To the extent the Board
determines in the future that such limitations are not required to preserve
the deductibility of compensation related to such stock options and
appreciation rights, the Board may modify or eliminate these limitations.

See discussion below under "Certain United States Federal Income Tax
Information" for a summary of the more general rules governing the
availability to the Company of tax deductions in connection with stock options
or stock purchase rights granted under the Option Plan.

TERMS OF OPTIONS

Each option is evidenced by a written stock option agreement between the
Company and the optionee and is subject to the terms and conditions listed
below, but specific terms may vary:

Exercise of the Option: The Board of Directors determines when options
granted under the Option Plan may be exercised. An option is exercised by
giving written notice of exercise to the Company, specifying the number of
full shares of Common Stock to be purchased and tendering payment to the
Company of the purchase price. Payment for shares issued upon exercise of an

8
<PAGE>

option may consist of cash, check, promissory note, exchange of shares of the
Company's Common Stock or such other consideration as determined by the Board
of Directors.

Exercise Price: The exercise price of options granted under the Option Plan
is determined by the Board of Directors, but the exercise price of incentive
stock options may not be less than one hundred percent (100%) of the fair
market value of the Company's Common Stock, which is defined to be the closing
price as reported by the Nasdaq National Market, on the last market trading
day prior to the date of the grant of the option. In the case of incentive
stock options granted to an optionee who owns more than ten percent (10%) of
the voting power or value of all classes of stock of the Company, the exercise
price must be not less than one hundred and ten percent (110%) of the fair
market value on the date of grant. Although it is currently anticipated that
the exercise price of nonstatutory stock options will generally not be less
than eighty-five percent (85%) of the fair market value of the Company's
Common Stock on the date of grant, the Option Plan provides that the exercise
price of nonstatutory stock options shall be determined by the Board. The
closing sale price of the Company's Common Stock on the Record Date was $
4.125.

Termination of Employment: The Option Plan provides that if the optionee's
employment or consulting relationship with the Company is terminated for any
reason, other than death or permanent disability, an option may thereafter be
exercised (to the extent it was then exercisable) within such time period as
is determined by the Board (which shall be no more than three months in the
case of an incentive stock option), subject to the stated term of the option.
If the optionee's employment or consulting relationship with the Company
terminates as a result of the optionee's permanent disability, the optionee
may exercise an option at any time within a period determined by the Board not
to be less than six (6) months or, in the case of an incentive stock option,
and not to exceed twelve (12) months following the date of such termination
(but in no event later than the expiration of the term of the option), but
only to the extent that the optionee was entitled to exercise the option on
the date of such termination.

Death: If an optionee should die while an employee or a consultant of the
Company, the optionee's estate may exercise an option until the term of the
option or other shorter period set forth in the option agreement, but only to
the extent that the optionee would have been entitled had the optionee
continued living and remained in continuous status as an employee or
consultant for six (6) months after date of death.

Termination of Options: The terms of options granted under the Option Plan
may not exceed ten (10) years from the date of grant. However, any incentive
stock option granted to an optionee who, at the time such option is granted,
owned more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or a parent or subsidiary corporation, may not
have a term of more than five (5) years. No option may be exercised by any
person after such expiration.

Non-transferability of Options: All options are non-transferable by the
optionee, other than by will or by the laws of descent and distribution, and
during the lifetime of the optionee may be exercised only by such optionee.

Rights Upon Exercise: Until an option has been properly exercised, that is,
proper written notice and full payment have been received by the Company, no
rights to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the optioned stock.

Other Provisions: The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as may be
determined by the Board of Directors.

9
<PAGE>

Adjustment Upon Changes in Capitalization

In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made to the exercise price and
number of shares subject to each outstanding option and to the number of
shares which have been reserved for issuance under the Option Plan. In the
event of the proposed dissolution or liquidation of the Company, all
outstanding options automatically terminate unless otherwise provided by the
Board. The Board of Directors may in such event and in its sole discretion
declare that any option shall terminate as of a fixed date and give each
optionee the right to exercise his or her option as to all or any part of the
optioned stock, including shares as to which the option would not otherwise be
exercisable. Subject to the change in control provisions described below, in
the event of a merger of the Company with another corporation, or the sale of
substantially all of the assets of the Company, the Option Plan provides that
each outstanding option shall be assumed or an equivalent option shall be
substituted by the successor corporation. If the successor corporation does
not agree to assume the option or to substitute an equivalent option, the
Board of Directors shall provide for the optionee to have the right to
exercise the option as to all of the optioned stock, including shares as to
which the option would not otherwise be exercisable.

Change in Control Provisions

The Option Plan provides that in the event of a "Change of Control" of the
Company (as defined below) any or all or none of the following acceleration
and valuation provisions shall apply, as determined by the Board of Directors
in its discretion in the event of a Change of Control: (i) all stock options
outstanding as of the date such Change of Control is determined to have
occurred that are not yet exercisable and vested on such date will become
immediately vested and fully exercisable and (ii) to the extent exercisable
and vested, the value of all outstanding options, unless otherwise determined
by the Board of Directors prior to any Change in Control but at or after the
time of grant, will be cashed out at the "Change in Control Price" (as defined
below) reduced by the exercise price applicable to such options. A "Change of
Control" means the occurrence of (i) the acquisition by a person or entity
(other than the Company, one of its subsidiaries or a Company employee benefit
plan or trustee thereof) of securities representing twenty-five percent (25%)
or more of the combined voting power of the Company, (ii) a transaction
approved by the shareholders and involving the sale of all or substantially
all of the assets of the Company or the merger or consolidation of the Company
with or into another corporation, other than a merger or consolidation where
the shareholders immediately prior to such transaction continue to own
securities representing at least seventy-five percent (75%) or more of the
combined voting power of the Company, or (iii) a change in the composition of
the Board of Directors occurring within a two-year period, as a result of
which fewer than a majority of the directors are incumbent directors. The
"Change in Control Price" shall be, as determined by the Board, (i) the
highest closing sale price of a share of Common Stock as reported by the
Nasdaq National Market at any time within the sixty (60) day period
immediately preceding the date of determination of the Change in Control Price
by the Board or (ii) the highest price paid or offered per share, as
determined by the Board, in any bona fide transaction or bona fide offer
related to the Change in Control of the Company at any time within such sixty
(60) day period or (iii) such lower price, as the Board, in its discretion,
determines to be a reasonable estimate of the fair market value of a share of
Common Stock.

Amendment and Termination

The Board of Directors may amend, alter, suspend or terminate the Option
Plan at any time or from time to time, but any such amendment, alteration,
suspension or termination shall not

10
<PAGE>

adversely affect any option then outstanding under the Option Plan, without
the consent of the holder of the option. In any event, the Option Plan will
terminate in 2004.

In addition, to the extent necessary to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or with Section 422 of the Code
(or any other applicable law or regulation), the Company shall obtain
shareholder approval of any amendment of the Option Plan in such a manner and
to such a degree as required.

Certain United States Federal Income Tax Information

Options granted under the Option Plan may be either "incentive stock
options," as defined in Section 422 of the Code, or nonstatutory options.

If an option granted under the Option Plan is an incentive stock option, the
optionee will recognize no income upon grant of the incentive stock option and
incur no tax liability due to the exercise unless the optionee is subject to
the alternative minimum tax. The Company will not be allowed a deduction for
federal income tax purposes as a result of the exercise of an incentive stock
option regardless of the applicability of the alternative minimum tax. Upon
the sale or exchange of the shares at least two years after grant of the
option and one year after exercise of the option, any gain will be treated as
long-term capital gain. Under current law, generally the tax on long-term
capital gains is capped at twenty-eight percent (28%) (20% in the case of
shares held for at least eighteen months). If the statutory holding periods
are not satisfied, the optionee will recognize ordinary income equal to the
difference between the exercise price and the lower of the fair market value
of the stock at the date of the option exercise or the sale price of the
stock. A different rule for measuring ordinary income upon such a premature
disposition may apply if the optionee is also an officer, director or ten
percent (10%) shareholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the
optionee. Any gain recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
capital gain.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory option.
However, upon exercise of the option, the optionee will generally recognize
ordinary income for tax purposes measured by the excess of the then fair
market value of the shares over the exercise price. In certain circumstances,
where the shares are subject to a substantial risk of forfeiture when acquired
or where the optionee is an officer, director or ten percent (10%) shareholder
of the Company, the date of taxation may be deferred unless the optionee files
an election with the Internal Revenue Service under Section 83(b) of the Code.
The income recognized by an optionee who is also an employee of the Company
will be subject to tax withholding by the Company by payment in cash or
Company stock or out of the current earnings paid to the optionee. Upon resale
of such shares by the optionee, any difference between the sale price and the
exercise price, to the extent not recognized as ordinary income as provided
above, will be treated as capital gain or loss. The Company will be entitled
to a tax deduction in the same amount as the ordinary income recognized by the
Optionee with respect to shares acquired upon exercise of a nonstatutory
option.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF UNITED STATES FEDERAL
INCOME TAXATION UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT
AND EXERCISE OF OPTIONS UNDER THE OPTION PLAN AND DOES NOT PURPORT TO BE
COMPLETE. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE CODE.
IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF AN
OPTIONEE'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY,
STATE OR FOREIGN COUNTRY IN WHICH AN OPTIONEE MAY RESIDE.

11
<PAGE>

Participation in the Option Plan

The following table sets forth, for each of the named executive officers
(the "Named Executive Officers"), all current executive officers as a group,
all current directors who are not executive officers as a group, and all other
employees as a group, with respect to the Option Plan: (i) the market value of
the shares of Common Stock underlying the options granted to such persons or
group of persons during the fiscal year ended September 30, 1997, minus the
exercise price of such shares; and (ii) the number of shares of the Company's
Common Stock subject to options granted under the Option Plan during fiscal
year 1997.

1994 INCENTIVE STOCK OPTION PLAN

<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS DOLLAR
NAME OF INDIVIDUAL OR IDENTITY OF GROUP GRANTED (#) VALUES ($)(1)
--------------------------------------- ------------------ -------------
<S> <C> <C>
Alok Mohan.................................... 1,085,000(2) -0-
Douglas L. Michels............................ 198,000(2) -0-
Edwin Adams................................... 315,000(2) -0-
Steven M. Sabbath............................. 217,000(2) -0-
John H. Moyer................................. 249,000(2) -0-
Scott McGregor................................ 166,000(2) -0-
All Named Executive Officers as a group....... 2,230,000(2) -0-
All current executive officers as a group..... 3,173,000(2) $ 4,375
All current nonemployee directors as a group.. 210,000 -0-
All other employees (including current
officers who are not executive officers) as a
group........................................ 4,753,717 $144,594
</TABLE>
- --------
(1) Market value of shares based on a closing price of $ 4.125 on the Nasdaq
National Market on December 31, 1997, minus the exercise price. Shares
subject to an option with an option exercise price greater than $4.125 are
considered to have zero dollar value.
(2) This includes shares subject to options that were repriced on July 18,
1997 as follows: Alok Mohan, 600,000; Douglas L. Michels, 104,000; Edwin
Adams, 145,000; Steven M. Sabbath, 108,000; John H. Moyer, 140,000; and
Scott McGregor, 71,000.

PROPOSAL THREE
APPROVAL OF AMENDMENT TO THE 1993 DIRECTOR OPTION PLAN

At the Annual Meeting, the shareholders are being asked to approve an
amendment to the Company's 1993 Director Option Plan (the "Director Plan") to
increase the number of shares reserved for issuance under the Director Plan by
200,000 shares, bringing the total number of shares reserved under the
Director Plan to 950,000. The foregoing amendment was approved by the Board of
Directors in November 1997.

The Company believes that the ability to grant stock options to directors is
an important factor in attracting and retaining the best available individuals
for service as directors of the Company. Each year the Company reviews the
number of shares available for issuance under the Director Plan. Then, based
on the Company's estimates of the incentive value of stock options and the
number of current and potential future vacancies on the Board of Directors,
management presents to the Board a recommendation for the addition of shares
to the pool reserved for issuance under the Director Plan. The Board reviews
this recommendation and presents a proposal such as this one to the
shareholders for approval.

The Director Plan was adopted by the Board of Directors in March 1993 and
approved by the Company's shareholders in May 1993. As of the Record Date,
options to purchase an aggregate of

12
<PAGE>

415,000 shares were outstanding, 6,000 options had been exercised and 329,000
shares remained available for issuance pursuant to future option grants under
the Director Plan. The range of exercise prices per share for options
outstanding under the Director Plan at the Record Date was from $5.50 to
$12.00, and the weighted average exercise price per share was approximately
$7.062. Expiration dates for outstanding options range from May 13, 2003 to
September 30, 2007.

Vote Required and Board of Director Recommendation

The affirmative vote of the majority of the Votes Cast will be required
under California law to approve the amendment to the Director Plan. An
abstention or non-vote is not an affirmative vote and, therefore, will have
the same effect as a vote against the proposal.

THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
AMENDMENT TO THE DIRECTOR PLAN.

The essential features of the Director Plan are outlined below.

SUMMARY OF DIRECTOR PLAN

Purpose

The purposes of the Director Plan are to attract and retain the best
available individuals for service as nonemployee directors of the Company
("Outside Directors"), to provide additional incentive to the Outside
Directors and to encourage their continued service on the Board.

Administration

The Director Plan is administered by the Board of Directors, who receive no
additional compensation for such service. All grants of options under the
Director Plan are automatic and non-discretionary pursuant to the terms of the
Director Plan. All questions of interpretation or application of the Director
Plan are determined by the Board, whose decisions are final and binding upon
all participants.

Eligibility

Options under the Director Plan may be granted only to Outside Directors of
the Company. As of the Record Date, there were seven (7) Outside Directors of
the Company, six (6) of which have been nominated to serve as directors for
the next year. One additional Outside Director of the Company has been
nominated to serve as a director for the next year.

Participation

Participation in the Director Plan provides for grants of options to be made
in two ways:

a. Each Outside Director is automatically granted an option to purchase
40,000 shares (the "Initial Grant") upon the date on which such
individual first becomes a director, whether through election by the
shareholders of the Company or by appointment by the Board of Directors
in order to fill a vacancy; and

b. Each Outside Director who continues to serve on the Board, receives on
the first day of each fiscal year of the Company, an option to purchase
6,000 shares (the "Annual Grant").

An Outside Director may elect to receive cash compensation in lieu of an
Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per Board meeting payable at a rate determined by the Board.

13
<PAGE>

TERMS OF OPTIONS

Each option granted under the Director Plan is evidenced by a written stock
option agreement between the Company and the optionee. Options are generally
subject to the terms and conditions listed below.

Exercise of the Option. The Initial Grant becomes exercisable at the rate of
one-twentieth (1/20) every three months, with the effect that these options
are not exercisable as to the full number of shares until the fifth
anniversary of the date of their grant. The Annual Grant becomes exercisable
at the rate of one-fourth (1/4) every three months, with the effect that this
option is not exercisable as to the full number of shares until the first
anniversary of the date of its grant. Options granted under the Director Plan
expire ten (10) years following the date of grant. An option is exercised by
giving written notice of exercise to the Company specifying the number of full
shares of Common Stock to be purchased and by tendering payment of the
purchase price. Payment for shares purchased upon exercise of an option shall
be in such form of consideration as is authorized by the Director Plan and
determined by the Board, and such form of consideration may vary for each
option.

Exercise Price. The per share exercise price for shares to be issued
pursuant to exercise of an option under the Director Plan is one hundred
percent (100%) of the fair market value per share of the Company's Common
Stocks which is defined to be the closing price as reported by the Nasdaq
National Market on the last market trading day prior to the date of the grant
of the option. As of the Record Date, the per share market value of the
Company's Common Stock was $4.125, based on the closing price on that date on
the Nasdaq National Market.

Termination of Continuous Status as a Director. If an optionee ceases to
serve as a director, he may, but only within twelve (12) months after the date
he ceases to be a director of the Company (three months for options granted
prior to June 1, 1994), exercise his option to the extent that he was entitled
to exercise it at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that he was not entitled
to exercise the option at the date of such termination, or if he does not
exercise such option within the time specified, the option terminates.

Disability; Death. In the event that a director is unable to continue his
service as such with the Company as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Tax Code) or if an optionee
should die while a director of the Company, he or his estate may, but only
within twelve (12) months from the date of termination due to disability or
death, exercise his option to the extent he was entitled to exercise his
option at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that he was not entitled
to exercise the option at the date of such termination, or if he or his estate
does not exercise such option within the time specified, the option
terminates.

Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, options under the Director Plan shall terminate
unless otherwise provided by the Board. In such event, the Board, in its sole
discretion, may determine to make options immediately exercisable as to all
shares.

Change in Control. The Director Plan provides that in the event of a "Change
of Control" of the Company (as defined below) all stock options outstanding as
of the date such Change of Control is determined to have occurred that are not
yet exercisable and vested on such date will become immediately vested and
fully exercisable. A "Change of Control" means the occurrence of (i) the
acquisition by a person or entity (other than the Company, one of its
subsidiaries or a Company employee benefit plan or trustee thereof) of
securities representing fifty percent (50%)

14
<PAGE>

or more of the combined voting power of the Company, (ii) a transaction
involving the sale of all or substantially all of the assets of the Company or
the merger or consolidation of the Company with or into another corporation,
other than a merger or consolidation where the shareholders immediately prior
to such transaction continue to own securities representing at least fifty
percent (50%) or more of the combined voting power of the Company, or (iii) a
change in the composition of the Board as a result of which fewer than a
majority of the directors are incumbent directors. Incumbent directors are
directors who either (a) are directors of the Company as of the date the
Director Plan is approved by the shareholders, or (b) are elected, or
nominated for election, to the Board of Directors of the Company with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination, but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors of the Company.

Capital Changes. In event of any changes made in the Company's
capitalization that result in an exchange of Common Stock for a greater or
lesser number of shares without receipt of consideration, appropriate
adjustment shall be made in the exercise price and in the number of shares
subject to options outstanding under the Director Plan, as well as the number
of shares reserved for issuance under the Director Plan.

Nontransferability of Option. Options granted pursuant to the Director Plan
may not be sold, pledged, assigned, hypothecated, transferred or disposed of
in any manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the optionee, only by the optionee.

Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Director Plan as may be
determined by the Board.

AMENDMENT AND TERMINATION OF THE PLAN

The Board may at any time amend, alter, suspend or discontinue the Director
Plan, but no amendment, alteration, suspension or discontinuance shall be made
that would impair the rights of any optionee under any grant theretofore made
without such optionee's consent. In addition, to the extent necessary and
desirable to comply with Rule 16b-3 (or any other applicable law or
regulation, including the requirements of the NASD or an established stock
exchange), the Company shall obtain shareholder approval of any amendment to
the Director Plan in such a manner and to such a degree as required.

CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION

Options granted pursuant to the Director Plan are "nonstatutory options" and
will not qualify for any special tax benefit to the optionee.

An optionee will not recognize any taxable income at the time the option is
granted. Upon exercise of the option, the optionee will generally recognize
ordinary income for federal tax purposes measured by the excess, if any, of
the fair market value of the shares over the exercise price. Because shares
held by directors might be subject to restrictions on resale under Section
16(b) of the Securities Exchange Act of 1934, as amended, the date of taxation
may be deferred unless the optionee files an election with the Internal
Revenue Service pursuant to Section 83(b) of the Code within thirty (30) days
after the date of exercise.

Upon a sale by an optionee of shares acquired pursuant to an option under
the Director Plan, any difference between the sales price and the exercise
price, to the extent not recognized as ordinary income as provided above, will
be treated as capital gain or loss. The tax rate on net

15
<PAGE>

capital gain (net long-term capital gain minus net short-term capital loss) is
capped at twenty-eight percent (28%) (20% in the case of shares held for at
least eighteen months). Capital losses are allowed in full against capital
gains plus $3,000 of other income.

The Company will be entitled to a tax deduction in the amount and at the
time that the optionee recognizes ordinary income with respect to shares
acquired upon exercise of an option under the Director Plan. Generally, the
Company is not required to withhold any amount for tax purposes on any such
income included by the optionee.

THE FOREGOING SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON THE
OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT OF OPTIONS UNDER THE
DIRECTOR PLAN DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE TO
THE APPLICABLE PROVISIONS OF THE CODE. IN ADDITION, THIS SUMMARY DOES NOT
DISCUSS THE TAX CONSEQUENCES OF AN OPTIONEE'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
OPTIONEE MAY RESIDE.

PROPOSAL FOUR
APPROVAL OF AMENDMENT TO THE 1993 EMPLOYEE STOCK PURCHASE PLAN

GENERAL

The Company's 1993 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1993 and approved by its
shareholders in May 1993 and is intended to qualify under Section 423 of the
Code. A total of 2,500,000 shares of Common Stock are currently reserved for
issuance under the Purchase Plan.

AMENDMENT TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE
PURCHASE PLAN

On November 18, 1997, the Board of Directors approved an amendment to the
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 750,000 shares to an aggregate of 3,250,000 shares. As of the
Record Date, 2,500,000 shares were reserved for issuance under the Purchase
Plan, of which 1,482,236 shares had been issued.

The Board of Directors believes that it is in the best interests of the
Company to provide employees with an opportunity to purchase Common Stock of
the Company through payroll deductions. The Board of Directors believes that
the shares remaining available for issuance pursuant to the Purchase Plan are
insufficient for such purpose. Accordingly, at the Annual Meeting the
shareholders are being requested to consider and to approve the amendment of
the Purchase Plan to increase the number of shares reserved for issuance
thereunder by 750,000 shares.

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION

The affirmative vote of a majority of the Votes Cast will be required under
California law to approve the amendment to the Purchase Plan. An abstention or
non-vote is not an affirmative vote and, therefore, will have the same effect
as a vote against the proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT TO
THE PURCHASE PLAN.

16
<PAGE>

SUMMARY OF THE PURCHASE PLAN

The essential features of the Purchase Plan are outlined below.

Purpose

The purpose of the Purchase Plan is to provide employees of the Company and
its majority-owned subsidiaries designated by the Board of Directors who
participate in the Purchase Plan with an opportunity to purchase Common Stock
of the Company through payroll deduction.

Administration

The Purchase Plan is administered by the Board of Directors or a committee
appointed by the Board, and is currently being administered by the Board of
Directors. All questions of interpretation or application of the Purchase Plan
are determined in the sole discretion of the Board of Directors or its
committee, and its decisions are final and binding upon all participants.
Members of the Board of Directors who are eligible employees are permitted to
participate in the Purchase Plan but may not vote on any matter affecting the
administration of the Purchase Plan or the grant of any option pursuant to the
Purchase Plan. No member of the Board who is eligible to participate in the
Purchase Plan may be a member of the committee appointed to administer the
Purchase Plan.

Eligibility

Any person who is a regular employee of the Company (or any of its majority-
owned subsidiaries designated by the Board of Directors) and would not own
capital stock of the Company and or hold outstanding options to purchase such
stock possessing five percent (5%) or more of the total combined voting power
or value of all classes of capital stock of the Company or of any Subsidiary
is eligible to participate in the Purchase Plan. As of the Record Date
approximately 983 employees were eligible to participate in the Purchase Plan
and approximately 336 of such eligible employees were participating.

Offering Dates

The Purchase Plan is implemented by consecutive six (6) month offering
periods. Currently the offering periods commence February 1 and August 1 of
each year. The Board of Directors has the power to alter the duration of the
offering periods without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first offering
period to be affected.

Participation in the Purchase Plan

Eligible employees become participants in the Purchase Plan by delivering to
the Company's payroll office a subscription agreement authorizing payroll
deductions. An eligible employee may participate in an offering period only
if, as of the enrollment date of such offering period, such employee is not
participating in any prior offering period that is continuing at the time of
such proposed enrollment. An employee who becomes ineligible to participate in
the Purchase Plan after the commencement of an offering may not participate in
the Purchase Plan until the commencement of the next offering period.

Purchase Price

The purchase price per share at which shares are sold under the Purchase
Plan is the lower of eighty-five percent (85%) of the fair market value of a
share of Common Stock on the date of commencement of the offering period or
eighty-five percent (85%) of the fair market value of a

17
<PAGE>

share of Common Stock on the applicable exercise date within such offering
period. The fair market value of the Common Stock on a given date shall be the
closing sale price as reported by the Nasdaq National Market on such date.

Payment of Purchase Price; Payroll Deductions

The purchase price of the shares is accumulated by payroll deductions during
the offering period. The deductions may not exceed ten percent (10%) of a
participant's eligible compensation, which is defined in the Purchase Plan to
include all base pay, overtime pay, bonus and commissions during the offering
period, exclusive of all other amounts. A participant may institute decreases
in the rate of payroll deductions at any time and such decreases are
immediately effective.

All payroll deductions are credited to the participant's account under the
Purchase Plan; no interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose and such payroll deductions need not be segregated.

Purchase of Stock; Exercise of Option

At the beginning of each offering period, by executing a subscription
agreement to participate in the Purchase Plan, each employee is in effect
granted an option to purchase shares of Common Stock. The maximum number of
shares placed under option to a participant in an offering period is
determined by dividing the compensation which such participant has elected to
have withheld during the exercise period by eighty-five percent (85%) of the
fair market value of the Common Stock at the beginning of the offering period
or on the applicable exercise date, whichever is lower; provided that such
number shall not exceed the number of shares determined by dividing $12,500 by
the fair market value of a share of the Company's Common Stock on the
enrollment date. Notwithstanding the foregoing, no employee may make aggregate
purchases of stock of the Company and its majority-owned subsidiaries under
the Purchase Plan and any other employee stock purchase plans qualified as
such under Section 423(b) of the Code in excess of $25,000 (determined using
the fair market value of the shares at the time the option is granted) during
any calendar year.

Withdrawal

While each participant in the Purchase Plan is required to sign a
subscription agreement authorizing payroll deductions, a participant may
terminate his or her participation in the Purchase Plan at any time by signing
and delivering to the Company a notice of withdrawal from the Purchase Plan.
All of the participant's accumulated payroll deductions will be paid to the
participant promptly after receipt of his or her notice of withdrawal and his
or her participation in the current offering period will be automatically
terminated, and no further payroll deductions for the purchase of shares will
be made during the offering period. No resumption of payroll deductions will
occur on behalf of such participant unless such participant re-enrolls in the
Purchase Plan by delivering a new subscription agreement to the Company during
the applicable open enrollment period preceding the commencement of a
subsequent offering period. A participant's withdrawal from the Purchase Plan
during an offering period does not have any effect upon such participant's
eligibility to participate in subsequent offering periods under the Purchase
Plan.

Termination of Employment

Termination of a participant's employment for any reason, including
retirement or death, cancels his or her participation in the Purchase Plan
immediately. In such event, the payroll

18
<PAGE>

deductions credited to the participant's account will be returned to such
participant or, in the case of death, to the person or persons entitled
thereto as specified by the employee in the subscription agreement.

Capital Changes

If any change is made in the capitalization of the Company, such as stock
splits or stock dividends, which results in an increase or decrease in the
number of shares of Common Stock outstanding without receipt of consideration
by the Company, appropriate adjustments will be made by the Company to the
number of shares subject to purchase and to the purchase price per share,
subject to any required action by the shareholders of the Company. In the
event of the proposed dissolution or liquidation of the Company, the offering
period then in progress will terminate immediately unless otherwise provided
by the Board of Directors. In the event of the proposed sale of all or
substantially all of the assets of the Company or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or
an equivalent option shall be substituted by the successor corporation, unless
the Board of Directors determines, in its discretion, to accelerate the
exercisability of all outstanding options under the Purchase Plan or to cancel
the options and refund all sums collected. The Board of Directors may also
make provisions for adjusting the number of shares subject to the Purchase
Plan and the purchase price per share if the Company effects one or more
reorganizations, rights offerings or other increases or reductions of shares
of the Company's outstanding Common Stock.

Certain United States Federal Income Tax Information

The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and
423 of the Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant
will generally be subject to tax, and the amount of the tax will depend upon
the holding period. If the shares are sold or otherwise disposed of more than
two years from the first day of the offering period, the participant will
recognize ordinary income measured as the lesser of (a) the excess of the fair
market value of the shares at the time of such sale or disposition over the
purchase price, or (b) an amount equal to fifteen percent (15%) of the fair
market value of the shares of the first day of the offering period. Any
additional gain will be treated as long-term capital gain. If the shares are
sold or otherwise disposed of before the expiration of this holding period,
the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
how long the participant holds the shares. The Company is not entitled to a
deduction for amounts taxed as ordinary income or capital gain to a
participant except to the extent of ordinary income recognized by the
participant upon a sale or disposition of shares prior to the expiration of
the holding period described above.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED
UNDER THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS
OF THE CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF
A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY
IN WHICH THE PARTICIPANT MAY RESIDE.

Stock Price

The closing price of a share of the Common Stock on the Nasdaq National
Market on the Record Date was $4.125.

19
<PAGE>

Participation in the Purchase Plan

The Company cannot now determine the number of shares to be purchased in the
future by the Named Executive Officers, all current executive officers as a
group, all current nonemployee directors of the Company ("Outside Directors")
as a group or all other employees (including current officers who are not
executive officers) as a group. In fiscal 1997, however, the following shares
of Common Stock were purchased by such persons pursuant to the Purchase Plan.

<TABLE>
<CAPTION>
NAME OR GROUP NUMBER OF SHARES DOLLAR VALUE(1)
------------- ---------------- ---------------
<S> <C> <C>
Alok Mohan.................................... 3,770 $ 3,268
Douglas L. Michels............................ -0- -0-
Edwin Adams................................... 3,138 2,605
Steven M. Sabbath............................. 3,584 3,073
John H. Moyer................................. 3,691 3,185
Scott McGregor................................ 3,770 3,268
All Named Executive Officers as a group....... 17,953 15,398
All current executive officers as a group..... 21,986 18,741
All other employees (including current
officers who are not executive officers as a
group)....................................... 409,365 $347,333
</TABLE>
- --------
(1) Market value of shares on the date of purchase, minus the purchase price
under the Purchase Plan.

PROPOSAL FIVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS

On December 30, 1997, the Company dismissed KPMG Peat Marwick LLP ("KPMG")
as the Company's independent public accountants, a capacity in which the firm
had served for several years, and selected Coopers & Lybrand LLP ("Coopers &
Lybrand") to replace KPMG in this role. The decision to change the Company's
independent accountants was approved by the Company's full Board of Directors.

During the Company's two most recent fiscal years and the subsequent interim
period preceding the change in accountants, there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG, would have caused KPMG to make reference
to the subject matter of the disagreements in connection with its reports on
the Company's financial statements for the two most recent fiscal years. In
addition, KPMG's reports on the financial statements of the Company for the
past two years contained unqualified opinions.

KPMG wrote a letter to the Audit Committee related to its audit of the
Company's consolidated financial statements of the fiscal year ended September
30, 1997 in which it included a reportable condition pertaining to the
reliability of the Company's system for monitoring the quantity of inventory
held by distributors and the completeness of the criteria applied to such data
that could effect the determination of appropriate allowances for returns and
exchanges from distributors. Subsequent to the close of the fiscal year, the
Company has continued to implement improved systems and reporting disciplines,
as well as undertake a program of onsite physical verification at major
distributor locations. The subject matter of the reportable condition was
discussed with a member of the Company's Audit Committee.

The Board of Directors has selected Coopers & Lybrand LLP as independent
public accountants to audit the consolidated financial statements of the
Company for the fiscal year ending September 30, 1998 and recommends that
shareholders vote for ratification of such appointment. In the event of a
negative vote on ratification, the Board of Directors will reconsider its
selection.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT PUBLIC
ACCOUNTANTS.

20
<PAGE>

EXECUTIVE COMPENSATION AND OTHER MATTERS

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation paid by the Company during
the three fiscal years ended September 30, 1997, to (i) the Company's Chief
Executive Officer, (ii) each of the four other most highly compensated
executive officers of the Company, and (iii) one former executive officer who
would have been included in the category described in subsection (ii) had he
still been an executive officer at fiscal 1997 year end of the Company whose
salary plus bonus exceeded $100,000 in fiscal 1997:

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
AWARDS
------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#) COMPENSATION($)(2)
------------------ ---- --------- ----------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Alok Mohan.............. 1997 $317,596 $90,353 $ 2,303(3) 1,085,000(4) $3,000
President, Chief 1996 293,496 71,165 19,719(5) -0- 780
Executive Officer 1995 274,933 58,787 100,000(6) 335,000 752
Douglas L. Michels...... 1997 256,868 70,056 1,527(7) 198,000(8) 3,000
Executive Vice 1996 243,811 35,438 10,264(9) -0- 3,585
President and Chief 1995 235,431 58,682 13,223 70,000 2,723
Technical Officer
Edwin Adams............. 1997 221,248 85,556 12,250(10) 315,000(11) 3,000
Senior Vice 1996 202,469 59,114 25,289(12) -0- 2,451
President and 1995 179,415 44,933 6,650(13) 50,000 1,430
General Manager,
The Americas
Steven M. Sabbath....... 1997 191,424 56,785 6,216(14) 217,000(15) 3,000
Vice President, Law 1996 178,074 24,478 11,413(16) -0- 2,403
and Corporate Affairs 1995 170,096 40,175 31,500 1,377
and Secretary
John H. Moyer(17) ...... 1997 188,404 44,957 1,196(18) 249,000(19) 3,000
Vice President, 1996 178,662 30,881 8,758(20) -0- 2,000
Human Resources 1995 26.923 -0- -0- 66,000 269
Scott McGregor(21)...... 1997 231,153 79,195 2,992(22) 166,000(23) 3,000
Former Senior Vice 1996 180,573 63,387 14,130(24) -0- 2,463
President, Products 1995 171,046 75,328 -0- 62,000 1,428
</TABLE>
- -------
(1) The Company pays bonuses to executive officers as are determined by the
Board of Directors. The bonuses for each executive officer are based on
the officer's base salary, the Company's financial performance and
individual performance during the fiscal year.
(2) The dollar amounts in this column represent premium payments made by the
Company with respect to insurance policies for the Named Executive
Officers for which the Company is not a beneficiary. In addition, this
includes 401(k) contributions in the amount of $3,000 paid by the
Company, on behalf of Mr. Mohan, Mr. Michels, Mr. Adams, Mr. McGregor,
Mr. Sabbath and Mr. Moyer.
(3) The dollar amount represents accrued payroll and bonus.
(4) Includes 600,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(5) The dollar amounts represent tax consulting services ($3,247), and
accrued payroll and bonus ($16,472).
(6) Represents relocation and moving allowance.
(7) Represents accrued payroll and bonus ($1,527).
(8) Includes 104,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(9) Represents car repairs ($1,908) and accrued payroll and bonus ($8,356).
(10) Represents auto lease payment ($7,816), tax preparation ($2,685), and
accrued payroll and bonus ($1,749).
(11) Includes 145,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(12) Represents auto lease payment ($9,536), tax consulting services ($5,400),
interest on employee loan ($1,375), and accrued and bonus ($8,978).
(13) Represents the amount of an automobile lease for the benefit of Mr.
Adams.
(14) Represents tax consulting services ($4,922) and accrued payroll and bonus
($1,294).
(15) Includes 108,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(16) Represents tax consulting services ($5,408) and accrued payroll and bonus
($6,005).
(17) Mr. Moyer joined the Company August 1995.
(18) Represents accrued payroll and bonus ($1,196).
(19) Includes 140,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.

21
<PAGE>

(20) Represents accrued payroll and bonus ($8,758).
(21) Mr. McGregor resigned from the Company in May 1997.
(22) Represents tax consulting services ($467) and accrued payroll and bonus
($2,525).
(23) Includes 71,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(24) Represents tax consulting services ($4,353), employee loan balance
($3,353) and accrued payroll and bonus ($6,424).

OPTION GRANTS IN FISCAL 1997

The following table sets forth each grant of stock options during the fiscal
year ended September 30, 1997 to the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL OPTION ANNUAL RATES OF STOCK
NUMBER OF SHARES EXERCISE PRICE APPRECIATION
OPTION GRANTED TO PRICE FOR OPTION TERM (3)
SHARES EMPLOYEES IN ($ PER EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR(2) SHARE) DATE 5%($) 10%($)
---- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alok Mohan.............. 165,000 2.04% $ 7.125 10/07/06 $ 739,344 $1,873,643
100,000 1.24 6.3125 04/01/07 396,990 1,006,050
600,000(4) 7.41 4.875 07/17/07 1,839,516 4,661,695
220,000 2.71 6.50 09/04/07 899,319 2,279,052
Douglas L. Michels...... 11,299 .14% $7.8375 10/07/01 $ 14,192 $ 41,099
22,701 .28 7.125 10/07/06 101,720 257,779
87,536 1.08 5.3625 07/17/02 75,227 217,855
16,464(4) .20 4.875 07/18/07 50,476 127,917
59,243 .73 6.50 09/04/07 242,174 613,718
757 .01 7.15 09/04/02 867 2,512
Edwin Adams............. 55,000 .68% $ 7.125 10/07/06 $ 246,448 $ 279,423
40,000 .49 6.25 03/30/07 157,224 398,436
145,000(4) 1.79 4.875 07/17/07 444,550 1,126,577
75,000 .93 6.50 09/04/07 306,586 776,949
Steven M. Sabbath....... 34,000 .42% $ 7.125 10/07/06 $ 152,349 $ 386,082
40,000 .49 6.25 03/30/07 157,223 398,436
108,000(4) 1.3 4.875 07/17/07 331,114 839,106
35,000 .43 6.50 09/04/07 143,073 362,576
John H. Moyer........... 34,000 .42% $ 7.125 10/07/06 $ 152,349 $ 386,084
40,000 .49 6.25 03/30/07 157,223 398,435
140,000(4) 1.73 4.875 07/17/07 429,221 1,087,729
35,000 .43 6.50 09/04/07 143,074 362,576
Scott McGregor.......... 55,000 .68% $ 7.125 10/07/06 $ 246,449 $ 624,548
40,000 .49 6.25 03/30/07 157,223 24,902
71,000(4) .88 4.875 07/17/07 217,677 551,634
</TABLE>
- --------
(1) All options were granted under the Option Plan. The option exercise price
of all stock options granted under the Option Plan is generally equal to
the fair market value of the shares of Common Stock on the date of grant.
The options have a term of 10 years (5 years in the case of incentive
stock options granted to Mr. Michels) and generally vest at the rate 25%
of the shares subject to the option per year in which the optionee remains
in continuous status as an employee or consultant.

(2) The Company granted options to purchase an aggregate of 8,092,717 shares
to employees in fiscal 1997, of which 4,174,738 shares were granted in
connection with the Option Exchange Program. 1,168,000 shares were granted
to the Named Executive Officers under the option exchange program.

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

(4) On July 18,1997 the Board of Directors adopted an Option Exchange Program
pursuant to which certain options held by Named Executive Officers were
exchanged for new options at a price of $4.875 with the following vesting
schedule: 1/16th of the shares subject to the option shall vest every
three (3) months from the vesting commencement date. See "Executive
Compensation and Other Matters-Report of the Compensation Committee of the
Board of Directors-Fiscal Year 1997 Repricing of Options."

22
<PAGE>

AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND FISCAL YEAR-END OPTION VALUES

The following table provides information on option exercises in fiscal 1997
by the Named Executive Officers and the value of such officers' unexercised
options at September 30, 1997.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF THE-MONEY OPTION SHARES
UNEXERCISED OPTION SHARES ON SEPTEMBER 30,
ON SEPTEMBER 30, 1997 1997($)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alok Mohan.................. 133,333 886,667 $25,000 $425,000
Douglas L. Michels.......... 0 164,000 0 28,826
Edwin Adams................. 69,000 251,000 $17,063 108,875
Steven M. Sabbath........... 57,500 143,000 246,094 74,250
John H. Moyer............... 0 175,000 0 96,250
Scott McGregor.............. 136,400 174,600 283,344 56,469
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on the Nasdaq National Market minus the exercise
price.

(2) Market value of securities underlying unexercised in-the-money options
based on the closing price of the Company's Common Stock on September 30,
1997 (the last trading day of fiscal 1997) on the Nasdaq National Market
of $5.5625, minus the exercise price.

EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS

The Company has entered into an agreement with Alok Mohan pursuant to which,
in the event Mr. Mohan's employment with the Company terminates as a result of
constructive termination, termination without cause, or voluntary termination
within three months of a Change of Control, Mr. Mohan's stock options shall
become exercisable in full. Mr. Mohan is entitled to serve as a consultant to
the Company for a period of one year following termination of employment for
any reason except termination due to disability or for cause. Mr. Mohan shall
have six months from the end of such consultancy in which to exercise any
stock options.

The Company entered into a consultancy agreement with Scott McGregor, in
connection with his resignation as Senior Vice President, Products, for
services commencing on June 1, 1997 and continuing until May 31, 1998.
Pursuant to such agreement, Mr. McGregor receives $8,648 every two weeks. Mr.
McGregor received $75,245 in fiscal year 1997. In addition, he received two
bonus payments of $11,243, based on the Company's performance as set forth in
The Santa Cruz Operation Corporate Management Incentive Plan for fiscal year
1997. No additional bonuses shall be due to Mr. McGregor during the term of
the agreement. Mr. McGregor's stock options shall continue to vest through
October 8, 1997, however, his options shall remain exercisable through May 31,
1998, and in addition, McGregor shall have the standard exercise window in
which to exercise subsequent to May 31, 1998, as specified in his stock option
agreements. In the event of a change in control of the Company, as defined in
the Stock Option Plan, on or before May 31, 1998, Mr. McGregor's stock options
shall vest fully on such date and become fully exercisable. Also, pursuant to
the agreement, the Company shall continue to maintain collateral on Mr.
McGregor's loan at Bank of the West, serving to guarantee his home loan, until
May 31, 1998.

In March of 1996, the Board of Directors approved a resolution providing
that prior to or after a change in control, as defined in the Option Plan, any
outstanding options held by corporate officers that were granted pursuant to
the Option Plan that are not at such time exercisable and vested shall become
fully exercisable and vested.

23
<PAGE>

The Company adopted a change in control plan in June 1997 and, accordingly,
has entered into change in control agreements with each of the Named Executive
Officers. Pursuant to these agreements, each such officer is eligible to
receive, in the event that his or her employment is involuntarily terminated
within one year following a change in control of the Company, an amount equal
to the product of twelve (12) times his or her annual compensation including
targeted bonuses at 100% attainment, continuation of health benefits, life
insurance, long-term disability and other fringe benefit plans available to
him or her prior to the involuntary termination of employment for twelve (12)
months thereafter and accelerated vesting on all options held. Pursuant to the
terms of these agreements, a change in control is as defined in the 1994
Incentive Stock Option Plan described herein.

There are no other employment contracts between the Company and any of the
executive officers named in the Summary Compensation Table above.

COMPENSATION OF DIRECTORS

During fiscal 1997, eight payments of $5,000 each were paid to director
Torresi for consulting services rendered in October 1996 through May 1997.
Pursuant to a consulting agreement the Company entered into with Mr. Torresi
in February 1996, the Company shall pay $5,000 per month for up to three days
service per month plus reasonable expenses. If additional services are
required during the month, additional compensation shall be mutually agreed by
the parties. In November 1997, the Board approved an amendment to the
consultancy arrangement with Mr. Torresi. The term of the consultancy shall be
for one year. Either party may, by mutual consent, enter into one or two
extensions of the term of the consultancy agreement, but neither party will be
required to do so. During the term of the consultancy, stock options
previously granted to Mr. Torresi, pursuant to the Incentive Stock Option Plan
will continue to vest, however stock options pursuant to the Director Option
Plan will not continue to vest. In addition, each year of Mr. Torresi's
consultancy he will be given a stock option grant for 10,000 shares with
vesting commencing on February 17, 1998, which shall vest quarterly over the
one year term. Mr. Torresi shall receive no cash compensation for his
consultancy, but will be reimbursed for related expenses. Pursuant to a
consulting agreement with director Williamson, the Company shall pay $1,000 a
day, plus reasonable expenses, for consulting services rendered to the Board
of Directors and $2,500 a day for consulting services pertaining to the
general business of the Company to be provided on an as-needed basis. The
Company has a consulting agreement with director McClure, pursuant to which
the Company shall pay $1,000 per day, plus reasonable expenses, for consulting
services pertaining to the general business of the Company, to be provided on
an as-needed basis. In fiscal 1997, the Company did not retain Mr. Williamson
or Mr. McClure for any consulting services and, therefore, no payments were
made in fiscal 1997. Directors are reimbursed for certain expenses in
connection with attendance at board and committee meetings.

Outside Directors (nonemployee directors) receive compensation for their
service on the Board pursuant to the 1993 Director Plan (the "Director Plan").
This compensation is in the form of stock options or in the case of the Annual
Grant, which is automatically granted on the first day of each fiscal year,
they may elect to be paid cash for each meeting attended, in lieu of a stock
option. All current outside directors have elected stock options for fiscal
year 1997.

The Company's 1993 Director Option Plan (the "Director Plan"), which
provides for the grant in nonstatutory stock options to nonemployee directors
of the Company, was adopted by the Board of Directors in March 1993 and
approved by the shareholders in May 1993. The Company has reserved a total of
750,000 shares of Common Stock for issuance pursuant to the Director Plan.
(See Proposal No. 3 for the proposed addition of 200,000 shares.) The Director
Plan is currently administered by the Board of Directors. Under the Director
Plan, each nonemployee director automatically receives a nonstatutory option
to purchase 40,000 shares of the Company's Common

24
<PAGE>

Stock on the date upon which such person first becomes a director (the
"Initial Grant"). In addition, each nonemployee director who remains in
continuous status as a nonemployee director is automatically granted a
nonstatutory option (the "Annual Grant") to purchase 10,000 shares of Common
Stock on the first day of each fiscal year, 6,000 shares of which are pursuant
to the Director Option Plan and 4,000 of which are pursuant to the Incentive
Stock Option Plan.

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

In the event of a merger of the Company with or into another corporation or
a consolidation, acquisition of assets of like transaction involving the
Company immediately prior to occurrence of a change in control, any
outstanding each option shall become fully exercisable and vested.

Unless terminated sooner, the Director Plan will terminate in 2003. The
Board has authority to amend or terminate the Director Plan, provided no such
action may affect options already granted and such options shall remain in
full force and effect. As of the Record Date, options to purchase 415,000
shares of Common Stock at a weighted average exercise price (per share) of
approximately $7.06 per share were outstanding and 329,000 shares remained
available for future option grants under the Director Plan.

In addition, on August 14, 1997, the Board approved a grant to the outside
directors pursuant to the Option Plan, for the following amounts: Gilbert
Williamson 40,000 shares; Robert McClure 40,000 shares; Jean-Francois Heitz
30,000 shares; R. Duff Thompson 25,000 shares; Enzo Torresi 25,000 shares;
Ronald Lachman 25,000 shares; and Ninian Eadie 25,000 shares. Such options
become exercisable based on such individuals' continued service as directors.
An Outside Director may elect to receive cash compensation in lieu of an
Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per Board meeting payable at a rate determined by the Board.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

The Compensation Committee of the Board of Directors serves as an
administrative arm of the Board to make decisions regarding executive
compensation and to make recommendations to the Board on compensation matters
generally. The following is the report of the Compensation Committee
describing compensation policies and rationales applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the fiscal year ended September 30, 1997. The information
contained in such report shall not be deemed to be "soliciting material" or to
be "filed" with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the
Securities Act or Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.

25
<PAGE>

General

The Compensation Committee is a standing committee comprised of three
nonemployee directors. After evaluating management's performance the
Compensation Committee recommends compensation and pay levels to the full
Board for approval. Stock option grants to executive officers are approved by
this committee.

Overview and Policies for 1997

The goals of the Compensation Committee are to attract, motivate, reward and
retain the key executive talent necessary to achieve the Company's business
objectives and contribute to the long-term success of the Company. The
Compensation Committee currently uses salary, bonus and stock options to meet
these goals.

In fiscal 1997, the Compensation Committee reviewed the compensation of the
Company's executive officers by evaluating each executive's scope of
responsibility, prior experience and salary history, and also took into
account the salaries for similar positions at comparable high technology
companies. In reviewing the compensation, the Compensation Committee focused
on each executive's prior performance with the Company and expected
contribution to the Company's future success.

The Company provides long-term incentives to executive officers through the
Option Plan. The purposes of the Option Plan are to attract and retain the
best employee talent available and to create a direct link between
compensation and the long-term performance of the Company. In general, the
Option Plan incorporates four-year vesting periods to encourage employees to
remain with the Company. The size of each option grant is based on the
recipient's position and tenure with the Company, the recipient's past
performance, and the size of previous stock option grants, primarily weighted
toward the recipient's position. In fiscal 1997, the Company continued its
policy of granting stock options to new employees and granted additional stock
options to employees, including executive officers, who had made and were
expected to make significant contributions to the Company's development. These
stock option grants were based primarily on the scope of the executive
officer's responsibilities at the Company and the remuneration to be paid to
such officer.

The compensation for Alok Mohan in fiscal 1997 was approved by the Board of
Directors. The Compensation Committee made its recommendation and the Board
made its determination of the Chief Executive Officer's compensation after
considering the same factors used to determine the compensation of other
executive officers.

Fiscal Year 1997 Repricing of Options. In June 1997, the Board of Directors
of the Company determined that the purposes of the 1994 Incentive Stock Option
Plan, were not being adequately achieved with respect to those employees
holding options that were exercisable above current market value and that it
was essential to the best interest of the Company and the Company's
shareholders that the Company retain and motivate such employees. The Board
further determined that it would be in the best interest of the Company and
the Company's shareholders to provide such optionees the opportunity to
exchange their above market value options for options exercisable at current
market value. On July 18, 1997, upon approval by the Board of Directors of the
Company, the Company offered all current employees with outstanding options
the opportunity to exchange such options for new stock options to purchase the
same number of shares at an exercise price of $4.875 per share, the fair
market value of the Common Stock of the Company on the close of business for
the most recent trading day prior to that date. Any holder accepting this
offer was required to give up existing vesting on the old option and accept
four year vesting commencing July 18, 1997 for the new option.

26
<PAGE>

The following table sets forth information with respect to the repricing of
those options held by the Named Executive Officers of the Company.

TEN-YEAR OPTION REPRICING

<TABLE>
<CAPTION>
MARKET
NUMBER OF PRICE OF EXERCISE
SECURITIES STOCK AT PRICE AT LENGTH OF
UNDERLYING TIME OF TIME OF ORIGINAL OPTION
OPTIONS REPRICING REPRICING NEW TERM REMAINING AT
NAME AND PRINCIPAL DATE OF REPRICED OR OR EXERCISE DATE OF REPRICING
POSITION REPRICING OR AMENDED AMENDMENT AMENDMENT PRICE OR AMENDMENT
------------------ --------- ---------- --------- --------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Alok Mohan, 07/18/97 60,000 $4.875 $ 10.00 $ 4.875 7 years 4 months
President and Chief 07/18/97 25,000 4.875 9.625 4.875 7 years 5 months
Executive Officer 07/18/97 150,000 4.875 9.1875 4.875 7 years 11 months
and Director 07/18/97 100,000 4.875 9.00 4.875 8 years 2 months
07/18/97 165,000 4.875 7.125 4.875 9 years 3 months
07/18/97 100,000 4.875 6.3125 4.875 9 years 9 months
Douglas L. Michels, 07/18/97 35,000 $4.875 $11.275 $5.3625 7 years 4 months
Executive Vice 07/18/97 23,000 4.875 9.00 5.3625 8 years 2 months
President and Chief 07/18/97 22,701 4.875 7.125 5.3625 9 years 3 months
Technology Officer 07/18/97 4,010 4.875 9.9000 5.3625 8 years 2 months
and Director 07/18/97 2,825 4.875 7.8375 4.875 8 years 2 months
07/18/97 7,990 4.875 9.9000 5.3625 9 years 3 months
07/18/97 8,474 4.875 7.8375 4.875 9 years 3 months
Edwin Adams, 07/18/97 25,000 $4.875 $ 10.00 $ 4.875 7 years 4 months
Senior Vice 07/18/97 6,000 4.875 9.00 4.875 8 years 2 months
President and 07/18/97 19,000 4.875 9.00 4.875 8 years 2 months
General Manager, 07/18/97 55,000 4.875 7.125 4.875 9 years 3 months
The Americas 07/18/97 40,000 4.875 6.25 4.875 9 years 9 months
Steven M. Sabbath, 07/18/97 2,500 $4.875 $ 6.625 $ 4.875 6 years 5 months
Vice President, Law 07/18/97 15,500 4.875 10.00 4.875 7 years 4 months
& Corporate Affairs 07/18/97 16,000 4.875 9.00 4.875 8 years 2 months
and Secretary 07/18/97 34,000 4.875 7.125 4.875 9 years 3 months
07/18/97 40,000 4.875 6.25 4.875 9 years 9 months
John H. Moyer, 07/18/97 50,000 $4.875 $6.1875 $ 4.875 8 years 1 month
Vice President, 07/18/97 10,000 4.875 9.00 4.875 8 years 2 months
Human Resources 07/18/97 6,000 4.875 9.00 4.875 8 years 2 months
07/18/97 34,000 4.875 7.125 4.875 9 years 3 months
07/18/97 40,000 4.875 6.25 4.875 9 years 9 months
Scott McGregor, 07/18/97 31,000 $4.875 $ 10.00 $ 4.875 8 years 2 months
Former Senior Vice 07/18/97 40,000 4.875 6.25 4.875 9 years 9 months
President, Products
</TABLE>

Summary

The Compensation Committee believes that the Company's compensation have
been successful in attracting and retaining qualified employees and in linking
compensation directly to corporate performance relative to the Company's
goals. The Company's compensation policies will evolve over time as the
Company moves to attain the near-term goals it has set for itself while
maintaining its focus on building long-term shareholder value.

MEMBERS OF THE COMPENSATION COMMITTEE:
RONALD LACHMAN
R. DUFF THOMPSON
GILBERT P. WILLIAMSON

27
<PAGE>

PERFORMANCE GRAPH

Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of the Company's Common Stock with
the cumulative return of the Nasdaq Stock Market Index and the Nasdaq Computer
and Data Processing Stocks Index for the period commencing May 27, 1993 (the
date of the Company's initial public offering) and ending on September 30,
1997 and a second graph comparing the annual percentage change in the
cumulative return to the shareholders for the period commencing October 1,
1996 and ending on September 30, 1997. The information contained in the
performance graphs shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the
Securities Act or Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.

The graph assumes that $100 was invested on May 27, 1993 in the Company's
Common Stock and in each index, and that all dividends were reinvested. No
dividends have been declared or paid on the Company's Common Stock.
Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns. The Company operates on a 52 week
fiscal year which ended on September 30, 1997.

COMPARISON OF CUMULATIVE TOTAL RETURNS FROM 5/27/93 -- 9/30/97

[PERFORMANCE GRAPH APPEARS HERE]
Nasdaq
Computer
The Nasdaq and Data
Santa Cruz Stock Market Processing
Operation, Inc. (US Companies) Stocks
-------------- -------------- ----------
05/27/93 100.0 100.0 100.0
09/30/93 80.8 108.3 97.6
03/31/94 43.4 105.8 99.5
09/30/94 71.7 109.2 108.4
03/31/95 111.1 117.7 134.1
09/29/95 67.6 150.8 173.6
03/29/96 49.4 159.8 190.0
09/30/96 53.5 179.0 215.3
03/31/97 50.5 177.6 207.8
09/30/97 44.9 245.7 291.5
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 05/27/93.

28
<PAGE>

COMPARISON OF CUMULATIVE TOTAL RETURNS FOR FISCAL YEAR 1997

[PERFORMANCE GRAPH APPEARS HERE]
Nasdaq
Computer
The Nasdaq and Data
Santa Cruz Stock Market Processing
Operation, Inc. (US Companies) Stocks
--------------- -------------- ----------
09/30/96 100.0 100.0 100.0
12/31/96 105.7 105.0 104.0
03/31/97 94.3 99.2 96.5
06/30/97 53.8 117.4 123.8
09/30/97 84.0 137.3 135.6
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 09/30/96.

CERTAIN TRANSACTIONS

Microsoft Corporation ("Microsoft") has certain rights under a Stock
Purchase Agreement entered into with the Company in May 1989. The Company is
required to notify Microsoft of any written notice received by the Company
related to a proposal by such person to acquire more than eight percent (8%)
of the Company's outstanding Common Stock, any notice under the Hart-Scott-
Rodino Act and any statements on Schedule 13D or 14D-1 under the Securities
Exchange Act of 1934.

The Company has several license agreements with Microsoft pursuant to which
Microsoft has provided software technology. The Company paid royalties to
Microsoft in excess of $3,754,000 for fiscal year 1997.

The Company has granted certain rights to Novell under an Asset Purchase
Agreement entered into with the Company in September 1995. Until such time as
Novell, together with its affiliates, ceases to own more than five percent
(5%) of the outstanding shares of Common Stock of the Company, the Company is
required to include one nominee designated by Novell, reasonably acceptable to
the Company, in the slate of nominees recommended by the Company for election
as directors of the Company. Novell has chosen Glenn Ricart as its nominee for
the Company's Board of Directors. Until the earlier of (i) September 18, 1998;
(ii) Novell ceasing to own more than five percent (5%) of the outstanding
shares of Common Stock of the Company; or

29
<PAGE>

(iii) Novell's core products becoming competitive with the Company's core
products; (a) the Company must notify Novell of the material terms of any
proposed sale or issuance of its capital stock (except issuances pursuant to
employee stock plans, repurchases or bona fide business acquisitions) and must
allow Novell to purchase additional shares of the Company's Common Stock in
order to enable Novell to maintain its voting and ownership rights and (b) in
the event that the Company's Board of Directors has approved an intention to
merge with, sell shares representing fifty percent (50%) or more of the voting
power of the Company, or substantially all of its assets to any of the
following companies: Sun Microsystems, Microsoft, Hewlett-Packard, IBM,
Digital Equipment Corporation, or Fujitsu, Company must provide Novell with
the proposed terms of the merger, sale or acquisition. Novell shall have the
right to acquire or merge with Company on the same terms, provided that Novell
elects to do so within ten (10) days of the notification of said proposed
merger, sale or acquisition. In the event that said merger, acquisition or
sale occurs before December 6, 1997 involving one of the companies named
above, Novell shall have unlimited, royalty-free, perpetual rights to the UNIX
and UnixWare7 technology purchased by the Company pursuant to the Agreement.
The Company paid royalties to Novell in excess of $402,000 for fiscal year
1997.

Lawrence Michels and Douglas Michels are partners in Encinal Partnership No.
1 ("EP1"), which leases to the Company certain office premises located in
Santa Cruz, California under two leases. The first lease commenced on January
1, 1989 and has a ten-year term, with two options for the Company to renew for
five-year periods. The lease covers approximately 56,230 square feet of
building space at a current cost of approximately $87,631 per month, subject
to an annual adjustment upward based on the Consumer Price Index. The second
lease commenced on July 1, 1991 and has a seven-year term, with two options to
renew for five-year periods. The second lease covers approximately 26,055
square feet of building space at a current cost of approximately $34,388 per
month, subject to an annual adjustment based on the Consumer Price Index.

The third partner in EP1 is Wave Crest Development, Inc. ("Wave Crest").
Wave Crest leases to the Company 61,500 square feet of office space in Santa
Cruz. From time to time, Lawrence Michels and Douglas Michels engage in real
estate transactions with Wave Crest and its president.

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

In May 1994 and August 1997, respectively, the Board of Directors of the
Company approved two loan guaranties through Bank of the West on behalf of
Edwin Adams, each for an aggregate principal amount of up to $100,000. The
loans are collateralized with Certificates of Deposit in the amount of
$115,000 by the Company. The collateral was released on one of the loans in
November 1997, and the other loan has a balance owing of $35,000. In addition,
in January 1995, the Board also approved a loan guaranty to Bank of the West
on behalf of Scott McGregor for an aggregate amount of up to $850,000. This
loan is secured by a deposit of $850,000 by the Company into an interest-
bearing certificate of deposit and has a term of fifteen (15) years. This loan
must be refinanced by June 1, 1998, one (1) year from the date of his
termination from the Company.

The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by California law.

30
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent (10%) of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on its review
of the copies of such forms received by the Company, or written
representations from certain reporting persons, the Company believes that all
Section 16 filing requirements applicable to its officer, directors and ten
percent shareholders during the fiscal year ended September 30, 1997 were
complied with.

OTHER MATTERS

The Company knows of no other matters to be submitted at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent
as the Board of Directors may recommend.

THE BOARD OF DIRECTORS

Dated: January 16, 1998

SCO, The Santa Cruz Operation, the SCO logo, and UnixWare are trademarks or
registered trademarks of The Santa Cruz Operation, Inc. in the USA and other
countries. UNIX is a registered trademark of The Open Group in the United
States and other countries.
(C) 1998 The Santa Cruz Operation, Inc. All Rights Reserved.

31
<PAGE>

[LOGO OF RECYCLED PAPER]
SKU#1187-PS-98
<PAGE>

DETACH HERE

PROXY

THE SANTA CRUZ OPERATION, INC.

1998 ANNUAL MEETING OF SHAREHOLDERS

FEBRUARY 17, 1998

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned shareholder of THE SANTA CRUZ OPERATION, INC., a California
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated January 16, 1998, and hereby
appoints Alok Mohan and Steven M. Sabbath, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1998 Annual Meeting
of Shareholders of THE SANTA CRUZ OPERATION, INC. to be held on February 17,
1998 at 3:00 p.m., local time, at the Cocoanut Grove Banquet and Conference
Center, located at 400 Beach Street, Santa Cruz California 95060, and at any
adjournment or adjournments thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth on the reverse side.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE

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

[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE

THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE AMENDMENT TO THE 1994
INCENTIVE STOCK OPTION PLAN, FOR THE AMENDMENT TO THE 1993 DIRECTOR OPTION PLAN,
FOR THE AMENDMENT TO THE 1993 EMPLOYEE STOCK PURCHASE PLAN AND FOR THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
PUBLIC ACCOUNTANTS AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE MEETING.

1. To elect directors to serve until the next Annual Meeting of Shareholders and
until their successors are elected.

NOMINEES: NINIAN ENDIE, JEAN-FRANCOIS HEITZ, RONALD LACHMAN, ROBERT M. MCCLURE,
DOUGLAS L. MICHELS, ALOK MOHAN, R. DUFF THOMPSON, GLENN RICART AND GILBERT P.
WILLIAMSON.

FOR WITHHELD

[_] [_]

[_] _____________________________________________
For all nominees except as noted above.

2. To approve an amendment to the Company's 1994 FOR AGAINST ABSTAIN
Incentive Stock Option Plan (the "Option Plan") [_] [_] [_]
to increase the number of shares reserved for
issuance under the Option Plan by 2,000,000
shares.

3. To approve an amendment to the Company's 1993 FOR AGAINST ABSTAIN
Director Option Plan (the "Director Plan") to [_] [_] [_]
increase the number of shares reserved for
issuance under the Director Plan by 200,000
shares.

4. To approve an amendment to the Company's 1993 FOR AGAINST ABSTAIN
Employee Stock Purchase Plan (the "Purchase [_] [_] [_]
Plan") to increase the number of shares
reserved for issuance under the Purchase Plan
by 750,000.

5. To ratify the appointment of Coopers & Lybrand FOR AGAINST ABSTAIN
L.L.P. as independent public accountants of the [_] [_] [_]
Company for the fiscal year ending September 30,
1998.

6. To transact such other business as may properly come before the meeting or
any adjournment thereof.

MARK HERE [_] MARK HERE [_]
FOR ADDRESS IF YOU PLAN
CHANGE AND TO ATTEND
NOTE AT LEFT THE MEETING

Signature Date Signature Date
---------------- --------- ---------------- --------