10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT of 1934

For the Fiscal Year Ended October 31, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                          .

Commission File Number 0-13351

NOVELL, INC.

(Exact name of registrant as specified in its charter)

Delaware	87-0393339
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

404 Wyman Street, Suite 500

Waltham, MA 02451

(Address of principal executive offices including zip code)

(781) 464-8000

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, par value $.10 per share

(Title of Class)

Preferred Share Purchase Rights

(Title of Class)

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

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

     The aggregate market value of the registrant’s common stock as of April 30, 2004 held by non-affiliates as of April 30, 2004 (based on the last reported price of the Common Stock on the Nasdaq National Market System on such date) was $3,648,866,087. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding common stock and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination is not necessarily conclusive for other purposes.

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

     As of December 31, 2004 there were 378,704,093 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2005, are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

NOVELL, INC.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		1
Item 2.	Properties		13
Item 3.	Legal Proceedings		14
Item 4.	Submission of Matters to a Vote of Security Holders		15
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 8.	Financial Statements and Supplementary Data		45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		92
Item 9A.	Controls and Procedures		92
Item 9B.	Other Information		92
PART III
Item 10.	Directors and Executive Officers of the Registrant		93
Item 11.	Executive Compensation		93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		93
Item 13.	Certain Relationships and Related Transactions		93
Item 14.	Principal Accountants’ Fees and Services		93
PART IV
Item 15.	Exhibits and Financial Statement Schedules		94
EXHIBIT 10.13
EXHIBIT 10.15
EXHIBIT 10.22
EXHIBIT 10.23
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

i

NOVELL, INC.

FORM 10-K

      In addition to historical information, this Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenue, projected costs, projected savings, prospects, plans, opportunities and objectives constitute “forward looking statements.” The words “may,” “will,” “expects,” “plans,” “anticipates,” “believe,” “estimates,” “potential,” or “continue” and similar types of expressions identify such statements, although not all forward-looking statements contain these identifying words. These statements are based upon information that is currently available to us and/or management’s current expectations, speak only as the date hereof, and are subject to certain risks and uncertainties. We expressly disclaim any obligation or undertaking to update or revise forward-looking statements contained or incorporated by reference herein to reflect any change or expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statement is based, in whole or in part. Our actual results may differ materially from the results discussed in or implied by such forward-looking statements as a result of a number of factors, which include, but are not limited to, those set forth below in the section titled “Risk Factors Affecting Future Results of Operations”. We assume no obligation to update any of our forward-looking statements for any reason, except as required by law. Readers should carefully review the risk factors described in this document and in other documents that Novell files from time to time with the Securities and Exchange Commission.

PART I

Item 1. Business

The Company

      Novell is a leading provider of information solutions, a position we have been in since 1983. We provide identity management and web services solutions and cross-platform solutions on several operating systems, including Linux, NetWare®, Windows, and Unix. All of our solutions are supported by our worldwide services, including consulting, training and technical services. Through these solutions, our customers can deliver information or system resources from diverse sources, regardless of how they are implemented and regardless of how they connect, in a secure and personalized way. We create value for our customers by reducing the cost, complexity and vulnerability of today’s information environments, allowing them to optimize the performance of the resources and assets that they employ. With approximately 6,000 employees globally, we serve customers all over the world.

      We deliver this value to our customers by developing, maintaining and delivering information solutions in the following categories:

      Identity management and web services solutions. Our identity management and web services products include applications that offer a full suite of capabilities, including the following:

•  secure authentication and authorization services;

•  single sign-on;

•  provisioning capabilities; and

•  portal and web services application infrastructure.

      We believe that customers have recognized the need to manage the access, utilization and optimization of assets through information systems that can understand, implement and administer business policies, not only

Novell annual report 2004 1

within organizations, but also between organizations and their customers and trading partners. Our web services solutions enable organizations to balance growing user demands for services and information with the organization’s demands for increased security. Through identity management and web services, customers can integrate business processes and systems, extending them within and across enterprise boundaries to interact with customers, employees, suppliers and partners. This affords organizations the opportunity to make changes to their business operations without incurring the cost of constantly changing their underlying application software. These identity-based technologies not only regulate access to information and applications, but are also increasingly becoming core components of numerous other products such as mobile phones and other digital devices. Our strategy has been to develop identity management technologies as a set of discrete services to accelerate time to value, as opposed to the use of a single monolithic application that can take years to implement and deploy.

      Cross-platform solutions. We offer two major operating system platforms, NetWare and SUSE® LINUX, in support of our cross-platform solutions. Our solutions offer an enterprise-ready, scalable approach to networking and collaboration services — including file, print, messaging, scheduling and workspace. In addition, our identity-driven, directory-based management modules allow customers to manage their computing environment from a single, central location. Our products are designed to operate within existing heterogeneous computing environments as well as to provide tools and strategies to allow easy migration between platforms to fit better with our customers’ technology plans.

      A major focus of our cross-platform solutions is to embrace and promote open source computing. Open source is a term used to describe software source code that generally allows free use, modification, and distribution of source code, subject to certain conditions. Open source software is generally built by a community of developers, many of whom are unaffiliated with each other. Corporations also fund open source projects or contribute code into open source to further assist the development efforts. We believe that a major shift toward open source software is underway as companies are more critically evaluating the cost effectiveness of their information technology (“IT”) investments, see value in having access to the source code, and are looking for ways to avoid vendor lock-in.

      We believe that we are uniquely positioned to drive the transition to greater use of open source software, as well as to benefit from this trend. Widespread adoption of Linux and open source software was initially hindered by weak technical support and a lack of applications, shortcomings that we are particularly well positioned to address. We leverage our financial stability, experience, and global support capabilities to help our customers integrate Linux and other open source software into their existing IT environments. While the flexibility and cost savings of Linux and open source have made it attractive to enterprise customers, we believe these businesses look to proprietary software vendors to provide applications, management and security. With our SUSE LINUX open source platform and our other cross-platform solutions, our customers can deploy the best of closed and open source software that many businesses find more attractive. As an example, our GroupWise® product now allows customers to collaborate seamlessly across their Windows and Linux environments. We also provide solutions allowing IT managers to centrally control Linux, NetWare and Windows systems in a consistent and straightforward way.

      Worldwide services. We provide worldwide IT consulting, training and support services to address our customers’ needs. Our worldwide IT consulting practice provides the business knowledge and technical expertise to help our customers implement and achieve maximum benefit from our products and solutions. We also offer open source and identity driven services that are focused to aid our clients in rapidly integrating applications or migrating existing platforms to Linux.

      Through our training services, we offer skills assessments, advanced technical training courses, and customized training directly and through authorized training service partners. We also offer testing and certification programs to systems administrators, engineers, salespeople, and instructors on a wide variety of technologies, including Linux. Over a decade ago, we introduced the concept of software engineer certifica-

2 Novell annual report 2004

tions. Building on this program, we introduced our Novell® Certified Linux Engineer and Novell Certified Linux Professional programs to accelerate the adoption of Linux and open source in the enterprise.

      We provide our customers with a global support structure covering proprietary and open source technical support. We deliver our technical support services through a variety of channels, including on-site dedicated resources as well as through telephone, web, e-mail, and remote systems management.

      Celerant Consulting. Celerant, a majority-owned subsidiary of Novell, provides value-based, operational strategy and implementation consulting services to a wide variety of customers mainly in Europe and the United States. Celerant specializes in improving the value derived from existing business processes by accelerating time to value and eliminating non-value creating activities.

      Novell was incorporated in Delaware on January 25, 1983. Our headquarters and principal executive offices are located at 404 Wyman Street, Suite 500, Waltham, MA 02451. Our telephone number at that address is (781) 464-8000. We also have offices located in Provo, Utah, telephone number (801) 861-7000. Our European headquarters are located in Nuremberg, Germany, telephone number (49) 911 740 53 0. We conduct primary product development activities in Provo, Utah; Waltham, Massachusetts; Cambridge, Massachusetts; Dublin, Ireland; Nuremberg, Germany; and Bangalore, India. We also contract out some product development activities to third-party developers.

      Our Annual Report, Securities and Exchange Commission (“SEC”) filings, earnings announcements, and other financial information are available on our Investor Relations website at http://www.novell.com/ir.

      We make freely available on our website at http://www.novell.com/company/shareholder/ our annual, quarterly, and current reports, including any amendments to those reports, as soon as reasonable practicable after they are filed with the SEC.

      Mailed copies of these reports can be obtained free of charge through our automated telephone access system at (800) 317-3195 or by emailing Novell’s investor relations department at irmail@novell.com.

Components of Information Solutions

      The following is a description of the core products and services that make up each of our information solution categories.

      Identity management and web services solutions.

•  Identity Manager, formerly DirXML®, is a powerful data-sharing and synchronization solution, often referred to as a meta-directory solution, which automatically distributes new and updated information across every designated application and directory on a network. This ensures that trusted e-business customers, partners, and suppliers are accessing consistent information, regardless of the applications and directories to which they have access.

•  eDirectory^TM is a full-service, platform-independent directory that significantly simplifies the complexities of managing users and resources in a mixed Linux, NetWare, UNIX, and Windows environment. It is a secure, scalable, cross-platform directory service that allows organizations to centrally store and manage information across all networks and operating systems and leverage existing IT investments.

•  BorderManager® is a suite of network services used to connect a network securely to the Internet or any other network, allowing outside access to intranets and user access to the Internet.

•  iChain® is an identity-based security solution that controls access across technical and organizational boundaries to applications, the Web, and network resources. iChain separates security from individual applications and Web servers, enabling single-point, policy-based management of authentication and access privileges throughout the Internet.

Novell annual report 2004 3

•  exteNd^TM is a comprehensive suite for the rapid development and deployment of web services. Customers can powerfully combine identity, integration, and portal services to securely deliver relevant business information, at the appropriate time, to the right people.

•  SecureLogin is a directory-integrated authentication solution that delivers reliable, single sign-on access across multi-platform networks, simplifying password management by eliminating the need for users to remember more than one password.

      Cross-platform solutions.

•  NetWare is our proprietary operating system platform that offers secure continuous access to core network resources such as files, printers, directories, e-mail and databases seamlessly across all types of networks, storage platforms and client desktops.

•  ZENworks® (Zero Effort Networking) management products protect the integrity of networks by centralizing, automating, and simplifying every aspect of network management, from distributing vital information across the enterprise to maintaining consistent policies on desktops, servers, and devices on Linux, NetWare, and Windows environments.

•  GroupWise collaboration products offer traditional and mobile users solutions for communication over intranets, extranets and the Internet.

•  SUSE LINUX Enterprise Server is an enterprise-class, open source server operating system for professional deployment in heterogeneous IT environments of all sizes and sectors. This operating system integrates all server services relevant in Linux and constitutes a stable and secure platform for the cost-efficient operation of IT environments.

•  SUSE LINUX Professional is an open source product that combines a fast, secure operating system with over 1,000 open source applications. It is ideal for new Linux users as well as technical enthusiasts, and it is principally sold through the retail channel.

•  Novell Linux Desktop, released in November 2004, is a business desktop product that brings together the Linux operating environment with a complete set of office applications. Among the more significant business applications, it includes OpenOffice (a word processor, spreadsheet, and presentation suite), Mozilla’s Firefox browser, and Novell Evolution^TM, a collaboration client for Linux.

      Worldwide Services.

•  Consulting services: We provide technical expertise to deliver world-class solutions, based on an innovative approach focused on solving our customers’ business problems. We deliver services ranging from discovery workshops to strategy projects to solution implementations, all using a consistent, well-defined methodology. Our consulting approach is based on a strong commitment to open standards, interoperability, and the right blend of technology from Novell and other leading vendors.

•  Technical Support: We provide phone-based, web-based, and onsite technical support for our proprietary and open source products through our Premium Support program. Premium Support provides customers with the flexibility to select the appropriate level of technical support services, which may include stated response times, around-the-clock support, service account management, and dedicated resources, such as Novell’s most experienced engineers. The Dedicated Support Engineer, Primary Support Engineer, and Account Management programs allow customers to build an ongoing support relationship with Novell at an appropriate level for their needs. We have committed a significant amount of technical support resources to the Linux open source platform. We also offer a full array of remote monitoring services and managed services. These services help customers increase system uptime, leveraging our experts to monitor and maintain the technologies our customers have employed.

4 Novell annual report 2004

•  Technical Support Alliance (“TSANet”): TSANet is an industry organization that enables world wide seamless collaborative support for multi-vendor support issues. TSANet was originally organized in 1993, with Novell being instrumental in the formation and charter of the organization. Membership today consists of more than one hundred software and hardware companies, including industry leaders such as EMC Corporation (“EMC”), Hewlett-Packard Company (“HP”), International Business Machines Corporation (“IBM”), Microsoft Corporation (“Microsoft”), Novell, Sun Microsystems, Inc. (“Sun”), Unisys Corporation, and Veritas Software Corporation (“Veritas”). We are an active member of TSANet worldwide, with representation on both the North American Board of Trustees and the European Board of Directors. We were also a major supporter in the creation of the TSANet Linux Community and are a sponsor member of that community when it was announced in August 2004.

•  Training Services: We accelerate the adoption of and enable the effective use of Novell products and solutions through the delivery of timely and relevant instructor-led and technology-based training course. Programs are delivered directly to customers and through our global channel of authorized Novell training partners. Our courses provide customers with a thorough understanding of the implementation, configuration, and administration of various Novell products and solutions. Additionally, we offer a consultative Technical Skills Assessment that provides client’s with an evaluation of their proficiencies and their knowledge gaps. Through our training services, we also provide Advanced Technical Training at an engineering level to customers on a global basis.

•  Certified Novell Engineer^SM (“CNE”) Program: Through the long-standing CNE® program, we are strengthening the networking industry’s self-support capability. CNE certificate holders are individuals who have received in-depth training and information and passed a comprehensive test validating their ability to proficiently administer both Novell and other networks.

•  Certified Linux Professional (“CLP”) Program: Announced in September of 2004, the CLP program represents the cornerstone of our commitment to providing training and certification options for our clients and partners who require credentials and validation of competency on our SUSE LINUX Enterprise Server platform.

•  Certified Linux Engineer (“CLE”) Program: Announced in March 2003, the CLE program represents the cornerstone of Novell’s commitment to providing training and certification options for client and partners requiring credentials and validation of competency on both Linux and Novell Services for Linux technologies.

Strategy

      Our mission is to reduce the cost, complexity and vulnerability of our customers’ information environments, allowing them to optimize the performance of their resources and assets. We pursue this mission through five key strategies that address the following:

•  our products and services;

•  our professional services;

•  our partnerships;

•  multi-channel delivery; and

•  continued development of our personnel.

Novell annual report 2004 5

      First, our product and services strategy focuses on two specific areas that represent the greatest challenges faced by IT executives today:

•  Our strategy has been to develop identity-based technologies as a set of standards-based, discrete services, as opposed to a monolithic application dependent upon the use of proprietary underlying technologies. Our goal is to use identity services offerings as a foundation for establishing long-term strategic relationships with key customers.

•  Our innovative, open standards-based products are easy to deploy, simple to operate, reliable and scalable, enabling IT executives to create more robust computing environments with reduced IT budgets. A key tenet of our strategy is to embrace the open source movement, specifically through the distribution of SUSE LINUX and open source applications. We provide services on Linux from the desktop to the server to the mainframe. Our plan is to continue to use our significant engineering and support resources to encourage customers to adopt Linux, giving them the freedom of choice Linux provides without the anxiety over whether an open source solution can truly be relied upon for mission critical functions. In addition to distributing SUSE LINUX, our Open Enterprise Server product, due to be released in the second quarter of fiscal 2005, will give customers the opportunity to choose between a NetWare environment or a Linux environment, providing customers a cost effective, secure, reliable, and supported means to migrate to Linux and open source solutions, at the customer’s option, while maintaining all of the NetWare functionality to which they have become accustomed. Our goal is that by providing a migration strategy, we will retain traditional NetWare customers and gain new customers who are looking for the additional benefits that open source offers.

      Second, our professional services are based on understanding the complexities our customers face in the information economy and the way our products best enable success in our customers’ environments. Our strategy is to focus our consulting and training expertise on identity-driven solutions and open source software adoption, and to provide a full range of support services for all proprietary and open source products offered by us.

      Third, we partner with the industry’s leading independent software vendors, systems integrators, and original equipment manufacturers to enhance the value delivered to customers. Some of our recent growth stems from a select set of alliances. We expect to continue to pursue building these alliances as well as develop other business channels. This extends our market reach and enables us to provide full solutions to our customers.

      Fourth, we deliver solutions through a multi-channel strategy, serving large organizations directly or with systems integration partners and serving small and medium organizations through our channel partners. We have reengaged and renewed our business partner and channel relationships, giving us a greater presence in the marketplace while lowering our distribution costs. To maximize our reach while ensuring the highest quality of service to our customers, we provide our channel partners complete access to all of our tools, training and methodologies.

      Fifth, we will continue to take advantage of innovation in our offerings, in our business practices and in our go-to-market strategy. We strive to leverage all of our core competencies and product sets: operating systems, resource management, identity management, application development, collaboration, cross-platform interoperability, and heterogeneous environments. The continuous updating of our employees’ skills remains a priority so that customers receive the best possible value. Where appropriate, we also intend to augment our offerings and delivery capabilities through acquisitions.

      Taken together, we believe the success of these key strategies will provide lasting benefits to our customers and stockholders alike.

      Our strategy for our Celerant consulting business is to remain focused on delivering measurable and sustainable value to clients with a unique value-based pricing proposition. We will continue to build on our

6 Novell annual report 2004

extensive experience and strong relationships in the chemicals, energy, manufacturing, telecommunications, and process industries. We have expertise in the pharmaceuticals, retail, and utilities industries, among others, on which we intend to build.

Strategic Relationships

      We partner with industry leaders in the software, hardware, consulting, and system integration industries to bring to market our solution sets. We believe that a well-managed and supported alliance portfolio is critical to our success in today’s competitive solutions market. Alliance engagements help increase our revenue and enhance our exposure to customers around the world.

      Our business partner strategy is based on having a single partner program with a goal of providing consistent interactions with Novell. This approach creates an environment where a single business plan is created, including technology enablement, certification, joint marketing, and sales initiatives. To ensure partner efficiency, we are building a partner ecosystem that combines our knowledge, services and solutions with that of our partners’ to provide customers the ability to adapt to, and profit from, the opportunities open source brings to businesses.

      Partnership engagements help expand our market leverage increasing revenue and enhancing exposure to customers. A partial list of our strategic partnerships includes: IBM, HP, Dell, Inc. (“Dell”), Intel Corporation, Oracle Corporation, SAP AG, Advanced Micro Devices, Inc., Veritas, Computer Associates International, Inc. (“Computer Associates”), EMC, and Adobe Systems, Inc. These partners have all joined the Novell PartnerNet® Program and gain value through participating in different partner tracks. Solution providers gain access to various marketing campaigns and programs that help drive sales volumes. Technology partners receive solution developer deliverables and services that ensure successful enablement of their technology with our technology. We instruct our training partners so that they are able to in turn train our customers.

Principal Markets, Segment and Geographic Information

      We sell our products, services, and solutions directly through our sales force and indirectly through resellers and distributors to corporations, government entities, and educational institutions both domestically and internationally.

      Our Chief Executive Officer and Worldwide Management Committee manage the overall growth and performance of the company in terms of the following segments:

•  North America — this geographic segment includes the United States and Canada.

•  EMEA — this geographic segment includes Eastern and Western Europe, the Middle East and Africa.

•  Asia Pacific — this geographic segment includes China, Southeast Asia, Australia, New Zealand and India.

•  Latin America — this geographic segment includes Mexico, Central America, South America and the Caribbean.

•  Japan — this geographic segment is a majority-owned joint venture between Novell and several other companies.

•  Celerant consulting — this segment provides operational strategy and implementation consulting services to a variety of customers mainly in Europe and the United States.

      All geographic segments sell our software and services. Celerant consulting offers management consulting services.

Novell annual report 2004 7

      Segment disclosures and geographical information for fiscal years 2004, 2003, and 2002 are presented in Part II, Item 8, Note W of the notes to the consolidated financial statements of this report, which is incorporated by reference into this Part I, Item 1. As our strategy continues to evolve, the way in which management views financial information to best evaluate performance and operating results may also change.

Acquisitions

      On July 19, 2004, we acquired Salmon Ltd. (“Salmon”), a privately-held information technology services and consulting firm headquartered in Watford, England. The acquisition of Salmon enables us to expand our range of IT consulting services offered in the United Kingdom.

      On January 12, 2004, we acquired SUSE LINUX AG (“SUSE”), a privately-held company and leading distributor of commercial Linux for enterprise servers. The acquisition of SUSE has expanded our ability to support and distribute a complete package of Linux solutions and provides us the ability to offer the most complete vertically-integrated set of open source infrastructure applications available.

      On August 4, 2003, we acquired Ximian, Inc. (“Ximian”), a privately-held company and provider of desktop and server solutions that enable enterprise Linux adoption. The acquisition of Ximian expanded our ability to support Linux solutions, providing us with Linux desktop, groupware and management technologies. Through this acquisition, along with the SUSE acquisition, we have brought leaders in the open source community together with a strong core of Linux developers at Novell.

Product Development

      Product development activities are conducted throughout the world to develop, translate and test products that meet the needs of our customers. Our commitment to deliver world-class products that simplify, secure, and accelerate business solutions means continued investment in product development. As a result of our focus on the Linux operating system, our product development activities have expanded and now include technology developed by the open source community.

      Our product development engineers work as a part of open source development teams across the world. This involvement ensures our role in leading technical advances, developing new features and having input over timing of releases, as well as other information related to the development of the Linux kernel and other open source projects. Product development expenses for the fiscal years 2004, 2003, and 2002 are discussed in Part II, Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated by reference into this Part I, Item 1.

Sales and Marketing

      We sell our business solutions via our channel market model, which we call our Clear Channel model, with value added partners such as demand agents, vertical markets resellers, systems integrator distributors, and OEMs who meet our criteria, as well as selling directly to named enterprise customers. In addition, we conduct sales and marketing activities and provide technical support, training, and field service to our customers from our 29 U.S. and 78 international sales offices.

      Distributors. We have established a network of independent distributors who sell our products to resellers, dealers, VARs (value added resellers), and computer retail outlets. As of October 31, 2004, there were four U.S. distributors and approximately 123 international distributors.

      VARs and Systems Integrators. We also sell directly to VARs and systems integrators who provide solutions across multiple vertical market segments and whose volume of purchases warrants buying directly from us.

8 Novell annual report 2004

      OEMs/ Independent Hardware Vendors (“IHVs”)/ Independent Software Vendors (“ISVs”). We license subsets of products to domestic and international OEMs/ IHVs/ ISVs for integration with their products and/or solutions.

      End-User Customers. We have assembled worldwide field resources to work directly with enterprise end users and have engaged in license agreements with over 5,000 customers to date. Additionally, product upgrades and software maintenance are sold directly to end-users. Customers can also purchase products and services under license agreements through partners or resellers in or near their geographic locations.

      Marketing Strategy. The goals of our marketing strategy are to contribute to our strategic decision-making through in-depth understanding of market trends, customer needs, preferences, and buying patterns; to build our market image; and to increase our revenue and market share in chosen target markets. We feel that today’s focus on streamlining operations and cost reduction has resulted in an increase in Chief Information Officer (“CIO”) importance and control. Our primary marketing audience is the CIO and other senior corporate executives, with additional audiences being the IT applications development staff and the IT operations staff.

      Marketing Initiatives. Our marketing activities are varied and tightly focused. To more closely align our offerings with customer needs, we have created a customer council and have more closely integrated the operations of marketing and product management. We have enhanced our Internet site to improve communication of our value strategy. The events that we sponsor are tightly focused and leverage our resources. Twice annually, Novell conducts BrainShare® Conferences in North America and Europe to inform and educate customers, partners, developers, and the press and analyst community about our product and solution strategy and offerings. In addition, we have other ongoing activities such as distribution of sales literature, press releases, periodic product announcements, support of Novell user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. These activities are all designed to educate the market about our products and services.

      International Revenue. In fiscal 2004, 2003, and 2002, approximately 56%, 54%, and 49%, respectively, of our revenue was generated from customers outside the U.S. Approximately 32% of our total revenue in fiscal 2004 was invoiced by us in U.S. dollars outside of the U.S. Local currency invoicing includes a significant portion of invoices generated in our Irish shared service center, as well as other international local office billings. No one foreign country accounted for more than 10% of revenue in any period based on revenue classified by location of the end-user customers. For information regarding risk related to foreign operations, see Part II, Item 7, “Factors Affecting Future Results of Operations,” which information is incorporated by reference into this Part I, Item 1.

Major Customers

      None of our customers accounted for more than 10% of our revenue in fiscal year 2004, 2003, or 2002.

Manufacturing Suppliers

      Our physical products, which consist primarily of compact discs and manuals, are duplicated by outside vendors. Multiple high-volume manufacturers are available and we do not rely on a single provider for our raw materials, nor have we encountered problems with our existing manufacturing suppliers.

Backlog

      Lead times for our products are relatively short. Consequently, we do not believe that backlog is a reliable indicator of future revenue or earnings. Our practice is to ship products promptly upon the receipt of purchase orders from our customers and, therefore, backlog is not significant.

Novell annual report 2004 9

Competition

Geographic segments

      The market for identity management and web services solutions and cross-platform solutions is highly competitive and subject to rapid technological change. We expect competition to continue to increase both from existing competitors and new market entrants. We believe that competitive factors common to all of our geographic segments include the following:

•  the ability to preserve our legacy customer base;

•  our ability to sell both products and services as part of an overall solution;

•  the timing and market acceptance of new solutions developed by us and our competitors;

•  brand and product awareness;

•  the performance, reliability, and security of our products;

•  the completeness of our suite of product and solutions offerings;

•  our ability to establish and maintain key strategic relationships with distributors, resellers, independent software vendors, and other partners; and

•  the pricing of our products and services and the pricing strategies of our competitors.

      Competitors of our identity management and web services solutions and cross-platform solutions include Microsoft, IBM, Sun, HP, Altiris, Inc., Computer Associates and Red Hat, Inc. Competitors of our worldwide services group include IBM, Accenture Ltd. (“Accenture”), HP, Computer Services Corporation (“CSC”) and Capgemini Group (“Capgemini”).

      One pervasive factor facing us and all companies doing business in our industry is the presence — and dominance — of Microsoft. In a decision upheld by a federal appellate court, Microsoft was found to have violated Section 2 of the Sherman Act by unlawfully acting to maintain its monopoly over desktop operating systems. And in a decision by the European Commission in 2004, now on appeal, the EC found Microsoft in violation of Article 82 of the EC Treaty for refusal to supply critical interoperability information to its competitors, including Novell. We remain concerned, however, that Microsoft may continue to engage in business practices that unfairly inhibit the growth of its competitors, including Novell, and that the settlement of the litigation between the Department of Justice and Microsoft and the decision in the EC will not significantly affect Microsoft’s practices.

Celerant consulting segment

      The key competitive factors faced by the Celerant segment are attracting and retaining the highest quality consultants; increasing the depth of our skills and expertise; broadening our consulting capabilities; and having expertise in key functional areas. The market for management consulting services is highly competitive due to the existence of various large consulting firms. Many of these companies have greater financial, technical and marketing resources and greater name recognition in the management consulting area, which could inhibit our ability to grow our consulting business. Additionally, the worldwide marketplace for management consulting services is highly fragmented. In different regions of the world, there may be multiple competitors, many with niche consultancies. Examples of these various competitors include: A.T. Kearney, Inc., McKinsey & Co., IBM Global Services, Capgemini, and The Management Consulting Group PLC.

Copyright, Licenses, Patents, and Trademarks

      We rely on copyright, patent, trade secret, and trademark law, as well as provisions in our license, distribution, and other agreements to protect our intellectual property rights. Our portfolio of patents,

10 Novell annual report 2004

copyrights, and trademarks as a whole is material to our business; but no individual piece of intellectual property is critical to our business. We have been issued what we consider to be valuable patents and have numerous other patents pending. No assurance can be given that the pending patents will be issued or, if issued, will provide protection for our competitive position. Notwithstanding our efforts to protect our intellectual property through contractual measures, unauthorized parties may still attempt to violate our intellectual property rights.

      Our business now includes a mix of proprietary offerings and offerings based on open source technologies. With respect to proprietary offerings, we perform the majority of our development efforts internally, but we also acquire and license technologies from third parties; no one license is critical to our business. Our open source offerings are primarily comprised of open source components developed by independent third parties over whom we exercise no control; the collective licenses to those open source technologies are critical to our business. If we are unable to maintain licenses to third party materials, our distribution of relevant offerings may be delayed until we are able to develop, license, or acquire replacement technologies. Such a delay could have a material adverse impact on our business.

      The software industry is characterized by frequent litigation regarding patent, copyright and other intellectual property rights and trends suggest that this may increase. We have from time to time had infringement claims asserted by third parties against us and our products. While there are no known pending or threatened claims against us for which we expect to have an unsatisfactory resolution that would have a material adverse effect on our results of operations and financial condition, there can be no assurance that such claims will not be asserted, or, if asserted, will be resolved in a satisfactory manner. In addition, there can be no assurance that third-parties will not assert other claims against us with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.

      In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that was the subject of the litigation. There can be no assurance that we would be successful in such development or that any such licenses would be available.

      In addition, the laws of certain countries in which our products are or may be developed, manufactured, or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.

Seasonality

      All five geographic segments of our business often experience a higher volume of revenue at the end of each quarter and during the fourth quarter of our fiscal year due to the spending cycles of our customers and the negotiation patterns typical in the software industry. Celerant consulting often experiences a lower volume of revenue during the fourth fiscal quarter as a large portion of its revenue is derived in Europe where many take summer holidays in August.

Employees

      As of December 31, 2004, we had 6,186 permanent and temporary employees. The functional distribution of our employees was: sales and marketing — 1,371; product development — 1,620; general and administrative — 846; and service, consulting, training, and operations — 2,349. Of these, 2,895 employees are in locations outside the U.S. All of our U.S. personnel are based at our facilities in Utah, Massachusetts, California, and various U.S. field offices. None of our employees are represented by a labor union, and we consider our employee relations to be good.

Novell annual report 2004 11

      Competition for personnel of the highest caliber is intense in the software and consulting industries. To make a long-term relationship with us rewarding, we endeavor to give our employees challenging work, educational opportunities, competitive wages, sales commission plans, bonuses, and opportunities to participate financially in the ownership and success of Novell through stock option and stock purchase plans.

Executive Officers

      Set forth below are the names, ages, and titles of the persons currently serving as our executive officers.

Name	Age		Position
Jack L. Messman		64	Chairman of the Board, President and Chief Executive Officer
Joseph S. Tibbetts, Jr.		52	Senior Vice President, Chief Financial Officer
Alan J. Friedman		57	Senior Vice President, People
Joseph A. LaSala, Jr.		50	Senior Vice President, General Counsel and Secretary
Ronald W. Hovsepian		43	President, Novell North America
Richard Seibt		52	President, Novell Europe, Middle East, Africa

Jack L. Messman

      Jack L. Messman became President and Chief Executive Officer of Novell in July 2001 in connection with Novell’s acquisition of Cambridge Technology Partners, Inc. (“Cambridge”) and was appointed Chairman of the Board of Directors in November 2001. He has been a director of Novell since 1985. From August 1999 to July 2001, Mr. Messman was President and Chief Executive Officer of Cambridge. Mr. Messman was the Chief Executive Officer of Union Pacific Resources Group Inc. (“UPR”), an oil and gas company, from 1991 to August 1999 and its Chairman from 1996 to August 1999. Mr. Messman is also a director of Safeguard Scientifics, Inc., RadioShack Corporation, and Timminco, Ltd.

Joseph S. Tibbetts, Jr.

      Joseph S. Tibbetts, Jr. joined Novell in February 2003 as Senior Vice President and Chief Financial Officer. Mr. Tibbetts served as a member of Novell’s Board of Directors from November 2002 until February 4, 2003, at which time he resigned from the Board to join our management team. Mr. Tibbetts served as a General Partner of Charles River Ventures, a venture capital firm, from March 2000 to June 2002. Prior to that, Mr. Tibbetts served as the Senior Vice President, Finance and Administration, Chief Financial Officer and Treasurer of Lightbridge, Inc., a firm focusing on customer relationship management solutions for the telecommunications industry, from May 1998 to February 2000. Prior to that, Mr. Tibbetts served as Vice President, Finance and Administration, Chief Financial Officer and Treasurer of SeaChange International, Inc., a developer and manufacturer of digital server systems for the television industry, from June 1996 to March 1998. Before then, Mr. Tibbetts spent 20 years at Price Waterhouse LLP (now PricewaterhouseCoopers) where he was an audit partner for ten years and led the firm’s national software practice.

Alan J. Friedman

      Alan J. Friedman became Senior Vice President, People of Novell in July 2001 in connection with Novell’s acquisition of Cambridge. Mr. Friedman served as Cambridge’s Senior Vice President of Human Resources, Enterprises Learning and Knowledge Management from January 2000 to July 2001, and had joined Cambridge in December 1999 as Vice President of Learning and Knowledge Management. Prior to joining Cambridge, Mr. Friedman was Senior Vice President of Human Resources for Arthur D. Little, Inc., a consulting firm, from June 1993 to December 1999.

12 Novell annual report 2004

Joseph A. LaSala, Jr.

      Joseph A. LaSala, Jr. became Senior Vice President, General Counsel and Secretary of Novell in July 2001 in connection with Novell’s acquisition of Cambridge. From March 2000 to July 2001, Mr. LaSala served as Senior Vice President, General Counsel and Secretary of Cambridge. Prior to joining Cambridge, Mr. LaSala served as Vice President, General Counsel and Secretary of UPR. from January 1996 to March 2000. Mr. LaSala is a member of the board of directors of Buckeye Pipe Line Company, the general partner of Buckeye Partners, L.P.

Ronald W. Hovsepian

      Ronald W. Hovsepian joined Novell in June 2003 as President, Novell North America. From February 2002 to December 2002, Mr. Hovsepian was a Managing Director with Bear Stearns Asset Management, a technology venture capital fund. From March 2000 to February 2002, Mr. Hovsepian served as Managing Director for Internet Capital Group, a venture capital firm (“ICG”). Mr. Hovsepian had most recently served as ICG’s Managing Director, Operations, where he was in charge of overseeing ICG’s top 30 investments. Prior to that, Mr. Hovsepian served in a number of positions with IBM over a 17-year period, most recently serving as Vice President, Business Development. Prior to that, Mr. Hovsepian had also served as Worldwide General Manager of Industry Solutions, Retail Sector and as Vice President, Supply Chain Solutions. Mr. Hovsepian is a member of the board of directors of Ann Taylor Corporation.

Richard Seibt

      Richard Seibt joined Novell in January 2004 in connection with our acquisition of SUSE LINUX AG (“SUSE”), where he served as Chief Executive Officer since he joined in January 2003. Mr. Seibt became President, Novell EMEA in February 2004. Prior to joining SUSE, Mr. Seibt served as Executive Board Member of United Internet AG, an Internet service provider, from September 1998 to December 2002. Prior to that, Mr. Seibt served in a number of positions with IBM, most recently serving as General Manager of the OS/ 2 Business Unit, Vice President Software Sales and Marketing North America and Managing Director IBM Germany.

Item 2. Properties

      In the U.S., we own approximately 872,000 square feet and occupy approximately 834,000 square feet of office space on 46 acres in Provo, Utah, which is used for administrative offices and functions as our primary product development center. We lease and occupy approximately 105,000 square-feet of office space in Waltham, Massachusetts, which is the location of our corporate headquarters and principal executive offices and is also used for product development. We lease approximately 177,000 square-feet of office building in Cambridge, Massachusetts, of which we occupy approximately 23,000 square feet, sublease approximately 133,000 square-feet and approximately 22,000 square feet is vacant. We assumed the lease of a 100,000 square foot facility in Billerica, Massachusetts, in conjunction with the acquisition of SilverStream Software Inc. (“SilverStream”). This facility is currently unoccupied. We lease sales and support offices in California, Colorado, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, Minnesota, Missouri, New York, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, and Washington.

      Internationally, we own an 85,000 square-foot office building in Bracknell, United Kingdom, a 42,000 square-foot building in the Netherlands, and an 18,000 square-foot building in Johannesburg, South Africa, all of which are used for sales and administrative offices. We lease and occupy a 21,000 square-foot facility in Dublin, Ireland, which is used as a shared services center and for product localization, a 29,000 square-foot facility in Richmond, United Kingdom, 11,000 square feet of which is used as headquarters and administrative offices for our Celerant subsidiary, and an 80,000 square-foot facility in Bangalore, India,

Novell annual report 2004 13

which is used as a product development center. In conjunction with the SUSE acquisition, we assumed the leases of various facilities in Germany totaling 110,000 square feet.

      We have subsidiaries in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Philippines, Portugal, Puerto Rico, Singapore, Spain, Sweden, Switzerland, Thailand, Taiwan, United Kingdom, and Venezuela, each of which leases a small facility used as sales and support offices.

      The terms of the above leases vary from month-to-month to up to 20 years. We believe that our existing facilities are adequate to meet our current requirements and we anticipate that suitable additional or substitute space will be available, as necessary, upon favorable terms.

Item 3. Legal Proceedings

      In November 2004, we filed suit against Microsoft in the U.S. District Court, District of Utah. We seek to be awarded treble damages in an amount to be determined at trial based on claims that Microsoft eliminated competition in the office productivity software market during the time that we owned the WordPerfect word-processing application and the Quattro Pro spreadsheet application. Among other claims, we alleged that Microsoft withheld certain critical technical information about Windows from us, thereby impairing our ability to develop new versions of WordPerfect and other Novell office productivity applications. The complaint also alleges that Microsoft integrated certain technologies into Windows designed to exclude WordPerfect and other Novell applications from relevant markets. In addition, we alleged that Microsoft used its monopoly power to prevent OEM’s from offering WordPerfect and other applications to customers. On January 7, 2005, Microsoft filed a motion to dismiss the complaint. We will vigorously oppose the motion to dismiss. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

      In May 2004, we received $18.5 million from The Canopy Group, Inc. (“Canopy”) in satisfaction of a judgment against Canopy. The judgment arose out of a collection action filed by us against Canopy, wherein we sought to recover a royalty payment due under a licensing agreement and arising out of a settlement payment from a third party to Canopy. In connection with this payment, we recognized revenue of $13.5 million and interest income of $5 million during the quarter ended July 31, 2004.

      In January 2004, the SCO Group, Inc. (“SCO”) filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. We removed the claim to the U.S. District Court, District of Utah. SCO’s original complaint alleged that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’s business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. The District Court dismissed the original complaint, but allowed SCO an opportunity to file an amended complaint, which SCO did in July 2004. As with the original complaint, SCO is again seeking to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights and to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights and to pay actual, special and punitive damages in an amount to be proven at trial. We have again sought to dismiss SCO’s amended complaint and ultimately believe that we have meritorious defenses to these claims even if our Motion to Dismiss is denied. Accordingly, we intend to vigorously defend ourselves in this suit. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

      SilverStream which we acquired in July 2002, and several of its former officers and directors, as well as the underwriters who handled SilverStream’s two public offerings, were named as defendants in several class action complaints that were filed on behalf of certain former stockholders of SilverStream who purchased

14 Novell annual report 2004

shares of SilverStream common stock between August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs have brought against other issuers and underwriters. These complaints all allege violations of the Securities Act, as amended and the Securities Exchange Act of 1934, as amended. In particular, they allege, among other things, that there was undisclosed compensation received by the underwriters of the public offerings of all of these issuers, including SilverStream’s. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the court. A Consolidated Amended Complaint with respect to all of these companies was filed in the U.S. District Court, Southern District of New York, on April 19, 2002. While we believe that SilverStream and its former officers and directors have meritorious defenses to the claims, a Memorandum of Understanding has been reached between many of the defendants and the plaintiffs, which contemplate a settlement of the claims. The settlement, however, has not been finalized. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

      In February 1998, a suit was filed in the U.S. District Court, District of Utah, against us and certain of our officers and directors, alleging violation of federal securities laws by concealing the true nature of our financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of our common stock from November 1, 1996 through April 22, 1997. After a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court dismissed the amended complaint with prejudice for failure to state a claim. Much of the District Court’s Order of Dismissal was recently affirmed by the Tenth Circuit Court of Appeals while certain claims were remanded for the District Court’s further review. We believe we have meritorious defenses to these remaining claims. While there can be no assurance as to the ultimate disposition of the lawsuit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

      We evaluate the adequacy of our legal reserves on a quarterly basis. During fiscal 2004, we recorded a reduction of $5 million in legal reserves relating to favorable developments in then current litigation matters and a reduction of $4 million due to a one-time adjustment to the legal reserve. We are currently party to various legal proceedings and claims including former employees, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Novell annual report 2004 15

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases of Equity Securities

      Novell’s common stock trades in the Nasdaq National Market under the symbol “NOVL.” The following chart sets forth the high and low sales prices of our common stock during each quarter of the last two fiscal years:

		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
Fiscal 2004
	High	$	12.93	$	14.24	$	10.98	$	7.45
	Low	$	5.64	$	9.31	$	6.32	$	5.62
Fiscal 2003
	High	$	3.98	$	3.29	$	3.85	$	6.35
	Low	$	2.63	$	2.15	$	2.72	$	3.46

      No dividends have been declared on our common stock. We have no current plans to pay dividends on our common stock, and intend to retain our earnings for use in our business. There were 8,566 stockholders of record at December 31, 2004.

Repurchases of Common Stock

								Maximum Dollar Value of
						Total Number of Shares		Shares That May Yet Be
		Number of		Average		Purchased Under Publicly		Repurchased Under Publicly
		Shares		Price Paid		Announced Repurchase		Announced Repurchase
Month Ended		Purchased(1)		per Share		Programs		Programs
August 31, 2004			—		—		N/A		N/A
September 30, 2004			—		—		N/A		N/A
October 31, 2004			387	$	6.31		N/A		N/A
	Totals		387				N/A		N/A

      On June 28, 2004, we filed a Form 8-K announcing our intention to use a portion of the proceeds from the issuance of senior convertible debentures to repurchase, on a one-time basis, $125 million of common stock (15,188,300 shares at $8.23 per share). These shares were repurchased on July 2, 2004, are held in treasury and are classified as treasury stock on our consolidated balance sheet at July 31, 2004.

      (1) Repurchases of shares of common stock that have not been publicly announced represent forfeited shares by employees to satisfy tax withholdings relating to vesting of restricted stock or payment of shares from the deferred compensation plan.

16 Novell annual report 2004

Item 6. Selected Financial Data

	Fiscal Year Ended
	October 31,		October 31,			October 31,			October 31,			October 31,
	2004		2003			2002			2001			2000
	(Amounts in thousands, except per share data)
Statement of operations
Revenue	$	1,165,917	$	1,105,496		$	1,134,320		$	1,050,796		$	1,161,735
Gross profit		750,238		666,778			684,902			712,162			834,337
Income (loss) from operations		65,692		(27,822	)		(68,125	)		(120,813	)		(31,582	)
Income (loss) before taxes		74,974		(55,010	)		(92,225	)		(276,766	)		70,672
Income tax expense (benefit)		17,786		106,894			10,896			(14,944	)		21,202
Net income (loss) before accounting change		57,188		(161,904	)		(103,121	)		(261,822	)		49,470
Cumulative effect of accounting change, net of tax(a)		—		—			(143,702	)		(11,048	)		—
Net income (loss)		57,188		(161,904	)		(246,823	)		(272,870	)		49,470
Net income (loss) available to common stockholders	$	31,092	$	(161,904	)	$	(246,823	)	$	(272,870	)	$	49,470
Net income (loss) per common share, basic and diluted	$	0.08	$	(0.44	)	$	(0.68	)	$	(0.82	)	$	0.15
Balance sheet
Cash, cash equivalents and short-term investments	$	1,211,467	$	751,852		$	635,858		$	705,243		$	698,193
Working capital		842,120		404,095			328,031			416,463			552,281
Total assets		2,291,548		1,567,653			1,665,065			1,904,006			1,712,346
Senior convertible debentures		600,000		—			—			—			—
Redeemable preferred stock		25,000		—			—			—			—
Stockholders’ equity	$	963,364	$	934,470		$	1,065,542		$	1,270,667		$	1,245,085

(a)	In fiscal 2001 we changed our method of accounting for revenue related to product sales to distribution channel partners from recognizing the revenue upon shipment to the distribution partner to recognizing such revenue upon the sale by the distribution partner to the end user.
	In fiscal 2002 we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” resulting in a transitional goodwill impairment loss.

See the Management’s Discussion and Analysis of Financial Condition and Results of Operations section for a discussion of data comparisons.

Novell annual report 2004 17

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

      The strategic focus of our business is to deliver to our customers identity management and web services solutions and cross-platform solutions, supported by services solutions that complement our products. Important factors in evaluating our 2004 fiscal year results include the state of the global economy and IT markets and our progress in implementing key initiatives. These initiatives include:

•  reducing the rate of revenue decline in our legacy NetWare business;

•  increasing revenue from our Linux and identity management businesses; and

•  increasing sales of other products and services, including consulting services.

      Our initiatives and their implementation involve risks and challenges. The following addresses our progress with these initiatives and their implementation during fiscal 2004, as well as the risks and challenges we believe we face over the next year.

      One of our most important strategies is to embrace the open source movement, specifically the Linux operating system, and to develop a competitive position in the Linux market. This strategy includes supporting the Linux operating system in addition to the NetWare operating system by offering Novell products and services that run on both Linux and NetWare platforms. Our acquisitions of Ximian and SUSE, as well as restructurings in this and the prior fiscal year, are direct results of this strategy. These acquisitions in particular enable us to offer a full range of enterprise solutions on the Linux platform, from the desktop to the server to the mainframe. We have completed the integration of Ximian and have made significant progress with the integration of SUSE personnel, operations and technology into our business. We expect that the benefits of the completed SUSE integration will not be fully realized until mid-fiscal 2005. Our key open source and Linux goals include the following:

•  We need to successfully address the concerns of our NetWare installed base in order to eliminate historic revenue declines by providing a well articulated technology roadmap that is applicable for their businesses. The installed base is an important source of cash flow and an opportunity for us to sell more products. Excluding the impact of foreign currency effects, NetWare revenue for fiscal 2004 declined by 10% from fiscal 2003. It is our goal that the release of our Open Enterprise Server (“OES”) product, which will include both the SUSE Linux Enterprise Server (“SLES”) 9 and NetWare operating systems, will keep customers with Novell. OES is designed as a platform to allow our installed base to easily transition from NetWare to Linux, should they choose to migrate. Our intention is that by providing customers with a clear migration path to our Linux products, we mitigate the risk that customers may defect.

•  We released SLES 9 during fiscal 2004, which we believe to be a major milestone in enabling enterprise Linux computing. We shipped approximately 40,000 SLES 9 units (including 12,000 to a single customer) during fiscal 2004 and 3,800 units of SLES 8 from the date of our acquisition of SUSE to the release of SLES 9. We also signed Linux-related enterprise-wide agreements with three Fortune 100 customers during the fourth quarter of fiscal 2004. Our belief is that sales of our SUSE LINUX products will increase as the market becomes more familiar with them. In addition, we believe that our Linux initiatives will help grow the Linux market and provide sales opportunities for our other products. As a result, we expect our existing product revenue streams and financial trends to benefit as the overall Linux market grows in the future.

•  Another important goal is to remove the barriers to adoption of Linux at the enterprise level. We believe that our experience providing enterprise-level service, support, and products as well as other of our competitive advantages will allow us to become the leader in Linux operating system distributions in a relatively short period of time. We will continue to invest heavily in engineering, partnerships,

18 Novell annual report 2004

support and training. We are constantly evaluating our entire solution stack, and we will make, buy or license the appropriate technologies in order to provide a more complete, value-add offering.

      Another goal is to expand our identity driven computing strategy. We are in the process of componentizing delivery of identity management solutions so customers can implement a broader strategy in smaller modules, thereby reducing the time it takes to realize considerable business value and lowering their overall risk in adopting an enterprise-wide identity strategy. We believe that a primary driver of growth will be the demonstration of successful, small implementations that we can use as case studies and proof points.

      In fiscal 2004, we were able to turn our IT consulting business around to profitability at the contribution margin level. In fiscal 2005, we plan to continue to profitably grow the IT consulting business and to more closely align the IT consulting engagements with the products we sell. We still intend to offer general IT consulting, but it will no longer be our primary focus. We believe that we need to demonstrate to the consulting and systems integrator (“CSI”) community that we are not direct competitors and show them how to use our products to develop identity solutions for their customers, with our help, when needed.

      As we have noted above, we are still a company in transition, and there is much work that lies ahead. Although we continued to successfully cut costs in fiscal 2004, reducing our work force and consolidating facilities, in fiscal 2005 we will need to maintain a transitional cost structure beyond that which a steady state business would require in order to develop, market and sell our products and solutions. Over the next 12 to 18 months, we expect to maintain current spending levels or to increase spending in the following areas:

•  We expect our research and development expenses as a percent of revenue will continue running higher than where we’d like over the next year as a result of efforts to rearchitect several products such as ZENworks, and eDirectory so that they will appeal to customers outside the NetWare installed base and as a result of our ongoing investments in Linux, partnerships and training.

•  Last year, we commenced the transition of our North America sales force to a new business model as a result of our new products and repositioning. We made significant progress during 2004, and we estimate that this transition will be complete by the end of fiscal 2005.

•  Our EMEA business is in need of similar changes to those we have been making in North America. We expect to begin that process in the first fiscal quarter of 2005 and expect the reorganization to last 12-18 months. To capitalize on Linux interest, we have created a pan-regional Linux Sales and Business Development group in North America and EMEA to help coordinate our activities.

•  Critical to Novell’s performance over time is retaining and motivating our employees. Like many companies, we have significantly limited compensation changes over the past two years. In 2005, we plan to increase compensation, resulting in increased expense in both cost of sales and operating expenses.

      Cash flow from operations is our principal source of liquidity. Additionally, we have recently had net cash infusions of $460 million from our private placement of senior convertible debentures in July 2004 and $448 million from our settlement of certain NetWare-related claims with Microsoft in November 2004. Our strong liquidity will help facilitate the implementation of this transition, as well to quickly respond to market developments and business opportunities that may arise.

      Despite recent improvements in the economy, we believe that we are still in a relatively soft IT spending environment in North America. Although IT demand trends appear to be slowly improving, we are seeing that CIOs are still cautious on IT investments. We see a continued reluctance to make large upfront commitments to infrastructure projects because they typically take long to complete and touch every part of the IT architecture. Longer sales cycles are resulting in pilot rollouts that may or may not turn into orders. Similarly, the European economy remains flat and IT budgets continue to be constrained in that region. As a result, there was general weakness across all lines of our business in the EMEA region except for our SUSE LINUX

Novell annual report 2004 19

products. We believe that our focus on Linux open source and identity management solutions will permit us to exploit the two primary concerns of CIOs — security and total cost of ownership.

Critical Accounting Policies

      An accounting policy is deemed to be critical if it requires us to make an accounting estimate based on assumptions about matters that are highly uncertain at the time an accounting estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur periodically could materially change the financial statements. We consider certain accounting policies related to revenue recognition, impairment of long-lived assets, and valuation of deferred tax assets to be critical policies due to the estimation processes involved in each.

      Revenue Recognition. Our revenue is derived primarily from the sale of software licenses and maintenance, technical support, training, and consulting services. Revenue is recognized in accordance with the requirements of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.” Under SOP 97-2, when an arrangement does not require significant production, modification or customization of the software, revenue is recognized when the following four criteria are met:

•  Persuasive evidence of an arrangement exists — We require evidence of an agreement with a customer specifying the terms and conditions of the products or services to be delivered.

•  Delivery has occurred — For software licenses, delivery takes place when the customer is given access to the software programs. For services, delivery takes place as the services are provided.

•  The fee is fixed or determinable — Fees are fixed or determinable if they are not subject to a refund or cancellation and do not have payment terms that exceed our standard payment terms.

•  Collection is probable — We perform a credit review of all customers with significant transactions to determine whether a customer is credit worthy and collection is probable.

      Revenue from software license fees is recognized upon delivery of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. Allowances for estimated sales returns and allowances are recorded in the same period as the related revenue. We recognize revenue on the sale of shrink-wrapped box product through our distributor channel on a sell-through basis.

      Revenue from maintenance contracts, subscriptions, support and other similar services is recognized as services are performed over the term of the performance period. Certain sales require continuing service, support and performance by us, and accordingly, a portion of the revenue is deferred until the future service, support, and performance are provided.

      Consulting project contracts are either time-and-materials or fixed-price contracts. Revenue from consulting projects is recognized only if a signed contract exists, the fee is fixed or determinable, and collection of the resulting receivable is probable. Revenue from time-and-materials contracts is recognized as the services are performed. Revenue from fixed-price contracts is recognized using the proportional performance method, using estimated time-to-completion to measure the percent complete. The cumulative impact of any revision in estimates of the percent complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known.

      Many of our software arrangements include multiple elements, such as product upgrade protection, software support services, consulting, and training, in addition to software licenses and maintenance. These multiple element arrangements are accounted for using the proportional method of accounting in which we allocate revenue to each element of the transaction based upon the relative fair values of the elements, which may include software products, product upgrade protection, software support services, consulting, and training. Fair value is determined by Novell-specific objective evidence of the price charged to other customers when

20 Novell annual report 2004

each element is sold separately. We have established sufficient Novell-specific objective evidence of the fair value of all elements of a multiple element arrangement.

      Services revenue includes reimbursable expenses charged to our clients.

      We record provisions against revenue for estimated sales returns and allowances on product and service-related sales in the same period as the related revenue is recorded. We also record a provision to operating expenses for bad debts resulting from customers’ inability to pay for the products or services they have received, due to such factors as bankruptcy. These estimates are based on historical sales returns and bad debt expense, analyses of credit memo data, and other known factors. If the historical data we use to calculate these estimates do not properly reflect future returns or bad debts, revenue or net income could be overstated or understated.

      Long-lived Assets. Our long-lived assets include net fixed assets, long-term investments, goodwill, and other intangible assets. At October 31, 2004, our long-lived assets included $231.5 million of net fixed assets, $56.0 million of long-term investments, $391.1 million of goodwill, and $48.6 million of identifiable intangible assets.

Property, Plant, and Equipment. We periodically review our property, plant, and equipment for impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In determining whether an asset is impaired, we must make assumptions regarding recoverability of costs, estimated future cash flows from the asset, intended use of the asset and other related factors. If these estimates or their related assumptions change, we may be required to record impairment charges for these assets. For example, in the fourth quarter of fiscal 2002, we determined that our facilities in San Jose, California and a small building in Provo, Utah had become impaired due to changes in the intended use of the facilities, as well as changes in the local commercial real estate market. Accordingly, an independent real estate consulting firm was retained to appraise the facilities. This resulted in a pre-tax, non-cash impairment charge of $80 million. In the third quarter of fiscal 2003, we sold our San Jose facility to a San Jose-based company looking to remain in the area and seeking to satisfy specific space requirements. As a result, we were able to sell the facility for more than anticipated, and we recorded a $25 million gain on the sale.

Long-term Investments. The fair value of the long-term investments is dependent on the actual financial performance of the companies or venture funds in which we have invested, the investees’ market value, and the volatility inherent in the external markets for these investments. In assessing potential impairment for these private equity investments, we consider these factors as well as the forecasted financial performance of our investees, liquidation preference value of the stock we hold, and estimated potential for investment recovery based on all these factors. If any of these factors indicate that the investment has become other-than-temporarily impaired, we may have to record additional impairment charges not previously recognized. During fiscal 2004, we recognized $5.4 million of impairment losses related to our long-term investments. If general market conditions do not improve, or if any of the companies or venture funds included in long-term investments do not meet performance goals, our investments could become other-than-temporarily impaired as their values decline, causing us to record further investment impairment charges.

Goodwill and Intangible Assets. In assessing the recoverability of our goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, or if actual cash flows are below our estimates, we may be required to record impairment charges for these assets.

During the fourth quarters of fiscal 2004, 2003 and 2002, we completed our annual goodwill impairment review based on August 1, 2004, 2003 and 2002 balances and determined that there was no goodwill

Novell annual report 2004 21

impairment as of those dates. These assessments are made at the segment level, and therefore we could be subject to an impairment charge to goodwill or intangible assets if any one of the geographic segments or Celerant is not performing well in the future. In addition, changes in the assumptions used in the analysis could have changed the resulting outcome. For example, to estimate the fair value of our reporting units at August 1, 2004, we made estimates and judgments about future cash flows based on our fiscal 2005 forecast and current long-range plans used to manage the business. These long-range estimates could change in the future depending on internal changes in our company as well as external factors. Future changes in estimates could possibly result in a non-cash impairment charge that could have a material adverse impact on our results of operations.

Developed technology and customer relationships are amortized over three years as a cost of revenue. Our trade names have an indefinite life and therefore are not amortized but are reviewed for impairment at least annually. We review our intangible assets periodically for indicators of impairment in accordance with SFAS No. 144. During fiscal 2003, we recorded a $23.6 million impairment charge against certain intangible assets we acquired as a part of the SilverStream acquisition.

      Deferred Tax Assets. We perform quarterly and annual assessments of the realization of our deferred tax assets considering all available evidence, both positive and negative. Assessments of the realization of deferred tax assets require that management make significant judgments about many factors, including the amount and likelihood of future taxable income. As a result of these assessments, we previously established valuation allowances on select deferred tax assets that were considered to be at risk due to their unique characteristics and limitations, such as capital loss carryovers and acquired tax attributes. Through the third quarter of fiscal 2003, we concluded that it was more likely than not that the remaining recognized deferred tax assets would be realized. The valuation allowance established in the fourth quarter of fiscal 2003 was recorded as a result of our analysis of the facts and circumstances at that time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required by SFAS No. 109 “Accounting for Income Taxes”. The Company’s cumulative pre-tax book loss for three consecutive years ended October 31, 2003 imposed a high standard for compelling, positive evidence of the likelihood of, and ability to forecast, future taxable income in the near term. As a result, in the fourth fiscal quarter 2003, we provided a full valuation allowance against net deferred tax assets carried on our balance sheet.

      In addition, during fiscal 2004, we incurred U.S. pre-tax losses for tax reporting purposes. At October 31, 2004, we have been in a cumulative pre-tax loss position for each of the last three years. As a result, we have provided a full valuation reserve on our deferred tax assets.

      We recorded deferred tax liabilities during fiscal 2004 for foreign jurisdictions. The deferred tax liabilities recorded in foreign jurisdictions were attributable to book to tax basis differences recorded as part of purchase price accounting for the assets and liabilities of companies acquired during the year.

      Loss Contingency Accruals. We are required to make accruals for certain loss contingencies related to litigation, restructurings and taxes. We accrue these items in accordance with SFAS No. 5, “Accounting for Contingencies” however the estimation of the amount to accrue requires significant judgment. Litigation accruals require we make assumptions about the future outcome of each case based on current information. When our restructurings include leased facilities, we are required to make assumptions about future sublease income, which would offset our costs and decrease our accrual. From time to time, we are subjected to tax audits and must make assumptions about the outcome of the audit. If any of the estimates or their related assumptions change in the future, or if actual outcomes are different than our estimates, we may be required to record additional charges or reduce our accruals For example, during fiscal 2004, we recorded a $4.9 million adjustment to a previous restructuring accrual due to changes in estimates we originally made regarding future sublease income, a $5 million reduction of our litigation accrual due to changes in the estimated outcome of certain ongoing legal cases and a $4 million reduction to our litigation accrual and $6 million reduction to our income tax accrual due to one-time adjustments to these reserves.

22 Novell annual report 2004

Results of Operations

Acquisitions

Salmon Ltd.

      On July 19, 2004, we purchased all of the outstanding stock of Salmon Ltd, a privately-held information technology services and consulting firm headquartered in Watford, England, for approximately $8.2 million in cash, plus estimated merger and transaction costs of $0.6 million. In addition, we recorded a deferred income tax liability of $1.2 million resulting from the future tax consequences of the non-deductibility of identified intangible assets recorded in connection with this acquisition.

      The purchase agreement provides for contingent payments of up to an additional $10.6 million based upon the future revenues and profitability of both Salmon and Novell in the United Kingdom over a period of two years. Any future earnout payments will be capitalized as goodwill when and if paid.

      Revenues of $6.5 million and expenses of $6.1 million were included in our statement of operations related to Salmon for the period from acquisition (July 19, 2004) to October 31, 2004.

SUSE LINUX AG

      On January 12, 2004, we purchased substantially all of the outstanding stock of SUSE LINUX AG, a privately-held company and a leading provider of Linux-based products, for approximately $210.0 million in cash, plus estimated merger and transaction costs of $9.0 million. In addition, we recorded a deferred income tax liability of $3.0 million resulting from the future tax consequences of the non-deductibility of identified intangible assets recorded in connection with this acquisition.

      Revenues of approximately $36.2 million and expenses of approximately $42.2 million were included in our statement of operations related to SUSE for the period from acquisition (January 12, 2004) to October 31, 2004.

Ximian, Inc.

      On August 4, 2003, we acquired Ximian, Inc., a privately-held company and provider of desktop and server solutions that enable enterprise Linux adoption, approximately $40.0 million in cash and estimated transaction costs of $0.5 million. Ximian’s results of operations have been incorporated into our statement of operations beginning on the acquisition date of August 4, 2003.

SilverStream Software, Inc.

      On July 17, 2002, we acquired substantially all of the outstanding shares of SilverStream at a price of $9.00 per share. At the closing date of the merger, approximately 23.5 million shares of SilverStream common stock were outstanding, resulting in a total cash acquisition price of $210.8 million. Direct transaction costs were approximately $1.1 million and the fair value of SilverStream stock options assumed, both vested and unvested, totaled $28.6 million. Silverstream’s results of operations have been incorporated into our statement of operations beginning on the acquisition date of July 17, 2002.

Revenue

      We sell our products, services, and solutions primarily to corporations, government entities, educational institutions, resellers and distributors both domestically and internationally. In the statement of operations, we categorize revenue as software licenses or maintenance and services. Software license revenue includes new

Novell annual report 2004 23

license revenue only. Maintenance and services includes all other revenue including Linux subscriptions and upgrade protection contracts.

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
New software licenses		$	238	$	265	$	319		(10	)%		(17	)%
Maintenance and services			928		840		815		10	%		3	%
	Total net revenue	$	1,166	$	1,105	$	1,134		6	%		(3	)%

      New software license revenue decreased in fiscal 2004 compared to fiscal 2003 and in fiscal 2003 compared to fiscal 2002 primarily as a result of lower NetWare, collaboration and ZENworks new license sales. Revenue from NetWare licenses decreased by $21 million or 20% from fiscal 2003 to fiscal 2004 and $39 million or 27% from fiscal 2002 to fiscal 2003. Revenue from Collaboration licenses decreased $3.3 million or 9% from fiscal 2003 to fiscal 2004 and $6.2 million or 14% from fiscal 2002 to fiscal 2003. Revenue from ZENworks licenses decreased by $1.4 million or 3% from fiscal 2003 to fiscal 2004 and $4.3 million or 9% from fiscal 2002 to fiscal 2003. These decreases were offset somewhat by favorable foreign exchange rates, particularly in Europe and the addition of approximately $4.4 million of revenue from SUSE.

      Maintenance and services revenue increased in fiscal 2004 compared to fiscal 2003 primarily due to increased worldwide services revenue, which increased $8.5 million or 3%, the recognition of $13.5 million of royalty revenue related to the legal judgment against The Canopy Group, Inc. (“Canopy”), the addition of $31.8 million in SUSE services revenue, and the benefit of favorable foreign exchange rates, primarily in Europe. These increases were offset somewhat by lower NetWare maintenance revenue, which decreased by $9.0 million or 5%. In total, NetWare revenue decreased by 10% from fiscal 2003 to 2004. The increase from fiscal 2002 to fiscal 2003 relates primarily to increased collaboration, ZENworks, and identity management maintenance revenue, offset somewhat by lower consulting revenue.

      Further explanation of revenue trends by product follows in the discussion of revenue by segment.

      Revenues by reporting segment were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
North America		$	515	$	508	$	577		1	%		(12	)%
Europe, Middle East, and Africa (“EMEA”)			378		348		323		9	%		8	%
Asia Pacific			62		60		55		3	%		9	%
Latin America			21		24		27		(13	)%		(11	)%
Japan			28		26		27		8	%		(4	)%
Celerant			162		139		125		17	%		11	%
	Total net revenue	$	1,166	$	1,105	$	1,134		6	%		(3	)%

24 Novell annual report 2004

      We further analyze revenue by solution categories within each geographic segment. Revenues by solution category in North America were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
Identity management and web services solutions		$	49	$	49	$	45		—	%		9	%
Cross-platform solutions			319		309		353		3	%		(13	)%
Services			147		150		179		(2	)%		(16	)%
	Total net revenue	$	515	$	508	$	577		1	%		(12	)%

      The 1% overall increase in the North America segment revenues for fiscal 2004 compared to fiscal 2003 is primarily due to increased revenue in our cross-platform services solution category. This increase is due primarily to the recognition of $13.5 million of royalty revenue related to the legal judgment against Canopy. Excluding the Canopy revenue, North America revenue for fiscal 2004 decreased by $7 million or 1% compared to the fiscal 2003. These declines are primarily due to a $18.2 million or 11% decline in fiscal 2004 in NetWare revenues and a $3.5 million or 2% decrease in worldwide services revenue. These declines are offset somewhat by increases in ZENworks revenues of $8 million or 13% for fiscal 2004 compared to fiscal 2003, principally related to our successful release of ZENworks 6.5 during the third quarter of fiscal 2004 and the addition of $11 million in revenue from SUSE in fiscal 2004. The SUSE revenue included subscriptions related to approximately 25,000 units of SLES 9. Revenues in identity management and web solutions and services remained relatively flat.

      Revenue in the North America segment decreased in fiscal 2003 compared to 2002 by 12%. The decrease is mainly a result of a $34.5 million or 17% decrease in NetWare revenue as a result of declining license maintenance sales, and a $28.3 million reduction in IT consulting revenues, which was due to the difficult economy, which caused corporate IT spending in general to decrease. These decreases were offset somewhat by increased identity management and web services revenue, primarily in the exteNd product line.

      Revenues by solution category in the EMEA segment were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
Identity management and web services solutions		$	41	$	37	$	30		11	%		23	%
Cross-platform solutions			213		199		196		7	%		2	%
Services			124		112		97		11	%		15	%
	Total net revenue	$	378	$	348	$	323		9	%		8	%

      The 9% overall increase in the EMEA segment revenues for fiscal 2004 compared to fiscal 2003 was due primarily to favorable foreign currency exchange rates, which increased revenues by approximately $18 million for fiscal 2004. This increase is also due to the inclusion of SUSE revenues in the cross-platform services solution category of $21 million for fiscal 2004 compared to no SUSE revenue in fiscal 2003. Also, revenues for fiscal 2004 increased by approximately $7 million due to the inclusion of Salmon revenues. During fiscal 2004, SUSE revenue in EMEA included subscriptions related to approximately 13,000 units of SLES 9 and 3,800 units of SLES 8 during fiscal 2004.

      Excluding the impact of foreign currency exchange rates, SUSE revenues and Salmon revenues, revenues for EMEA for fiscal 2004 decreased by approximately $16 million or 4% due primarily to declining NetWare revenue and lower than expected maintenance renewals in Germany and the United Kingdom.

      Revenue in the EMEA segment increased by 8% in 2003 compared to 2002. The increase was mainly due to favorable exchange rates coupled with slight increases in product revenue and IT consulting sales.

Novell annual report 2004 25

      Revenues by solution category in the Asia Pacific segment were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
Identity management and web services solutions		$	8	$	7	$	5		14	%		40	%
Cross-platform solutions			34		36		34		(6	)%		6	%
Services			20		17		16		18	%		6	%
	Total net revenue	$	62	$	60	$	55		3	%		9	%

      The 3% overall increase in Asia Pacific segment revenues for fiscal 2004 compared to fiscal 2003 is primarily due to favorable foreign currency exchange rates, improved revenues for our services, ZENworks and identity management products, offset somewhat by decreases in NetWare revenue of approximately $4 million or 17%.

      Revenue in the Asia Pacific segment increased by 9% in 2003 compared to 2002. The increase in 2003 is mainly a result of favorable exchange rates coupled with flat product and services sales.

      Revenues by solution category in the Latin America segment were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
Identity management and web services solutions		$	2	$	3	$	1		(33	)%		200	%
Cross-platform solutions			10		11		12		(9	)%		(8	)%
Services			9		10		14		(10	)%		(29	)%
	Total net revenue	$	21	$	24	$	27		(13	)%		(11	)%

      The 13% overall decline in Latin America segment revenues for fiscal 2004 is primarily due to a 19% decrease in NetWare revenue, a 14% decrease in collaboration products, a 26% decrease in identity management and web services revenue, and a 10% decrease in services revenue. These decreases were somewhat offset by a 15% increase in ZENworks revenue due primarily to our successful release of ZENworks 6.5 during the third quarter. Revenue in the Latin America segment decreased by 11% in 2003 compared to 2002. The decrease in 2003 is mainly a result of a 20% decrease in NetWare revenue, a 21% decrease in ZENworks revenue, and a 30% decrease in services revenue, offset somewhat by increased collaboration revenue. Overall, the decrease in revenues reflect the poor economic conditions in Latin America resulting in lower IT spending.

      Revenues by solution category in the Japan segment were as follows:

								2004 vs			2003 vs
		2004		2003		2002		2003			2002
		(In millions)						(Percentage change)
Identity management and web services solutions		$	1	$	1	$	1		—	%		—	%
Cross-platform solutions			19		15		14		27	%		7	%
Services			8		10		12		(20	)%		(17	)%
	Total net revenue	$	28	$	26	$	27		8	%		(4	)%

      The 8% overall increase in Japan segment revenues for fiscal 2004 is primarily due to increased royalty revenue, offset somewhat by declining services revenue. Revenue in the Japan segment decreased by 4% in 2003 compared to 2002 primarily due to decreased services revenue.

26 Novell annual report 2004

      Revenues in the Celerant consulting segment were as follows:

							2004 vs			2003 vs
	2004		2003		2002		2003			2002
	(In millions)						(Percentage change)
Celerant consulting	$	162	$	139	$	125		17	%		11	%

      Celerant revenues for fiscal 2004 increased 17% compared to the prior year due to a combination of underlying growth in the business and favorable currency exchange rates. Excluding the impact of the foreign currency exchange rates, revenue increased by 8% for fiscal 2004 compared to fiscal 2003 due to improved revenue growth in our European businesses.

      Revenue in the Celerant consulting segment increased by 11% in 2003 compared to 2002 due to favorable exchange rates and increased demand for services.

Deferred revenue

      Deferred revenue represents revenue that has been billed or collected, but that will be recognized when the earnings process is completed in future periods. The majority of deferred revenue relates to maintenance contracts and subscriptions and is recognized ratably over the related periods, typically one year. At October 31, 2004, deferred revenue increased by $52 million or 16% to $374 million compared to the balance at October 31, 2003. This increase is largely attributable to a $12 million increase due to favorable foreign currency exchange rates, a $17 million increase due to the inclusion of SUSE deferred revenue, and the remaining increase is primarily due to advanced invoicing of maintenance contract renewals and to changes in our business mix moving towards more maintenance and subscription contracts.

Forward-looking revenue trends

      We expect NetWare to continue to decline in fiscal 2005 and we will attempt to offset this decline with growth in our new products. Based on our review of industry trend reports from industry analysts, we expect the Linux and identity management markets to grow between 30-35% and 14-16%, respectively, in fiscal 2005. We anticipate our revenues in these areas will increase as well. In addition based on our review of IDC reports, we anticipate an overall improvement in IT spending of around 7%, which should help us increase our ZENworks, consulting and support revenue in fiscal 2005.

Gross profit

											2004 vs			2003 vs
		2004			2003			2002			2003			2002
		($ in millions)									(Percentage change)
New software licenses		$	215		$	233		$	288			(8	)%		(19	)%
	as a percent of new software license revenue		90	%		88	%		90	%
Maintenance and services		$	535		$	433		$	397			23	%		9	%
	as a percent of maintenance and services revenue		58	%		52	%		49	%
Total gross profit		$	750		$	667		$	685			12	%		(3	)%
	as a percent of net revenue		64	%		60	%		60	%

      The increase in gross profit from new software licenses as a percentage of related revenue from fiscal 2003 to fiscal 2004 and the decrease in gross profit from software licenses as a percentage of related revenue from fiscal 2002 to fiscal 2003 are due to an intangible asset impairment charge taken in fiscal 2003 against software licenses of $9.6 million. This charge related to intangible assets from the acquisition of SilverStream.

      The increase in gross profit from maintenance and services as a percentage of related revenue from fiscal 2003 to fiscal 2004 is primarily due to the recognition of $13.5 million of revenue in connection with the

Novell annual report 2004 27

Canopy legal judgment during fiscal 2004, which had relatively little corresponding cost of sales. In addition, our margins were positively impacted by increased consulting billing rates, which increased from $135 per hour in fiscal 2003 to $144 per hour in fiscal 2004 and from cost savings related to workforce reductions we implemented during fiscal 2003 and 2004, mainly in the North America and EMEA segments.

      Gross profit as a percentage of revenue on maintenance and services increased in fiscal 2003 relative to fiscal 2002 due to efforts to improve resource utilization in our IT consulting services such as elimination of excess capacity, which was partially offset by the intangible asset impairment charge of $14.0 million taken against maintenance and services in fiscal 2003.

Forward-looking gross margin trends

      We expect gross margin percentages will decrease in fiscal 2005 as our revenue mix continues to shift from software licenses to services as our Linux and worldwide services businesses improve. Additionally, during fiscal 2005 we anticipate that gross margin percentages will be lower as we increase our investment in restructuring the North America and EMEA businesses and in increasing compensation to retain and motivate our employees, who have had limited compensation increases over the last two years.

Operating expenses

											2004 vs			2003 vs
		2004			2003			2002			2003			2002
		($ in millions)									(Percentage change)
Sales and marketing		$	363		$	381		$	359			(5	)%		6	%
	as a percent of net revenue		31	%		34	%		32	%
Product development		$	199		$	184		$	169			8	%		9	%
	as a percent of net revenue		17	%		17	%		15	%
General and administrative		$	102		$	111		$	123			(8	)%		(10	)%
	as a percent of net revenue		9	%		10	%		11	%
Restructuring expenses		$	23		$	43		$	19			(47	)%		126	%
	as a percent of net revenue		2	%		4	%		2	%
Purchased in-process research and development		$	—		$	1		$	3			—			(67	)%
	as a percent of net revenue		—	%		—	%		—	%
(Gains)/impairments on real property		$	(2	)	$	(25	)	$	80			92	%		(131	)%
	as a percent of net revenue		—	%		(2	)%		7	%
Total operating expenses		$	685		$	695		$	753			(1	)%		(8	)%
	as a percent of net revenue		59	%		63	%		66	%

      Sales and marketing expenses in total and as a percentage of revenue, decreased in fiscal 2004 compared to fiscal 2003 due primarily to lower marketing spending, mainly in corporate advertising and the effect of fiscal 2003 and 2004 restructurings, offset somewhat by additional expenses related to the SUSE and Salmon acquisitions in fiscal 2004. This decline is offset somewhat by changes in foreign currency exchange rates. Sales and marketing expense, in total and as a percentage of revenue, increased in fiscal 2003 compared to fiscal 2002 primarily as a result of higher advertising costs and the addition of SilverStream sales and marketing costs, including SilverStream employees, for the full twelve months of fiscal 2003.

      Product development costs in fiscal 2004 increased compared to fiscal 2003 due to increased research and development activity from the acquisitions of Ximian and SUSE. Product development headcount increased by 140 engineers compared to the prior year due primarily to the acquisitions of Ximian and SUSE, offset by workforce reductions in other areas of product development. Product development expenses, in total and as a percentage of revenue, increased in fiscal 2003 compared to fiscal 2002 primarily due to the addition of

28 Novell annual report 2004

SilverStream product development costs, including SilverStream employees who became Novell product development employees in July 2002.

      General and administrative expenses in fiscal 2004 decreased compared to fiscal 2003 primarily due to favorable legal developments that allowed us to reduce our legal reserves by $5 million during our second quarter of fiscal 2004, one-time adjustments to our medical liabilities, accounts payable accruals, and legal reserves of $7.9 million during our fourth quarter of fiscal 2004, and a one-time adjustment to decrease bad debt expense by $1.8 million compared to fiscal 2003, offset somewhat by increased expenses related to the addition of SUSE and Salmon general and administrative costs. General and administrative expenses decreased, in total and as a percentage of revenue, in fiscal 2003 from fiscal 2002 primarily due to a full year’s impact of restructuring activities undertaken in 2002. This decrease was partially offset by the addition of SilverStream general and administrative costs in July 2002.

      Purchased in-process research and development is technology purchased in the acquisitions of Ximian and SilverStream that was not technologically feasible at the date of the acquisition, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, and was not ready for initial customer testing. In-process research and development was valued based on discounting forecasted cash flows that will be generated directly from the related products. The in-process research and development does not have any alternative future use and did not otherwise qualify for capitalization. As a result, the entire amount was expensed.

Forward-looking operating expense trends

      In order to fully transition our business from our legacy products, such as NetWare, to those that will drive our future growth, such as Linux, we will need to maintain a transitional cost structure in order to develop, market and sell these products and solutions. Specifically, we anticipate our investment in product development in fiscal 2005 will be higher than recent years as we develop new products and re-architect older products. We expect to continue to incur costs in North America as we complete the process of restructuring this organization and expect to incur costs to similarly restructure our EMEA business. We plan to increase compensation to retain and motivate our employees in fiscal 2005, who have had limited compensation increases over the last two years. This will increase both cost of sales and operating expenses.

(Gain)/impairment on real property

      During fiscal 2004, we recognized a gain of $2.0 million on the sale of one of our facilities. During the fourth quarter of fiscal 2002, we determined that there were indicators of impairment related to our facility in San Jose, California and a small building in Provo, Utah due to the move of most employees from San Jose to other facilities, as well as changes in the local real estate market. We then performed an analysis of each of the property’s future undiscounted cash flows and determined that their estimated future cost recovery was lower than the recorded net book value of the assets. Based on the results of this analysis, we obtained an independent appraisal to determine the fair value of these locations. Based on the fair value of these facilities as determined by the independent appraisals, we recorded a pre-tax non-cash impairment charge of $80 million. In the third quarter of fiscal 2003, we sold our facility in San Jose, California, for $125 million, which resulted in a realized gain of $25 million.

Restructuring Expenses

Second, third and fourth quarters of fiscal 2004

      During the second, third and fourth quarters of fiscal 2004, we recorded net restructuring expenses of $5.3 million, $9.7 million, and $4.0 million, respectively. These restructuring expenses were in response to the evolution of our business strategy to develop a competitive position in the Linux market. This strategy includes plans to support the Linux operating system in addition to the NetWare operating system, by offering our

Novell annual report 2004 29

products and services that run on Linux, NetWare and other platforms. The acquisitions of Ximian and SUSE are direct results of the evolution in our business strategy. These changes were made to address market penetration for Linux and NetWare and to address NetWare revenue declines. Specific actions taken include reducing our workforce by 54 employees during the second quarter, 65 employees during the third quarter, and 17 employees during the fourth quarter of fiscal 2004, mainly in consulting, sales and product development in EMEA and North America. In addition, we consolidated facilities, resulting in the closure of two sales facilities and the disposal of excess equipment and tenant improvements in the United States. Total restructuring expenses for fiscal 2004 by reporting segment were as follows: North America $5.5 million, EMEA $9.4 million, Asia Pacific $0.4 million, Latin America $0.2 million, and non-allocated corporate costs $3.5 million.

      The following table summarizes the activity during fiscal 2004 related to this restructuring:

								Balance at
	Original		Cash			Non-Cash		October 31,
	Reserve		Payments			Adjustments		2004
	(In millions)
Severance and benefits	$	13	$	(8	)	$	—	$	5
Excess facilities and property and equipment		6		(4	)		—		2
	$	19	$	(12	)	$	—	$	7

      As of October 31, 2004, the remaining balance of the fiscal 2004 restructuring expenses included accrued liabilities related to severance and benefits, which will be paid out over the remaining severance obligation period, not to exceed two years, lease costs for redundant facilities, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be paid over the respective remaining contract terms.

      During fiscal 2004, we also recorded a $5.9 million restructuring expense to increase prior restructuring liabilities by $1.0 million and prior merger-related liabilities by $4.9 million, and we released approximately $2.1 million of excess restructuring reserves related to prior restructuring events. The increases were the result of changes in estimates used when the original expenses were recorded primarily due to changes in the real estate market in the United Kingdom. The net impact of the fiscal 2004 restructurings and the release of the prior restructuring excess reserves was an expense of $22.9 million in fiscal 2004.

Third quarter of fiscal 2003

      During the third quarter of fiscal 2003, we recorded a pre-tax restructuring expense of approximately $27.8 million resulting from the restructuring of our operations in response to changes in general market conditions, changing customer demands, and the evolution of our business strategy relative to the identity management and web services areas of our business and our revised strategy. This strategy includes plans to support Linux in addition to NetWare by offering our products and services that run on both NetWare and Linux platforms. These changes in strategy and company structure were made to address the then current revenue declines. Specific actions taken included reducing our workforce worldwide by approximately 600 employees (approximately 10%) across all functions and geographies, with a majority coming from product development, sales, and general and administrative functions, primarily in the United States. In addition, we consolidated facilities and disposed of excess equipment. Total restructuring expenses by reporting segment were as follows: North America $18.9 million, EMEA $6.0 million, Asia Pacific $2.4 million, and Latin America $0.5 million of the total restructuring expense.

      As of October 31, 2004, the remaining balance of the third quarter of fiscal 2003 restructuring expense included accrued liabilities related to redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be paid over the respective remaining contract terms.

30 Novell annual report 2004

      The following table summarizes the activity related to this restructuring.

								Balance at							Balance at
	Original		Cash			Non-Cash		October 31,		Cash			Non-Cash		October 31,
	Expense		Payments			Adjustments		2003		Payments			Adjustments		2004
	(In millions)
Severance and benefits	$	20	$	(18	)	$	4	$	6	$	(7	)	$	1	$	—
Excess facilities and property
and equipment		6		(3	)		6		9		(6	)		—		3
Other restructuring-related costs		2		—			—		2		—			—		2
	$	28	$	(21	)	$	10	$	17	$	(13	)	$	1	$	5

      During the fourth quarter of fiscal 2003, we accrued an additional $10 million related to the completion of restructuring activities that were part of the previous quarter’s plan of restructuring. The additional accrual relates mainly to the severance of approximately 100 employees and the closing of excess facilities. Such activities occurred mostly in the North America reporting segment.

      During the third quarter of fiscal 2003, we also released approximately $2 million related to excess restructuring reserves related to the second quarter fiscal 2002 restructuring event. The net impact of the third quarter fiscal 2003 restructuring and the release of the excess fiscal 2002 restructuring reserves was an expense of $26 million.

Second quarter of fiscal 2003

      During the second quarter of fiscal 2003, we determined that the amount we had originally accrued for facility-related costs in previous restructurings was too low and accrued an additional $8 million. The original liability was based on estimated sublease rates and timing, which have been affected by the decline in the real estate market.

Second quarter of fiscal 2002

      During the second quarter of fiscal 2002, we recorded a pre-tax restructuring expense of approximately $20 million. The expense was a result of our continued move toward becoming a business solutions provider, addressing changes in the market due to technology changes, and becoming more customer-focused. Specific actions taken included: reducing our workforce worldwide by approximately 50 employees (less than 1%) across all functional areas, consolidating facilities, closing offices in unprofitable locations, and disposing of excess property and equipment. The following table summarizes the activity related to the second quarter fiscal 2002 restructuring.

						Non-Cash			Balance at					Non-Cash		Balance at					Non-Cash		Balance at
	Original		Cash			Expenses/			October 31,		Cash			Expenses/		October 31,		Cash			Expenses/		October 31,
	Expense		Payments			Adjustments			2002		Payments			Adjustments		2003		Payments			Adjustments		2004
	(In millions)
Severance and benefits	$	15	$	(9	)	$	(2	)	$	4	$	(3	)	$	—	$	1	$	(1	)	$	—	$	—
Excess facilities and property and equipment		5		(1	)		—			4		(4	)		4		4		(2	)		2		4
Other restructuring- related costs		1		—			—			1		(1	)		—		—		—			1		1
	$	21	$	(10	)	$	(2	)	$	9	$	(8	)	$	4	$	5	$	(3	)	$	3	$	5

      As of October 31, 2004, the remaining balance of the second quarter 2002 restructuring expense included redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms.

Novell annual report 2004 31

      During the second quarter of fiscal 2002, we also released approximately $1.3 million of excess accruals related to the fiscal 2000 restructuring, which reduced the restructuring costs reflected on the statement of operations for fiscal 2002. These excess accruals relate to facilities and legal costs that were not required.

Other income (expense), net

											2004 vs			2003 vs
		2004			2003			2002			2003			2002
		($ in millions)									(Percentage change)
Investment impairments		$	(5	)	$	(35	)	$	(58	)		86	%		40	%
	as a percent of net revenue		—	%		(3	)%		(5	)%
Investment income		$	23		$	13		$	25			77	%		(48	)%
	as a percent of net revenue		2	%		1	%		2	%
Other expenses, net		$	(9	)	$	(5	)	$	9			(80	)%		(155	)%
	as a percent of net revenue		(1	)%		—	%		1	%
Total other income (expense), net		$	9		$	(27	)	$	(24	)		133	%		(13	)%
	as a percent of net revenue		1	%		(2	)%		(2	)%

      Our long-term investments consist primarily of investments in venture capital fund partnerships and other direct investments in equity securities of privately-held securities. The decline in investment impairments during fiscal 2004 and fiscal 2003 from the prior years is primarily the result of more stable fund valuations as compared to the same periods in fiscal 2003 and fiscal 2002.

      Investment income for fiscal 2004 increased compared to fiscal 2003 due to the collection of $5 million of interest income earned in connection with the favorable legal judgment against Canopy during the third quarter of fiscal 2004. Investment income decreased in fiscal 2003 from fiscal 2002 primarily due to lower yields on short-term investments.

      Other expenses, net, for fiscal 2004 increased compared to fiscal 2003 primarily due to higher foreign currency transaction losses and a slight increase in interest expense of $2.0 million related to the issuance of senior convertible debentures on July 2, 2004. Other expenses, net, for fiscal 2003 decreased compared to fiscal 2002 primarily due to higher foreign currency transaction losses.

Income tax expense

											2004 vs			2003 vs
		2004			2003			2002			2003			2002
		($ in millions)									(Percentage change)
Income tax expense		$	18		$	107		$	11			(83	)%		873	%
	as a percent of revenue		2	%		10	%		1	%
Effective tax rate			24	%		194	%		12	%

      The effective tax rate for fiscal 2004 significantly decreased from fiscal 2003 primarily as a result of a full valuation allowance that was established for our total deferred tax assets during the fourth quarter of 2003. For fiscal 2004, we did not record income tax expense for U.S. activity. On a U.S. tax return basis, we expect a taxable loss for 2004. Thus, we concluded that we could not forecast future U.S. taxable income under the more likely than not standard. Accordingly, current year deferred tax provisions were also recorded as adjustments to the valuation allowance.

      The effective tax rate for fiscal 2003 significantly changed from the effective tax rate for fiscal 2002 primarily as a result of the need for additional valuation allowances in fiscal 2003. In the fourth quarter of 2003, we provided a full valuation allowance against net deferred tax assets carried on our balance sheet. SFAS No. 109 requires an assessment of a company’s current and previous performance and other relevant

32 Novell annual report 2004

factors when determining the need for such a valuation allowance. Under this pronouncement, factors such as current and previous operating losses are given greater weight than the outlook for future profitability in determining deferred tax asset carrying value. This adjustment will have no impact on our cash flow or future prospects, nor does it alter our ability to utilize the underlying tax net operating loss and credit carryforwards in the future. As deferred tax assets or liabilities increase or decrease in the future, or if a portion or all of the valuation allowance is no longer deemed to be necessary, the adjustment to the valuation allowance will increase or decrease future income tax provisions.

      In connection with our review of our tax reserves for the fourth quarter of 2004, we determined that the amount of reserves required for tax exposures was less than the amount recorded in the financial statements. As a result, we reduced the tax reserve and provision by $6 million.

      On November 8, 2004, we announced an agreement with Microsoft to settle potential antitrust litigation. A gain of $448 million, the settlement less estimated transaction costs, will be included in operating income in our first fiscal quarter ended January 31, 2005. We anticipate using net operating loss carryforwards against this income, and expect an estimated $10 million current liability as a result of the related alternative minimum tax.

Preferred stock dividends

	2004			2003		2002
	($ in millions)
Non-cash deemed dividend related to beneficial conversion feature of preferred stock	$	(26	)	$	—	$	—
Preferred stock cash dividends	$	(—	)	$	—	$	—

      On March 23, 2004, we entered into a definitive agreement with IBM providing for an investment of $50 million by IBM in Novell. The primary terms of the investment, which were negotiated in November 2003, entailed the purchase by IBM of 1,000 shares of our Series B redeemable preferred stock that are convertible into 8 million shares of our common stock at a price of $6.25 per common share. The shares are entitled to a dividend of 2% per annum, payable quarterly in cash. Dividends on preferred stock were $0.4 million during fiscal 2004.

      Because the fair value of our common stock of $9.46 per share on March 23, 2004 was greater than the conversion price of $6.25 per share, we recorded a one-time, non-cash deemed dividend of $25.7 million attributable to the value of the Series B preferred stock’s conversion feature. This beneficial conversion feature had no impact on net income, but did reduce earnings attributable to common stockholders and thus reduced basic and diluted earnings per share by approximately $0.07 in fiscal 2004.

      On June 17, 2004, 500 shares of Series B Preferred Stock, with a carrying value of $25 million, were converted into 4 million shares of our common stock.

Change in Accounting Principle

      Effective November 1, 2001, we adopted SFAS No. 142, which requires the discontinuance of amortization related to goodwill and indefinite lived intangible assets. These assets are subject to an impairment test at least annually. In addition, SFAS No. 142 includes provisions requiring the identification of reporting units upon adoption for the purpose of assessing potential future impairments and the performance of an initial impairment analysis within the first six months after adoption. We completed our goodwill impairment analysis during the second quarter of fiscal 2002 and recognized a transitional goodwill impairment loss of $144 million related to our consulting segment as of November 1, 2001, which was recorded as the cumulative effect of a change in accounting principle in our consolidated statements of operations.

Novell annual report 2004 33

Liquidity and Capital Resources

	October 31,			October 31,			Percentage
	2004			2003			Change
	($ in millions)
Cash and short-term investments	$	1,211		$	752			61	%
Percentage of total assets		53	%		48	%

      An overview of the significant cash flow activities for fiscal 2004 and 2003 are as follows:

	Fiscal 2004			Fiscal 2003			Fiscal 2002
	(Dollar amounts in millions)
Cash provided by operating activities	$	119		$	55		$	51
Issuance of senior convertible debentures, net of issuance costs		585			—			—
Issuance of convertible preferred stock		50			—			—
Issuance of common stock, net		58			20			13
Repurchase of common stock — held in treasury		(125	)		—			—
Expenditures for property, plant and equipment		(27	)		(39	)		(28	)
Proceeds from sales of property, plant and equipment		5			125			16
Net cash paid for acquisitions		(206	)		(41	)		(106	)

      Cash, cash equivalents, and short-term investments increased $459.6 million or 61% from October 31, 2003 to October 31, 2004. This increase is primarily due to the following:

•  improved cash flows from operating activities of $119.1 million primarily due to cost reductions over the past several quarters;

•  the issuance of senior convertible debentures (“Debentures”) on July 2, 2004 in the amount of $600 million, less issuance costs of $14.9 million;

•  the issuance of $50 million of Series B preferred stock on March 23, 2004;

•  the net issuance of $58.2 million of common stock during the year, primarily associated with employee exercises of stock options and purchases through the employee stock purchase program; and

•  the sale of property, plant and equipment, including buildings and land in Orem, Utah, which netted $5.0 million in cash.

      These increases are offset by decreases in cash, cash equivalents, and short-term investments due to the following:

•  a $125 million repurchase of common stock during the third quarter of fiscal 2004 in connection with our Debentures offering;

•  the purchase of property, plant and equipment for $27 million;

•  the purchase of SUSE on January 10, 2004 for $210 million less $10 million of cash acquired; and

•  the purchase of Salmon on July 19, 2004 for $8.4 million less cash acquired of $3.1 million.

      As of October 31, 2004, we had cash, cash equivalents and other short-term investments of approximately $272 million held in accounts outside the United States. Our short-term investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a portion of our investment portfolio is invested in equity securities and mutual funds, which are subject to market risk. Approximately $4.5 million of our short-term investments is restricted for deferred compensation payments, which are paid out as requested by the plan participants. Our short-term investment portfolio includes gross unrealized gains and losses of $1.1 million and $1.0 million, respectively, as of October 31, 2004. We monitor

34 Novell annual report 2004

our investments and record losses when a decline in the investment’s market value is determined to be other than temporary.

      We also invest excess cash in long-term investments through the Novell Venture account, Cambridge Technology Capital Fund I L.P. (“CTC I”), and directly in equity securities in privately-held companies. Investments made through the Novell Venture account and CTC I are generally in private companies, including small capitalization stocks in the high-technology industry sector, and in funds managed by venture capitalists for the promotion of our business and strategic objectives. As of October 31, 2004, we had a carrying value of $54.0 million related to investments in various venture capital funds and had commitments to contribute an additional $32.9 million to these funds, of which we estimate approximately $19.9 million could be contributed in fiscal 2005, approximately $9.3 million in fiscal 2006, and approximately $3.7 million thereafter as requested by the fund managers. Through our acquisition of Cambridge, we also own both limited and general partnership interests in CTC I of approximately 24%. As of October 31, 2004, we had an investment balance of $0.2 million in CTC I and had commitments to contribute an additional $0.3 million through 2007. We intend to fund these investments with cash from operations and cash on hand.

      As of October 31, 2004, we have various operating leases related to our facilities with remaining terms of more than one year. These leases have minimum annual lease commitments of $27.9 million in fiscal 2005, $22.1 million in fiscal 2006, $19.1 million in fiscal 2007, $13.4 million in fiscal 2008, $7.2 million in fiscal 2009, and $9.0 million thereafter. Furthermore, we have $24.0 million of minimum rentals to be received in the future from subleases.

      On July 2, 2004, we issued and sold $600 million aggregate principal amount of our senior convertible debentures due 2024. The Debentures pay interest at 0.50% per annum, payable semi-annually on January 15 and July 15 of each year, commencing January 15, 2005. Each $1,000 principal amount of Debentures is convertible, at the option of the holders, into 86.7905 shares of our common stock prior to July 15, 2024 if (1) the price of our common stock trades above 130% of the conversion price for a specified duration, (2) the trading price of the Debentures is below a certain threshold, subject to specified exceptions, (3) the Debentures have been called for redemption, or (4) specified corporate transactions have occurred. None of the conversion triggers were met as of October 31, 2004. The conversion rate is subject to certain adjustments. The conversion rate initially represents a conversion price of $11.52 per share. Holders of the Debentures may require us to repurchase all or a portion of their Debentures on July 15, 2009, July 15, 2014 and July 15, 2019, or upon the occurrence of certain events, including a change in control. The Debentures can be redeemed by us for cash beginning on or after July 20, 2009.

      In connection with the issuance of the Debentures, we incurred $14.9 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are included in other assets and are being amortized as interest expense using the effective interest method over the term from issuance through the first date that the holders can require repurchase of the Debentures (July 15, 2009). Amortization expense related to the issuance costs was $1.0 million for the fiscal year ended October 31, 2004. In addition, interest expense was $1.0 million for the fiscal year ended October 31, 2004. We intend to use the proceeds from these Debentures for general corporate purposes, including potential acquisitions.

      As of October 31, 2004, we also have $25 million of Series B preferred stock outstanding. The preferred stock is redeemable at our option, and by the holder only under certain change in control circumstances.

Novell annual report 2004 35

Contractual Obligations

		Payments Due by Period
				Less than						More than
				1 Year		1-3 Years		3-5 Years		5 Years
		Total		(2005)		(2006-2007)		(2008-2009)		(Beyond 2009)
		(In millions)
Commitments to venture capital funds		$	33.2	$	19.9	$	12.6	$	0.7	$	—
Senior convertible debentures			600.0		—		—		—		600.0
Interest on senior convertible debentures(a)			59.0		3.0		6.0		6.0		44.0
Purchase commitments(b)			9.0		6.6		1.9		0.4		0.1
Operating lease obligations			98.7		27.9		41.2		20.6		9.0
	Total	$	799.9	$	57.4	$	61.7	$	27.7	$	653.1
Other contractual obligations:
	Dividends on preferred stock		(c)		0.5		1.0		1.0		(c)

(a)	Interest on senior convertible debentures assumes no conversions.
(b)	Purchase obligations represent future contracted payments under normal take or pay arrangements entered into as a part of the normal course of business that are not recorded as liabilities at October 31, 2004.
(c)	Dividend payments are indefinite and are $500,000 per year.

      On November 8, 2004, Novell announced an agreement with Microsoft to settle potential antitrust litigation related to our NetWare operating system in exchange for $536 million in cash, which we received on November 18, 2004. The financial terms of the NetWare settlement agreement, net of related legal fees, are expected to result in a pre-tax gain of approximately $448 million in the first quarter of fiscal 2005.

      Our principal source of liquidity continues to be from operations, cash on hand, and short-term investments. At October 31, 2004, our principal unused sources of liquidity consisted of cash and cash equivalents of $434.4 million and short-term investments in the amount of $777.1 million. During fiscal 2004, we generated $119 million of cash flow from operations, including $18.5 million from the settlement of litigation with Canopy. Our liquidity needs for the next twelve months are principally for financing of fixed assets, commitments to our venture capital funds and product development and to maintain flexibility in a dynamic and competitive operating environment, including the ability to pursue potential acquisition and investment opportunities. Our liquidity needs beyond the next twelve months include those mentioned previously in addition to redemption of our Debentures.

      We anticipate generating positive cash flows from operations in addition to investment income in fiscal 2005 sufficient to fund operations. We anticipate being able to fund our current operations, future potential acquisitions, any further integration, restructuring or additional merger-related costs, and planned capital expenditures for the next twelve months with existing cash and short-term investments together with cash generated from operations and investment income. We believe that borrowings under our credit facilities or offerings of equity or debt securities are possible for expenditures beyond the next twelve months, if the need arises, although such offerings may not be available to us on acceptable terms and are dependent on market conditions at such time. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. We also anticipate having adequate cash in fiscal 2005 for necessary capital expenditures.

Recent Pronouncements

      In March 2004, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 03-6, “Participating Securities and the Two — Class Method under Financial Accounting Standards Board

36 Novell annual report 2004

(“FASB”) Statement 128,” Issue 03-6 requires the two-class method of calculating earnings per share for companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends of the company. Because the Series B preferred stock participates in dividends, we are required to use the two-class method of calculating earnings per share, effective in fiscal 2004 and retroactively for all prior periods. This change in computational methods had no impact on earnings per share for any period in fiscal 2004 or any prior period.

      In November 2004, the EITF reached a final conclusion on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share”. EITF Issue 04-8 addresses when the dilutive effect of contingently convertible debt with a market price trigger should be included in diluted earnings per share calculations. The EITF’s conclusion is that the market price trigger should be ignored and that these securities should be treated as convertible securities and included in diluted earnings per share regardless of whether the conversion contingencies have been met. Because our senior convertible debentures are contingently convertible debt with a market price trigger, we will be required to comply with EITF Issue 04-8 beginning in the first quarter of fiscal 2005. Had the conclusions of EITF Issue 04-8 been effective for fiscal 2004, reported earnings per share would not have changed due to the timing of our issuance of the senior convertible debentures. However, future earnings per share could be impacted by the adoption of this standard. For example, had the senior convertible debentures been outstanding for the fiscal year ended October 31, 2004, on a pro forma basis our diluted earnings per share attributable to common stock would have been $0.07 instead of our reported $0.08 per diluted share and our weighted average number of shares would have increased by approximately 52 million shares.

      In December 2004, the FASB issued its final standard on accounting for employee stock options, SFAS No. 123(R), “Share-Based Payment”, which replaces SFAS Nos. 123 and supercedes Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires all companies to measure compensation costs for all share-based payments, including stock options, at fair value and expense such payments to the statement of operations over the service period. SFAS No. 123(R) is effective beginning for interim or annual periods beginning after June  15, 2005, which would be our fourth fiscal quarter of fiscal 2005. We are in the process of determining the impact SFAS No. 123(R) will have on our consolidated financial statements.

Risk Factors

Our NetWare revenue stream continues to deteriorate.

      We have been selling and upgrading NetWare for many years, sales of which have been declining. Overall, NetWare license and maintenance revenue of our business declined by $36 million in fiscal 2004, excluding the impact of favorable foreign exchange rates. Our next generations of NetWare enterprise-ready operating system and services, Open Enterprise Server, will give customers the opportunity to choose between a NetWare operating system and a Linux operating system, providing NetWare customers a means to migrate to Linux and open source solutions while maintaining enterprise-class functionality to which they have become accustomed. Our goal is that by providing a migration strategy, we will retain existing NetWare customers and gain new customers who are looking for the additional benefits that open source has to offer. If this strategy is unsuccessful, our NetWare revenue stream will deteriorate faster than the growth of revenue streams from our other products.

We had net losses in fiscal years 2002 and 2003 and may not maintain profitability.

      We had net losses of $161.9 million in 2003 and $246.8 million in 2002. Although we generated net income of $57.2 million in 2004, we cannot be certain that we will generate sufficient revenues to maintain profitability. If our revenues grow more slowly than we anticipate, or if our operating expenses increase more

Novell annual report 2004 37

than we expect or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected.

If our identity management and cross-platform services solutions do not grow at the rate we anticipate, our growth will be negatively impacted.

      Our product strategy focuses on two specific areas: identity management and web services solutions, and cross-platform services solutions with a specific emphasis on open source platforms. We have focused on these offerings because we believe that identity driven solutions and open source platforms are two of the fastest growing segments in our industry, and we believe that they represent the best opportunity for us to profitably grow our revenues. Our ability to achieve success with this strategy is dependent on a number of factors including, but not limited to, the following:

•  the growth of these markets;

•  development of key product solutions and upgrades;

•  the acceptance of these solutions by clients, particularly enterprise companies;

•  enticing customers to upgrade from older versions of our products to newer versions;

•  successfully selling technical support and other Novell solutions to our maintenance customers of our open source products; and

•  the acceptance of those products by large industry partners and major accounts.

We may not be able to successfully compete in a challenging market for computer software and consulting services.

      The industries we compete in are highly competitive. We expect competition to continue to increase both from existing competitors and new market entrants. Competitors of our identity management and web services solutions and cross-platform solutions include Microsoft, IBM, Sun, HP, Altiris, and Computer Associates. Our primary competitor in the North America Linux market is Red Hat. Competitors of our worldwide services group include IBM, Accenture, HP, CSC and Capgemini. Competitors of our Celerant consulting segment include A.T. Kearney, McKinsey & Co., IBM Global Services, Capgemini, and The Management Consulting Group. Many of our competitors have greater financial, technical and marketing resources than we have. We believe that competitive factors common to all of our segments include:

•  the pricing of our products and services and the pricing strategies of our competitors;

•  the timing and market acceptance of new solutions developed by us and our competitors;

•  brand and product awareness;

•  the performance, reliability and security of our products;

•  the ability to preserve our legacy customer base;

•  our ability to establish and maintain key strategic relationships with distributors, resellers and other partners; and

•  our ability to attract and retain highly qualified development, consulting and managerial personnel.

If third parties claim that we infringed upon their intellectual property, our ability to use some technologies and products could be limited and we may incur significant costs to resolve these claims.

      Litigation regarding intellectual property rights is common in the software industry. We have from time to time received letters or been the subject of claims suggesting that we are infringing upon the intellectual

38 Novell annual report 2004

rights of others. In addition, we have faced and expect to continue to face from time to time disputes over rights and obligations concerning intellectual property. The cost and time of defending ourselves can be significant. If an infringement claim is successful, we and our customers may be required to obtain one or more licenses from third parties, and we may be obligated to pay or reimburse our customers for monetary damages. In such instances, we or our customers may not be able to obtain necessary licenses from third parties at a reasonable cost or at all, and may face delays in product shipment while developing or arranging for alternative technologies, which could adversely affect our operating results.

In the event claims for indemnification are brought for intellectual property infringement, we could incur significant expenses, thereby adversely affecting our results of operations.

      We indemnify customers against certain claims that our products infringe upon the intellectual property rights of others. Additionally, under our Novell Linux Indemnification Program, we offer indemnification for copyright infringement claims made by third parties against registered Novell customers who obtain SUSE LINUX Enterprise Server 8, SUSE LINUX Enterprise Server 9, SUSE LINUX Retail Solution, and Novell Linux Desktop, and who, after January 12, 2004, obtain upgrade protection and a qualifying technical support contract from us or a participating channel partner. Although indemnification programs for proprietary software are common in our industry, indemnification programs that cover open source software are not. For example, SCO has brought claims against two end users of Linux and has threatened to bring claims against other end users of Linux arising out of the facts alleged in SCO’s lawsuit against IBM and in SCO’s public statements. In the event that claims for indemnification are brought for intellectual property infringement, we could incur significant expense reimbursing customers for their legal costs and, in the event those claims are successful, for damages.

Legal actions being taken by SCO could adversely affect our revenues and business plan if these legal actions cause a reduction in demand for our SUSE LINUX and Ximian products.

      SCO filed a legal action in March 2003 against IBM alleging, among other things, that Linux is an unauthorized derivative of UNIX and that portions of UNIX intellectual property that SCO alleges it owns have been included in the Linux operating system without authorization. In addition, SCO has warned that legal liability for the use of Linux may extend to commercial users, has threatened users with litigation and sought licensing fees from them, and more recently has filed Linux related suits against other parties. As discussed below, SCO has sued Novell for slander of title relating to disputes about whether Novell or SCO owns the copyrights to UNIX, on which some of SCO’s Linux-related claims depend. It is possible that SCO’s actions may reduce general demand for Linux and Linux related products and services. In this event, demand for our Linux (or open-source) products and services could decrease, thereby reducing revenue, and would otherwise adversely affect our business since we have made a strategic decision to become active in the Linux market.

A lawsuit filed against us by SCO could result in a substantial judgment against us and adversely affect our revenues and business plan if they are successful.

      In January 2004, SCO filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. We removed the claim to the U.S. District Court, District of Utah. SCO’s original complaint alleged that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’s business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. The District Court dismissed the original complaint, but allowed SCO an opportunity to file an amended complaint, which SCO did in July 2004. As with the original complaint, SCO is again seeking to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights and to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights

Novell annual report 2004 39

and to pay actual, special and punitive damages in an amount to be proven at trial. We have again sought to dismiss SCO’s amended complaint. Our revenues and business plan could be adversely affected if SCO is ultimately successful.

We have experienced delays in the introduction of new products due to various factors, resulting in lost revenue.

      We have in the past experienced delays in the introduction of new products due to a number of factors, including the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices, the need to “debug” products prior to extensive distribution, and with regard to our open-source products, our increasing reliance on the work of third parties not employed by Novell. Additionally, our open source offerings depend to a large extent on the efforts of developers not employed by us for the creation and update of open source technologies. For example, Linus Torvalds, the original developer of the Linux kernel, and a small group of engineers, many of whom are not employed by us, are primarily responsible for the development and evolution of the Linux kernel that is a key component of our Open Enterprise Server offering. The timing and nature of new releases of the Linux kernel are controlled by these third parties. Delays in developing, completing, or shipping new or enhanced products could result in delayed or reduced revenues for those products and could adversely impact customer acceptance of those offerings.

We benefit from the open source contributions of third-party programmers and corporations, and if they cease to make these contributions, our product strategy could be adversely affected.

      Our open source offerings depend to a large extent on the efforts of developers not employed by us for the creation and update of open source technologies. Also, we and many other corporations contribute software into the open source movement. If key members, or a significant percentage, of this group of developers or corporations decides to cease development of the Linux kernel or other open source applications, we would have to either rely on another party (or parties) to develop these technologies, develop them ourselves or adapt our product strategy accordingly. This could increase our development expenses, delay our product releases and upgrades or adversely impact customer acceptance of open source offerings.

We may not be able to attract and retain qualified personnel because of the intense competition for qualified personnel in the computer and consulting industries.

      Our ability to maintain our competitive technological position depends, in large part, on our ability to attract and retain highly qualified development, consulting, and managerial personnel. Competition for personnel of the highest caliber is intense in the software and consulting industries. The loss of certain key individuals, or a significant group of key personnel, would adversely affect our performance. The failure to successfully hire suitable replacements in a timely manner could have a material adverse effect on our business.

If our relationships with other IT services organizations become impaired we could lose business.

      We maintain relationships with IT services organizations that recommend, design and implement solutions for their customers’ businesses that include our products. Any of these organizations could decide at any time to not continue to do business with us or to not recommend our products. A change in the willingness of these IT service organizations to do business with us or recommend our products could result in lower revenues.

40 Novell annual report 2004

The success of our acquisitions is dependent on our ability to integrate personnel, operations and technology, and if we are not successful, our revenue will not grow at the rate we anticipate.

      Achieving the benefits of acquisitions will depend in part on the successful integration of personnel, operations and technology. The integration of acquisitions will be subject to risks and will require significant expenditure of time and resources. The challenges involved in integrating acquisitions include the following:

•  obtaining synergies from the companies’ organizations;

•  obtaining synergies from the companies’ service and product offerings effectively and quickly;

•  bringing together marketing efforts so that the market receives useful information about the combined companies and their products;

•  coordinating sales efforts so that customers can do business easily with the combined companies;

•  integrating product offerings, technology, back office, human resources, accounting and financial systems;

•  assimilating employees who come from diverse corporate cultural backgrounds into a common business culture revolving around our solutions offerings; and

•  retaining key officers and employees who possess the necessary skills and experience to quickly and effectively transition and integrate the businesses.

      Failure to effectively and timely complete the integration of acquisitions could materially harm the business and operating results of the combined companies. In addition, goodwill related to any acquisitions could become impaired. Furthermore, we may assume significant liabilities in connection with acquisitions we make or become responsible for liabilities of the acquired businesses.

Our financial and operating results may vary and may fall below analysts’ estimates, which may cause the price of our common stock to decline.

      We do not currently provide estimates of our revenues or results of operations for future periods. Our operating results may fluctuate from quarter to quarter due to a variety of factors including, but not limited to:

•  timing of orders from customers and shipments to customers;

•  impact of foreign currency exchange rates on the price of our products in international locations;

•  inability to respond to the decline in revenue through the distribution channel;

•  inability to deliver solutions as expected by our customers and systems integration partners.

      In addition, we often experience a higher volume of revenue at the end of each quarter and during the fourth quarter of our fiscal year. Because of this, fixed costs that are out of line with revenue levels may not be detected until late in any given quarter and results of operations could be adversely affected.

      Due to these factors or other unanticipated events, quarter-to-quarter comparisons of our operating results may not be reliable indicators of our future performance. In addition, from time to time our quarterly financial results may fall below the expectations of the securities and industry analysts who publish reports on our company, or of investors generally. This could cause the market price of our securities to decline, perhaps significantly.

Novell annual report 2004 41

We face increased risks in conducting a global business.

      We are a global corporation with offices and subsidiaries around the world and, as such, we face risks in doing business abroad that we do not face domestically. Certain aspects inherent in transacting business internationally could negatively impact our operating results, including:

•  costs and difficulties in staffing and managing international operations;

•  unexpected changes in regulatory requirements;

•  tariffs and other trade barriers;

•  difficulties in enforcing contractual and intellectual property rights;

•  longer payment cycles;

•  local political and economic conditions;

•  potentially adverse tax consequences, including restrictions on repatriating earnings and the threat of “double taxation”; and

•  fluctuations in currency exchange rates, which can affect demand and increase our costs.

We may not be able to protect our confidential information, and this could adversely affect our business.

      We generally enter into contractual relationships with our employees that protect our confidential information. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. In addition, we may not be able to timely detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce these contractual obligations and our intellectual property rights, our business could be adversely affected.

Some of our short-term, long-term, and venture capital fund investments have become impaired and additional investments could become impaired.

      Our investment portfolio includes investments in public equity securities, small capitalization stocks in the high-technology industry sector, private companies, and funds managed by venture capitalists. Many of these investments might become other-than-temporarily impaired. During our fiscal years ended October 31, 2004 and 2003, we recorded impairment charges of $5 million and $35 million, respectively, related to some of the investments in our portfolio whose market value had experienced an other-than-temporary decline. As of October 31, 2004, we had net unrealized gains, net of taxes, on investments totaling approximately $0.1 million. If the funds in which we have invested suffer poor financial performance, or if the private companies in which we have invested are not successfully acquired or undertake initial public offerings, the value of our investments may decrease further.

Our consulting services contracts contain pricing risks and, if our estimates prove inaccurate, we could lose money.

      Our IT and Celerant consulting businesses derive a portion of their revenue from fixed-price, fixed-time contracts. Because of the complex nature of the services provided, it is sometimes difficult to accurately estimate the cost, scope and duration of particular client engagements. If we do not accurately estimate the resources required for a project, do not accurately assess the scope of work associated with a project, do not manage the project properly, or do not satisfy our obligations in a manner consistent with the contract, then our costs to complete the project could increase substantially. We have occasionally had to commit unanticipated additional resources to complete projects, and may have to take similar action in the future. We may not be compensated for these additional costs or the commitment of these additional resources.

42 Novell annual report 2004

Additionally, our Celerant consulting business derives revenue from projects priced on a contingency basis. If results are not met, or if a dispute arises, we may not be able to realize a potentially large amount of revenue.

Our IT and Celerant consulting clients can cancel or reduce the scope of their engagements with us on short notice.

      If our clients cancel or reduce the scope of an engagement with our IT or Celerant consulting business, we may be unable to reassign our professionals to new engagements without delay. Personnel and related costs constitute a substantial portion of our operating expenses. Because these expenses are relatively fixed, and because we establish the levels of these expenses well in advance of any particular quarter, cancellations or reductions in the scope of client engagements could result in the under-utilization of our professional services employees, causing significant reductions in operating results for a particular quarter.

Recent changes in the accounting treatment of the Debentures may cause us to report significant dilution of our earnings per share.

      In November 2004, the EITF reached a final conclusion on Issue 04-8 that changed the accounting treatment for contingent convertible debt, including the Debentures. As a result, the shares of common stock issuable upon conversion of the Debentures must be included in any calculation of earnings per share on a fully diluted basis. This change has retroactive effect and will cause us to report, in our Form 10-Q for our first quarter of fiscal 2005, significant dilution of our earnings per share reflecting the shares of our common stock underlying the outstanding Debentures. Our stock price may suffer due to the report of lower earnings per share.

Conversion of the Debentures into shares of our common stock will dilute the ownership interests of existing stockholders.

      The conversion of some or all of the Debentures into shares of common stock will dilute the ownership interest of existing common stockholders. Any large volume sales in the public market of the common stock issued upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Debentures may encourage short selling by market participants because the conversion of the Debentures could depress the price of our common stock.

Novell annual report 2004 43

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates, and market prices of equity securities. To mitigate some of these risks, we utilize currency forward contracts and currency options. We do not use derivative financial instruments for speculative or trading purposes, and no significant derivative financial instruments were outstanding at October 31, 2004.

Interest Rate Risk

      The primary objective of our short-term investment activities is to preserve principal while maximizing yields without significantly increasing risk. Our strategy is to invest in widely diversified short-term investments, consisting primarily of investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximately $2.1 million decrease (less than 0.5%) in the fair value of our available-for-sale securities.

Market Risk

      We also hold available-for-sale equity securities in our short-term investment portfolio. As of October 31, 2004, gross unrealized gains, before tax effect on the short-term public equity securities totaled $0.6 million. A reduction in prices of 10% of these short-term equity securities would result in approximately a $0.5 million decrease (less than 0.5%) in the fair value of our short-term investments.

      In addition, we invest in equity securities issued by privately-held companies that are included in our long-term portfolio of investments, primarily for the promotion of business and strategic objectives. These investments are generally in thinly capitalized companies in the high-technology industry sector or venture capital funds. Because of the nature of these investments, we are exposed to equity price risks. We typically do not attempt to reduce or eliminate our market exposure on these securities. A 10% adverse change in equity prices of long-term equity securities would result in an approximate $5.5 million decrease in the fair value of our long-term securities.

Foreign Currency Risk

      We use derivatives to hedge those net assets and liabilities that, when re-measured or settled according to accounting principles generally accepted in the U.S., impact our consolidated statement of operations. Currency forward contracts are utilized in these hedging programs. All forward contracts entered into by us are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation or trading purposes. Gains and losses on these currency forward contracts would generally be offset by corresponding gains and losses on the net foreign currency assets and liabilities that they hedge, resulting in negligible net gain or loss overall on the hedged exposures. When hedging balance sheet exposures, all gains and losses on forward contracts are recognized in other income (expense) in the same period as when the gains and losses on re-measurement of the foreign currency denominated assets and liabilities occur. All gains and losses related to foreign exchange contracts are included in cash flows from operating activities in the consolidated statements of cash flows. Our hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. If we did not hedge against foreign currency exchange rate movement, an increase or decrease of 10% in exchange rates would result in an increase or decrease in income before taxes of approximately $3.6 million. This number represents the exposure related to balance sheet re-measurement only and assumes that all currencies move in the same direction at the same time relative to the U.S. dollar.

      All of the potential changes noted above are based on sensitivity analyses performed on our financial position at October 31, 2004. Actual results may differ materially.

44 Novell annual report 2004

Item 8.     Financial Statements and Supplementary Data

Novell, Inc.

	Page
Consolidated Statements of Operations		46
Consolidated Balance Sheets		47
Consolidated Statements of Stockholders’ Equity		48
Consolidated Statements of Cash Flows		49
Notes to Consolidated Financial Statements		50
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm		90
Selected Consolidated Quarterly Financial Data — Unaudited		91

Novell annual report 2004 45

NOVELL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

			Fiscal Year Ended
			October 31,			October 31,			October 31,
			2004			2003			2002
Net revenue:
	New software licenses		$	238,419		$	265,256		$	319,281
	Maintenance and services			927,498			840,240			815,039
Total net revenue				1,165,917			1,105,496			1,134,320
Cost of revenue:
	New software licenses			23,478			31,773			31,175
	Maintenance and services			392,201			406,945			418,243
Total cost of revenue				415,679			438,718			449,418
Gross profit				750,238			666,778			684,902
Operating expenses:
	Sales and marketing			362,569			380,826			358,742
	Product development			198,614			183,758			169,247
	General and administrative			102,437			110,963			122,588
	Restructuring expenses			22,903			43,067			19,100
	Purchased in-process research and development			—			920			3,000
	(Gain on sale) impairment of property, plant and equipment			(1,977	)		(24,934	)		80,350
		Total operating expenses		684,546			694,600			753,027
Income (loss) from operations				65,692			(27,822	)		(68,125	)
Other income (expense):
	Investment income			23,401			13,033			24,654
	Impairment of investments			(5,415	)		(34,735	)		(57,572	)
	Other, net			(8,704	)		(5,486	)		8,818
		Other income (expense), net		9,282			(27,188	)		(24,100	)
Income (loss) before taxes				74,974			(55,010	)		(92,225	)
Income tax expense				17,786			106,894			10,896
Income (loss) before accounting change				57,188			(161,904	)		(103,121	)
Cumulative effect of accounting change, net of taxes				—			—			(143,702	)
Net income (loss)				57,188			(161,904	)		(246,823	)
Deemed dividend related to beneficial conversion feature of preferred stock				(25,680	)		—			—
Preferred stock dividends				(416	)		—			—
Net income (loss) available to common stockholders			$	31,092		$	(161,904	)	$	(246,823	)
Weighted-average shares outstanding:
	Basic			381,100			370,545			363,569
	Diluted			390,879			370,545			363,569
Net income (loss) per common share, basic and diluted:
		Before cumulative effect of accounting change	$	0.08		$	(0.44	)	$	(0.28	)
		Cumulative effect of accounting change, net of taxes		—			—			(0.40	)
		Net income (loss) per common share, basic and diluted	$	0.08		$	(0.44	)	$	(0.68	)

See notes to consolidated financial statements.

46 Novell annual report 2004

NOVELL, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

				October 31,			October 31,
				2004			2003
ASSETS
Current assets:
	Cash and cash equivalents			$	434,404		$	366,932
	Short-term investments				777,063			384,920
	Receivables (net of allowances of $24,396 and $26,852 at October 31, 2004 and 2003, respectively)				269,431			232,492
	Prepaid expenses				25,190			23,005
	Other current assets				28,846			23,204
			Total current assets		1,534,934			1,030,553
Property, plant and equipment, net					231,468			255,526
Long-term investments					55,986			50,948
Goodwill					391,088			213,300
Intangible assets, net					48,616			10,800
Other assets					29,456			6,526
			Total assets	$	2,291,548		$	1,567,653
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	55,956		$	50,258
	Accrued compensation				126,612			101,164
	Other accrued liabilities				98,983			117,073
	Income taxes payable				37,077			35,493
	Deferred revenue				374,186			322,470
			Total current liabilities		692,814			626,458
Deferred income taxes					3,855			—
Senior convertible debentures					600,000			—
			Total liabilities		1,296,669			626,458
Minority interests					6,515			6,725
Redeemable securities:
	Series B preferred stock, $.10 par value, Authorized — 1,000 shares;
	Outstanding — 500 and no shares at October 31, 2004 and 2003, respectively (at redemption value)				25,000			—
Stockholders’ equity:
	Series A preferred stock, $.10 par value,
		Authorized — 499,000 shares; no shares issued			—			—
	Common stock, par value $.10 per share, Authorized — 600,000,000 shares;
		Issued — 393,061,385 and 376,460,107 shares at October 31, 2004 and 2003, respectively, Outstanding — 377,874,351 and 376,460,107 shares at October 31, 2004 and 2003, respectively			39,306			37,646
	Additional paid-in capital				431,102			319,016
	Treasury stock, at cost — 15,187,034 and no shares at October 31, 2004 and 2003, respectively				(124,989	)		—
	Retained earnings				607,851			576,759
	Accumulated other comprehensive income				16,180			7,068
	Other				(6,086	)		(6,019	)
			Total stockholders’ equity		963,364			934,470
			Total liabilities, redeemable securities and stockholders’ equity	$	2,291,548		$	1,567,653

See notes to consolidated financial statements.

Novell annual report 2004 47

NOVELL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

																			Accumulated
	Common			Common			Treasury			Treasury			Additional						Other
	Stock			Stock			Stock			Stock			Paid-In			Retained			Comprehensive
	Shares			Amount			Shares			Amount			Capital			Earnings			Income			Other			Total
Balance at October 31, 2001		362,341		$	36,234			—		$	—		$	256,332		$	985,486		$	2,455		$	(9,840	)	$	1,270,667
Stock issued from stock plans		5,737			574			—			—			13,780			—			—			(1,254	)		13,100
Stock options issued for acquisition		—			—			—			—			28,583			—			—			(4,826	)		23,757
Shares cancelled		(540	)		(55	)		—			—			(1,556	)		—			—			1,697			86
Amortization of unearned stock compensation		—			—			—			—			—			—			—			7,153			7,153
Change in unrealized gain on investments, net of tax		—			—			—			—			—			—			(2,828	)		—			(2,828	)
Cumulative translation adjustment, net of tax		—			—			—			—			—			—			430			—			430
Net loss		—			—			—			—			—			(246,823	)		—			—			(246,823	)
Comprehensive loss		—			—			—			—			—			—			—			—			(249,221	)
Balance at October 31, 2002		367,538			36,753			—			—			297,139			738,663			57			(7,070	)		1,065,542
Stock issued from stock plans		9,008			902			—			—			22,499			—			—			(2,872	)		20,529
Shares cancelled		(86	)		(9	)		—			—			(622	)		—			—			232			(399	)
Amortization of unearned stock compensation		—			—			—			—			—			—			—			3,691			3,691
Change in unrealized gain on investments, net of tax		—			—			—			—			—			—			(705	)		—			(705	)
Cumulative translation adjustment, net of tax		—			—			—			—			—			—			7,716			—			7,716
Net loss		—			—			—			—			—			(161,904	)		—			—			(161,904	)
Comprehensive loss		—			—			—			—			—			—			—			—			(154,893	)
Balance at October 31, 2003		376,460			37,646			—			—			319,016			576,759			7,068			(6,019	)		934,470
Stock issued from stock plans		12,757			1,276			1			11			63,101			—			—			(5,452	)		58,936
Stock issued for conversion of preferred stock		4,000			400			—			—			24,600			—			—			—			25,000
Shares repurchased		—			—			(15,188	)		(125,000	)		—			—			—			—			(125,000	)
Shares cancelled		(156	)		(16	)		—			—			(1,295	)		—			—			537			(774	)
Amortization of unearned stock compensation		—			—			—			—			—			—			—			4,848			4,848
Beneficial conversion feature		—			—			—			—			25,680			(25,680	)		—			—			—
Dividends on preferred stock		—			—			—			—			—			(416	)		—			—			(416	)
Change in unrealized gain on investments, net of tax		—			—			—			—			—			—			(1,352	)		—			(1,352	)
Cumulative translation adjustment, net of tax		—			—			—			—			—			—			11,720			—			11,720
Change in minimum pension liability		—			—			—			—			—			—			(1,256	)		—			(1,256	)
Net income		—			—			—			—			—			57,188			—			—			57,188
Comprehensive income		—			—			—			—			—			—			—			—			66,301
Balance at October 31, 2004		393,061		$	39,306			(15,187	)	$	(124,989	)	$	431,102		$	607,851		$	16,180		$	(6,086	)	$	963,364

See notes to consolidated financial statements.

48 Novell annual report 2004

NOVELL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

				Fiscal Year Ended
				October 31,			October 31,			October 31,
				2004			2003			2002
Cash flows from operating activities
Net income (loss)				$	57,188		$	(161,904	)	$	(246,823	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization				53,482			61,058			68,785
	Gain on sale of property, plant and equipment				(1,639	)		(25,299	)		(8,762	)
	Gain on sale of long-term investments				(1,567	)		—			—
	Impairment of goodwill and intangible assets, net of tax				—			13,935			143,702
	Impairment of investments and property, plant and equipment				5,415			34,735			137,922
	Purchased in-process research and development				—			920			3,000
	Changes in current assets and liabilities, excluding the effect of acquisitions:
		Receivables, net			(25,250	)		(17,215	)		18,599
		Prepaid expenses			(1,467	)		1,135			7,580
		Deferred income taxes			870			105,277			(14,035	)
		Other current assets			(3,069	)		368			7,741
		Deferred revenue			43,261			47,195			32,083
		Accounts payable			2,492			(7,213	)		(23,386	)
		Accrued liabilities			(10,619	)		2,014			(74,932	)
			Net cash provided by operating activities		119,097			55,006			51,474
Cash flows from financing activities
	Issuance of common stock, net				58,162			20,130			13,186
	Issuance of convertible preferred stock				50,000			—			—
	Issuance of senior convertible debentures				600,000			—			—
	Payment of issuance costs on senior convertible debentures				(14,850	)		—			—
	Payment of cash dividends on preferred stock				(292	)		—			—
	Repurchases of common stock, held in treasury				(125,000	)		—			—
			Net cash provided by financing activities		568,020			20,130			13,186
Cash flows from investing activities
	Purchases of property, plant and equipment				(26,997	)		(39,468	)		(27,610	)
	Proceeds from the sale of property, plant and equipment				4,951			125,000			16,050
	Purchases of short-term investments				(999,078	)		(727,817	)		(549,008	)
	Maturities of short-term investments				160,611			117,485			262,974
	Sales of short-term investments				444,972			396,462			477,313
	Proceeds from sale of long-term investments				1,567
	Cash paid for acquisition of Salmon, net of cash acquired				(5,322	)		—			—
	Cash paid for acquisition of SUSE, net of cash acquired				(200,298	)		—			—
	Cash paid for acquisition of Ximian, net of cash acquired				—			(40,046	)		—
	Cash paid for acquisition of SilverStream, net of cash acquired				—			—			(102,975	)
	Cash paid for acquisition of Volera minority interest				—			(1,050	)		(3,500	)
	Purchases of long-term investments				(12,702	)		(14,322	)		(26,143	)
	Other				12,651			11,565			14,299
			Net cash (used in) provided by investing activities		(619,645	)		(172,191	)		61,400
Total increase (decrease) in cash and cash equivalents					67,472			(97,055	)		126,060
Cash and cash equivalents — beginning of period					366,932			463,987			337,927
Cash and cash equivalents — end of period				$	434,404		$	366,932		$	463,987
Supplemental disclosures of cash and non-cash financing and investing activities:
Deemed dividend related to beneficial conversion feature of Series B preferred stock				$	25,680		$	—		$	—
Conversion of Series B preferred stock					25,000			—			—
Issuance of notes receivable for sale of property, plant and equipment					9,935			—			—
Cash paid for interest					—			—			—
Cash paid for income taxes				$	11,212		$	17,806		$	20,514

See notes to consolidated financial statements.

Novell annual report 2004 49

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2004

A. Summary of Business Operations

      Novell is a leading provider of information solutions, a position we have been in since 1983. We provide identity management and web services solutions and cross-platform solutions on several operating systems, including Linux, NetWare, Windows, and Unix. All of our solutions are supported by our worldwide services, including consulting, training and technical services. Through these solutions, our customers can deliver information or system resources from diverse sources, regardless of how they are implemented and regardless of how they connect, in a secure and personalized way. We create value for our customers by reducing the cost, complexity and vulnerability of today’s information environments, allowing them to optimize the performance of the resources and assets that they employ. With approximately 6,000 employees globally, we serve customers all over the world.

      We deliver this value to our customers by developing, maintaining and delivering the following four solution categories:

      Identity management and web services solutions. Our identity management and web services products include applications that offer a full suite of capabilities, including the following:

•  secure authentication and authorization services;

•  single sign-on;

•  provisioning capabilities; and

•  portal and web services application infrastructure.

      We believe that customers have recognized the need to manage the access, utilization and optimization of assets through information systems that can understand, implement and administer business policies, not only within organizations, but also between organizations and their customers and trading partners. Our web services solutions enable organizations to balance growing user demands for services and information with the organization’s demands for increased security. Through identity management and web services, customers can integrate business processes and systems, extending them within and across enterprise boundaries to interact with customers, employees, suppliers and partners. This affords organizations the opportunity to make changes to their business operations without incurring the cost of constantly changing their underlying application software. These identity-based technologies not only regulate access to information and applications, but are also increasingly becoming core components of numerous other products such as mobile phones and other digital devices. Our strategy has been to develop identity management technologies as a set of discrete services to accelerate time to value, as opposed to the use of a single monolithic application that can take years to implement and deploy.

      Cross-platform solutions. We offer two major operating system platforms, NetWare and SUSE LINUX, in support of our cross-platform solutions. Our solutions offer an enterprise-ready, scalable approach to networking and collaboration services — including file, print, messaging, scheduling and workspace. In addition, our identity-driven, directory-based management modules allow customers to manage their computing environment from a single, central location. Our products are designed to operate within existing heterogeneous computing environments as well as to provide tools and strategies to allow easy migration between platforms to fit better with our customers’ technology plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      A major focus of our cross-platform solutions is to embrace and promote open source computing. Open source is a term used to describe software source code that generally allows free use, modification, and distribution of source code, subject to certain conditions. Open source software is generally built by a community of developers, many of whom are unaffiliated with each other. Corporations also fund open source projects or contribute code into open source to further assist the development efforts. We believe that a major shift toward open source software is underway as companies are more critically evaluating the cost effectiveness of their information technology (“IT”) investments, are intrigued about having access to the source code, and are looking for ways to avoid vendor lock-in.

      We believe that we are uniquely positioned to drive the transition to greater use of open source software, as well as to benefit from this trend. Widespread adoption of Linux and open source software was initially hindered by weak technical support and a lack of applications, shortcomings that we are particularly well positioned to address. We leverage our financial stability, experience, and global support capabilities to help our customers integrate Linux and other open source software into their existing IT environments. While the flexibility and cost savings of Linux and open source have made it attractive to enterprise customers, we believe these businesses look to proprietary software vendors to provide applications, management and security. With our SUSE LINUX open source platform and our other cross-platform solutions, our customers can deploy the best of closed and open source software that many businesses find more attractive. As an example, our GroupWise product now allows customers to collaborate seamlessly across their Windows and Linux environments. We also provide solutions allowing IT managers to centrally control Linux, NetWare and Windows systems in a consistent and straightforward way.

      Worldwide services. We provide worldwide IT consulting, training and support services to address our customers’ needs. Our worldwide IT consulting practice provides the business knowledge and technical expertise to help our customers implement and achieve maximum benefit from our products and solutions. We also offer open source and identity driven services that are focused to aid our clients in rapidly integrating applications or migrating existing platforms to Linux.

      Through our training services, we offer skills assessments, advanced technical training courses, and customized training directly and through authorized training service partners. We also offer testing and certification programs to systems administrators, engineers, salespeople, and instructors on a wide variety of technologies, including Linux. Over a decade ago, we introduced the concept of software engineer certifications. Building on this program, we introduced our Novell Certified Linux Engineer and Novell Certified Linux Professional programs to accelerate the adoption of Linux and open source in the enterprise.

      We provide our customers with a global support structure covering proprietary and open source technical support. We deliver our technical support services through a variety of channels, including on-site dedicated resources as well as through telephone, web, e-mail, and remote systems management.

      Celerant Consulting. Celerant, a majority-owned subsidiary of Novell, provides value-based, operational strategy and implementation consulting services to a wide variety of customers mainly in Europe and the United States. Celerant specializes in improving the value derived from existing business processes by accelerating time to value and eliminating non-value creating activities.

      We are subject to a number of risks similar to those of other companies of similar size in our industry, including a recent history of pre-tax losses, rapid technological changes, competition, limited number of suppliers, customer concentration, integration of acquisitions, government regulations, management of international activities and dependence on key individuals.

Novell annual report 2004 51

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

B. Summary of Significant Accounting Policies

      The accompanying consolidated financial statements reflect the application of significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Novell, Inc., its subsidiaries and majority-owned joint ventures. All material inter-company accounts and transactions have been eliminated in consolidation.

Management’s Estimates and Uncertainties

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

Reclassifications

Certain amounts reported in prior years have been reclassified from what was previously reported to conform to the current year’s presentation.

Foreign Currency Translation

Due to increased activity in non-U.S. dollar currencies, beginning November 1, 2002, we determined the functional currency of all of our international subsidiaries, except for our Irish subsidiaries and a German holding company, to be the local currency. In our Irish subsidiary and German holding company, the functional currency is the U.S. dollar. These subsidiaries generate and expend cash primarily in their respective local currencies. Assets and liabilities of these subsidiaries are translated at current month-end exchange rates. Revenue and expenses are translated monthly at the average monthly exchange rate. Translation adjustments are recorded in accumulated other comprehensive income. Previously, the functional currency of our international subsidiaries, except Novell Japan, Novell India, and the international subsidiaries of Cambridge Technology Partners (“Cambridge”) and SilverStream Software, Inc. (“SilverStream”), was the U.S. dollar. All transaction gains and losses are reported in other income (expense). Foreign exchange resulted in a loss of $5.0 million and $3.0 million, respectively, during fiscal 2004 and 2003, and a gain of $0.3 million in fiscal 2002.

Cash, Cash Equivalents and Short-Term Investments

We consider all investments purchased with an initial term to maturity of three months or less to be cash equivalents. All auction market securities are classified as short-term investments. Short-term investments are diversified, primarily consisting of investment grade securities that either mature within the next 12 months or have other characteristics of short-term investments. All of our auction market securities have auction dates within at least 6 months of the prior auction date. Our fixed income securities have maturities, puts, announced calls, auctions, or resets ranging from zero to seven years. These securities are available to be used for current operations and thus are classified as short-term investments, even though some maturities may extend beyond one year.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

All marketable debt and equity securities that are included in cash and short-term investments are considered available-for-sale and are carried at fair value. The unrealized gains and losses related to these securities are included in accumulated other comprehensive income, net of tax, after any applicable tax valuation allowances (see Note U). Fair values are based on quoted market prices where available. If quoted market prices are not available, as in the case of municipal debt securities, we use third-party pricing services to assist in determining fair value. In many instances, these services examine the pricing of similar instruments to estimate fair value. When securities are sold, their cost is determined based on the specific identification method.

Concentrations of Credit Risk

Financial instruments that subject us to credit risk primarily consist of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, and amounts due under subleases. Our credit risk is managed by investing cash and cash equivalents in high-quality money market instruments and securities of the U.S. government and its agencies. Accounts receivable include amounts owed by geographically dispersed end users, distributors, resellers, and original equipment manufacturer (“OEM”) customers. No collateral is required. We provide a standard right of return of 30 days. Provisions are made for sales returns and bad debts and are based on historical experience and on specific customer situations. Accounts receivable are not sold or factored. There were no customers with outstanding receivable balances greater than 10% of total accounts receivable at October 31, 2004 or 2003. We generally have not experienced any material losses related to receivables from individual customers or groups of customers. Due to these factors, no significant additional credit risk, beyond amounts provided for, is believed by management to be inherent in our accounts receivable. Our long-term notes receivable in the amount of $9.8 million is secured by collateral. Our subleases are with many different parties and thus no concentration of credit risk exists at October 31, 2004.

During the years ended October 31, 2004, 2003 and 2002 there were no customers who accounted for more than 10% of total net revenue.

Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or lease term, if shorter. Such lives are as follows:

Asset classification	Useful Lives
Buildings		30 years
Furniture and equipment		2 – 7  years
Leasehold improvements and other		3 – 10  years

Goodwill and Intangible Assets

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we do not amortize goodwill or intangibles with indefinite lives resulting from acquisitions. We review these assets periodically for potential impairment issues. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives.

Novell annual report 2004 53

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Disclosure of Fair Value of Financial Instruments

Our financial instruments mainly consist of cash and cash equivalents, short-term investments, accounts receivable, notes receivable, long-term investments, accounts payable, and senior convertible debentures. The carrying amounts of our cash equivalents and short-term investments, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. Long-term investments are accounted for initially at cost. The Company periodically reviews the realizability of each long-term investment when impairment indicators exist with respect to the investment. If an other-than-temporary impairment of the value of the investments is deemed to exist, the carrying value of the investment is written down to its estimated fair value. We consider an impairment to be other than temporary when market evidence or issuer-specific knowledge does not reflect long-term growth to support current carrying values. As of October 31, 2004 and 2003, we did not hold any publicly-traded long-term equity securities. Our long-term notes receivable and senior convertible debentures have interest rates that approximate current market rates; therefore the carrying value of the both approximate fair value.

Revenue

Our revenue is derived primarily from the sale of software licenses and maintenance, technical support, training, and consulting services. Revenue is recognized in accordance with the requirements of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.” Under SOP 97-2, when an arrangement does not require significant production, modification or customization of the software, revenue is recognized when the following four criteria are met:

•  Persuasive evidence of an arrangement exists — We require evidence of an agreement with a customer specifying the terms and conditions of the products or services to be delivered.

•  Delivery has occurred — For software licenses, delivery takes place when the customer is given access to the software programs. For services, delivery takes place as the services are provided.

•  The fee is fixed or determinable — Fees are fixed or determinable if they are not subject to a refund or cancellation and do not have payment terms that exceed our standard terms.

•  Collectibility is probable — We perform a credit review of all customers with significant transactions to determine whether a customer is credit-worthy and collectibility is probable.

Revenue from software license fees is generally recognized upon delivery of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. Allowances for estimated sales returns and allowances are recorded in the same period as the related revenue. We recognize revenue on the sale of shrink-wrapped box products through our distributor channel on a sell-through basis.

Revenue from maintenance contracts, subscription agreements, support, and other similar services, is recognized as services are performed over the term of the performance period. Certain sales require continuing service, support, and performance by us, and accordingly, a portion of the revenue is deferred until the future service, support, and performance are provided.

Consulting project contracts are either time-and-materials or fixed-price contracts. Revenue from consulting projects is recognized only if a signed contract exists, the fee is fixed or determinable, and collection of the resulting receivable is probable. Revenue from time-and-materials contracts is recog-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

nized as the services are performed. Revenue from fixed-price contracts is recognized using the proportional performance method, using the estimated time-to-completion to measure the percent complete. The cumulative impact of any revision in estimates of the percent complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known.

Many of our software arrangements include multiple elements, such as product upgrade protection, software support services, consulting, and training, in addition to software licenses and maintenance. These multiple element arrangements are accounted for using a proportional method of accounting in which we allocate revenue to each element of the transaction based upon the relative fair values of the elements, which may include software products, product upgrade protection, software support services, consulting, and training. Fair value is determined by Novell-specific objective evidence of the price charged to other customers when each element is sold separately. We have established sufficient Novell-specific objective evidence of the fair value of all elements of a multiple element arrangement.

Services revenue includes reimbursable expenses charged to our clients.

We record provisions against revenue for estimated sales returns and allowances on product and service-related sales in the same period as the related revenue is recorded. We also record a provision to operating expenses for bad debts resulting from customers’ inability to pay for the products or services they have received, due to such factors as bankruptcy. These estimates are based on historical sales returns and bad debt expense, analyses of credit memo data, and other known factors.

Cost of Revenue

Amortization charges for product and services related intangible assets are recorded as a cost of revenue in the statements of operations.

Expenses

Product development costs are expensed as incurred. Due to the use of the working model approach, capitalized development costs have not been material.

Advertising costs are expensed as incurred. Advertising expenses totaled $10.6 million, $37.5 million, and $19.5 million, in fiscal 2004, 2003, and 2002, respectively.

Stock-Based Compensation

We account for our stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. We apply the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” We account for stock-based awards issued to non-employees using the fair value model as defined by SFAS No. 123.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At October 31, 2004, we had authorized several stock-based compensation plans which are more fully described in Note R. Under these plans, options to purchase shares of our common stock could be granted to employees, consultants, and outside directors. Under the intrinsic value method, compensation expense is calculated based on the difference between the fair value of our common stock and the option exercise price at the date of grant. We generally grant employee stock options with an exercise price equal to the fair value of our common stock. If compensation expense for our stock-based compensation had been determined based on the fair value of the stock grants, our net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below:

		Fiscal Year Ended
		October 31,			October 31,			October 31,
		2004			2003			2002
		(Amounts in thousands,
		except per share amounts)
Net income (loss) available to common stockholders:
	As reported	$	31,092		$	(161,904	)	$	(246,823	)
	Less: total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects		(51,436	)		(28,753	)		(63,086	)
	Add: total stock-based compensation expense recorded in the statement of operations		4,940			3,445			7,534
	Pro forma	$	(15,404	)	$	(187,212	)	$	(302,375	)
Net income (loss) per common share:
	As reported basic and diluted	$	0.08		$	(0.44	)	$	(0.68	)
	Pro forma basic and diluted	$	(0.04	)	$	(0.51	)	$	(0.83	)

For the purpose of the above table, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2004, 2003, and 2002: a risk-free interest rate of approximately 2.8% for fiscal 2004, 2.8% for fiscal 2003, and 3.6% for fiscal 2002; a dividend yield of 0.0% for all years; a weighted-average expected life of 3.75 years for fiscal 2004 and five years for fiscal 2003 and 2002; and a volatility factor of the expected market price of our common stock of 0.77 for fiscal 2004, 0.85 for fiscal 2003, and 0.87 for fiscal 2002. The weighted-average fair value of options granted in fiscal 2004, 2003, and 2002 was $5.63, $2.38, and $1.70, respectively.

We do not recognize compensation expense related to employee purchase rights under the Novell, Inc. 1989 Employee Stock Purchase Plan. Pro forma compensation expense is estimated for the fair value of the employees’ purchase rights using the Black-Scholes model with the following assumptions for the rights granted in fiscal 2004, 2003, and 2002: a dividend yield of 0.0% for all years; an expected life of six months for all years; an expected volatility factor of 0.77 for fiscal 2004, 0.85 for fiscal 2003, and 0.87 for fiscal 2002; and a risk-free interest rate of approximately 1.2% for fiscal 2004, 1.1% for fiscal 2003, and 1.5% for fiscal 2002. The weighted-average fair value of the purchase rights granted on April 19, 2004, October 20, 2003, May 7, 2003, October 21, 2002, April 22, 2002, and October 22, 2001, was $4.19, $2.19, $1.07, $0.93, $1.50, and $1.52, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share available to common stockholders is presented in conformity with SFAS No. 128, “Earnings per Share.” Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period and excludes the dilutive effects of common stock equivalents. Common stock equivalents include stock options and, in certain circumstances, convertible securities such as our senior convertible debentures and convertible Series B preferred stock. Diluted earnings per share includes the dilutive effect of common stock equivalents.

In March 2004, the EITF reached a final consensus on Issue 03-6, “Participating Securities and the Two — Class Method under FASB Statement 128. “Issue 03-6 requires the two-class method of calculating earnings per share for companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends of the company. Because the Series B preferred stock participates in dividends, we are required to use the two-class method of calculating earnings per share, effective in fiscal 2004 and retroactively for all prior periods. This change in computational methods had no impact on earnings per share for any period in fiscal 2004 or any prior period.

Derivative Instruments

A large portion of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Euro, Japanese Yen, and certain other European, Latin American and Asian currencies. To protect against reductions in value caused by changes in foreign exchange rates, we have established balance sheet and inter-company hedging programs. We hedge currency risks of some assets and liabilities denominated in foreign currencies through the use of one-month foreign currency forward contracts. We do not currently hedge currency risks related to revenue or expenses denominated in foreign currencies.

We enter into these one-month hedging contracts two business days before the end of each month and settle them at the end of the following month. Due to the short period of time between entering into the forward contracts and the year-end, the fair value of the derivatives as of October 31, 2004 is insignificant. Gains and losses recognized during the year on these foreign currency contracts are recorded as other income or expense and would generally be offset by corresponding losses or gains on the related hedged items, resulting in negligible net exposure to our financial statements.

Recent Pronouncements

In November 2004, the EITF reached a final conclusion on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share”. This issue addresses when the dilutive effect of contingently convertible debt with a market price trigger should be included in diluted earnings per share calculations. The EITF’s conclusion is that the market price trigger should be ignored and that these securities should be treated as convertible securities and included in diluted earnings per share regardless of whether the conversion contingencies have been met. The effect of Issue 04-8 is discussed in Note T.

In December 2004, the FASB issued its final standard on accounting for employee stock options, SFAS No. 123(R), “Share-Based Payment”, which replaces SFAS Nos. 123 and supercedes Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires all companies to measure compensation costs for all share-based payments, including stock

Novell annual report 2004 57

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

options, at fair value and expense such payments to the statement of operations over the service period. SFAS No. 123(R) is effective beginning for interim or annual periods beginning after June 15, 2005, which would be our fourth fiscal quarter of fiscal 2005. We are in the process of determining the impact SFAS No. 123(R) will have on our consolidated financial statements.

C. Acquisitions

Salmon Ltd.

      On July 19, 2004, we purchased all of the outstanding stock of Salmon Ltd. (“Salmon”), a privately-held information technology services and consulting firm headquartered in Watford, England, for approximately $8.2 million in cash, plus estimated merger and transaction costs of $0.6 million. In addition, we recorded a deferred income tax liability of $1.2 million resulting from the future tax consequences of the non-deductibility of identified intangible assets recorded in connection with this acquisition.

      The acquisition of Salmon enables us to expand our range of IT consulting services in the United Kingdom. Salmon’s results of operations have been included in the consolidated financial statements beginning on the acquisition date.

      The purchase price was preliminarily allocated as follows:

		Estimated
		Acquisition Cost		Asset Life
		(In thousands)
Fair value of net tangible assets acquired		$	3,007	N/A
Identifiable intangible assets:
	Customer relationships		3,417	3 years
	Non-compete agreement		422	3 years
Goodwill			3,109	Indefinite
Total acquisition cost		$	9,955

      The purchase price has been allocated to the tangible and identifiable intangible assets and the excess of the total purchase price over the amounts assigned has been recorded as goodwill. We estimated the fair values of the intangible assets. Customer relationships and the non-compete agreement are being amortized over their estimated useful lives. Goodwill is not amortized but is periodically evaluated for impairment.

      The purchase price allocation will be adjusted as integration plans, including restructuring, are finalized, as allowed by SFAS No. 141, “Business Combinations”.

      The purchase agreement provides for contingent payments of up to an additional $10.6 million based upon the future revenues and profitability of both Salmon and Novell in the United Kingdom over a period of two years. Any future earnout payments will be capitalized as goodwill when and if paid.

      Net tangible assets of Salmon consisted mainly of cash and cash equivalents, accounts receivable, fixed assets, accounts payable, and other liabilities.

      Goodwill from the acquisition resulted from our belief that the consulting methodologies and expertise Salmon had developed are valuable to our services business. We also believed it was more beneficial to acquire such knowledge rather than to develop it in-house. The goodwill from the Salmon acquisition was allocated to our EMEA segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The valuation of customer relationships in the amount of $3.4 million was determined by comparing estimated future cash flow with and without the relationships in place.

      The non-compete agreement in the amount of $0.4 million relates to an agreement Salmon has with a key individual. The valuation of the agreement was determined by estimating the present value of future cash flows with and without the non-compete agreement in place.

      If the Salmon acquisition had occurred on November 1, 2002, the unaudited pro forma results of operations for the fiscal years ended October 31, 2004 and 2003 would have been:

	Fiscal Year Ended
	Oct. 31,		Oct. 31,
	2004		2003
	(Amounts in thousands,
	except per-share amounts)
Net revenue	$	1,181,514	$	1,123,969
Net income (loss) attributable to common stockholders		29,184		(160,061	)
Net income (loss) per share attributable to common stockholders — basic	$	0.08	$	(0.43	)
Net income (loss) per share attributable to common stockholders — diluted	$	0.07	$	(0.43	)

SUSE LINUX AG

      On January 12, 2004, we purchased substantially all of the outstanding stock of SUSE LINUX AG (“SUSE”), a privately-held company and a leading provider of Linux-based products, for approximately $210.0 million in cash, plus estimated merger and transaction costs of $9.0 million. In addition, we recorded a deferred income tax liability of $3.0 million resulting from the future tax consequences of the non-deductibility of identified intangible assets recorded in connection with this acquisition. The deferred income tax liability was originally valued at $17.3 million; however, during the fourth quarter of fiscal 2004 we completed a reorganization of certain subsidiaries of SUSE Linux AG in accordance with German merger law that resulted in a reduction of the deferred tax liability and goodwill of approximately $14.3 million.

      The acquisition of SUSE enables us to offer a full range of enterprise solutions on the Linux platform, from the desktop to the server to the mainframe. SUSE’s results of operations have been incorporated into ours beginning on the acquisition date.

      The purchase price was preliminarily allocated as follows:

		Estimated
		Acquisition Cost		Asset Life
		(In thousands)
Fair value of net tangible assets acquired		$	1,599	N/A
Identifiable intangible assets:
	Customer relationships		13,385	3 years
	Internal use software		5,864	3 years
	Trademarks/trade names		24,221	Indefinite
Goodwill			176,963	Indefinite
Total acquisition costs		$	222,032

Novell annual report 2004 59

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The purchase price has been allocated to the tangible and identifiable intangible assets and the excess of the total purchase price over the amounts assigned has been recorded as goodwill. We estimated the fair values of the intangible assets. Customer relationships and internal use software are being amortized over their estimated useful lives. Trademarks, trade names and goodwill are not amortized but are periodically evaluated for impairment.

      The purchase price allocation will be adjusted as integration plans, including restructuring, are finalized, as allowed by SFAS No. 141.

      Net tangible assets of SUSE consisted mainly of cash and cash equivalents, accounts receivable, fixed assets, accounts payable, and other liabilities.

      Goodwill from the acquisition resulted from our belief that the technology SUSE had developed is valuable to our solutions offerings. We also believed it was more beneficial to acquire such knowledge rather than to develop it in-house. The goodwill from the SUSE acquisition has been allocated to our geographic segments based on anticipated future revenue to be derived from this transaction.

      Customer relationships in the amount of $13.4 million, net of tax, relate to the following types of contracts:

•  product maintenance services;

•  business support services;

•  partner memberships;

•  alliances; and

•  customer backlog.

      The valuation of product maintenance services, business support services, and partner memberships were determined by comparing the estimated future cash flows generated from annual renewals of each contract, versus such cash flows without the renewals of such contracts. The valuation of alliances was determined using the replacement cost approach. The valuation of customer backlog was determined based on forecasted cash flows from firm orders that had been placed that SUSE is expected to service.

      Internal use software in the amount of $5.9 million relates to proprietary know-how that is technologically feasible at the acquisition date. These included three operational software applications that SUSE used to package, test, and configure the open source software for distribution to customers. The valuation of the internal use software was determined using the replacement cost approach, whereby estimates of the value are based upon the estimated cost to recreate the software.

      The value of trademarks and trade names was determined based on assigning a royalty rate to the revenue streams that were expected from the products using the SUSE trade names. The royalty rate was determined based on trade name recognition, marketing support, and contribution of the trade name’s value relative to the revenue drivers. The pre-tax royalty rate of two percent was applied to the product revenue and discounted to a present value, resulting in a valuation of approximately $24.2 million.

60 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      If the SUSE acquisition had occurred on November 1, 2002, the unaudited pro forma results of operations for the fiscal years ended October 31, 2004 and 2003 would have been:

	Fiscal Year Ended
	Oct. 31,		Oct. 31,
	2004		2003
	(Amounts in thousands,
	except per share amounts)
Net revenue	$	1,173,890	$	1,140,201
Net income (loss) attributable to common stockholders		30,135		(177,170	)
Net income (loss) per share attributable to common stockholders — basic and diluted	$	0.08	$	(0.48	)

Ximian, Inc.

      On August 4, 2003, we acquired Ximian, Inc. (“Ximian”), a privately-held company and provider of desktop and server solutions that enable enterprise Linux adoption, for approximately $40.0 million in cash and estimated transaction costs of $0.5 million. This transaction was accounted for as a purchase. Ximian’s results of operations have been incorporated into Novell’s beginning on the acquisition date of August 4, 2003.

      The value of the acquisition was allocated as follows:

		Estimated
		Acquisition Cost		Asset Life
		(In thousands)
Fair value of net tangible assets acquired		$	161	N/A
Intangible assets:
	Purchased in-process research and development		920	Expensed in fiscal 2003
	Developed technology		3,532	3 years
	Customer relationships		307	3 years
	Trademarks/trade names		755	Indefinite
Goodwill			34,854	Indefinite
		$	40,529

      Goodwill, shown in the table above, includes a $2.9 million charge to record deferred income tax liability for the future amortization of developed technology and customer relationships. As a result, developed technology and customer relationships are shown above net of this income tax effect.

      Results of operations of Ximian are included in our results of operations beginning August 4, 2003. Goodwill from the acquisition resulted from our belief that the technology Ximian had developed is valuable to our product offerings. We also believed it was more beneficial to acquire such technology rather than to develop it in-house. The goodwill from the Ximian acquisition has been allocated to our geographic segments based on anticipated future revenue to be derived from this transaction.

      Net tangible assets of Ximian consisted mainly of cash and cash equivalents, accounts receivable, fixed assets, accounts payable, and other liabilities.

      The $0.9 million of in-process research and development pertains to technology that was not technologically feasible at the date of the acquisition, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, and was not ready for initial customer testing.

Novell annual report 2004 61

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shortly before the acquisition, Ximian released its latest version of each of its products, thus there was minimal in-process research and development at the acquisition date. In-process research and development was valued based on discounting forecasted cash flows that will be generated directly from the related products. Completion of development of the future upgrades of these products is dependent upon our delivery of our Linux applications products and our successful integration of Ximian. The in-process research and development does not have any alternative future use and did not otherwise qualify for capitalization. As a result, the entire amount was expensed.

      Developed technology relates to Ximian’s products that are commercially available and can be combined with Novell products and services. To determine the value of developed technology, the expected future cash flow attributable to the products was discounted taking into account risk associated with these assets relative to the in-process research and development. The analysis resulted in a valuation of approximately $3.5 million for developed technology, which had reached technological feasibility.

      The valuation of customer relationships in the amount of $0.3 million, net of tax, was determined by comparing estimated future cash flows with and without the relationship in place.

      The value of trademarks and trade names was determined based on assigning a royalty rate to the revenue streams that were expected from the products using the Ximian® trade names. The royalty rate was determined based on trade name recognition, marketing support, and contribution of the trade name’s value relative to the revenue drivers. The pre-tax royalty rate of one percent was applied to the product revenue and discounted to a present value, resulting in a valuation of approximately $0.8 million.

SilverStream Software, Inc.

      In July 2002, we acquired substantially all of the outstanding shares of SilverStream at a price of $9.00 per share. At the closing date of the merger, approximately 23.5 million shares of SilverStream common stock were outstanding, resulting in a total cash acquisition price of $210.8 million. Direct transaction costs were approximately $1.1 million and the fair value of SilverStream stock options assumed, both vested and unvested, totaled $28.6 million.

      With respect to stock options assumed as a part of the merger, all SilverStream options, vested and unvested, were exchanged for Novell options with the same terms and vesting characteristics. The fair value of these options was included in the acquisition purchase price. The portion of the intrinsic value related to unvested options that will be earned over the remaining vesting period of those options was deducted from the fair value of the unvested options and recorded as deferred compensation. This deferred compensation was amortized over the remaining vesting period of approximately two years, in accordance with Financial Accounting Standards Board Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation”. In total, options to purchase approximately 5 million shares of SilverStream common stock were converted into options to purchase approximately 15 million shares of Novell, Inc. common stock using a conversion ratio of 3.0518.

      The fair value of the options was determined using the Black-Scholes model using the following assumptions:

•  fair market value of the underlying shares was based on the average closing price of Novell’s common stock on June 10, 2002, and the three days prior to and subsequent to that date.

•  expected option life of 2-5 years.

•  expected volatility of 80%.

62 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•  risk free interest rate of 5%.

•  expected dividend rate of 0%.

      The value of the acquisition was allocated as follows:

		Acquisition Cost		Asset Life (in years)
		(In thousands)
Net tangible assets acquired		$	86,083	N/A
Deferred compensation			4,826	2 years
Intangible assets
	Purchased in-process research and development		3,000	Expensed in fiscal 2002
	Developed technology		19,800	3 years
	Trademarks/trade names		2,200	Indefinite
Goodwill			124,622	Indefinite
		$	240,531

      Goodwill from the acquisition resulted from our belief that the technology SilverStream had developed is valuable to our web services product offerings. We also believe it was more beneficial to acquire such technology rather than develop it in-house. The goodwill from the SilverStream acquisition was allocated to our geographic segments based on forecasted sales of SilverStream products by geography.

      Net tangible assets of SilverStream consisted mainly of cash and cash equivalents, accounts receivable, fixed assets, accounts payable, and other liabilities.

      The $3 million of in-process research and development pertains to replacement and enhancement technology that was included in the next versions of the exteNd product suite, and was not technologically feasible at the date of the acquisition, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, and was not ready for initial customer testing. Shortly before the acquisition, SilverStream released its latest version of each of the products in the exteNd suite, thus there was minimal in-process research and development at the acquisition date. In-process research and development was valued based on discounting forecasted cash flows directly from the related products. Completion of development of the future upgrades of these products is dependant upon the delivery of our web services products and successfully integrating SilverStream. The in-process research and development did not have any alternative future use and did not otherwise qualify for capitalization.

      Developed technology related to SilverStream’s exteNd products that were shipping at the date of the acquisition and could be combined with our products and services. To determine the value of developed technology, the expected future cash flow attributable to the exteNd products was discounted taking into account risk associated with these assets relative to the in-process research and development. The analysis resulted in a valuation of approximately $20 million for developed technology, which had reached technological feasibility.

      The value of trademarks and trade names was determined based on assigning a royalty rate to the revenue streams expected from the products using the exteNd trade names. The royalty rate was determined based on trade name recognition, marketing support and contribution of the trade name’s value relative to the revenue drivers. A pre-tax royalty rates of 0.5 percent was applied to the anticipated product revenue and discounted to a present value, resulting in a valuation of approximately $2 million.

Novell annual report 2004 63

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Our statement of operations includes SilverStream results subsequent to July 20, 2002. The unaudited pro forma consolidated statement of operations data for fiscal 2002 set forth below gives effect to the acquisition of SilverStream as if it had occurred on November 1, 2001. The unaudited pro forma results for these periods include an adjustment to reflect amortization of intangibles recorded in conjunction with the acquisition and the adoption of SFAS No. 142 at the beginning of the periods.

	Fiscal Year Ended
	October 31, 2002
	(Amounts in
	thousands, except
	per share data)
Net revenue	$	1,162,176
Net loss before accounting change		(189,909	)
Net loss		(333,645	)
Net loss per share — basic and diluted	$	(0.92	)

D. Short-Term Investments

      Following is a summary of our short-term investments at fiscal year ended October 31, 2004 and 2003:

										Fair
										Market
			Cost at		Gross		Gross			Value at
			October 31,		Unrealized		Unrealized			October 31,
			2004		Gains		Losses			2004
			(Amounts in thousands)
Short-term investments:
	Auction market securities		$	358,200	$	5	$	—		$	358,205
	U.S. government and agency securities			200,415		216		(416	)		200,215
	Corporate notes and bonds			171,461		284		(407	)		171,338
	Asset and mortgage-backed securities			42,552		7		(157	)		42,402
	Equity securities			4,288		615		—			4,903
		Total short-term investments	$	776,916	$	1,127	$	(980	)	$	777,063

										Fair
										Market
			Cost at		Gross		Gross			Value at
			October 31,		Unrealized		Unrealized			October 31,
			2003		Gains		Losses			2003
			(Amounts in thousands)
Short-term investments:
	Auction market securities		$	76,600	$	14	$	(7	)	$	76,607
	U.S. government and agency securities			115,538		388		(127	)		115,799
	Corporate notes and bonds			176,462		1,307		(195	)		177,574
	Asset and mortgage-backed securities			9,780		19		(14	)		9,785
	Equity securities			4,742		413		—			5,155
		Total short-term investments	$	383,122	$	2,141	$	(343	)	$	384,920

64 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      At October 31, 2004, approximately $4.5 million of our equity securities are restricted for deferred compensation payments, which are paid out as requested by the participants of the plan. We had net unrealized gains related to short-term investments, net of deferred taxes, of $0.1 million and $1.2 million at October 31, 2004 and 2003, respectively. We realized gains on the sales of securities of $5.3 million, $1.8 million, and $8.1 million, in fiscal 2004, 2003, and 2002, respectively, while realizing losses on sales of securities of $0.6 million, $0.5 million, and $1.3 million, during those same periods, respectively. In addition, during fiscal 2002 we recognized a $2.9 million loss on short-term investments due to a change in market value that was considered to be other-than-temporary.

E. Notes Receivable

      In October 2004, we completed the sale of three buildings we owned in Orem, Utah for $12.8 million, including a $10 million note receivable. The note is secured by the buildings and land as well as a personal guarantee and letters of credit. The note bears interest at 5.50375% for the first year and LIBOR plus 3% thereafter through the maturity date. Principal payments on the note are to be made periodically with a final lump sum payment on the maturity date in October 2009. As of October 31, 2004, there was $0.1 million recorded in other current assets and $9.8 million recorded in other assets.

F. Long-Term Investments

      The primary components of long-term investments as of October 31, 2004 and 2003 were investments made through the Novell Venture account, Cambridge Technology Capital Fund I L.P. (“CTC I”), or directly by us for strategic direct investments in private long-term equity securities. Long-term investments are accounted for initially at cost and written down to fair market value when indicators of impairment are deemed to be other than temporary. At October 31, 2004 and 2003, we had long term investment of $56.0 million and $50.9 million, respectively.

      Investments made through the Novell Venture account generally are in private companies, primarily small capitalization stocks in the high-technology industry sector. Within the Novell Venture account there are also investments in venture capital funds that are managed largely by external venture capitalists. Investments made through CTC I generally are in expansion-stage, private companies providing products and services within the technology industry. The values of the investments made through the Novell Venture account and CTC I are dependent on the financial performance, successful acquisition, and/or initial public offering of the investees.

      We routinely review our investments in private securities and venture funds for impairment. During fiscal 2004, 2003, and 2002 we recognized impairment losses on long-term investments totaling $5.4 million, $34.7 million, and $54.4 million, respectively. During fiscal 2004, we recognized a $1.6 million gain on the sale of long-term investments.

Novell annual report 2004 65

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

G. Property, Plant and Equipment

      Property, plant and equipment consists of the following:

	October 31,			October 31,
	2004			2003
	(Amounts in thousands)
Buildings and land	$	210,453		$	226,971
Furniture and equipment		214,429			220,914
Leasehold improvements and other		86,580			91,454
Property, plant and equipment, at cost		511,462			539,339
Accumulated depreciation		(279,994	)		(283,813	)
Property, plant and equipment, net	$	231,468		$	255,526

      Depreciation and amortization expense related to property, plant and equipment totaled $40.0 million, $47.3 million, and $58.2 million, in fiscal 2004, 2003, and 2002, respectively.

      In October 2004, we completed the sale of three buildings we owned in Orem, Utah for $12.8 million, including $10 million we financed though a secured note receivable. This transaction resulted in a loss of approximately $0.3 million. During fiscal 2004, we also sold an additional facility for $2 million. This facility had a net book value of zero at the time of sale. In May 2003, we completed the sale of our 512,000 square foot office complex, and approximately 48 acres of land in San Jose, California in two transactions for $125 million cash, resulting in a total net gain of approximately $24.9 million.

      We review our property, plant and equipment annually for indicators of impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As of October 31, 2004, we have not identified or recorded any impairments of our property, plant and equipment.

H. Goodwill and Intangible Assets

Goodwill

      Goodwill includes approximately $177.0 million from the January 2004 acquisition of SUSE, approximately $124.6 million from the July 2002 acquisition of SilverStream, approximately $43.0 million from the July 2001 acquisition of Cambridge, approximately $34.9 million from the August 2003 acquisition of Ximian, approximately $3.1 million from the acquisition of Salmon, and approximately $9.0 million related to the acquisition of several small technology-related companies. Goodwill has been allocated to our operating segments described in Note W.

66 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a summary of goodwill, which has been allocated to our operating segments, which we consider to be reporting units for allocating and evaluating goodwill:

	North						Asia			Latin
	America			EMEA			Pacific			America			Japan			Celerant		Total
	(In thousands)
Balance at October 31, 2003	$	85,067		$	74,100		$	8,887		$	1,750		$	996		$	42,500	$	213,300
Acquisition of SUSE		91,792			65,022			11,733			3,539			4,877			—		176,963
Acquisition of Salmon		—			3,109			—			—			—			—		3,109
Adjustments*		(1,311	)		(851	)		(96	)		(21	)		(5	)		—		(2,284	)
Balance at October 31, 2004	$	175,548		$	141,380		$	20,524		$	5,268		$	5,868		$	42,500	$	391,088

*  Adjustments relate to the release of excess merger-related liabilities related to the acquisitions of Ximian and SilverStream.

      SFAS No. 142 requires that companies perform an impairment test within six months of adopting the statement and at least annually thereafter. Steps required in the impairment test include: Step 1 — identifying reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units, and determining if the fair value of each reporting unit is less than its carrying amount. If the fair value of any reporting unit is below carrying value, Step 2 — determining the impairment amount — is performed.

      In the fourth quarters of fiscal 2004 and 2003, we performed our annual goodwill impairment test under SFAS No. 142. This test was performed as of August 1, 2004 and 2003, respectively. To estimate the fair value of our reporting units, management made estimates and judgments about future cash flows based on assumptions that are consistent with both short-term and long-range plans used to manage the business. We also considered factors such as our market capitalization in assessing the fair value of the business. Based on the results of our analyses, we determined that no goodwill impairment existed in any of our reporting units for either year.

      Changes to the estimates used in the analyses, including estimated future cash flows, could cause one or more of the reporting units to be valued differently in future periods. Future analysis could possibly result in a non-cash goodwill impairment charge of up to $391.1 million, the full amount of our goodwill, depending on the estimated value of the reporting units and the value of the net assets attributable to those reporting units at that time.

Intangible Assets

      The following is a summary of intangible assets, net of accumulated amortization:

	October 31,		October 31,
	2004		2003		Asset Lives
	(Amounts in thousands)
Trademarks and trade names	$	26,121	$	2,390		Indefinite
Developed technology		4,203		8,410		3 years
Customer relationships		13,570		—		3 years
Internal use software		4,340		—		3 years
Non-compete agreement		382		—		3 years
Total intangible assets	$	48,616	$	10,800

Novell annual report 2004 67

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Trademarks and trade names at October 31, 2004 related primarily to the SUSE, Ximian® and SilverStream individual product names, which we continue to use. Developed technology at October 31, 2004 related primarily to the Linux product line as a result of our January 2004 acquisition of SUSE, cross-platform services product line as a result of our acquisition of Ximian and the exteNd product line that we acquired as a part of our acquisition of SilverStream. During the third quarter of fiscal 2003, we determined that impairment indicators existed related to the developed technology and trade names we acquired from SilverStream as a result of unexpected revenue declines and the evident failure to achieve revenue growth targets for the exteNd products. Based on a valuation of these assets, we recorded a $23.6 million charge to cost of revenue to write down these assets to estimated fair value, which was determined by the net present value of future estimated revenue streams attributed to these assets. Customer relationships at October 31, 2004 related primarily to the customers we acquired as a part of our acquisitions of SUSE and Salmon. Internal use software at October 31, 2004 related to certain build tools we acquired through our acquisition of SUSE. Non-compete agreement related to certain agreements that were assumed through our acquisition of Salmon.

      We analyze our intangible assets periodically for indicators of impairment. No indicators of impairments to our intangible assets were noted during fiscal 2004.

      Intangible assets are shown net of accumulated amortization of $9.5 million and $11.0 million at October 31, 2004 and 2003, respectively. Amortization expense was $9.5 million in fiscal 2004, $11.0 million in fiscal 2003, and $6.3 million in fiscal 2002. Amortization of intangibles is estimated to be approximately $10.9 million in fiscal 2005, $9.3 million in fiscal 2006, and $2.2 million in fiscal 2007.

I. Income Taxes

      We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires that we record deferred tax assets and liabilities based upon the future tax consequence of differences between the book and tax basis of assets and liabilities, and other tax attributes. SFAS No. 109 also requires that we assess the ability to realize deferred tax assets based upon a “more likely than not” standard and provide a valuation allowance for any tax assets not deemed realizable under this standard. The components of income tax expense consist of the following:

				Fiscal Year Ended
				October 31,			October 31,			October 31,
				2004			2003			2002
				(Amounts in thousands)
Income tax expense
	Current:
		Federal		$	(5,819	)	$	—		$	—
		State			500			800			1,488
		Foreign			23,826			23,512			19,625
			Total current income tax expense		18,507			24,312			21,113
	Deferred:
		Federal			—			88,747			(14,696	)
		State			—			(4,222	)		(5,093	)
		Foreign			(721	)		(1,943	)		9,572
			Total deferred income tax expense (benefit)		(721	)		82,582			(10,217	)
			Total income tax expense	$	17,786		$	106,894		$	10,896

68 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Differences between the U.S. statutory and effective tax rates are as follows:

	Fiscal Year Ended
	October 31,			October 31,			October 31,
	2004			2003			2002
U.S. statutory rate		35.0	%		(35.0	)%		(35.0	)%
State income taxes, net of federal tax effect		—			(4.0	)		(2.5	)
Research and development tax credits		(3.7	)		(6.7	)		(4.2	)
Tax exempt income		—			—			(0.9	)
Foreign income taxed at different rates than U.S. statutory rate		—			(9.8	)		(8.0	)
Valuation allowances		(3.0	)		209.2			59.0
Reversal of permanently invested earnings		—			32.9			—
Non-recurring tax benefit		(7.8	)		—			—
Other, net		3.2			7.7			3.4
Effective tax (benefit) rate		23.7	%		194.3	%		11.8	%

      Domestic and foreign components of income (loss) before taxes are as follows:

	Fiscal Year Ended
	October 31,		October 31,			October 31,
	2004		2003			2002
	(Amounts in thousands)
Domestic	$	36,651	$	(129,395	)	$	(168,341	)
Foreign		38,323		74,385			76,116
Total income (loss) before taxes	$	74,974	$	(55,010	)	$	(92,225	)
Cash paid for income taxes	$	11,212	$	17,806		$	20,514

      The components of deferred tax assets at October 31, 2004 and 2003 are as follows:

					October 31,			October 31,
					2004			2003
					(Amounts in thousands)
Deferred income taxes:
	Deferred tax assets:
		Accruals			$	19,105		$	25,332
		Capital loss carryforward				48,288			40,053
		Credit carryforwards				131,037			125,596
		Net operating loss carryforwards				263,494			237,421
		Intangibles from acquisitions				—			3,856
		Investment impairments				47,303			56,081
		Receivable valuation accounts				4,774			5,848
		Other items				738			(963	)
			Gross deferred tax assets			514,739			493,224
			Valuation allowance			(456,516	)		(423,436	)
				Total deferred tax assets		58,223			69,788
	Deferred tax liabilities:
		Depreciation				(11,827	)		(7,660	)
		Foreign earnings				(46,396	)		(62,128	)
		Intangibles from acquisitions				(3,855	)		—
				Total deferred tax liabilities		(62,078	)		(69,788	)
Net deferred tax assets (liabilities)					$	(3,855	)	$	—

Novell annual report 2004 69

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We perform quarterly and annual assessments of the realization of our deferred tax assets considering all available evidence, both positive and negative. As a result of these assessments, prior to fiscal 2003 we established valuation allowances on select deferred tax assets that were considered to be at risk due to their unique characteristics and limitations, such as capital loss carryovers and acquired tax attributes. Through the third quarter of fiscal 2003, we concluded that it was more likely than not that the remaining recognized deferred tax assets would be realized. The valuation allowance established in the fourth quarter of fiscal 2003 was recorded as a result of our analysis of the facts and circumstances at that time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required by SFAS No. 109. Our cumulative pre-tax book loss for three consecutive years ended October 31, 2003, imposed a high standard for compelling, positive evidence of the likelihood of, and ability to forecast, future taxable income in the near term. As a result, in the fourth fiscal quarter 2003, we provided a full valuation allowance against net deferred tax assets carried on our balance sheet. In conjunction with our decision to provide a full valuation allowance on our net deferred tax assets in 2003, we also recorded a deferred tax liability for our foreign earnings that were previously considered permanently invested. This resulted in an additional deferred tax liability of $18.1 million.

      At the end of fiscal 2004 we again assessed the ability to realize our deferred tax assets. We concluded that we could not forecast future taxable income under the more likely than not standard. Accordingly, current year deferred tax provisions were offset by adjustments to the valuation allowance. The valuation allowances reduce our deferred tax assets to zero. The valuation allowance on deferred tax assets increased by $33 million, $77 million, and $98 million in fiscal 2004, 2003 and 2002 respectively. The October 31, 2003 deferred tax assets have been adjusted to recognize a correction of previously reported items of approximately $53 million. These amounts are fully reserved and accordingly have no impact on the financial statements.

      We recorded deferred tax liabilities during fiscal 2004 for foreign jurisdictions, which were attributable to book and tax basis differences recorded as part of purchase price accounting for the assets and liabilities of companies acquired during the year.

      As of October 31, 2004, we had U.S. net operating loss carryforwards for federal tax purposes of approximately $445 million. If not utilized, these carryforwards will expire in fiscal years 2020 through 2024. These amounts do not include an additional $261 million in net operating loss carryforwards from acquired companies that will expire in years 2010 through 2022. These loss carryforwards from acquired companies can be utilized to offset future taxable income, but are subject to certain annual limitations. In addition, we have approximately $100 million of foreign loss carryforwards, of which $7 million, $4 million, $2 million, and $3 million are subject to expiration in years 2006 though 2009, respectively. The remaining losses do not expire. We have $125 million in capital loss carryforwards, which, if not utilized, will expire in fiscal years 2006 through 2009. We have foreign tax credit carryforwards of $35 million that expire between 2009 and 2014, and general business credit carryforwards of $91 million that expire between 2018 and 2024.

      As of October 31, 2004, deferred tax assets of approximately $55 million pertain to certain tax credits and net operating loss carryforwards resulting from the exercise of employee stock options. If recognized, the tax benefit of these credits and losses will be accounted for as a credit to stockholders’ equity. Deferred tax assets of $126 million relate to acquired entities. These acquired deferred tax assets are subject to limitation under the change of ownership rules of the Internal Revenue Code and have been fully valued. Any future benefit relating to these deferred tax assets will first reduce goodwill relating to the acquisition, second reduce other non-current intangible assets relating to the acquisition, and third reduce income tax expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In connection with our review of the tax reserves for the fourth quarter of 2004, we determined that the amount of reserves related to tax exposures was less than the amount recorded in the financial statements. As a result, we reduced the tax reserves by $6 million.

      On November 8, 2004, Novell announced an agreement with Microsoft to settle potential antitrust litigation. A gain of $448 million, the settlement less estimated transaction costs, will be included in operating income in the first fiscal quarter ended January 31, 2005. The company anticipates using net operating loss carryforwards against this income, and expects an estimated $10 million current liability as a result of the Alternative Minimum Tax.

J. Other Accrued Liabilities

      Other accrued liabilities consist of the following:

		October 31,		October 31,
		2004		2003
		(Amounts in thousands)
Other accrued expenses		$	48,104	$	58,837
Restructuring reserves			19,178		28,277
Accrued property and other taxes			17,451		17,309
Accrued marketing expenses			8,032		6,940
Accrued royalties			5,101		5,710
Accrued interest and dividends			1,117		—
	Total other accrued liabilities	$	98,983	$	117,073

K. Restructuring Expenses

          Second, third and fourth quarters of fiscal 2004

      During the second, third and fourth quarters of fiscal 2004, we recorded net restructuring expenses of $5.3 million, $9.7 million, and $4.0 million, respectively. These restructuring expenses were in response to the evolution of our business strategy to develop a competitive position in the Linux market. This strategy includes plans to support the Linux operating system in addition to the NetWare operating system, by offering our products and services that run on Linux, NetWare and other platforms. The acquisitions of Ximian and SUSE are direct results of the evolution in our business strategy. These changes were made to address market penetration for Linux and NetWare and to address NetWare revenue declines. Specific actions taken include reducing our workforce by 54 employees during the second quarter, 65 employees during the third quarter, and 17 employees during the fourth quarter of fiscal 2004, mainly in consulting, sales and product development in EMEA and North America. In addition, we consolidated facilities, resulting in the closure of two sales facilities and the disposal of excess equipment and tenant improvements in the United States. Total restructuring expenses for fiscal 2004 by reporting segment were as follows: North America $5.5 million, EMEA $9.4 million, Asia Pacific $0.4 million, Latin America $0.2 million, and non-allocated corporate costs $3.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the activity during fiscal 2004 related to this restructuring:

								Balance at
	Original		Cash			Non-Cash		October 31,
	Reserve		Payments			Adjustments		2004
	(In thousands)
Severance and benefits	$	12,910	$	(8,252	)	$	—	$	4,658
Excess facilities, property and equipment		6,152		(3,645	)		—		2,507
	$	19,062	$	(11,897	)	$	—	$	7,165

      As of October 31, 2004, the remaining balance of the fiscal 2004 restructuring expenses included accrued liabilities related to severance and benefits, which will be paid out over the remaining severance obligation period, not to exceed two years, lease costs for redundant facilities, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be paid over the respective remaining contract terms.

      During fiscal 2004, we also recorded a $5.9 million restructuring expense to increase prior restructuring liabilities by $1.0 million and prior merger-related liabilities by $4.9 million, and we released approximately $2.1 million of excess restructuring reserves related to prior restructuring events. The increases were the result of changes in estimates used when the original expenses were recorded primarily due to changes in the real estate market in the United Kingdom. The net impact of the fiscal 2004 restructurings and the release of the prior restructuring excess reserves was an expense of $22.9 million in fiscal 2004. These adjustments, which pertain to separate restructuring events, are included in the applicable tables that follow.

Third quarter of fiscal 2003

      During the third quarter of fiscal 2003, we recorded a pre-tax restructuring expense of approximately $27.8 million resulting from the restructuring of our operations in response to changes in general market conditions, changing customer demands, and the evolution of our business strategy relative to the identity management and web services areas of our business and our revised strategy. This strategy includes plans to support Linux in addition to NetWare, by offering our products and services that run on both NetWare and Linux platforms. These changes in strategy and company structure were made to address the current revenue declines. Specific actions taken included reducing our workforce worldwide by approximately 600 employees (approximately 10%) across all functions and geographies, with a majority coming from product development, sales, and general and administrative functions, primarily in the United States. In addition, we consolidated facilities, and disposed of excess equipment. Total restructuring expenses by reporting segment were as follows: North America $18.9 million, EMEA $6.0 million, Asia Pacific $2.4 million, and Latin America $0.5 million

      As of October 31, 2004, the remaining balance of the third quarter of fiscal 2003 restructuring expense included accrued liabilities related to redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be paid over the respective remaining contract terms.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the activity related to this restructuring.

								Balance at							Balance at
	Original		Cash			Non-Cash		October 31,		Cash			Non-Cash		October 31,
	Expense		Payments			Adjustments		2003		Payments			Adjustments		2004
	(In thousands)
Severance and benefits	$	20,287	$	(17,163	)	$	3,755	$	6,879	$	(7,462	)	$	876	$	293
Excess facilities, property and equipment		5,778		(3,079	)		5,735		8,434		(5,911	)		—		2,523
Other restructuring-related costs		1,729		(423	)		536		1,842		—			—		1,842
	$	27,794	$	(20,665	)	$	10,026	$	17,155	$	(13,373	)	$	876	$	4,658

      During the fourth quarter of fiscal 2003, we accrued an additional $10 million related to the completion of restructuring activities that were part of the previous quarter’s plan of restructuring. The additional accrual relates mainly to the severance of approximately 100 employees and the closing of excess facilities. Such activities occurred mostly in the North America reporting segment.

      During the third quarter of fiscal 2003, we also released approximately $2 million related to excess restructuring reserves related to the second quarter fiscal 2002 restructuring event. The net impact of the third quarter fiscal 2003 restructuring and the release of the excess fiscal 2002 restructuring reserves was an expense of $26 million.

Second quarter of fiscal 2003

      During the second quarter of fiscal 2003, we determined that the amount we had originally accrued for facility-related costs in previous restructurings was too low and accrued an additional $8 million. The original liability was based on estimated sublease rates and timing, which were affected by the decline in the real estate market. This additional amount, which pertains to three separate restructuring events, is included in the applicable tables that follow.

Second quarter of fiscal 2002

      During the second quarter of fiscal 2002, we recorded a pre-tax restructuring expense of approximately $20 million. The expense was a result of our continued move toward becoming a business solutions provider, addressing changes in the market due to technology changes, and becoming more customer-focused. Specific actions taken included: reducing our workforce worldwide by approximately 50 employees (less than 1%) across all functional areas, consolidating facilities, closing offices in unprofitable locations, and disposing of excess property and equipment. The following table summarizes the activity related to the second quarter fiscal 2002 restructuring.

						Non-Cash			Balance at					Non-Cash			Balance at					Non-Cash		Balance at
	Original		Cash			Expenses/			October 31,		Cash			Expenses/			October 31,		Cash			Expenses/		October 31,
	Expense		Payments			Adjustments			2002		Payments			Adjustments			2003		Payments			Adjustments		2004
	(In thousands)
Severance and benefits	$	14,748	$	(9,172	)	$	(1,318	)	$	4,258	$	(3,152	)	$	(100	)	$	1,006	$	(1,006	)	$	—	$	—
Excess facilities, property and equipment		5,146		(925	)		—			4,221		(4,460	)		4,381			4,142		(2,216	)		1,597		3,523
Other restructuring-related costs		492		(42	)		(150	)		300		—			—			300		(41	)		817		1,076
	$	20,386	$	(10,139	)	$	(1,468	)	$	8,779	$	(7,612	)	$	4,281		$	5,448	$	(3,263	)	$	2,414	$	4,599

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of October 31, 2004, the remaining balance of the second quarter 2002 restructuring expense included redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms.

      During the second quarter of fiscal 2002, we also released approximately $1.3 million of excess accruals related to the fiscal 2000 restructuring, which reduced the restructuring costs reflected on the statement of operations for fiscal 2002. These excess accruals relate to facilities and legal costs that were not required.

Fourth quarter of fiscal 2001

      During the fourth quarter of fiscal 2001, we recorded $51 million of pre-tax, restructuring expenses resulting from changes in general market conditions, changing customer demands, and the evolution of our business strategy, all of which required us to restructure our operations. This business strategy focused on business solutions designed to secure and power the networked world across leading operating systems. The execution of this strategy included refining our consulting initiatives, refocusing research and development efforts, defining sales and marketing efforts to be more customer and solutions oriented, and adjusting the overall cost structure given then current revenue levels and our strategic direction.

      Specific actions included reducing our workforce worldwide by approximately 1,100 employees (approximately 16%), consolidating excess facilities and disposing of excess property and equipment, terminating a management consulting contract that no longer fits with our strategic focus, and abandoning and writing off technologies that no longer fit within our new strategy. We also realigned our remaining resources to better manage and control our business. The following table summarizes the costs and activities related to the fourth quarter 2001 restructuring.

	Balance at					Non-Cash			Balance at					Non-Cash		Balance at					Non-Cash			Balance at
	October 31,		Cash			Expenses/			October 31,		Cash			Expenses/		October 31,		Cash			Expenses/			October 31,
	2001		Payments			Adjustments			2002		Payments			Adjustments		2003		Payments			Adjustments			2004
	(In thousands)
Severance and benefits	$	32,793	$	(27,676	)	$	(4,000	)	$	1,117	$	(1,013	)	$	—	$	104	$	(104	)	$	—		$	—
Excess facilities, property and equipment		10,896		(8,215	)		1,970			4,651		(2,181	)		262		2,732		(862	)		(333	)		1,537
Other restructuring- related costs		911		(287	)		—			624		(439	)		—		185		—			95			280
	$	44,600	$	(36,178	)	$	(2,030	)	$	6,392	$	(3,633	)	$	262	$	3,021	$	(966	)	$	(238	)	$	1,817

      As of October 31, 2004, the remaining balance of the fourth quarter 2001 restructuring charge included accrued liabilities largely related to redundant facilities costs, which will be paid over the respective remaining lease terms.

Third quarter of fiscal 2001

      During the third quarter of fiscal 2001, we recorded a restructuring expense of approximately $30 million, pre-tax, as a result of our acquisition of Cambridge and changes in our business to move towards a business solutions strategy.

      Specific actions included reducing our workforce worldwide by approximately 280 employees (approximately 5% before the addition of Cambridge) across all functional areas, consolidating facilities and disposing of excess property and equipment, abandoning and writing off technologies that no longer fit within our new

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integrated strategy, and discontinuing unprofitable product lines. The following table summarizes the activity related to the third quarter 2001 restructuring costs.

	Balance at					Balance at					Non-Cash		Balance at					Non-Cash			Balance at
	October 31,		Cash			October 31,		Cash			Expenses/		October 31,		Cash			Expenses/			October 31,
	2001		Payments			2002		Payments			Adjustments		2003		Payments			Adjustments			2004
	(In thousands)
Severance and benefits	$	3,377	$	(3,377	)	$	—	$	—		$	—	$	—	$	—		$	—		$	—
Excess facilities, property and equipment		9,736		(5,847	)		3,889		(1,914	)		678		2,653		(422	)		(2,011	)		220
Other restructuring-related costs		1,224		(1,087	)		137		(137	)		—		—		—			—			—
	$	14,337	$	(10,311	)	$	4,026	$	(2,051	)	$	678	$	2,653	$	(422	)	$	(2,011	)	$	220

L. Line of Credit

      We have a $25 million bank line of credit available for letter of credit purposes. At October 31, 2004, there were standby letters of credit of $18.3 million outstanding under this line, all of which are secured by cash. The bank line expires on April 1, 2005. The bank line is subject to the terms of a credit agreement containing financial covenants and restrictions, none of which are expected to affect our operations. We are in compliance with all financial covenants relating to this line of credit as of October 31, 2004. In addition, at October 31, 2004, we had outstanding letters of credit of an insignificant amount at other banks.

M. Senior Convertible Debentures

      On July 2, 2004, we issued and sold $600 million aggregate principal amount of our senior convertible debentures (“Debentures”) due 2024. The Debentures pay interest at 0.50% per annum, payable semi-annually on January 15 and July 15 of each year, commencing January 15, 2005. Each $1,000 principal amount of Debentures is convertible, at the option of the holders, into 86.7905 shares of our common stock prior to July 15, 2024 if (1) the price of our common stock trades above 130% of the conversion price for a specified duration, (2) the trading price of the Debentures is below a certain threshold, subject to specified exceptions, (3) the Debentures have been called for redemption, or (4) specified corporate transactions have occurred. None of the conversion triggers have been met as of October 31, 2004. The conversion rate is subject to certain adjustments. The conversion rate initially represents a conversion price of $11.52 per share. Holders of the Debentures may require us to repurchase all or a portion of their Debentures on July 15, 2009, July 15, 2014 and July 15, 2019, or upon the occurrence of certain events including a change in control. The Debentures can be redeemed by us for cash beginning on or after July 20, 2009.

      The Debentures were sold to an “accredited investor” within the meaning of Rule 501 under the Securities Act of 1933, as amended, in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial investor offered and resold the Debentures to “qualified institutional buyers” under Rule 144A of the Securities Act.

      In connection with the issuance of the Debentures, we incurred $14.9 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are classified within Other Assets and are being amortized as interest expense using the effective interest method over the term from issuance through the first date that the holders can require repurchase of the Debentures (July 15, 2009). Amortization expense related to the issuance costs was $1.0 million and interest expense on the Debentures was $1.0 million for the fiscal year ended October 31, 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

N. Guarantees

      During the first quarter of fiscal 2002, we sold our subsidiary in the Czech Republic. As a part of this transaction, we provided a guarantee to the landlord of the building we leased in the Czech Republic whereby we agreed to pay any and all monies due under the lease, including legal fees if the new lessee defaults on the lease. During the fiscal year 2003, we paid approximately $0.1 million against this guarantee and at October 31, 2004, we had accrued an additional $0.2 million, which represents our liability exposure if the new lessee continues in default, excluding legal fees. In addition, we have provided a guarantee in the amount of $2 million related to a foreign tax audit. As of October 31, 2004 we had accrued $2 million for this guarantee. No amounts have been paid against this guarantee. It is expected that the term of the guarantee will continue until the conclusion of the audit. We have also provided other guarantees of insignificant amounts for various purposes.

      As an element of our standard contract terms, we include an indemnification clause in our agreements with our customers that indemnify the licensee against certain liability and damages arising from intellectual property infringement claims resulting from their use or distribution of our software. Additionally, during the first quarter of fiscal 2004, we implemented our Novell Linux Indemnification Program. Under this program, indemnification is offered for copyright infringement claims made by third parties against registered Novell customers who obtain certain Novell Linux products and who meet other requirements relating to technical support. We do not record a liability for potential litigation claims related to indemnification agreements with our customers, unless and until we conclude the likelihood of a material obligation is probable and estimable.

O.  Commitments and Contingencies

      The Board of Directors established a venture investment program within our investment portfolio for the purpose of promoting our business and strategic objectives by making investments in private companies, mainly small capitalization stocks in the high-technology industry sector, and in funds managed by venture capitalists for the promotion of our business and strategic objectives. As of October 31, 2004, we had a carrying value of $54.0 million related to investments in various venture capital funds and had commitments to contribute an additional $32.9 million to these funds, of which approximately $19.9 million could be contributed in fiscal 2005, approximately $9.3 million in fiscal 2006, and approximately $3.7 million thereafter as requested by the fund managers. Through our acquisition of Cambridge, we also own both limited and general partnership interests in CTC I of approximately 24%. As of October 31, 2004, we had an investment balance of $0.2 million in CTC I and had commitments to contribute an additional $0.3 million through 2007.

      As of October 31, 2004, we have various operating leases related to our facilities with remaining terms of more than one year. These leases have minimum annual lease commitments of $27.9 million in fiscal 2005, $22.1 million in fiscal 2006, $19.1 million in fiscal 2007, $13.4 million in fiscal 2008, $7.2 million in fiscal 2009, and $9.0 million thereafter. Furthermore, we have $24.0 million of minimum rentals to be received in the future from subleases.

      Rent expense, net of sublease rental income, for operating and month-to-month leases was $21.5 million, $24 million, and $29 million, in fiscal 2004, 2003, and 2002, respectively.

P.  Legal Proceedings

      In November 2004, we filed suit against Microsoft in the U.S. District Court, District of Utah. We seek to be awarded treble damages in an amount to be determined at trial based on claims that Microsoft eliminated competition in the office productivity software market during the time that we owned the WordPerfect word-processing application and the Quattro Pro spreadsheet application. Among other claims,

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we alleged that Microsoft withheld certain critical technical information about Windows from us, thereby impairing our ability to develop new versions of WordPerfect and other Novell office productivity applications. The complaint also alleges that Microsoft integrated certain technologies into Windows designed to exclude WordPerfect and other Novell applications from relevant markets. In addition, we alleged that Microsoft used its monopoly power to prevent OEM’s from offering WordPerfect and other applications to customers. On January 7, 2005, Microsoft filed a motion to dismiss the complaint. We will vigorously oppose the motion to dismiss. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

      In May 2004, we received $18.5 million from The Canopy Group, Inc. (“Canopy”) in satisfaction of a judgment against Canopy. The judgment arose out of a collection action filed by us against Canopy, wherein we sought to recover a royalty payment due under a licensing agreement and arising out of a settlement payment from a third party to Canopy. In connection with this payment, we recognized revenue of $13.5 million and interest income of $5 million during the quarter ended July 31, 2004.

      In January 2004, the SCO Group, Inc. (“SCO”) filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. We removed the claim to the U.S. District Court, District of Utah. SCO’s original complaint alleged that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’s business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. The District Court dismissed the original complaint, but allowed SCO an opportunity to file an amended complaint, which SCO did in July 2004. As with the original complaint, SCO is again seeking to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights and to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights and to pay actual, special and punitive damages in an amount to be proven at trial. We have again sought to dismiss SCO’s amended complaint and ultimately believe that we have meritorious defenses to these claims even if our Motion to Dismiss is denied. Accordingly, we intend to vigorously defend ourselves in this suit. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

      SilverStream, which we acquired in July 2002, and several of its former officers and directors, as well as the underwriters who handled SilverStream’s two public offerings, were named as defendants in several class action complaints that were filed on behalf of certain former stockholders of SilverStream who purchased shares of SilverStream common stock between August  16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs have brought against other issuers and underwriters. These complaints all allege violations of the Securities Act, as amended “The Securities Act,” and the Securities Exchange Act of 1934, as amended “The Exchange Act.” In particular, they allege, among other things, that there was undisclosed compensation received by the underwriters of the public offerings of all of these issuers, including SilverStream’s. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the court. A Consolidated Amended Complaint with respect to all of these companies was filed in the U.S. District Court, Southern District of New York, on April 19, 2002. While we believe that SilverStream and its former officers and directors have meritorious defenses to the claims, a Memorandum of Understanding has been reached between many of the defendants and the plaintiffs, which contemplate a settlement of the claims. The settlement, however, has not been finalized. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

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      In February 1998, a suit was filed in the U.S. District Court, District of Utah, against us and certain of our officers and directors, alleging violation of federal securities laws by concealing the true nature of our financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of our common stock from November 1, 1996 through April 22, 1997. After a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court dismissed the amended complaint with prejudice for failure to state a claim. Much of the District Court’s Order of Dismissal was recently affirmed by the Tenth Circuit Court of Appeals while certain claims were remanded for the District Court’s further review. We believe we have meritorious defenses to these remaining claims. While there can be no assurance as to the ultimate disposition of the lawsuit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

      We evaluate the adequacy of our legal reserves on a quarterly basis. During fiscal 2004, we recorded a reduction of $5 million in legal reserves relating to favorable developments in current litigation matters and a reduction of $4 million due to a one-time adjustment to the legal reserves. We are currently party to various legal proceedings and claims including former employees, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Q.  Redeemable Preferred Stock

      On March 23, 2004, we entered into a definitive agreement with International Business Machines Corporation (“IBM”) in connection with IBM’s previously announced $50 million investment in Novell. The primary terms of the investment were negotiated in November 2003 and entailed the purchase by IBM of 1,000 shares of our Series B redeemable preferred stock (“Series B Preferred Stock”) that are convertible into 8 million shares of our common stock at a conversion price of $6.25 per common share. The Series B Preferred Stock is entitled to a dividend of 2% per annum, payable quarterly in cash. Dividends on the Series B Preferred Stock during fiscal 2004 amounted to $0.4 million, of which $0.3 million was paid out during the year.

      Because the fair value of our common stock of $9.46 per share on March 23, 2004 was greater than the conversion price of $6.25 per share of Series B Preferred Stock, we recorded a one-time, non-cash deemed dividend of $25.7 million pursuant to EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.”

      The Series B Preferred Stock is convertible at any time at the option of the holder and has a liquidation value equal to $50,000 per share. Each share of Preferred Stock issued and outstanding is entitled to the number of votes equal to the number of shares of common stock into which it is convertible. The Series B Preferred Stock is senior to the common stock with respect to dividends and liquidation preferences. The Series B Preferred Stock is redeemable at our option, and by the holder only under certain change in control circumstances. Because the redemption is not certain to occur, the Series B Preferred Stock is not required to be classified as a liability, but rather is classified in the mezzanine section of the balance sheet and is stated at redemption value.

      On June 17, 2004, 500 shares of Series B Preferred Stock, with a carrying value of $25 million, were converted into 4 million shares of our common stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

R.  Stockholders’ Equity

Preferred Share Rights Agreement

      In December 1988, the Board of Directors adopted a Preferred Share Rights Agreement. This plan was most recently amended in September 1999 and expires on November 21, 2006. The plan provides for a dividend of rights, which cannot be exercised until certain events occur, to purchase shares of our Series A Preferred Stock. Each common stockholder of record has one right for each share of common stock owned. This plan was adopted to ensure that all of our stockholders receive fair value for their common stock in the event a third party proposes to acquire us and to guard against coercive tactics to gain control of us without offering fair value to our stockholders. We have 499,000 authorized shares of Series A Preferred Stock with a par value of $0.10 per share, none of which were issued or outstanding at October 31, 2004 or October 31, 2003.

Stock Repurchase

      On July 2, 2004, we used approximately $125 million of the proceeds from the issuance of the Debentures to repurchase 15,188,300 shares of common stock at $8.23 per share. These shares are held in treasury and are classified as treasury stock on our consolidated balance sheet.

Stock Option Plans

      Pursuant to an exchange offer dated May 14, 2003, approved by our stockholders at our 2003 Annual Meeting held on May 1, 2003, through the approval of amendments to our stock option plans, we offered a stock option exchange program to our non-executive employees, giving them the right to exchange outstanding stock options with an exercise price of $5.03 per share or higher for new options that were granted on December 16, 2003. The options tendered under the program were replaced with options to purchase a fewer number of shares than the original options would have provided, based upon an exchange ratio dependent upon the exercise price of the tendered option.

      Under the program, options to purchase 17.0 million shares of our common stock were tendered, representing approximately 64% of the options that were eligible for the exchange. These tendered options were cancelled and are no longer outstanding. We issued new options with an exercise price of $9.14, the fair market value of our common stock on December 16, 2003, to purchase an aggregate of 8.9 million shares of our common stock. We apply the intrinsic value method and related interpretations in accounting for stock options granted under our stock option plans. Accordingly, no compensation expense has been recognized in connection with the grant of replacement options. We have amended the Novell/SilverStream 1997 Stock Option Plan to reduce the aggregate number of shares of common stock issuable there under by 8.1 million shares, the excess of the number of options tendered over the number of options reissued.

      We currently have five broad-based stock option plans with options available for grant to employees and consultants, and one stock option plan with options available for grant to members of the Board of Directors. We typically grant nonstatutory options at fair market value. In addition, we occasionally grant restricted stock purchase rights and restricted units to certain employees. Prior to 2002, we granted options to virtually all employees at their time of hire. Our current practice is to grant options to mid- and upper-management at time of hire. We also maintain an on-going annual grant program under which certain employees are eligible for consideration for performance and retention grants. These plans are discussed in more detail below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The 2000 Stock Plan and the 1991 Stock Plan

      The 2000 Stock Plan (the “2000 Plan”), with an aggregate of 16 million shares of common stock reserved for issuance, provides for the grant of incentive stock options, nonstatutory stock options, restricted stock purchase rights and common stock equivalents (“CSE’s”) and was approved by stockholders in April 2000. Shares of common stock may also be issued under the 2000 Plan to satisfy our obligations under our Stock Based Deferred Compensation Plan. As of October 31, 2004, a total of 5,632,390 shares of common stock remained available for issuance pursuant to the 2000 Plan. The 1991 Stock Plan (the “1991 Plan”), with an aggregate of 80,277,765 shares of common stock reserved for issuance, provides for the grant of nonqualified stock options, restricted stock purchase rights, restricted units, stock appreciation rights and long-term performance awards and was most recently approved by the stockholders in March 1994. As of October 31, 2004, a total of 19,583,461 shares of common stock remained available for issuance pursuant to the 1991 Plan. Under both plans, options are granted at the fair market value of our common stock at the date of grant, generally vest over 48 months (although options have been granted that vest over 24 or 36 months), are exercisable upon vesting and expire either four, eight or ten years from the date of grant. Under both plans, restricted stock purchase rights have been granted providing for the sale of our common stock to certain employees at a purchase price of $0.10 per share. Shares of restricted common stock are subject to repurchase by us until they have vested. Grants of restricted stock generally vest over a three-year period. There were 1,182,500 shares of outstanding restricted common stock that remained unvested and subject to repurchase at the end of fiscal 2004. Under the 1991 Plan, restricted units may be granted to international employees. These units vest three years from their date of grant, have an exercise price of $0.10 and are payable in common stock. Under the 2000 Plan, CSE’s may be issued to non-employee members of our Board of Directors, who elect to have all or a portion of their board retainers deferred through the purchase of CSE’s. The purchase price for CSE’s is equal to the fair market value of our common stock on the date of purchase. Participating board members who defer compensation into the award of CSE’s specify the future date such common stock equivalents will be converted into shares of our common stock.

The 2000 Nonqualified Stock Option Plan

      The 2000 Nonqualified Stock Option Plan (the “2000 NQ Plan”), with an aggregate of 26 million shares of common stock reserved for issuance, provides for the grant of nonstatutory stock options. As of October 31, 2004, a total of 12,904,116 shares of common stock remained available for issuance pursuant to the 2000 NQ Plan. Under the 2000 NQ Plan, nonstatutory options are granted at the fair market value of our common stock at the date of grant, generally vest over 48 months (although options have been granted that vest over 24 months), are exercisable upon vesting and expire either four, eight or ten years from the date of grant.

The Novell/SilverStream 1997 Stock Option Plan

      The Novell/SilverStream 1997 Stock Option Plan (the “SilverStream 1997 Plan”), with an aggregate of 12,530,883 shares of common stock reserved for issuance, after taking into account the retirement of 8,090,788 shares in January 2004 in connection with Novell’s stock option exchange program, provides for the grant of incentive stock options and nonstatutory stock options, was most recently approved by stockholders of SilverStream in May of 2002, and was assumed by us in July 2002 in connection with our acquisition of SilverStream. As of October 31, 2004, a total of 6,512,393 shares of common stock remained available for issuance pursuant to the SilverStream 1997 Plan. Under the SilverStream 1997 Plan, options are granted at the fair market value of our common stock at the date of grant. Options that had been granted prior to our acquisition of SilverStream were granted at the fair market value of SilverStream’s common stock at the date of grant and were converted to options to acquire our common stock based on the terms of the acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options generally vest over 48 months (although options had been granted before our acquisition of SilverStream that vest over 42 or 60 months), are exercisable upon vesting, and expire eight or ten years from date of grant.

The Novell/SilverStream 2001 Stock Option Plan

      The Novell/SilverStream 2001 Stock Option Plan (the “SilverStream 2001 Plan”), with an aggregate of 2,426,494 shares of common stock reserved for issuance, provides for the grant of nonstatutory stock options. We assumed the SilverStream 2001 Plan in July 2002 in connection with the acquisition of SilverStream. As of October 31, 2004, a total of 701,481 shares of common stock remain available for issuance pursuant to the SilverStream 2001 Plan. Under the SilverStream 2001 Plan, options are granted at the fair market value of our common stock at the date of grant. Options that had been granted prior to our acquisition of SilverStream were granted at the fair market value of SilverStream’s common stock at the date of grant and were converted to options to acquire our common stock based on the terms of the acquisition. Options generally vest over 48 months (although options had been granted before our acquisition of SilverStream that vest over 42 months), are exercisable upon vesting and expire eight or ten years from date of grant.

The Stock Option Plan for Non-Employee Directors

      The Stock Option Plan for Non-Employee Directors (the “Director Plan”), with an aggregate of 1,500,000 shares of common stock reserved for issuance, provides for two types of non-discretionary stock option grants to non-employee members of our Board of Directors: an initial grant of 30,000 options at the time a director is first elected or appointed to the Board, with options vesting over four years and exercisable upon vesting; and an annual grant of 15,000 options upon reelection to the Board, with options vesting over two years and exercisable upon vesting. Under the Director Plan, options are granted at the fair market value of our common stock at the date of grant. The Director Plan was approved by the stockholders in April 1996. As of October 31, 2004, a total of 574,500 shares of common stock remained available for issuance pursuant to the Director Plan. Options expire ten years from the date of grant.

Additional Stock Option Plans

      Miscellaneous plans assumed due to acquisitions (including two additional SilverStream plans not mentioned above that were also assumed in connection with the SilverStream acquisition) have terminated, and no further options may be granted under these plans. Options previously granted under these plans that have not yet expired or otherwise become unexercisable continue to be administered under such plans, and any portions that expire or become unexercisable for any reason shall be cancelled and be unavailable for future issuance.

      A summary of the status of our stock option plans as of October 31, 2004, 2003 and 2002 is presented below. As noted previously, options to purchase 17.0 million shares of the company’s stock were forfeited in fiscal year 2003 in connection with our stock option exchange program. These forfeited options are included in the fiscal 2003 activity below. On December 16, 2003, we issued replacement options to purchase 8.9 million shares of our common stock with an exercise price of $9.14 per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Fiscal 2004					Fiscal 2003					Fiscal 2002
					Weighted-					Weighted-					Weighted-
		Number of			Average		Number of			Average		Number of			Average
		Options			Exercise Price		Options			Exercise Price		Options			Exercise Price
		(Number of options in thousands)
Outstanding at beginning of year			41,875		$	5.21		75,814		$	7.75		74,510		$	8.79
Granted:
	Price at fair value		17,893			9.58		6,387			3.27		5,053			3.96
	Price at greater than fair value		—			—		—			—		—			—
	Price at less than fair value		486			0.10		820			0.10		400			0.10
Assumed:
	Price at greater than fair value		—			—		—			—		6,857			11.10
	Price at less than fair value							—			—		8,163			1.11
Exercised			(10,530	)		4.41		(4,725	)		2.38		(1,369	)		2.00
Cancelled:
	Forfeited		(3,593	)		8.59		(35,051	)		10.49		(17,694	)		9.70
	Expired		(5	)		5.62		(1,370	)		8.40		(106	)		23.92
Outstanding at end of year			46,126		$	6.76		41,875		$	5.21		75,814		$	7.75
Exercisable at end of year			23,247		$	5.73		26,887		$	6.04		48,349		$	8.92

      The following table summarizes information about stock options outstanding at October 31, 2004:

			Options Outstanding
							Options Exercisable
			Weighted-
Range of	Number of		Average		Weighted-		Number of		Weighted-
Exercise	Options		Remaining		Average		Options		Average
Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
	(Number of options in thousands)
$0.00 – $ 3.06		6,035		6.14	$	2.30		3,119	$	2.32
$3.12 – $ 3.92		4,656		6.71		3.72		2,490		3.75
$3.93 – $ 4.68		6,573		6.65		4.53		6,065		4.57
$4.70 – $ 6.91		7,380		5.95		5.40		6,375		5.37
$6.93 – $ 9.14		9,975		3.53		8.95		1,087		8.34
$9.19 – $38.88		11,507		6.44		10.58		4,111		11.08
$0.00 – $38.88		46,126		5.75	$	6.76		23,247	$	5.73

      Other information:

	Fiscal 2004		Fiscal 2003
	(Number of shares and
	options in thousands)
Options available for future grants		45,908		68,727
Shares of common stock outstanding at year end		377,874		376,460
Options granted during the year as a percentage of outstanding common stock		5%		2%
Option holders as a percentage of total employees		74%		82%

Employee Stock Purchase Plan

      In May 2003, the stockholders approved a 10 million share increase to the Company’s 1989 Employee Stock Purchase Plan (the “Purchase Plan”). As amended, we are now authorized to issue up to 34 million

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

shares of our common stock to our employees who work at least 20 hours a week and more than five months a year. In May 2003, the Purchase Plan was further amended to limit the number of shares that can be purchased by employees during any fiscal year to 3 million shares. Under the terms of the Purchase Plan, there are two six-month offer periods per year, and employees can choose to have up to 10% of their salary withheld to purchase our common stock. The purchase price of the common stock is 85% of the lower of the subscription date fair market value or the purchase date fair market value. Approximately 35% of the eligible employees participated in the Purchase Plan in fiscal 2004, 33% in fiscal 2003, and 34% in fiscal 2002. Under the Purchase Plan, we issued 2.2 million shares to employees in fiscal 2004 and 4 million shares to employees in each of fiscal 2003 and 2002. This plan has approximately 6.3 million shares available for future issuance.

Shares Reserved for Future Issuance

      As of October 31, 2004, there were 92,034,795 shares of common stock reserved for stock option exercises, 6,279,752 shares of common stock reserved for issuances under the stock purchase program, 4,000,000 shares reserved for the conversion of Series B preferred stock, and 52,074,300 shares reserved for the conversion of our Debentures.

S.  Employee Savings and Retirement Plans

      We adopted a 401(k) savings and retirement plan in December 1986. The plan covers all Novell U.S. employees who are 21 years of age or older who are scheduled to complete 1,000 hours of service during any consecutive 12-month period. Our 401(k) retirement and savings plan allows us to contribute an amount equal to 100% of the employee’s contribution up to the higher of 4% of each employee’s compensation or the maximum contribution allowed by tax laws.

      SilverStream had a 401(k) savings plan, to which eligible employees could contribute up to 15% of their annual compensation, subject to limitations established by the Internal Revenue Code of 1986, as amended. SilverStream could elect to contribute a discretionary matching contribution to each such participant’s deferred compensation account equal to a discretionary percentage determined by SilverStream. On January 1, 2003, the SilverStream 401(k) savings plan was rolled into the Novell 401(k) retirement and savings plan.

      Ximian had a 401(k) savings plan, to which eligible employees could contribute up to 20% of their annual compensation, subject to limitations established by the Internal Revenue Code of 1986, as amended. On January 1, 2004, Ximian employees were eligible to participate in the Novell, Inc. 401(k) retirement and savings plan, as amended. The Ximian plan assets have been rolled into the Novell, Inc. 401(k) retirement and savings plan.

      SUSE had a 401(k) savings plan, to which eligible employees could contribute up to 100% of their annual compensation, subject to limitations established by the Internal Revenue Code of 1986, as amended. SUSE could elect to contribute a discretionary matching contribution to each such participant’s deferred compensation account equal to a discretionary percentage determined by SUSE. On October 1, 2004, the SUSE 401(k) savings plan was rolled into the Novell 401(k) retirement and savings plan.

      Our Celerant subsidiary sponsors a defined benefit pension plan covering approximately 28 former Celerant employees. The plan was closed to new members as of April 5, 1997. Actuarial gains or losses are being amortized over a 15 year period, and the amortization charges are included within the overall net periodic pension costs, which is charged to the income statement. As of October 31, 2004, the benefit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

obligation of the plan was approximately $2.7 million and funded status of the plan was a deficit of approximately $0.9 million, which was recorded as a liability.

      We also have other retirement plans in certain foreign countries in which we employ personnel. Each plan is consistent with local laws and business practices.

      Company matching contributions on our 401(k) savings and retirement plan and other retirement plans were $20.6 million, $22.7 million, and $18.6 million, in fiscal 2004, 2003, and 2002, respectively.

T.  Net Income (Loss) Per Share Attributable to Common Stockholders

      The following table reconciles the numerators and denominators of the earnings per share calculation for the fiscal years ended October 31, 2004, 2003, and 2002:

			Fiscal Year Ended
			October 31,			October 31,			October 31,
			2004			2003			2002
			(Amounts in thousands, except per share
			data)
Basic net income (loss) per share computation:
	Net income (loss)		$	57,188		$	(161,904	)	$	(246,823	)
	Deemed dividend related to beneficial conversion feature of preferred stock			(25,680	)		—			—
	Dividends on Series B preferred stock			(416	)		—			—
	Allocation of earnings to preferred stockholders			(274	)		—			—
	Net income (loss) attributable to common stockholders		$	30,818		$	(161,904	)	$	(246,823	)
	Weighted-average common shares outstanding			381,100			370,545			363,569
	Basic net income (loss) per share attributable to common stockholders		$	0.08		$	(0.44	)	$	(0.68	)
Diluted net income (loss) per share computation:
	Net income (loss)		$	57,188		$	(161,904	)	$	(246,823	)
	Deemed dividend related to beneficial conversion feature of preferred stock			(25,680	)		—			—
	Dividends on Series B preferred stock			(416	)		—			—
	Allocation of earnings to preferred stockholders			(274	)		—			—
	Net income (loss) attributable to common stockholders		$	30,818		$	(161,904	)	$	(246,823	)
	Weighted-average common shares outstanding			381,100			370,545			363,569
	Incremental shares attributable to the assumed exercise of outstanding options			9,779			—			—
		Total adjusted weighted average common shares		390,879			370,545			363,569
	Diluted net income (loss) per share attributable to common stockholders		$	0.08		$	(0.44	)	$	(0.68	)

      Incremental shares attributable to the assumed exercise of outstanding options of 2,277,414, and 639,938 have been excluded from the calculation of diluted net loss per share for fiscal 2003 and 2002, respectively, as their effect would have been anti-dilutive due to the net loss incurred in those periods. Incremental shares

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

attributable to the assumed conversion of convertible preferred stock of 3,388,406 have been excluded from the calculation of diluted earnings per share in fiscal 2004 as their effect would have been anti-dilutive. Incremental shares attributable to options with exercise prices that were at or greater than the average market price (“out of the money”) at October 31, 2004, 2003, and 2002 were also excluded from the calculation of diluted earnings per share as their effect would have been antidilutive. At October 31, 2004, 2003, and 2002, there were 18,539,606, 50,497,016, and 70,309,436 out of the money options, respectively, that had been excluded.

      As of October 31, 2004, our Debentures are contingently convertible into 52,074,300 shares of common stock. Under current accounting literature, the dilutive effect of these contingently issuable shares of common stock is included in the calculation of diluted earnings per share only when the conversion contingencies have been satisfied. Because none of the conversion contingencies were satisfied during fiscal year ended October 31, 2004, these contingently issuable shares were excluded in the determination of diluted earnings per share.

      In November 2004, the EITF reached a final conclusion on Issue 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share”. This issue addresses when the dilutive effect of contingently convertible debt with a market price trigger should be included in diluted earnings per share calculations. The EITF’s conclusion is that the market price trigger should be ignored and that these securities should be treated as convertible securities and included in diluted earnings per share regardless of whether the conversion contingencies have been met. Because our senior convertible debentures are contingently convertible debt with a market price trigger, we will be required to comply with EITF Issue 04-8 beginning in the first quarter of fiscal 2005. Had the conclusions of EITF Issue 04-8 been effective for fiscal 2004, reported earnings per share would not have changed due to the timing of our issuance of the senior convertible debentures. However, future earnings per share could be impacted by the adoption of this standard. For example, had the senior convertible debentures been outstanding for the fiscal year ended October 31, 2004, on a pro forma basis our diluted earnings per share attributable to common stock would have been $0.07 instead of the reported $0.08 per diluted share and our weighted average number of shares would have increased by approximately 52 million shares.

U. Comprehensive Income

      Our accumulated other comprehensive income (loss) is comprised of the following:

	Fiscal Year Ended
	October 31,			October 31,
	2004			2003
	(Amounts in thousands)
Net unrealized gain on investments	$	147		$	1,499
Minimum pension liability		(1,256	)		—
Cumulative translation adjustment		17,289			5,569
Total other comprehensive income	$	16,180		$	7,068

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Changes to accumulated other comprehensive income are as follows:

	Fiscal Year Ended
	October 31,			October 31,			October 31,
	2004			2003			2002
	(Amounts in thousands)
Total gross unrealized loss on investments during the year, net of tax benefit of $2,670, $941, and $6,408 respectively	$	(4,251	)	$	(1,503	)	$	(10,203	)
Adjustment for unrealized loss on investment impairments		—			—			3,130
Adjustment for net realized gains on investments included in net income (loss), net of tax expense of $1,821, $500, and $2,666, respectively		2,899			798			4,245
Net unrealized loss on investments		(1,352	)		(705	)		(2,828	)
Minimum pension liability, net of tax expense of $788, $0, and $0, respectively		(1,256	)		—			—
Cumulative translation adjustments, net of tax expense of $7,362, $4,828, and $270, respectively		11,720			7,716			430
Other comprehensive income (loss)	$	9,112		$	7,011		$	(2,398	)

V. Related Party Transactions

      During 2004 and 2003, we received consulting services from J.D. Robinson Incorporated. Mr. Robinson, a director of Novell, is Chairman and Chief Executive Officer and the sole shareholder of J.D. Robinson Incorporated. The agreement provides for payments of $0.2 million per year for these services. In each of fiscal 2004 and 2003, services in the amount of $0.2 million were provided by J.D. Robinson.

W. Segment Information

      Beginning November 1, 2002, we reorganized our operations and began reporting our financial results in four segments; three are based on geographic areas and the fourth is Celerant consulting. The geographic segments were Americas, EMEA, and Asia Pacific. Beginning in fiscal 2004, we separated our Americas segment into North America and Latin America and separated Japan from our Asia Pacific segment. We have applied this presentation to all periods presented for comparability. Performance is evaluated by our Chief Executive Officer and our chief decision makers, and is based on reviewing revenue and segment operating income (loss) information for each of the geographic segments and for the Celerant consulting segment.

      The geographic segments include:

•  North America — includes the United States and Canada

•  EMEA — includes Eastern and Western Europe, Middle East, and Africa

•  Asia Pacific — includes China, Southeast Asia, Australia, New Zealand, and India

•  Latin America — includes Mexico, Central America, South America and the Caribbean

•  Japan — this geographic segment is a majority-owned joint venture between Novell and several other companies

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      All geographic segments sell our software and services. These offerings are sold in the United States via direct, OEM, reseller, and distributor channels, and internationally are sold directly and through distributors who sell to dealers and end users. Operating results by segment are as follows:

		Fiscal 2004					Fiscal 2003					Fiscal 2002
				Operating					Operating					Operating
		Net Revenue		Income (Loss)			Net Revenue		Income (Loss)			Net Revenue		Income (Loss)
		(Amounts in thousands)
	North America	$	514,477	$	269,137		$	507,526	$	225,471		$	577,574	$	272,856
	EMEA		378,273		122,159			348,105		122,897			322,705		122,010
	Asia Pacific		61,774		20,116			60,141		13,229			55,027		12,287
	Latin America		21,026		1,685			24,036		4,750			26,972		6,307
	Japan		28,304		7,089			26,359		4,055			26,810		1,531
	Common unallocated operating costs		—		(350,827	)		—		(381,414	)		—		(382,360	)
Total geographic segments			1,003,854		69,359			966,167		(11,012	)		1,009,088		32,631
Celerant consulting			162,063		17,631			139,329		5,115			125,232		5,167
Unallocated integration, impairment and restructuring costs			—		(21,298	)		—		(21,925	)		—		(105,923	)
Total		$	1,165,917	$	65,692		$	1,105,496	$	(27,822	)	$	1,134,320	$	(68,125	)

      Common unallocated operating costs include corporate services common to all geographic segments such as corporate sales and marketing, product development, corporate general and administrative costs, and corporate infrastructure costs. Celerant consulting does not utilize these corporate services.

      In addition to reviewing geographic and Celerant consulting segment results, our chief decision makers review net revenue by solution category. These solution categories are:

•  Identity management and web services solutions — solutions that help customers with their identity management and security issues. Products include Identity Manager, eDirectory, Border Manager, iChain, exteNd, and Secure Login.

•  Cross-platform solutions — solutions that offer an effective and open approach to networking and collaboration services, including file, print, messaging, scheduling, workspace, etc. while using a cross-platform approach. Products include NetWare, ZENworks, GroupWise, SUSE LINUX Enterprise Server, SUSE LINUX Professional, Novell LINUX Desktop, and Novell iFolder®.

•  Worldwide services — comprehensive worldwide IT consulting, training, and support services that apply business solutions to our customers’ business situations, providing the business knowledge and technical expertise to help our customers implement our identity management, web services, and cross-platform services.

•  Celerant consulting — operational strategy and implementation consulting services offered to a wide range of customers across various sectors, worldwide.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue by Solution Category

		Fiscal Years Ended
		October 31,		October 31,		October 31,
		2004		2003		2002
		(Amounts in thousands)
	Identity management and web services solutions	$	101,531	$	96,977	$	82,610
	Cross-platform solutions		597,475		569,859		608,750
Total software licenses and maintenance			699,006		666,836		691,360
Services			304,848		299,331		317,728
Total IT software and solutions			1,003,854		966,167		1,009,088
Celerant consulting			162,063		139,329		125,232
Total net revenue		$	1,165,917	$	1,105,496	$	1,134,320

Geographic Information

      Revenue outside the United States are comprised of revenue to customers in Europe, Africa, the Middle East, Canada, South America, Australia, and Asia Pacific. Other than revenue from Ireland, international revenue was not material individually in any other international location. Inter-company revenue between geographic areas is accounted for at prices representative of unaffiliated party transactions. “U.S. operations” include shipments to customers in the U.S., licensing to OEMs, and exports of finished goods directly to international customers, primarily in Canada, South America, and Asia. “Irish operations” include shipments from Ireland of product to customers throughout Europe, the Middle East, and Africa, and licensing to OEMs. The Irish operation acts as the sales principal and thus records the revenue on shipments it makes. The Irish operation uses our other European, Middle Eastern, and African subsidiaries as commissionaires and commission agents to assist in the sales of software and in turn pays them a commission. This inter-company commission is included in the eliminations. “Other international operations” primarily includes revenue from consulting and service contracts.

			Fiscal Year Ended
			October 31,			October 31,			October 31,
			2004			2003			2002
			(Amounts in thousands)
Revenue:
	U.S. operations		$	587,710		$	682,909		$	711,320
	Irish operations			320,624			305,697			270,126
	Other international operations			311,799			216,364			211,001
	Eliminations			(54,216	)		(99,474	)		(58,127	)
		Total revenue	$	1,165,917		$	1,105,496		$	1,134,320
Long-lived assets at year end:
	U.S. operations		$	715,005		$	753,712		$	1,007,391
	Irish operations			291,168			108,709			109,250
	Other international operations			326,033			94,528			75,476
	Eliminations			(605,048	)		(426,438	)		(520,913	)
		Total long-lived assets at year end	$	727,158		$	530,511		$	671,204

88 Novell annual report 2004

NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Reconciliation of long-lived assets to total assets is as follows:

		October 31,		October 31,		October 31,
		2004		2003		2002
		(Amounts in thousands)
Long-lived assets		$	727,158	$	530,574	$	671,204
Other long-term assets			29,456		6,526		74,323
Current assets			1,534,934		1,030,553		919,538
	Total assets	$	2,291,548	$	1,567,653	$	1,665,065

      In fiscal 2004, 2003, and 2002, sales to international customers were approximately $648.5 million, $593.1 million, and $551.7 million, respectively. In fiscal 2004, 2003, and 2002, international sales to the EMEA segment were 77% 75%, and 73%, of international sales, respectively. No one foreign country accounted for more than 10% of total revenue in any period and there were no customers who accounted for more than 10% of revenue in any period.

X. Derivative Instruments

      A large portion of our revenue, expense, and capital purchasing activities is transacted in U.S. dollars. We do not currently hedge currency risks related to revenue or expenses denominated in foreign currencies. However, we hedge currency risks of some assets and liabilities denominated in foreign currencies to protect against reductions in value caused by changes in foreign exchange rates. We have established balance sheet and intercompany hedging programs that use one-month foreign currency forward contracts, primarily on the Euro, Japanese Yen, and certain other European, Latin American and Asian currencies.

      We enter into these one-month hedging contracts two business days before the end of each month and settle them at the end of the following month. Due to the short period of time between entering into the forward contracts and the quarter-end, the fair value of the derivatives as of October 31, 2004 is insignificant. Gains and losses recognized during a quarter on these foreign currency contracts are recorded as other income or expense and generally offset corresponding gains and losses on the underlying hedged assets and liabilities, resulting in negligible effect to our financial statements.

Y. Subsequent Events

      On November 8, 2004, Novell announced an agreement with Microsoft Corporation to settle potential antitrust litigation related to our NetWare operating system in exchange for $536 million in cash, which we received on November 18, 2004. The financial terms of the NetWare settlement agreement, net of related legal fees, are expected to result in a pre-tax gain of approximately $448 million in the first quarter of fiscal 2005. We will account for this transaction, and any related tax effects, in the first quarter of fiscal 2005.

Novell annual report 2004 89

REPORT OF ERNST & YOUNG LLP,

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders — Novell, Inc.

      We have audited the accompanying consolidated balance sheets of Novell, Inc. and subsidiaries (the Company) as of October 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novell, Inc. and subsidiaries at October 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ ERNST & YOUNG LLP

Boston, Massachusetts

November 16, 2004

90 Novell annual report 2004

NOVELL, INC.

SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

Unaudited

	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter			Fiscal Year
	(Amounts in thousands, except per share data)
Fiscal Year Ended October 31, 2004
Revenue	$	267,107		$	293,556		$	304,597		$	300,657		$	1,165,917
Gross profit		172,231			187,114			200,641			190,252			750,238
Income before taxes		16,483			14,837			28,794			14,860			74,974
Net income		10,135			10,383			23,405			13,265			57,188
Net income (loss) available to common stockholders	$	10,135		$	(15,399	)	$	23,216		$	13,140		$	31,092
Net income (loss) per common share, basic and diluted	$	0.03		$	(0.04	)	$	0.06		$	0.03		$	0.08
Fiscal Year Ended October 31, 2003
Revenue	$	259,971		$	275,967		$	282,809		$	286,749		$	1,105,496
Gross profit		162,407			167,196			151,763	*		185,412			666,778
Income (loss) before taxes		(12,354	)		(34,984	)		(23,762	)		16,090			(55,010	)
Net loss		(11,888	)		(28,612	)		(12,400	)		(109,004	)		(161,904	)
Net loss available to common stockholders	$	(11,888	)	$	(28,612	)	$	(12,400	)	$	(109,004	)	$	(161,904	)
Net income (loss) per common share, basic and diluted	$	(0.03	)	$	(0.08	)	$	(0.03	)	$	(0.29	)	$	(0.44	)
Fiscal Year Ended October 31, 2002
Revenue	$	277,859		$	273,853		$	282,273		$	300,335		$	1,134,320
Gross profit		160,290			161,025			172,451			191,136			684,902
Income (loss) before taxes		11,930			(32,042	)		15,498			(87,611	)		(92,225	)
Net income (loss) before accounting change		8,351			(29,749	)		9,949			(91,672	)		(103,121	)
Net income (loss)		8,351			(173,451	)		9,949			(91,672	)		(246,823	)
Net income (loss) available to common stockholders	$	8,351		$	(173,451	)	$	9,949		$	(91,672	)	$	(246,823	)
Net income (loss) per common share before accounting change, basic and diluted	$	0.02		$	(0.08	)	$	0.03		$	(0.25	)	$	(0.28	)
Net income (loss) per common share, basic and diluted	$	0.02		$	(0.48	)	$	0.03		$	(0.25	)	$	(0.68	)

*  Reflects the reclassification of an intangible asset impairment loss of $23.6 million to cost of revenue from other income (expense) as previously recorded in our Form 10-Q for the third quarter of fiscal 2003.

Novell annual report 2004 91

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      On September 27, 2004, we retained PricewaterhouseCoopers LLP (“PwC”) as our independent registered public accounting firm effective for the fiscal year 2005 beginning November 1, 2004. PwC replaces Ernst & Young LLP, which we retained to complete the fiscal year 2004 audit. On September 27, 2004, we filed a current report on Form 8-K to report this change (as amended on October 7, 2004).

Item 9A. Controls and Procedures

      (a) Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

      (b) No change in our internal control over financial reporting occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

      On January 7, 2005, we entered into a change in control agreement (the “Agreement”) with Jack L. Messman, our President and Chief Executive Officer. Pursuant to the Agreement, in the event that Mr. Messman’s employment with us were to be terminated without a change in control, we would provide the following benefits: (i) an amount equal to two times Mr. Messman’s base salary and target bonus; (ii) a prorated bonus for the year of termination; (iii) twelve months of continued health and dental coverage; (iv) one year of accelerated vesting of Mr. Messman’s stock options; (v) one year of accelerated vesting of Mr. Messman’s restricted common stock; and (vi) reimbursement for outplacement benefits that are actually provided, not to exceed 20% of Mr. Messman’s base salary. In the event of an involuntary termination in connection with a change in control, Mr. Messman would receive the following benefits: (i) an amount equal to three times Mr. Messman’s base salary and target bonus; (ii) a prorated bonus for the year of termination; (iii) 36 months of continued health and dental coverage; (iv) a lump sum cash payment of what Novell would have paid as matching contributions under the Novell 401(k) plan for 36 months after Mr. Messman’s termination date; (v) a lump sum cash payment of what Novell would have paid as premiums under Mr. Messman’s split-dollar life insurance policy for 36 months after Mr. Messman’s termination date; (vi) payment of certain legal fees; (vii) outstanding restricted common stock, if any, and other equity rights, if any, will become fully vested; (viii) outstanding stock options will become fully vested; (ix) a lump sum payment equal to 20% of Mr. Messman’s base salary which may be used to cover the costs of outplacement assistance; and (x) if the payments provided to the executive exceed the amount that triggers the excise tax under section 4999 of the Tax Code by more than 10%, the payments will be grossed-up. Mr. Messman also has the right to terminate his employment for any reason during the 30-day period after the first anniversary of a change in control and still receive these benefits. Additionally, the Agreement contains non-competition and non-solicitation provisions.

92 Novell annual report 2004

PART III

Item 10. Directors and Executive Officers of Registrant

      The information required with respect to directors is incorporated herein by reference to the information contained in the section captioned “Election of Directors” of our definitive proxy statement (the “Proxy Statement”) for the Annual Meeting of Stockholders to be held April 14, 2005, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The information with respect to our audit committee financial expert is incorporated herein by reference to the information contained in the section captioned “Corporate Governance” of the Proxy Statement. We have undertaken to provide to any person without charge, upon request, a copy of our code of ethics applicable to our chief executive officer and senior financial officers. You may obtain a copy of this code of ethics through our automated telephone access system at 800-317-3195 or by e-mailing Novell’s investor relations department at irmail@novell.com. The information required by this Item regarding our executive officers is set forth above in Item 1 in Part I hereof under the heading entitled “Executive Officers” which information is incorporated by reference into this Part III, Item 10.

      The information regarding filings under Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement.

Item 11. Executive Compensation

      The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned “Executive Compensation” of the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned “Securities Ownership by Principal Stockholders and Management” of the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

      The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the sections captioned “Executive Compensation — Employment Contracts, Termination of Employment and Change-in-Control Arrangements” and “Certain Transactions” of the Proxy Statement.

Item 14. Principal Accountant Fees and Services

      The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in the sections captioned “Principal Accountant Fees and Services” of the Proxy Statement.

Novell annual report 2004 93

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)      (1.) Financial Statements:

      The following documents are filed as a part of this Annual Report on Form 10-K for Novell, Inc.:

Consolidated Statements of Operations for the fiscal years ended October 31, 2004, October 31, 2003 and October 31, 2002.

Consolidated Balance Sheets at October 31, 2004 and October 31, 2003.

Consolidated Statements of Stockholders’ Equity for the fiscal years ended October 31, 2004, October 31, 2003 and October 31, 2002.

Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2004, October 31, 2003 and October 31, 2002.

Notes to Consolidated Financial Statements.

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm.

           (2.) Financial Statement Schedules:

      The following consolidated financial statement schedule is included on page 97 of this Form 10-K:

                Schedule II — Valuation and Qualifying Accounts

Schedules other than that listed above are omitted because they are not required, not applicable or because the required information is shown in the consolidated financial statements or notes thereto.

           (3.) Exhibits:

A list of the exhibits required to be filed as part of this report is set forth in the Exhibit Index on page 98 of this Form 10-K, which immediately precedes such exhibits, and is incorporated herein by reference.

(b) Exhibits

See Item 15(a)(3).

(c) Financial Statement Schedules

See Item 15(a)(2).

94 Novell annual report 2004

SIGNATURES

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

Novell, Inc.

(Registrant)

Date: January 13, 2005

By:  /s/ JACK L. MESSMAN

Jack L. Messman,

Chairman of the Board, President

and Chief Executive Officer

Novell annual report 2004 95

SIGNATURES

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

Name	Title	Date
/s/ JACK L. MESSMAN              (Jack L. Messman)	Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)	January 13, 2005
/s/ JOSEPH S. TIBBETTS, JR.              (Joseph S. Tibbetts, Jr.)	Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)	January 13, 2005
/s/ ALBERT AIELLO              (Albert Aiello)	Director	January 13, 2005
/s/ FRED CORRADO              (Fred Corrado)	Director	January 13, 2005
/s/ RICHARD L. CRANDALL              (Richard L. Crandall)	Director	January 13, 2005
/s/ WAYNE MACKIE              (Wayne Mackie)	Director	January 13, 2005
(Claudine B. Malone)	Director
/s/ RICHARD L. NOLAN              (Richard L. Nolan)	Director	January 13, 2005
/s/ THOMAS G. PLASKETT              (Thomas G. Plaskett)	Director	January 13, 2005
/s/ JOHN W. PODUSKA, SR.              (John W. Poduska, Sr.)	Director	January 13, 2005
/s/ JAMES D. ROBINSON, III              (James D. Robinson, III)	Director	January 13, 2005
/s/ KATHY BRITTAIN WHITE              (Kathy Brittain White)	Director	January 13, 2005

96 Novell annual report 2004

NOVELL, INC.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Accounts Receivable Allowance

				Additions		Additions				Deductions		Deductions
		Balance at		Charged to		Charged to		Additions		from		from Bad		Balance
		Beginning		Return		Bad Debt		from		Return		Debt		at End
		of Period		Allowances		Allowances		Acquisition		Allowances		Allowances		of Period
		(In thousands)
Fiscal year ended
	October 31, 2002	$	47,249	$	30,916	$	2,819	$	1,861	$	32,734	$	10,435	$	39,676
	October 31, 2003	$	39,676	$	9,838	$	2,134	$	—	$	20,527	$	4,269	$	26,852
	October 31, 2004	$	26,852	$	30,301	$	763	$	2,468	$	32,854	$	3,133	$	24,396

Novell annual report 2004 97

EXHIBIT INDEX

Exhibit
Number		Description
	2.1	Amendment No. 1 to Agreement and Plan of Reorganization, dated as of May 24, 2001, by and among Novell, Inc., Ceres Neptune Acquisition Corp. and Cambridge Technology Partners (Massachusetts), Inc.(1)(Annex A)
	2.2	Agreement and Plan of Merger, dated as of June 9, 2002 by and among Novell, Inc., Delaware Planet, Inc. and SilverStream Software, Inc.(2)(Exhibit 2.1)
	3.1	Certificate of Incorporation.(3)(Exhibit 3.1)
	3.2	By-Laws, as amended and restated February 26, 2002.(4)(Exhibit 3.2)
	4.1	Reference is made to Exhibit 3.1.
	4.2	Form of certificate representing the shares of Novell common stock.(5)(Exhibit 4.3)
	4.3	Preferred Shares Rights Agreement, dated as of December 7, 1988, as amended and restated effective September 20, 1999, by and between Novell, Inc. and ChaseMellon Shareholder Services, L.L.C.(6)(Exhibit 1)
	4.4	Indenture dated as of July 2, 2004 between the Registrant and Wells Fargo Bank, National Association, as Trustee.(7)(Exhibit 4.1)
	10.1	Registration Rights Agreement dated July 2, 2004 between the Registrant and Citigroup Global Markets Inc., for itself and on behalf of certain purchasers.(7)(Exhibit 10.1)
	10.2*	Novell, Inc. 1989 Employee Stock Purchase Plan.(8)(Exhibit 4.1)
	10.3*	Novell, Inc. 1991 Stock Plan.(9)(Exhibit 4.1)
	10.4*	Novell, Inc. 2000 Stock Plan.(10)(Exhibit 4.2)
	10.5*	Novell, Inc. 2000 Stock Option Plan.(10)(Exhibit 4.1)
	10.6*	UNIX System Laboratories, Inc. Stock Option Plan.(11)(Exhibit 4.3)
	10.7*	Novell, Inc. Stock Option Plan for Non-Employee Directors.(12)(Exhibit 4.1)
	10.8*	Novell, Inc./ SilverStream Software, Inc. 1997 Stock Incentive Plan.(13)(Exhibit 4.2)
	10.9*	Novell, Inc./ SilverStream Software, Inc. 2001 Stock Incentive Plan.(13)(Exhibit 4.3)
	10.10*	Novell, Inc./ SilverStream Software, Inc./eObject, Inc. 2000 Stock Plan.(13)(Exhibit 4.4)
	10.11*	Novell, Inc./ SilverStream Software, Inc./ Bondi Software, Inc. Employee Stock Option Plan.(13)(Exhibit 4.5)
	10.12*	Novell, Inc. Stock Based Deferred Compensation Plan.(14)(Appendix E)
	10.13*	Novell, Inc. Stock-Based Deferred Compensation Plan — Stock Purchase Assistance Subplan.(15)
	10.14*	Key Employment Agreement dated as of May 22, 2001 between the Registrant and Jack L. Messman.(1)(Exhibit C to Annex A)
	10.15*	Severance Agreement dated as of January 7, 2005 between the Registrant and Jack L. Messman.(15)
	10.16*	Severance Agreement dated as of March 25, 2003 between the Registrant and Alan J. Friedman.(16)(Exhibit 10.16)
	10.17*	Severance Agreement dated as of May 29, 2003 between the Registrant and Ronald W. Hovsepian.(16)(Exhibit 10.17)
	10.18*	Severance Agreement dated as of March 25, 2003 between the Registrant and Joseph A. LaSala, Jr.(16)(Exhibit 10.18)

98 Novell annual report 2004

Exhibit
Number		Description
	10.19*	Severance Agreement dated as of February 10, 2003 between the Registrant and Joseph S. Tibbetts, Jr.(16)(Exhibit  10.20)
	10.20*	Letter Agreement dated December 15, 1995 between Novell, Inc. and RRE Advisors, LLC.(17)(Exhibit 10.2)
	10.21*	Letter Agreement dated July 14, 2001 between Novell, Inc. and Dennis R. Raney.(18)(Exhibit 10.15)
	10.22*	Novell, Inc. Non-employee Director Compensation Summary.(15)
	10.23*	Novell, Inc. Deferred Compensation Plan.(15)
	21	Subsidiaries of the Registrant.(15)
	23.1	Consent of Ernst & Young LLP, Independent Auditors.(15)
	31.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
	31.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(15)
	32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(15)

* Indicates management contracts or compensatory plans

(1)	Incorporated by reference to the Annex or Exhibit identified in parentheses, filed as an annex or exhibit to the Proxy Statement-Prospectus forming a part of the Registration Statement on Form S-4 (Reg. No. 333-59326) of the Registrant, filed April 20, 2001 and amended May 25, 2001.
(2)	Incorporated by reference to the Exhibit identified in the parentheses, filed as an exhibit to the Registrant’s Report on Form 8-K, filed June 10, 2002 (File No. 0-13351).
(3)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, filed for the fiscal quarter ended April 30, 2004 (File No. 0-13351).
(4)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Annual Report on Form 10-K, filed for the fiscal year ended October 31, 2002.
(5)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto (File No. 2-94613).
(6)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Report on Form 8-A, dated December 13, 1999 (File No. 0-13351).
(7)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, filed for the fiscal quarter ended July 31, 2004 (File No. 0-13351).
(8)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed October 12, 2001 (File No. 333-62087).
(9)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed May 29, 1996 (File No. 333-04775).

(10)  Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed July 1, 2000 (File No. 333-41328).

Novell annual report 2004 99

(11)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440).
(12)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed May 30, 1996 (File No. 333-04823).
(13)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Registration Statement on Form S-8, filed August 6, 2002 (File No. 333-97713).
(14)	Incorporated by reference to the Appendix identified in parentheses, filed as an exhibit to the Proxy Statement of the Registrant filed March 17, 2003.
(15)	Filed herewith.
(16)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Annual Report on Form 10-K, filed for the fiscal year ended October 31, 2003 (File No. 0-13351).
(17)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, filed for the fiscal quarter ended January 31, 2002 (File No. 0-13351).
(18)	Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit to the Registrant’s Annual Report on Form 10-K, filed for the fiscal year ended October 31, 2001 (File No. 0-13351).

100 Novell annual report 2004

EX-10.13

                                                                   Exhibit 10.13









                                  NOVELL, INC.

                              STOCK-BASED DEFERRED

                              COMPENSATION PLAN --

                        STOCK PURCHASE ASSISTANCE SUBPLAN


                        Effective as of October 14, 2004

                        STOCK PURCHASE ASSISTANCE SUBPLAN

                                  INTRODUCTION

      1.1 ESTABLISHMENT OF SUBPLAN. This Subplan, effective as of the Effective
Date, is established pursuant to the provisions of Section 8.4 of the Plan and
is intended as a subplan to the Plan.

      1.2 PURPOSE OF SUBPLAN. The Company established the Subplan in connection
with the operation of the Plan after it was determined that the deferral of
Compensation under the Plan would result in adverse tax consequences to certain
participants in the SOP. This Subplan is intended to provide a vehicle for
select employees who participate in the SOP to achieve, and maintain, their SOR
under the SOP by offering them an opportunity to purchase shares of Common Stock
on the open market and to receive a potentially forgivable loan from the Company
for a portion of the purchase price of the shares of Common Stock purchased by
the employee. This Subplan is only available to those participants in the SOP
who would experience adverse tax consequences in the country they reside if they
deferred Compensation to the Plan. The Subplan will be interpreted in a manner
consistent with these intentions.

                                   ARTICLE II
                                   DEFINITIONS

      Except as otherwise defined below, all capitalized terms used in this
Subplan shall have the meanings set forth in the Plan. For purposes of this
Subplan, the following terms shall have the following meanings:

      2.1 AGGREGATE LOAN AMOUNT means the Loan Percentage, multiplied by
seventy-five percent (75%) of the Eligible Employee's Compensation.

      2.2 EFFECTIVE DATE means the effective date of the Subplan, which is
September 20, 2004.

      2.3 ELIGIBLE EMPLOYEE means any participant in the SOP who meets all of
the following eligibility requirements: (i) does not defer Compensation to the
Plan, (ii) is designated by the Committee to participate in the Subplan, and
(iii) is either not (A) a reporting person under Section 16 of the Securities
Exchange Act of 1934, as amended, or (B) otherwise prohibited from participating
in the Subplan because of applicable law.

      2.4 FAIR MARKET VALUE means the closing price of the Common Stock on the
relevant trading day as reported in The Wall Street Journal.

      2.5 LOAN PERCENTAGE means a percentage to be determined by the Committee
for each Plan Year, which such percentage shall not exceed 25%. Unless the
Committee determines otherwise prior to the beginning of the applicable Plan
Year, the Loan Percentage for purposes of

this Subplan shall be equal to the percentage used to determine the Matching
Contribution pursuant to Section 4.1 of the Plan.

      2.6 PARTICIPANT means an Eligible Employee who is eligible to participate
in the Subplan as provided in Section 3.1 and who has determined to purchase
shares of Common Stock on the open-market during the Plan Year and enter into
the loan arrangement with the Company described in Section 3.3.

      2.7 PLAN means the Novell, Inc. Stock-Based Deferred Compensation Plan.

      2.8 PLAN YEAR means, for the first Plan Year, the Effective Date through
December 31, 2004. For each subsequent Plan Year, the Plan Year is the calendar
year.

      2.9 SUBPLAN means the Stock Purchase Assistance Subplan, as set forth in
this document, as amended from time to time.

                                  ARTICLE III
                                  PARTICIPATION

      3.1 ELIGIBILITY. An individual shall be eligible to participate in the
Subplan only to the extent and for the period that the individual is an Eligible
Employee. An individual who becomes an Eligible Employee at any time during the
Plan Year shall be eligible to participate in the Subplan for any period after
such individual becomes an Eligible Employee. An individual who ceases to be an
Eligible Employee during the Plan Year for any reason shall cease to be eligible
to participate in the Subplan as of the date such individual ceases to be an
Eligible Employee; provided, however, that any loans outstanding as of such date
will be subject to the provisions of Section 4.5 below.

      3.2 PARTICIPATION. An Eligible Employee may purchase shares of Common
Stock on the open market at any time during the Plan Year, provided that such
Eligible Employee complies with all Company policies and procedures in
connection with such purchase(s). Purchases of Common Stock made prior to the
individual becomes an Eligible Employee shall not be covered by this Subplan.

       3.3 LOAN. An Eligible Employee who purchases shares of Common Stock
during the Plan Year in accordance with Section 3.2 will have the opportunity to
enter into a loan arrangement with the Company pursuant to which the Company
will loan to the Eligible Employee an amount equal to (i) the Fair Market Value
of the shares of Common Stock purchased by the Eligible Employee while a
participant in this Subplan, multiplied by (ii) the Loan Percentage. For purpose
of the preceding sentence, Fair Market Value shall be determined as of the date
the Eligible Employee purchased such shares of Common Stock. The Eligible
Employee must notify the Company's Shareholder Services of his intent to enter
into such loan arrangement within thirty (30) days after the date the Eligible
Employee purchased the shares of Common Stock. In no event may the aggregate of
all loans made pursuant to this Plan to any Eligible Employee during any Plan
Year exceed the Aggregate Loan


                                       2

Amount. The terms of the loan shall be as set forth in Article IV below and as
determined by the Committee in its sole discretion.

                                   ARTICLE IV
                                   LOAN TERMS

      4.1 LOAN PROCEDURES. The Company shall enter into a loan arrangement with
each Participant who presents to the Company's Shareholder Services evidence
certifying the purchase of shares of Common Stock in accordance with Section 3.2
and completes the forms necessary to certify such purchase. The information
required to certify such purchase and the timing such information must be
presented to the Company's Shareholder Services shall be as determined by the
Company's Shareholder Services, in its sole discretion. The loan will become
effective within thirty (30) days of the Participant's certification and the
Company shall provide the Participant with the loan proceeds at the same time as
the loan becomes effective.

      4.2 LOAN TERMS. Each loan the Company enters into pursuant to Section 3.3
shall be evidenced by a loan agreement which shall provide that the loan shall
be due and payable in full on the January 1 that first occurs after the fifth
annual anniversary of the January 1 of the calendar year that the loan was made,
unless the loan is forgiven in accordance with Section 4.3 below or repaid
sooner in accordance with Section 4.4 below. The loan shall also be fully
recourse against the Participant. In addition, as collateral to secure the loan
until it is either fully forgiven or repaid, the Participant shall issue as
security for the loan all of the shares of Common Stock for which the loan
proceeds are determined. A certificate representing the secured shares of Common
Stock shall be delivered to the Company along with a stock power executed in
blank before funds will be issued under the loan. Interest shall be charged on
such loan at the rate determined by the Committee, in its sole discretion. The
loan agreement shall contain such other terms, provisions and conditions
consistent with the Subplan and applicable law as may be determined by the
Committee.

      4.3 FORGIVENESS. Notwithstanding anything in this Subplan to the contrary,
each loan made to a Participant pursuant to Section 3.3 of this Subplan shall be
forgiven in full on the January 1 that first occurs after the fifth annual
anniversary of the January 1 of the calendar year that the loan was made,
provided the Participant is an Eligible Employee on such date. Notwithstanding
the preceding sentence, all such loans shall be forgiven in full prior to such
date if (i) the Participant terminates employment with the Company while an
Eligible Employee prior to such date on account of death or Disability, or (ii)
a Change in Control occurs while the Participant is an Eligible Employee.

      4.4 MANDATORY REPAYMENT. In the event that the Participant's employment
with the Company terminates for any reason other than death or Disability, all
loans outstanding to the Participant shall be immediately due and payable,
unless the Committee determines otherwise. For this purpose, a termination of
employment with the Company shall not be deemed to occur merely because of the
Participant's transfer between the Company and any affiliate or subsidiary of
the Company. Any amounts due to the Company may be deducted from any payments
due from the Company to the Participant, if permitted by local law.


                                       3

      4.5 CHANGE IN STATUS. If at any time while a loan issued pursuant to
Section 3.3 is outstanding, the Participant becomes a reporting person under
Section 16 of the Securities Exchange Act of 1934, as amended, or if applicable
law or regulation makes the loan impermissible, the Committee may take any of
the following actions with respect to the loan prior to the occurrence or
application of one of the foregoing events: (i) forgive the entire loan, (ii)
require immediate repayment of the loan, (iii) combination of (i) and (ii), or
(iv) take such other action that is permissible in accordance with applicable
law and regulation. If at any time while a loan issued pursuant to Section 3.3
is outstanding, the Participant ceases to be an Eligible Employee, but continues
as an employee of the Company or any affiliate or subsidiary of the Company, the
loan shall continue in accordance with its terms.

                                   ARTICLE V
                             SUBPLAN ADMINISTRATION

      5.1 SUBPLAN ADMINISTRATOR. This Subplan shall be administered by the
Committee, which will be the Subplan Administrator. The Committee members shall
be appointed by and serve at the pleasure of the Board.

      5.2 AMENDMENT OR TERMINATION. Unless terminated sooner or extended, with
stockholder approval, by the Committee or the Board, the Subplan shall terminate
at the same time as the Plan. Upon termination of the Subplan, outstanding loans
will continue in effect in accordance with their terms. The Committee or the
Board may amend all or any provision of this Subplan, and may terminate the
Subplan in its entirety, at any time and for any reason. The Committee or the
Board may also amend the terms of any loan to comply with applicable law or
regulation if it is determined that such law or regulation would prohibit the
loan. In addition, the Committee or the Board may amend the terms of any loan if
any subsequently issued accounting rules results in adverse accounting
consequences to the Company.

      5.3 ADMINISTRATION OF THE SUBPLAN. The Committee shall have the sole
authority to control and manage the operation and administration of the Subplan
and have all powers, authority and discretion necessary or appropriate to carry
out the Subplan provisions, and to interpret and apply the terms of the Subplan
to particular cases or circumstances. All decisions, determinations and
interpretations of the Committee will be binding on all interested parties and
will be given the maximum deference allowed by law. The Committee may impose
such restrictions or limitations on Participants in the Subplan that the
Committee deems necessary and appropriate to comply with applicable law. The
Committee may delegate its administrative powers to another committee or to an
individual, and all references to the Committee in the Plan shall mean the
Committee's delegatee.

           Committee members who are Participants will abstain from voting on
any Subplan matters that relate primarily to themselves. The Board will identify
three or more individuals to serve as a temporary replacement of the Committee
members in the event that all members of the Committee must abstain from voting.


                                       4

      5.4 INDEMNIFICATION. The Company will and hereby does indemnify and hold
harmless any of its employees, officers, directors or members of the Committee
who have fiduciary or administrative responsibilities with respect to the
Subplan from and against any and all losses, claims, damages, expenses and
liabilities (including reasonable attorneys' fees and amounts paid, with the
approval of the Board, in settlement of any claim) arising out of or resulting
from the implementation of a duty, act or decision with respect to the Subplan,
so long as such duty, act or decision does not involve gross negligence or
willful misconduct on the part of any such individual.

                                   ARTICLE VI
                                  MISCELLANEOUS

      6.1 WITHHOLDING; PAYROLL TAXES. Participants shall be responsible for all
local, state, federal or foreign taxes that result from their entering into the
loan arrangement and forgiveness of any portion of a loan under this Subplan.
Participants will be required to pay to the Company or have withheld from other
Compensation received by the Participant from the Company the amount necessary
for the Company to satisfy its withholding obligations under local, state,
federal or foreign law that results from any loan arrangement and the
forgiveness of any portion of a loan.

      6.2 NONALIENATION. No benefit or interest of any Participant under this
Subplan will be subject to any manner of assignment, alienation, anticipation,
sale, transfer, pledge or encumbrance, whether voluntary or involuntary.

      6.3 LIMITATION OF RIGHTS. Nothing in this Subplan will be construed to
give a Participant the right to continue in the employ of the Company at any
particular position or to interfere with the right of the Company to discharge,
lay off or discipline a Participant at any time and for any reason, or to give
the Company the right to require any Participant to remain in its employ or to
interfere with the Participant's right to terminate his or her employment.

      6.4 INCORPORATION OF TERMS OF THE PLAN. Except as otherwise provided
herein, the terms of the Plan are hereby incorporated by reference and a part of
this Subplan to the extent applicable.

      6.5 GOVERNING LAW. To the extent that state law applies, the provisions of
this Subplan will be construed, enforced and administered in accordance with the
laws of the Commonwealth of Massachusetts.


                                       5

EX-10.15

                                                                   Exhibit 10.15
                               SEVERANCE AGREEMENT

      THIS SEVERANCE AGREEMENT (this "Agreement"), dated as of January 7, 2005,
is made and entered by and between Novell, Inc., a Delaware corporation (the
"Company"), and Jack L. Messman (the "Executive").

                                   WITNESSETH:

      WHEREAS, the Executive is a senior executive of the Company and has made
and is expected to continue to make major contributions to the short- and
long-term profitability, growth and financial strength of the Company;

      WHEREAS, the Executive currently has an employment agreement with the
Company, dated May 22, 2001, (the "Employment Agreement") that provides for the
payment of certain severance and the receipt of certain benefits in the event of
the termination of the Executive's employment;

      WHEREAS, the Board (as defined below) has determined that appropriate
alternative arrangements should be taken to encourage the continued attention
and dedication of Executive to his assigned duties without distraction;

      WHEREAS, in consideration of the Executive's continued employment with the
Company and the Executive's agreement to waive any rights he may have to receive
severance compensation and benefits under his Employment Agreement, the Company
desires to provide Executive with certain compensation and benefits set forth in
this Agreement in order to ameliorate the financial and career impact on
Executive in the event the Executive's employment with the Company is terminated
for a reason related to, or unrelated to, a Change in Control (as defined below)
of the Company; and

      WHEREAS, the Executive agrees to waive any rights he may have under his
Employment Agreement with respect to severance compensation and benefits.

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth and intending to be legally bound hereby,
the Company and the Executive agree as follows:

      1. Certain Defined Terms. In addition to terms defined elsewhere herein,
the following terms have the following meanings when used in this Agreement with
initial capital letters:

            (a) "Base Pay" means the greater of (i) Executive's annual base
salary rate, exclusive of bonuses, commissions and other Incentive Pay, as in
effect immediately preceding Executive's Termination Date, or (ii) Executive's
highest annual base salary rate, exclusive of bonuses, commissions and other
Incentive Pay, as in effect in any of the three (3) full calendar years
preceding Executive's Termination Date.

            (b)   "Board" means the Board of Directors of the Company.

            (c) "Cause" means a determination by the Board that Executive has
committed any of the following acts:

                  (i) the Executive has been convicted of a criminal violation
      involving fraud, embezzlement or theft in connection with his duties or in
      the course of his employment with the Company or any Subsidiary; or

                  (ii) the Executive has committed intentional wrongful
      disclosure of secret processes or confidential information of the Company
      or any Subsidiary; and any such act has been demonstrably and materially
      harmful to the Company. For purposes of this subsection (ii), no act on
      the part of the Executive will be deemed "intentional" if it was due
      primarily to an error in judgment or negligence, but will be deemed
      "intentional" if done by the Executive not in good faith and without
      reasonable belief that the Executive's action was in the best interest of
      the Company.

      Notwithstanding the foregoing, the Executive will not be deemed to have
      been terminated for "Cause" under this subsection (ii) unless and until
      there has been delivered to the Executive a copy of a resolution duly
      adopted by the affirmative vote of not less than three- quarters of the
      members of the Board then in office at a meeting of the Board, finding
      that, in the good faith opinion of the Board, the Executive has committed
      an act constituting "Cause," as herein defined, and specifying the
      particulars thereof in detail. Prior to any such determination, Executive
      shall be provided with reasonable notice of such pending determination and
      Executive, together with his counsel (if the Executive chooses to have
      counsel present at such meeting), shall be provided with the opportunity
      to be heard before the Board makes any such determination. Nothing herein
      will limit the right of the Executive or his beneficiaries to contest the
      validity or propriety of any such determination.

            (d) "Change in Control" means the occurrence of any of the following
events:

                  (i) the acquisition by any individual, entity or group (within
      the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
      "Person") of beneficial ownership (within the meaning of Rule 13d-3
      promulgated under the Exchange Act) of 25% or more of the combined voting
      power of the then outstanding Voting Stock of the Company; provided,
      however, that for purposes of this Section 1(d)(i), the following
      acquisitions will not constitute a Change in Control: (A) any issuance of
      Voting Stock of the Company directly from the Company that is approved by
      the Incumbent Board (as defined in Section 1(d)(ii), below), (B) any
      acquisition by the Company of Voting Stock of the Company, (C) any
      acquisition of Voting Stock of the Company by any employee benefit plan
      (or related trust) sponsored or maintained by the Company or any
      Subsidiary, or (D) any acquisition of Voting Stock of the Company by any
      Person pursuant to a



                                       2

      Business Combination that complies with clauses (A), (B) and (C) of
      Section 1(d)(iii), below; and provided, further, that a Change in Control
      will not occur if any Person becomes the beneficial owner of 25% or more
      of the combined voting power of the Voting Stock of the Company solely as
      a result of an issuance of Voting Stock described in clause (A) of this
      Section 1(d)(i) or an acquisition of Voting Stock described in clause (B)
      of this Section 1(d)(i) unless and until such Person thereafter acquires
      beneficial ownership of Voting Stock of the Company that causes the
      aggregate percent of the combined voting power of the Voting Stock of the
      Company then owned beneficially by such Person to exceed the percent of
      the combined voting power of Voting Stock of the Company owned
      beneficially by such Person immediately after such issuance or acquisition
      described in clause (A) or (B) of this Section 1(d)(i); or

                  (ii) individuals who, as of the date hereof, constitute the
      Board (the "Incumbent Board," as modified by this Section 1(d)(ii)), cease
      for any reason to constitute at least a majority of the Board; provided,
      however, that any individual becoming a Director subsequent to the date
      hereof whose election, or nomination for election by the Company's
      stockholders, was approved by a vote of at least two-thirds of the
      Directors then comprising the Incumbent Board (either by a specific vote
      or by approval of the proxy statement of the Company in which such person
      is named as a nominee for director, without objection to such nomination)
      will be deemed to have then been a member of the Incumbent Board, but
      excluding, for this purpose, any such individual whose initial assumption
      of office occurs as a result of an actual or threatened election contest
      (within the meaning of Rule 14a-11 of the Exchange Act) with respect to
      the election or removal of Directors or other actual or threatened
      solicitation of proxies or consents by or on behalf of a Person other than
      the Board; or

                  (iii) consummation of a reorganization, merger or
      consolidation, a sale or other disposition of all or substantially all of
      the assets of the Company, or other transaction (each, a "Business
      Combination"), unless, in each case, immediately following such Business
      Combination, (A) all or substantially all of the individuals and entities
      who were the beneficial owners of Voting Stock of the Company immediately
      prior to such Business Combination beneficially own, directly or
      indirectly, more than 50% of the combined voting power of the then
      outstanding shares of Voting Stock of the entity resulting from such
      Business Combination (including, without limitation, an entity which as a
      result of such transaction owns the Company or all or substantially all of
      the Company's assets either directly or through one or more subsidiaries),
      (B) no Person (other than the Company; such entity resulting from such
      Business Combination; any employee benefit plan (or related trust)
      sponsored or maintained by the Company, any Subsidiary or such entity
      resulting from such Business Combination; or any Person who immediately
      prior to such Business Combination beneficially owned directly or
      indirectly 25% or more of the combined voting power of the voting stock of
      the Company and whose ownership of such Voting Stock did not result in a
      Change in Control under Section 1(d)(i)) beneficially owns, directly or
      indirectly, 25% or more of the combined voting power of the then
      outstanding



                                       3

      shares of Voting Stock of the entity resulting from such Business
      Combination, and (C) at least a majority of the members of the Board of
      Directors of the entity resulting from such Business Combination were
      members of the Incumbent Board at the time of the execution of the initial
      agreement or of the action of the Board providing for such Business
      Combination; or

                  (iv) approval by the stockholders of the Company of a complete
      liquidation or dissolution of the Company, except pursuant to a Business
      Combination that complies with clauses (A), (B) and (C) of Section
      1(d)(iii).

            (e) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act
of 1986, as amended.

            (f) "Code" means the Internal Revenue Code of 1986, as amended.

            (g) "Constructive Termination Associated With a Change in Control"
means the termination of the Executive's employment with the Company by
Executive as a result of the occurrence of one of the following events as a
result of a Change in Control:

                  (i) without the Executive's express written consent, the
      failure to elect or reelect or otherwise to maintain the Executive in the
      office or the position, or an equivalent office or position, of or with
      the Company and/or a Subsidiary (or any successor thereto by operation of
      law of or otherwise), as the case may be, which the Executive held
      immediately prior to a Change in Control, or the removal of the Executive
      as a Director of the Company and/or a Subsidiary (or any successor
      thereto) if the Executive has been a Director of the Company and/or a
      Subsidiary immediately prior to the Change in Control;

                  (ii) without the Executive's express written consent, the
      failure of the Company to remedy any of the following within ten (10)
      business days after receipt by the Company of written notice thereof from
      the Executive: (A) an adverse change in the nature or scope of the
      authorities, powers, functions, responsibilities or duties attached to the
      position with the Company and any Subsidiary which the Executive held
      immediately prior to the Change in Control, (B) a reduction in the
      aggregate of the Executive's Base Pay and Incentive Pay, or (C) the
      termination or denial of the Executive's rights to Employee Benefits or a
      reduction in the scope or value thereof;

                  (iii) without the Executive's express written consent, a
      determination by the Executive (which determination will be conclusive and
      binding upon the parties hereto provided it has been made in good faith
      and in all events will be presumed to have been made in good faith unless
      otherwise shown by the Company by clear and convincing evidence) that a
      change in circumstances has occurred following a Change in Control,
      including, without limitation, a change in the scope of the business or
      other activities for which the Executive was responsible immediately prior
      to the Change in Control, which has



                                       4

      rendered the Executive unable to carry out, has hindered the Executive's
      performance of, or has caused the Executive to suffer a reduction in, any
      of the authorities, powers, functions, responsibilities or duties attached
      to the position held by the Executive immediately prior to the Change in
      Control, which situation is not remedied within ten (10) business days
      after written notice to the Company from the Executive of such
      determination;

                  (iv) without the Executive's express written consent, the
      liquidation, dissolution, merger, consolidation or reorganization of the
      Company or transfer of all or substantially all of its business and/or
      assets, unless the successor or successors (by liquidation, merger,
      consolidation, reorganization, transfer or otherwise) to which all or
      substantially all of its business and/or assets have been transferred (by
      operation of law or otherwise) assumes all duties and obligations of the
      Company under this Agreement pursuant to Section 15(a);

                  (v) without the Executive's express written consent, a
      requirement by the Company that the Executive have his principal location
      of work changed to any location that is in excess of thirty-five (35)
      miles from the location thereof immediately prior to the Change in
      Control, or that the Executive travel away from his office in the course
      of discharging his responsibilities or duties hereunder at least 20% more
      (in terms of aggregate days in any calendar year or in any calendar
      quarter when annualized for purposes of comparison to any prior year) than
      was required of the Executive in any of the three (3) full years
      immediately prior to the Change in Control; or

                  (vi) without limiting the generality or effect of the
      foregoing, without the Executive's express written consent, any material
      breach of this Agreement by the Company or any successor thereto which is
      not remedied by the Company within ten (10) business days after receipt by
      the Company of written notice from the Executive of such breach.

      In no event shall the termination of Executive's employment with the
Company on account of the Executive's death or Disability or because the
Executive engaged in conduct constituting Cause be deemed to be a Constructive
Termination Associated With a Change in Control.

            (h) "Constructive Termination Prior to a Change in Control" means
the termination of Executive's employment with the Company by the Executive as a
result of:

                  (i) the failure to elect or reelect or otherwise to maintain
      the Executive as the President and Chief Executive Officer of the Company,
      or the removal of or failure to nominate the Executive as a Director of
      the Company (or any successor thereto);

                  (ii) the failure of the Company to remedy any of the following
      within thirty (30) calendar days after receipt by the Company of written
      notice



                                       5

      thereof from the Executive: (A) a materially adverse change in the nature
      or scope of the authorities, powers, functions, responsibilities or duties
      attached to the Executive's position with the Company, (B) a reduction in
      Executive's Base Pay, unless pursuant to a voluntary reduction by
      Executive or a reduction affecting all senior Company management, (C) the
      termination or denial of the Executive's rights to Employee Benefits or a
      material reduction in the scope thereof unless pursuant to a reduction
      affecting all senior Company management, or (D) a reduction in Executive's
      Incentive Pay opportunity below 100% of the Executive's Base Pay, unless
      pursuant to a voluntary reduction by Executive or a reduction affecting
      all senior Company management;

                  (iii) a requirement by the Company that the Executive have his
      principal location of work changed to any location that is in excess of
      thirty-five (35) miles from the location thereof without his prior written
      consent; or

                  (iv) without limiting the generality or effect of the
      foregoing, any material breach of this Agreement by the Company or any
      successor thereto which is not remedied by the Company within 30 calendar
      days after receipt by such party of written notice from the Executive
      specifying the grounds for such breach in reasonable detail.

      In no event shall the termination of Executive's employment with the
      Company on account of the Executive's death or Disability or because the
      Executive engaged in conduct constituting Cause be deemed to be a
      Constructive Termination Prior to a Change in Control.

            (i) "Disability" means the Executive becomes permanently disabled
within the meaning of, and begins actually to receive disability benefits
pursuant to, the long-term disability plan in effect for, or applicable to, the
Executive.

            (j) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement income and
welfare benefit policies, plans, programs or arrangements in which the Executive
is entitled to participate, including, without limitation, any stock option,
performance share, performance unit, stock purchase, stock appreciation,
savings, pension, supplemental executive retirement, or other retirement income
or welfare benefit, deferred compensation, incentive compensation, group or
other life, health, medical/hospital or other insurance (whether funded by
actual insurance or self-insured by the Company or a Subsidiary), disability,
salary continuation, expense reimbursement and other employee benefit policies,
plans, programs or arrangements that may now exist or any equivalent successor
policies, plans, programs or arrangements that may be adopted hereafter by the
Company or a Subsidiary, providing perquisites, benefits and service credit for
benefits at least as great in the aggregate as are payable thereunder.

            (k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.


                                       6

            (l) "Incentive Pay" means the greater of: (i) Executive's maximum
Target Bonus for which Executive was eligible during the period that includes
the Termination Date, or (ii) the highest aggregate bonus or incentive payment
paid to Executive during any of the three (3) full calendar years prior to his
Termination Date. For purposes of this definition, "Target Bonus" means the
annual bonus, incentive, commission or other sales incentive compensation, or
comparable incentive payment opportunity which, in the sole discretion of the
Company, is deemed to constitute a Target Bonus, in addition to Base Pay, for
which Executive was eligible to receive, but did not receive prior to his
Termination Date, in regard to services rendered in the year covered by
Executive's Termination Date and is to be made pursuant to any bonus, incentive,
profit-sharing, performance, discretionary pay or similar agreement, policy,
plan, program or arrangement (whether or not funded) of the Company or a
Subsidiary, or any successor thereto. For purposes of this definition,
"Incentive Pay" does not include any stock option, stock appreciation, stock
purchase, restricted stock or similar plan, program, arrangement or grant, one
time bonus or payment (including, but not limited to, any sign-on bonus), any
amounts contributed by the Company for the benefit of Executive to any qualified
or nonqualified deferred compensation plan, whether or not provided under an
arrangement described in the prior sentence, or any amounts designated by the
parties as amounts other than Incentive Pay.

            (m) "Involuntary Termination Associated With a Change in Control"
means the termination of Executive's employment related to a Change in Control:
(i) by the Company for any reason other than Cause, the Executive's death or the
Executive's Disability, or (ii) on account of a Constructive Termination
Associated with a Change in Control.

            (n) "Involuntary Termination Prior to a Change in Control" means the
termination of Executive's employment unrelated to a Change in Control: (i) by
the Company for any reason other than Cause, the Executive's death or the
Executive's Disability, or (ii) on account of a Constructive Termination Prior
to a Change in Control.

            (o)   "Restricted Business" means,

                  (i) if the Executive is entitled to severance benefits under
      this Agreement on account of an Involuntary Termination Prior to a Change
      in Control, (A) the design, development, manufacture, marketing or support
      of local or wide area network products, computer operating systems,
      applications products, software products or services that enable
      organizations to more effectively conduct business using the Web, or any
      other software products of the type designed, developed, manufactured,
      sold or supported by the Company or as proposed to be designed, developed,
      manufactured, sold or supported by the Company pursuant to a development
      project that is actually being pursued during the term of this Agreement;
      (B) any business that performs technology and consulting services that
      help businesses develop and accelerate their transition to Internet-based
      e-business solutions and processes, or management services that assist
      businesses in improving their operating processes; or (C) any business
      that



                                       7

      competes directly or indirectly with the hardware, software or consulting
      businesses of the Company.

                  (ii) if the Executive is entitled to severance benefits under
      this Agreement on account of an Involuntary Termination Associated With a
      Change in Control, any business function with a direct competitor of the
      Company that is substantially similar to the business function performed
      by the Executive with the Company immediately prior to his Termination
      Date.

            (p) "Restricted Territory" means the counties, towns, cities or
states of any country in which the Company operates or does business.

            (q) "Severance Period" means the twelve (12) month period after the
Executive's Termination Date.

            (r) "Subsidiary" means any Company controlled affiliate.

            (s) "Termination Date" means the last day of Executive's employment
with the Company.

            (t) "Termination of Employment" means, except as provided in the
following sentence, the termination of Executive's active employment
relationship with the Company on account of an Involuntary Termination Prior to
a Change in Control or an Involuntary Termination Associated With a Change in
Control. For purposes of the non-solicitation provision of Section 11 of the
Agreement, the term "Termination of Employment" shall mean the termination of
Executive's employment relationship with the Company for any reason, including,
but not limited to, the Executive's Involuntary Termination Prior to a Change in
Control, Involuntary Termination Associated With a Change in Control, voluntary
termination, termination on account of Disability, or termination by the Company
for Cause.

            (u) "Voting Stock" means securities entitled to vote generally in
the election of directors.

      2. Termination Prior to a Change in Control.

            (a) Involuntary Termination Prior to a Change in Control. In the
event Executive's employment is terminated on account of an Involuntary
Termination Prior to a Change in Control, Executive shall be entitled to the
benefits provided in subsection (b) of this Section 2.

            (b) Compensation and Benefits Upon Involuntary Termination Prior to
a Change in Control. In the event a termination described in subsection (a) of
this Section 2 occurs, the Company shall pay and provide to the Executive after
his Termination Date:

                  (i) (A) 2 times Base Pay, plus (B) 2 times Incentive Pay, for
      the Severance Period, payable in equal installments, consistent with the


                                       8

      Company's past payroll practices, commencing with the first payroll period
      that occurs after Executive's Termination Date. Notwithstanding the
      foregoing, the Executive may determine, in his sole discretion and at any
      time, that the amounts payable under this subsection (i) shall be paid to
      him in a lump sum, as opposed to installments over the Severance Period.

                  (ii) Executive shall receive his pro rated Incentive Pay for
      the year in which his Termination of Employment occurs. The pro rated
      Incentive Pay shall be based on the Executive's Incentive Pay for the year
      in which Executive's Termination Date occurs, multiplied by a fraction,
      the numerator of which is the number of days during which Executive was
      employed by the Company in the year of his termination and the denominator
      of which is 365. Such pro rated Incentive Pay shall be paid to Executive
      in equal installments over the Severance Period, consistent with the
      Company's past payroll practices, commencing with the first payroll period
      that occurs after Executive's Termination Date. Notwithstanding the
      foregoing, the Executive may determine, in his sole discretion and at any
      time, that the amounts payable under this subsection (ii) shall be paid to
      him in a lump sum, as opposed to installments over the Severance Period.

                  (iii) For a period of twelve (12) months following his
      Termination Date, Executive shall continue to receive the medical and
      dental coverage in effect on his Termination Date (or generally comparable
      coverage) for himself and, where applicable, his spouse and dependents, as
      the same may be changed from time to time for employees generally, as if
      Executive had continued in employment during such period; or, as an
      alternative, the Company may elect to pay Executive cash in lieu of such
      coverage in an amount equal to Executive's after-tax cost of continuing
      comparable coverage, where such coverage may not be continued by the
      Company (or where such continuation would adversely affect the tax status
      of the plan pursuant to which the coverage is provided). If the Executive
      does not receive the cash payment described in the preceding sentence, the
      Company shall take all commercially reasonable efforts to provide that the
      COBRA health care continuation coverage period under section 4980B of the
      Code, shall commence immediately after the foregoing twelve (12) month
      benefit period, with such continuation coverage continuing until the
      earlier of (i) the end of the applicable COBRA health care continuation
      coverage period or (ii) the date on which Executive is covered by the
      medical and dental coverage of his successor employer, if any.

                  (iv) With respect to any Company stock options held by the
      Executive as of the date of such Involuntary Termination Prior to a Change
      in Control, the Company shall accelerate the vesting of that portion of
      the Executive's stock options, if any, which would have vested and become
      exercisable within the one (1) year period after the Executive's
      Termination Date, such options, plus any other options that previously
      became exercisable and have not expired or been exercised, to remain
      exercisable, notwithstanding anything in any other agreement governing
      such options, for the longer of (A) a period of six



                                       9

      (6) months after the Executive's Termination Date, or (B) the period set
      forth in the award agreement covering the option; provided, however, that
      in no event will the option be exercisable beyond its original term.

                  (v) With respect to any shares of Company common stock held by
      the Executive that are, at the time of such Involuntary Termination Prior
      to a Change in Control, subject to the Company's repurchase right upon
      termination of the Executive's employment ("Restricted Stock"), the
      Company shall waive such repurchase right as to the number of shares of
      Restricted Stock that would have vested within the one (1) year period
      after the Executive's Termination Date.

                  (vi) To cover the cost of outplacement assistance services for
      Executive that are actually provided by an outplacement agency selected by
      Executive, for which the Company provides prior approval, with such
      approval not to be unreasonably withheld, in an amount not to exceed
      twenty percent (20%) of the Executive's Base Pay.

                  (vii) Executive shall receive any amounts earned, accrued or
      owing but not yet paid to Executive as of his Termination Date, payable in
      a lump sum, and any benefits accrued or earned in accordance with the
      terms of any applicable benefit plans and programs of the Company.

      3.    Termination Associated With a Change in Control.

            (a) Involuntary Termination Associated With a Change in Control. In
the event Executive's employment is terminated after, or in connection with, a
Change in Control, on account of (i) an Involuntary Termination Associated With
a Change in Control within the two year period after the Change in Control, (ii)
an Involuntary Termination Associated With a Change in Control that occurs (A)
not more than six (6) months prior to the date on which a Change in Control
occurs or (B) following the commencement of any discussion with a third person
that ultimately results in a Change in Control, or (iii) voluntarily by the
Executive for any reason (other than for death, Disability, or under
circumstances in which the Executive engaged in conduct that would constitute
Cause) during the thirty (30) day period immediately following the first
anniversary of the first occurrence of a Change in Control, Executive shall be
entitled to the benefits provided in subsection (b) of this Section 3. If
Executive is entitled to benefits described in this Section 3 by reason of
clause (a)(ii) above, Executive shall receive the compensation and benefits
described in Section 2(b) above after his Termination of Employment, in
accordance with the provisions of Section 2(b), regardless of whether the Change
in Control actually occurs, and Executive shall receive the additional
compensation and benefits described in Section 3(b) below only if the Change in
Control is consummated and shall receive such additional amounts after the
consummation of the Change in Control, in accordance with the provisions of
Section 3(b) below. For purposes of subsection 3(a)(ii)(B) above, to be eligible
to receive amounts described in Section 3(b) below, the Change in Control must
be consummated within the twelve (12) month period following Executive's
Termination Date, except in circumstances pursuant to which the consummation of
the Change in Control is delayed,



                                       10

through no failure of the Company or the third person, by a governmental or
regulatory authority or agency with jurisdiction over the matter, or as a result
of other similar circumstances. In such a circumstance, the remaining of the
twelve (12) month period shall be tolled and shall recommence upon termination
of the delaying event.

            (b) Compensation and Benefits Upon Involuntary Termination
Associated With a Change in Control. Subject to the provisions of Section 5
hereof, in the event a termination described in subsection (a) of this Section 3
occurs, the Company shall pay and provide to the Executive after his Termination
Date:

                  (i) Lump sum payment equal to (A) 3 times Base Pay, plus (B) 3
      times Incentive Pay. Payment shall be made within thirty (30) days after
      Executive's Termination Date (or the end of the revocation period for the
      Release, if later).

                  (ii) Executive shall receive his pro rated Incentive Pay for
      the year in which his Termination of Employment occurs. The pro rated
      Incentive Pay shall be based on the Executive's Incentive Pay for the year
      in which Executive's Termination Date occurs, multiplied by a fraction,
      the numerator of which is the number of days during which Executive was
      employed by the Company in the year of his termination and the denominator
      of which is 365. Such pro rated Incentive Pay shall be paid to Executive
      in a lump sum within thirty (30) days after the effective date of the
      termination (or the end of the revocation period for the Release, if
      later).

                  (iii) For a period of thirty-six (36) months following his
      Termination Date, Executive shall continue to receive the medical and
      dental coverage in effect on his Termination Date (or generally comparable
      coverage) for himself and, where applicable, his spouse and dependents, as
      the same may be changed from time to time for employees generally, as if
      Executive had continued in employment during such period; or, as an
      alternative, the Company may elect to pay Executive cash in lieu of such
      coverage in an amount equal to Executive's after-tax cost of continuing
      comparable coverage, where such coverage may not be continued by the
      Company (or where such continuation would adversely affect the tax status
      of the plan pursuant to which the coverage is provided). If the Executive
      does not receive the cash payment described in the preceding sentence, the
      Company shall take all commercially reasonable efforts to provide that the
      COBRA health care continuation coverage period under section 4980B of the
      Code, shall commence immediately after the foregoing thirty-six (36) month
      benefit period, with such continuation coverage continuing until the
      earlier of (i) the end of the applicable COBRA health care continuation
      coverage period or (ii) the date on which Executive is covered by the
      medical and dental coverage of his successor employer, if any.

                  (iv) Lump sum payment equal to the total amount that Executive
      would have received under the Company's 401(k) plan as a Company match if
      Executive was eligible to participate in the Company's 401(k) plan for



                                       11

      the thirty-six (36) month period after his Termination Date and he
      contributed the maximum amount to the plan for the match. Payment shall be
      made within thirty (30) days after Executive's Termination Date (or the
      end of the revocation period for the Release, if later).

                  (v) Lump sum payment equal to the total premiums that the
      Company would have paid under Executive's split-dollar life insurance
      policy, if any, that is in effect immediately prior to his Termination
      Date, if Executive was employed by the Company for the thirty-six (36)
      month period following Executive's Termination Date; provided, however,
      that if the remaining length of the term of the split-dollar arrangement
      pursuant to which the Company must make premium payments is less than the
      foregoing thirty-six (36) month period, Executive shall only receive a
      lump sum payment equal to the remaining Company premiums for the term of
      the arrangement. Payment shall be made within thirty (30) days after
      Executive's Termination Date (or the end of the revocation period for the
      Release, if later). Notwithstanding the foregoing, no payment shall be
      made to Executive pursuant to this subsection (v) if on the Executive's
      Termination Date, either Executive does not have a split-dollar life
      insurance policy with the Company or the Company has no obligations to
      make premium contributions to Executive's split-dollar life insurance
      policy.

                  (vi) Lump sum payment equal to twenty percent (20%) of the
      Executive's Base Pay in order to cover the cost of outplacement assistance
      services for Executive. Payment shall be made within thirty (30) days
      after Executive's Termination Date (or the end of the revocation period
      for the Release, if later).

                  (vii) Executive shall receive any amounts earned, accrued or
      owing but not yet paid to Executive as of his Termination Date, payable in
      a lump sum, and any benefits accrued or earned in accordance with the
      terms of any applicable benefit plans and programs of the Company.

            (c) Notwithstanding any provision to the contrary in any applicable
plan, program or agreement, upon the occurrence of a Change in Control, all
stock options, Restricted Stock and other equity rights held by the Executive
will become fully vested and/or exercisable, as the case may be, on the date on
which the Change in Control occurs, and all stock options held by the Executive
shall remain exercisable, notwithstanding anything in any other agreement
governing such options, for the longer of (i) a period of thirty-six (36) months
after the Executive's Termination Date, or (ii) the period set forth in the
award agreement covering the option; provided, however, that in no event will
the option be exercisable beyond its original term.

      4. Termination of Employment on Account of Disability, Cause or Death.
Notwithstanding anything in this Agreement to the contrary, if Executive's
employment terminates on account of Disability, Executive shall be entitled to
receive disability benefits under any disability program maintained by the
Company that covers Executive, and Executive shall not be considered to have
terminated employment under this


                                       12

Agreement and shall not receive benefits pursuant to Sections 2 and 3 hereof. If
Executive's employment terminates on account of Cause or because of his death,
Executive shall not be considered to have terminated employment under this
Agreement and shall not receive benefits pursuant to Sections 2 and 3 hereof.

      5. Release. Notwithstanding the foregoing, no payments shall be made or
benefits provided under Section 3(b) unless Executive executes, and does not
revoke, the Company's standard written release, substantially in the form as
attached hereto as Annex A, (the "Release"), of any and all claims against the
Company and all related parties with respect to all matters arising out of
Executive's employment by the Company (other than entitlements under the terms
of this Agreement or under any other plans or programs of the Company in which
Executive participated and under which Executive has accrued or become entitled
to a benefit) or a termination thereof.

      6. Enforcement. Without limiting the rights of the Executive at law or in
equity, if the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will pay
interest on the amount or value thereof at an annualized rate of interest equal
to the so- called composite "prime rate" as quoted from time to time during the
relevant period in the Eastern Edition of The Wall Street Journal. Such interest
will be payable as it accrues on demand. Any change in such prime rate will be
effective on and as of the date of such change.

      7. Certain Additional Payments by the Company.

            (a) The provisions of this Section 7 shall apply notwithstanding
anything in this Agreement to the contrary. Subject to subsection (b) below, in
the event that it shall be determined that any payment or distribution by the
Company to or for the benefit of Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would constitute an "excess parachute payment" within
the meaning of section 280G of the Code, the Company shall pay Executive an
additional amount (the "Gross-Up Payment") such that the net amount retained by
Executive after deduction of any excise tax imposed under section 4999 of the
Code, and any federal, state and local income tax, employment tax, excise tax
and other tax imposed upon the Gross-Up Payment, shall be equal to the Payment.

            (b) Notwithstanding subsection (a), and notwithstanding any other
provisions of this Agreement to the contrary, if the net after-tax benefit to
Executive of receiving the Gross-Up Payment does not exceed the Safe Harbor
Amount (as defined below) by more than 10% (as compared to the net-after tax
benefit to Executive resulting from elimination of the Gross-Up Payment and
reduction of the Payments to the Safe Harbor Amount), then (i) the Company shall
not pay Executive the Gross-Up Payment and (ii) the provisions of subsection (c)
below shall apply. The term "Safe Harbor Amount" means the maximum dollar amount
of parachute payments that may be paid under section 280G of the Code without
imposition of an excise tax under section 4999 of the Code.



                                       13

            (c) The provisions of this subsection (c) shall apply only if the
Company is not required to pay Executive a Gross-Up Payment as a result of
subsection (b) above. If the Company is not required to pay Executive a Gross-Up
Payment as a result of the provisions of subsection (b), the Company will apply
a limitation on the Payment amount as set forth in subsection (i) below (a
"Parachute Cap") if the application of the Parachute Cap is beneficial to
Executive, according to the following provisions:

                  (i) If subsection (ii) does not apply, the aggregate present
      value of the Payments under Section 3 of this Agreement ("Agreement
      Payments") shall be reduced (but not below zero) to the Reduced Amount.
      The "Reduced Amount" shall be an amount expressed in present value which
      maximizes the aggregate present value of Agreement Payments without
      causing any Payment to be subject to the limitation of deduction under
      section 280G of the Code. For purposes of this Section 7, "present value"
      shall be determined in accordance with section 280G(d)(4) of the Code.

                  (ii) It is the intention of the parties that the Parachute Cap
      apply only if application of the Parachute Cap is beneficial to Executive.
      Therefore, if the net amount that would be retained by Executive under
      this Agreement without the Parachute Cap, after payment of any excise tax
      under section 4999 of the Code, exceeds the net amount that would be
      retained by Executive with the Parachute Cap, then the Company shall not
      apply the Parachute Cap to Executive's payments. In that event, neither
      the Parachute Cap nor the Gross-Up Payment will apply to Executive.

            (d) All determinations to be made under this Section 7 shall be made
by the nationally recognized independent public accounting firm used by the
Company immediately prior to the Change in Control ("Accounting Firm"), which
Accounting Firm shall provide its determinations and any supporting calculations
to the Company and Executive within ten days of Executive's termination date. If
any Gross-Up Payment is required to be made, the Company shall make the Gross-Up
Payment within ten days after receiving the Accounting Firm's calculations. Any
such determination by the Accounting Firm shall be binding upon the Company and
Executive.

            (e) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in this Section 7 shall be borne
solely by the Company.

      8. No Mitigation Obligation. The Company hereby acknowledges that it will
be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the payment
of the severance compensation by the Company to the Executive in accordance with
the terms of this Agreement is hereby acknowledged by the Company to be
reasonable, and the Executive will not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor will any profits, income, earnings or other benefits from any source
whatsoever create any mitigation, offset, reduction or any other obligation on
the part of the Executive hereunder or otherwise.



                                       14

      9. Legal Fees and Expenses. In the event of a Change in Control, it is the
intent of the Company that the Executive not be required to incur legal fees and
the related expenses associated with the interpretation, enforcement or defense
of the Executive's rights under this Agreement by litigation or otherwise
because the cost and expense thereof would detract from the benefits intended to
be extended to the Executive hereunder. Accordingly, if a Change in Control
occurs and it should appear to the Executive that the Company has failed to
comply with any of its obligations under this Agreement or in the event that the
Company or any other person takes or threatens to take any action to declare
this Agreement void or unenforceable, or institutes any litigation or other
action or proceeding designed to deny, or to recover from, the Executive the
benefits provided or intended to be provided to the Executive under Section 3(b)
of the Agreement, the Company irrevocably authorizes the Executive from time to
time to retain counsel of the Executive's choice, at the expense of the Company
as hereafter provided, to advise and represent the Executive in connection with
any such interpretation, enforcement or defense, including without limitation
the initiation or defense of any litigation or other legal action, whether by or
against the Company or any Director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Notwithstanding any existing
or prior attorney-client relationship between the Company and such counsel, the
Company irrevocably consents to the Executive's entering into an attorney-client
relationship with such counsel, and in that connection the Company and the
Executive agree that a confidential relationship will exist between the
Executive and such counsel. Without respect to whether the Executive prevails,
in whole or in part, in connection with any of the foregoing, the Company will
pay and be solely financially responsible for any and all attorneys' and related
fees and expenses incurred by the Executive in connection with any of the
foregoing; provided that, in regard to such matters, the Executive has not acted
frivolously, in bad faith or with no colorable claim of success. Such expenses
will be paid by the Company as they are incurred by Executive.

      10. Confidentiality. The Executive hereby covenants and agrees that he
will not disclose to any person not employed by the Company, or use in
connection with engaging in competition with the Company, any confidential or
proprietary information (as defined below) of the Company. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available (other than by the Executive's breach of this Section
10) or generally known to persons engaged in businesses similar or related to
those of the Company. Confidential or proprietary information will include,
without limitation, the Company's financial matters, customers, employees,
industry contracts, strategic business plans, product development (or other
proprietary product data), marketing plans, consulting solutions and processes,
and all other secrets and all other information of a confidential or proprietary
nature which is protected by the Uniform Trade Secrets Act. For purposes of the
preceding two sentences, the term "Company" will also include any Subsidiary
(collectively, the "Restricted Group"). The foregoing obligations imposed by
this Section 10 will not apply (i) in the course of the business of and for the
benefit of the Company, (ii) if such confidential or proprietary information has
become, through no fault of the Executive, generally known to the public, or
(iii) if the Executive is required by law to make



                                       15

disclosure (after giving the Company notice and an opportunity to contest such
requirement).

      11. Covenants Not to Compete and Not to Solicit. In the event of
Executive's Termination of Employment, the Company's obligations to provide
severance pay as provided in Sections 2 and 3 shall be expressly conditioned
upon the Executive's covenants not to compete and not to solicit as provided
herein. In the event the Executive breaches his obligations to the Company as
provided herein, the Company's obligations to make severance payments to
Executive pursuant to Sections 2 and 3 shall cease, without prejudice to any
other remedies that may be available to the Company.

            (a) Covenant Not to Compete. For a period of one (1) year following
Executive's Termination Date, the Executive shall not directly or indirectly,
engage in (whether as employee, consultant, proprietor, partner, director or
otherwise), or have any ownership interest in, or participate in a financing,
operation, management or control of, any person, firm, corporation or business
that is a Restricted Business in a Restricted Territory without the prior
written consent of the Board. For this purpose, ownership of no more than 5% of
the outstanding Voting Stock of a publicly traded corporation shall not
constitute a violation of this provision.

            (b)   Covenant Not to Solicit.

                  (i) If Executive is receiving compensation and benefits under
      Section 2(b) above, then, for a period of one (1) year following
      Executive's Termination Date, Executive shall not: (i) solicit, encourage
      or take any other action which is intended to induce any other employee of
      the Company to terminate his employment with the Company; or (ii)
      interfere in any manner with the contractual or employment relationship
      between the Company and any such employee of the Company. The foregoing
      shall not prohibit Executive or any entity with which Executive may be
      affiliated from hiring a former employee of the Company, provided that
      such hiring results exclusively from such former employee's affirmative
      response to a general recruitment effort.

                  (ii) If Executive is receiving compensation and benefits under
      Section 3(b) above (or subsequently becomes entitled to severance under
      section 3(b) above because of a termination described in Section
      3(a)(ii)), then, for a period of two (2) years following Executive's
      Termination Date, Executive shall not: (i) solicit, encourage or take any
      other action which is intended to induce any other employee of the Company
      to terminate his employment with the Company; or (ii) interfere in any
      manner with the contractual or employment relationship between the Company
      and any such employee of the Company. The foregoing shall not prohibit
      Executive or any entity with which Executive may be affiliated from hiring
      a former employee of the Company, provided that such hiring results
      exclusively from such former employee's affirmative response to a general
      recruitment effort.



                                       16

            (c) Interpretation. The covenants contained herein are intended to
be construed as a series of separate covenants, one for each county, town, city
and state or other political subdivision of a Restricted Territory. Except for
geographic coverage, each such separate covenant shall be deemed identical in
terms to the covenant contained in the preceding subsections. If, in any
judicial proceeding, the court shall refuse to enforce any of the separate
covenants (or any part thereof) deemed included in such subsections, then such
unenforceable covenant (or such part) shall be deemed to be eliminated from this
Agreement for the purpose of those proceedings to the extent necessary to permit
the remaining separate covenants (or portions thereof) to be enforced.

            (d) Reasonableness. In the event that the provisions of this Section
11 shall ever be deemed to exceed the time, scope or geographic limitations
permitted by applicable laws, then such provisions shall be reformed to the
maximum time, scope or geographic limitations, as the case may be, permitted by
applicable laws.

      12. Employment Rights. Nothing expressed or implied in this Agreement will
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company or any Subsidiary prior to or
following any Change in Control.

      13. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any applicable law, regulation or
ruling.

      14. Term of Agreement. This Agreement shall continue in full force and
effect for the duration of Executive's employment with the Company; provided,
however, that after the termination of Executive's employment during the term of
this Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired.

      15. Successors and Binding Agreement.

            (a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form and substance reasonably satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent the Company would be required to perform if no such succession had taken
place. This Agreement will be binding upon and inure to the benefit of the
Company and any successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business or assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor will thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise be
assignable, transferable or delegable by the Company.

            (b) This Agreement will inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
successors,



                                       17

heirs, distributees and legatees. This Agreement will supersede the provisions
of any employment or other agreement between the Executive and the Company that
relate to any matter that is also the subject of this Agreement, and such
provisions in such other agreements will be null and void.

            (c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Sections 15(a) and 15(b). Without limiting the generality or effect of the
foregoing, the Executive's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by the Executive's will or by
the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 15(c), the Company will have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.

      16. Notices. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder will be in writing and will be deemed to have
been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed by the recipient), or five
(5) business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three (3) business
days after having been sent by a nationally recognized courier service for
overnight/next-day delivery, such as FedEx, UPS, or the United States Postal
Service, addressed to the Company (to the attention of the Secretary of the
Company) at its principal executive office and to the Executive at his principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.

      17. Governing Law. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the Commonwealth of Massachusetts, without giving
effect to the principles of conflict of laws of such Commonwealth.

      18. Validity. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, unenforceable
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances will not be affected, and
the provision so held to be invalid, unenforceable or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid or legal.

      19. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No



                                       18

agreements or representations, oral or otherwise, expressed or implied with
respect to the subject matter hereof have been made by either party that are not
set forth expressly in this Agreement. References to Sections are to references
to Sections of this Agreement. Any reference in this Agreement to a provision of
a statute, rule or regulation will also include any successor provision thereto.
Whenever used herein, the masculine includes the feminine.

      20. Survival. Notwithstanding any provision of this Agreement to the
contrary, the parties' respective rights and obligations under Sections 2, 3, 7,
9, 10, and 11 will survive any termination or expiration of this Agreement or
the termination of the Executive's employment for any reason whatsoever.

      21. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same agreement.

                            [SIGNATURE PAGE FOLLOWS]


                                       19

      IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.

NOVELL, INC.

By:

/s/ Alan J. Friedman

Name: Alan J. Friedman
Title:  Senior Vice President, People

EXECUTIVE

/s/ Jack L. Messman

Jack L. Messman

                                       20


                                                                         Annex A

             SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE

      THIS SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE (the
"Agreement") is made as of this ___ day of __________, ____, by and between
Novell, Inc. (the "Company") and _______________ ("Executive").

      WHEREAS, Executive formerly was employed by the Company as ________;

      WHEREAS, Executive and Company entered into the Severance Agreement, dated
____ ____, 200_, (the "Severance Agreement") which provides for certain benefits
in the event that Executive's employment is terminated on account of a reason
set forth in the Severance Agreement;

      WHEREAS, Executive and the Company mutually desire to terminate
Executive's employment on an amicable basis, such termination to be effective
_________ ____, ____ ("Date of Resignation"); and

      WHEREAS, in connection with the termination of Executive's employment, the
parties have agreed to a separation package and the resolution of any and all
disputes between them.

      NOW, THEREFORE, IT IS HEREBY AGREED by and between Executive and the
Company as follows:

      1. (a) Executive, for and in consideration of the commitments of the
Company as set forth in paragraph 6 of this Agreement, and intending to be
legally bound, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Company,
its affiliates, subsidiaries and parents, and its officers, directors,
employees, and agents, and its and their respective successors and assigns,
heirs, executors, and administrators (collectively, "Releasees") from all causes
of action, suits, debts, claims and demands whatsoever in law or in equity,
which Executive ever had, now has, or hereafter may have, whether known or
unknown, or which Executive's heirs, executors, or administrators may have, by
reason of any matter, cause or thing whatsoever, from the beginning of
Executive's employment to the date of this Agreement, and particularly, but
without limitation of the foregoing general terms, any claims arising from or
relating in any way to Executive's employment relationship with the Company, the
terms and conditions of that employment relationship, and the termination of
that employment relationship, including, but not limited to, any claims arising
under the Age Discrimination in Employment Act, the Older Workers Benefit
Protection Act, Title VII of The Civil Rights Act of 1964, the Americans with
Disabilities Act, the Family and Medical Leave Act of 1993, the Employee
Retirement Income Security Act of 1974, [STATE FAIR EMPLOYMENT PRACTICE LAW],
and any other claims under any federal, state or local common law, statutory, or
regulatory provision, now or hereafter recognized, and



                                      A-1

any claims for attorneys' fees and costs. This Agreement is effective without
regard to the legal nature of the claims raised and without regard to whether
any such claims are based upon tort, equity, implied or express contract or
discrimination of any sort.

            (b) To the fullest extent permitted by law, and subject to the
provisions of paragraph 11 below, Executive represents and affirms that (i)
[OTHER THAN _______,] Executive has not filed or caused to be filed on
Executive's behalf any claim for relief against the Company or any Releasee and,
to the best of Executive's knowledge and belief, no outstanding claims for
relief have been filed or asserted against the Company or any Releasee on
Executive's behalf; (ii) [OTHER THAN _______,] Executive has not reported any
improper, unethical or illegal conduct or activities to any supervisor, manager,
department head, human resources representative, agent or other representative
of the Company, to any member of the Company's legal or compliance departments,
or to the ethics hotline, and has no knowledge of any such improper, unethical
or illegal conduct or activities; and (iii) Executive will not file, commence,
prosecute or participate in any judicial or arbitral action or proceeding
against the Company or any Releasee based upon or arising out of any act,
omission, transaction, occurrence, contract, claim or event existing or
occurring on or before the date of this Agreement.

      2. The Company, for and in consideration of the commitments of the
Executive as set forth in this Agreement, and intending to be legally bound,
does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Executive from all claims,
demands or causes of action arising out of facts or occurrences prior to the
date of this Agreement, but only to the extent the Company knows or reasonably
should know of such facts or occurrence and only to the extent such claim,
demand or cause of action relates to a violation of applicable law or the
performance of Executive's duties with the Company; provided, however, that this
release of claims shall not in any case be effective with respect to any claim
by the Company alleging a breach of the Executive's obligations under this
Agreement.

      3. In consideration of the Company's agreements as set forth in paragraph
6 herein, Executive agrees to be comply with the limitations described in
Sections 10 and 11 of the Severance Agreement.

      4. Executive further agrees and recognizes that Executive has permanently
and irrevocably severed Executive's employment relationship with the Company,
that Executive shall not seek employment with the Company or any affiliated
entity at any time in the future, and that the Company has no obligation to
employ him in the future.

      5. Executive further agrees that Executive will not disparage or subvert
the Company, or make any statement reflecting negatively on the Company, its
affiliated corporations or entities, or any of their officers, directors,
employees, agents or representatives, including, but not limited to, any matters
relating to the operation or management of the Company, Executive's employment
and the termination of Executive's employment, irrespective of the truthfulness
or falsity of such statement.



                                      A-2

      6. In consideration for Executive's agreement as set forth herein, the
Company agrees:

            (i) [TO PAY TO EXECUTIVE A LUMP SUM PAYMENT EQUAL TO (A) 3 TIMES
BASE PAY (AS DEFINED IN THE SEVERANCE AGREEMENT), PLUS (B) 3 TIMES INCENTIVE PAY
(AS DEFINED IN THE SEVERANCE AGREEMENT). PAYMENT SHALL BE MADE WITHIN THIRTY
(30) DAYS AFTER THE EFFECTIVE DATE OF EXECUTIVE'S DATE OF RESIGNATION (OR THE
END OF THE REVOCATION PERIOD SET FORTH IN THIS AGREEMENT, IF LATER).

            (ii) TO PAY EXECUTIVE EXECUTIVE'S PRO RATED INCENTIVE PAY (AS
DEFINED IN THE SEVERANCE AGREEMENT) FOR THE YEAR IN WHICH EXECUTIVE'S DATE OF
RESIGNATION OCCURS. SUCH PRO RATED INCENTIVE PAY SHALL BE PAID TO EXECUTIVE IN A
LUMP SUM WITHIN THIRTY (30) DAYS AFTER THE EFFECTIVE DATE OF THE TERMINATION (OR
THE END OF THE REVOCATION PERIOD SET FORTH IN THIS AGREEMENT, IF LATER).

            (iii) [FOR A PERIOD OF THIRTY-SIX (36) MONTHS FOLLOWING EXECUTIVE'S
DATE OF RESIGNATION, EXECUTIVE SHALL CONTINUE TO RECEIVE THE MEDICAL AND DENTAL
COVERAGE IN EFFECT ON EXECUTIVE'S DATE OF RESIGNATION (OR GENERALLY COMPARABLE
COVERAGE) FOR EXECUTIVE AND, WHERE APPLICABLE, EXECUTIVE'S SPOUSE AND
DEPENDENTS, AS THE SAME MAY BE CHANGED FROM TIME TO TIME FOR EMPLOYEES
GENERALLY, AS IF EXECUTIVE HAD CONTINUED IN EMPLOYMENT DURING SUCH PERIOD] OR
[PAY EXECUTIVE CASH IN A LUMP SUM PAYMENT EQUAL TO EXECUTIVE'S AFTER-TAX COST OF
CONTINUING COMPARABLE MEDICAL AND DENTAL COVERAGE FOR THE THIRTY-SIX (36) MONTH
PERIOD FOLLOWING EXECUTIVE'S DATE OF RESIGNATION.] [THE COMPANY SHALL TAKE ALL
COMMERCIALLY REASONABLE EFFORTS TO PROVIDE THAT THE COBRA HEALTH CARE
CONTINUATION COVERAGE PERIOD UNDER SECTION 4980B OF THE CODE, SHALL COMMENCE
IMMEDIATELY AFTER THE FOREGOING THIRTY-SIX (36) MONTH BENEFIT PERIOD, WITH SUCH
CONTINUATION COVERAGE CONTINUING UNTIL THE EARLIER OF (I) THE END OF THE
APPLICABLE COBRA HEALTH CARE CONTINUATION COVERAGE PERIOD OR (II) THE DATE ON
WHICH EXECUTIVE IS COVERED BY THE MEDICAL AND DENTAL COVERAGE OF EXECUTIVE'S
SUCCESSOR EMPLOYER, IF ANY.]

            (iv) TO PAY TO EXECUTIVE A LUMP SUM PAYMENT EQUAL TO THE TOTAL
AMOUNT THAT EXECUTIVE WOULD HAVE RECEIVED UNDER THE COMPANY'S 401(K) PLAN AS A
COMPANY MATCH IF EXECUTIVE WAS ELIGIBLE TO PARTICIPATE IN THE COMPANY'S 401(K)
PLAN FOR THE THIRTY-SIX (36) MONTH PERIOD AFTER EXECUTIVE'S DATE OF RESIGNATION
AND EXECUTIVE CONTRIBUTED THE MAXIMUM AMOUNT TO THE PLAN FOR THE MATCH. PAYMENT
SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE EXECUTIVE'S DATE OF RESIGNATION
(OR THE END OF THE REVOCATION PERIOD SET FORTH IN THIS AGREEMENT, IF LATER).

            (v) [TO PAY TO EXECUTIVE A LUMP SUM PAYMENT EQUAL TO THE TOTAL
PREMIUMS THAT THE COMPANY WOULD HAVE PAID UNDER EXECUTIVE'S SPLIT-DOLLAR LIFE
INSURANCE POLICY, IF ANY, THAT IS IN EFFECT IMMEDIATELY PRIOR TO EXECUTIVE'S
DATE OF RESIGNATION, IF EXECUTIVE WAS EMPLOYED BY THE COMPANY FOR THE THIRTY-SIX
(36) MONTH PERIOD FOLLOWING EXECUTIVE'S DATE OF RESIGNATION. PAYMENT SHALL BE
MADE WITHIN THIRTY (30) DAYS AFTER THE EFFECTIVE DATE OF EXECUTIVE'S DATE OF
RESIGNATION (OR THE END OF THE REVOCATION PERIOD SET FORTH IN THIS AGREEMENT, IF
LATER)]. [NOTE: THE FOREGOING ONLY APPLIES IF EXECUTIVE HAS A SPLIT-DOLLAR
ARRANGEMENT WITH THE COMPANY AND THE COMPANY IS REQUIRED TO MAKE PREMIUM
CONTRIBUTIONS ON EXECUTIVE'S DATE OF



                                      A-3

RESIGNATION. THE TOTAL MONTHS COVERED BY THE PREMIUMS WILL BE REDUCED IF THE
TERM OF THE POLICY IS SHORTER THAN THAT PROVIDED FOR EXECUTIVE.]

            (vi) TO PAY TO EXECUTIVE A LUMP SUM PAYMENT EQUAL TO TWENTY PERCENT
(20%) OF THE EXECUTIVE'S BASE PAY IN ORDER TO COVER THE COST OF OUTPLACEMENT
ASSISTANCE SERVICES FOR EXECUTIVE. PAYMENT SHALL BE MADE WITHIN THIRTY (30) DAYS
AFTER THE EFFECTIVE DATE OF EXECUTIVE'S DATE OF RESIGNATION (OR THE END OF THE
REVOCATION PERIOD SET FORTH IN THIS AGREEMENT, IF LATER).

            (vii) EXECUTIVE SHALL RECEIVE ANY AMOUNTS EARNED, ACCRUED OR OWING
BUT NOT YET PAID TO EXECUTIVE AS OF EXECUTIVE'S DATE OF RESIGNATION, PAYABLE IN
A LUMP SUM, AND ANY BENEFITS ACCRUED OR EARNED IN ACCORDANCE WITH THE TERMS OF
ANY APPLICABLE BENEFIT PLANS AND PROGRAMS OF THE COMPANY.

EXCEPT AS SET FORTH IN THIS AGREEMENT, IT IS EXPRESSLY AGREED AND UNDERSTOOD
THAT RELEASEES DO NOT HAVE, AND WILL NOT HAVE, ANY OBLIGATIONS TO PROVIDE
EXECUTIVE AT ANY TIME IN THE FUTURE WITH ANY PAYMENTS, BENEFITS OR
CONSIDERATIONS OTHER THAN THOSE RECITED IN THIS PARAGRAPH, OR THOSE REQUIRED BY
LAW, OTHER THAN UNDER THE TERMS OF ANY BENEFIT PLANS WHICH PROVIDE BENEFITS OR
PAYMENTS TO FORMER EMPLOYEES ACCORDING TO THEIR TERMS.]

      7. Executive understands and agrees that the payments, benefits and
agreements provided in this Agreement are being provided to him in consideration
for Executive's acceptance and execution of, and in reliance upon Executive's
representations in, this Agreement. Executive acknowledges that if Executive had
not executed this Agreement containing a release of all claims against the
Company, Executive would only have been entitled to the payments provided in the
Company's standard severance pay plan for employees.

      8. Executive acknowledges and agrees that the Company previously has
satisfied any and all obligations owed to him under any employment agreement or
offer letter Executive has with the Company and, further, that this Agreement
supersedes any employment agreement or offer letter Executive has with the
Company, and any and all prior agreements or understandings, whether written or
oral, between the parties shall remain in full force and effect to the extent
not inconsistent with this Agreement, and further, that, except as set forth
expressly herein, no promises or representations have been made to him in
connection with the termination of Executive's employment agreement, if any, or
offer letter, if any, with the Company, or the terms of this Agreement.

      9. Executive agrees not to disclose the terms of this Agreement to anyone,
except Executive's spouse, attorney and, as necessary, tax/financial advisor.
Likewise, the Company agrees that the terms of this Agreement will not be
disclosed except as may be necessary to obtain approval or authorization to
fulfill its obligations hereunder or as required by law. It is expressly
understood that any violation of the confidentiality obligation imposed
hereunder constitutes a material breach of this Agreement.



                                      A-4

      10. Executive represents that Executive does not presently have in
Executive's possession any records and business documents, whether on computer
or hard copy, and other materials (including but not limited to computer disks
and tapes, computer programs and software, office keys, correspondence, files,
customer lists, technical information, customer information, pricing
information, business strategies and plans, sales records and all copies
thereof) (collectively, the "Corporate Records") provided by the Company and/or
its predecessors, subsidiaries or affiliates or obtained as a result of
Executive's prior employment with the Company and/or its predecessors,
subsidiaries or affiliates, or created by Executive while employed by or
rendering services to the Company and/or its predecessors, subsidiaries or
affiliates. Executive acknowledges that all such Corporate Records are the
property of the Company. In addition, Executive shall promptly return in good
condition any and all Company owned equipment or property, including, but not
limited to, automobiles, personal data assistants, facsimile machines, copy
machines, pagers, credit cards, cellular telephone equipment, business cards,
laptops and computers. As of the Date of Resignation, the Company will make
arrangements to remove, terminate or transfer any and all business communication
lines including network access, cellular phone, fax line and other business
numbers.

      11. Nothing in this Agreement shall prohibit or restrict Executive from:
(i) making any disclosure of information required by law; (ii) providing
information to, or testifying or otherwise assisting in any investigation or
proceeding brought by, any federal regulatory or law enforcement agency or
legislative body, any self-regulatory organization, or the Company's [DESIGNATED
LEGAL, COMPLIANCE OR HUMAN RESOURCES OFFICERS]; or (iii) filing, testifying,
participating in or otherwise assisting in a proceeding relating to an alleged
violation of any federal, state or municipal law relating to fraud, or any rule
or regulation of the Securities and Exchange Commission or any self-regulatory
organization.

      12. The parties agree and acknowledge that the agreement by the Company
described herein, and the settlement and termination of any asserted or
unasserted claims against the Releasees, are not and shall not be construed to
be an admission of any violation of any federal, state or local statute or
regulation, or of any duty owed by any of the Releasees to Executive.

      13. Executive agrees and recognizes that should Executive breach any of
the obligations or covenants set forth in this Agreement, the Company will have
no further obligation to provide Executive with the consideration set forth
herein, and will have the right to seek repayment of all consideration paid up
to the time of any such breach. Further, Executive acknowledges in the event of
a breach of this Agreement, Releasees may seek any and all appropriate relief
for any such breach, including equitable relief and/or money damages, attorney's
fees and costs.

      14. Executive further agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any



                                      A-5

violations of this Agreement, which rights shall be cumulative and in addition
to any other rights or remedies to which the Company may be entitled.

      15. This Agreement and the obligations of the parties hereunder shall be
construed, interpreted and enforced in accordance with the laws of the
Commonwealth of Massachusetts.

      16.   Executive certifies and acknowledges as follows:

            (a) That Executive has read the terms of this Agreement, and that
Executive understands its terms and effects, including the fact that Executive
has agreed to RELEASE AND FOREVER DISCHARGE the Company and each and everyone of
its affiliated entities from any legal action arising out of Executive's
employment relationship with the Company and the termination of that employment
relationship;

            (b) That Executive has signed this Agreement voluntarily and
knowingly in exchange for the consideration described herein, which Executive
acknowledges is adequate and satisfactory to him and which Executive
acknowledges is in addition to any other benefits to which Executive is
otherwise entitled;

            (c) That Executive has been and is hereby advised in writing to
consult with an attorney prior to signing this Agreement;

            (d) That Executive does not waive rights or claims that may arise
after the date this Agreement is executed;

            (e) That the Company has provided him with a period of [TWENTY-ONE
(21)] or [FORTY-FIVE (45)] days within which to consider this Agreement, and
that Executive has signed on the date indicated below after concluding that this
Separation of Employment Agreement and General Release is satisfactory to him;
and

            (f) Executive acknowledges that this Agreement may be revoked by him
within seven (7) days after execution, and it shall not become effective until
the expiration of such seven (7) day revocation period. In the event of a timely
revocation by Executive, this Agreement will be deemed null and void and the
Company will have no obligations hereunder.


                            [SIGNATURE PAGE FOLLOWS]


                                      A-6

      Intending to be legally bound hereby, Executive and the Company executed
the foregoing Separation of Employment Agreement and General Release this ______
day of _______,____.


_____________________________       Witness:________________________
[EXECUTIVE]


NOVELL, INC.

By:___________________________      Witness:________________________
Name:
Title:


                                      A-7

EX-10.22

                                                                   Exhibit 10.22

                   NON-EMPLOYEE DIRECTOR COMPENSATION SUMMARY
                                  NOVELL, INC.

 Non-employee directors of Novell receive the following compensation:

      -     Annual retainer of $50,000 for board membership, paid quarterly in
            advance on May 1, August 1, November 1 and February 1

      -     Annual retainer of $5,000 for service as a committee chairperson, if
            applicable, paid quarterly in advance on May 1, August 1, November 1
            and February 1

      -     Meeting fees

            -     $1,500 for each Board meeting attended

            -     $1,500 for each committee meeting attended

      -     Reimbursement for expenses incurred in attending meetings

      -     Participation in the director option plan (described below).

   If directors elect to attend conferences, or if new directors elect to attend
third-party orientation programs, that enhance knowledge or skills that will be
valuable in helping directors to make a contribution to Novell, Novell will
provide reimbursement for attendance at one conference per year and one
orientation program. Reimbursement will be provided for the director for (i)
registration fees, (ii) lodging, (iii) meals and (iv) transportation to and from
the conference or orientation program.

   Under the terms of the 2000 Stock Plan, non-employee directors have the right
to convert all or any portion of their annual board retainers (but not committee
retainers) to the award of Common Stock Equivalents (the "CSE's"). The CSE's are
awarded to directors on each date an installment of the annual retainer is paid,
and the number of CSE's to be received is based on the closing price of the
common stock on the day before the award. The CSE's will be converted into
shares of common stock on the earlier to occur of (i) the termination of service
as a director and (ii) another date that may be specified by the director.

   Each installment of the annual board retainer (not any applicable committee
retainers) will be increased by an amount (the amount of the increase is
referred to as the "Match") of up to 25% of such portion of the annual board
retainer that is deferred. The Match may only be used to purchase additional
CSE's. The exact percentage of the Match shall be determined by the Compensation
Committee or the Board of Directors each year. The Match is subject to vesting
requirements. CSE's purchased with Match funds shall be credited to a separate
bookkeeping account from the CSE's purchased with the base annual board
retainer. In the event that any non-employee director ceases to serve as a
member of Novell's Board of Directors prior to the third anniversary of such
director's purchase of any CSE's with any given Match, all CSE's purchased with
that Match shall be forfeited and such director shall no longer have any rights
with respect to such Match or such CSE's.

   Notwithstanding the previous paragraphs, if at the time a non-employee
director makes a deferral election there is a trading blackout, CSE's (including
those CSE's to be purchased with Match funds) shall not be awarded until the
directors have been advised by Novell's General Counsel that the trading
blackout is no longer in effect. If such trading blackout is in effect on a date
that CSE's are to be awarded, the portion of the annual board retainer that has
been deferred shall instead be deferred into a money market account. As soon as
practicable after the directors have been advised by Novell's General Counsel
that the trading blackout is no longer in effect, the portion of the annual
board retainer that has been deferred into such money market account shall be
converted into CSE's based on the closing price of the common stock on the date
before the conversion.

   Each non-employee director shall receive options to purchase 50,000 shares
vesting 25% annually over four years upon joining the Board. In addition, each
non-employee director shall receive an annual grant of an option to purchase
25,000 shares vesting 50% annually over two years. All options are non-statutory
options and have an exercise price equal to the fair market value on the date of
grant. Options will be granted either automatically pursuant to Novell's Stock
Option Plan for Non-Employee Directors (the "Director Plan") or by the
Compensation Committee pursuant to Novell's 2000 Stock Plan. All options are
non-statutory options, have an exercise price equal to the fair market value of
our common stock on the date of grant and have a term of eight or ten years.
Upon a change in control, options granted under the Director Plan become
exercisable in full by a non-employee director if within one year of such change
in control the non-employee director ceases for any reason to be a member of the
Board of Directors. Under the 2000 Stock Plan, in the event of a change in
control, the outstanding options may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the options will fully vest and become
fully exercisable. Upon retirement from the Board of Directors after the age 73,
options granted under the Director Plan become fully vested and the director has
one year in which to exercise. Upon retirement from the Board of Directors after
the age 65, the vesting of options granted under the 2000 Stock Plan is
accelerated by one year and the director has two years in which to exercise.

EX-10.23

                                                                   Exhibit 10.23

                                  NOVELL, INC.
                           DEFERRED COMPENSATION PLAN
                (AS AMENDED AND RESTATED AS OF NOVEMBER 1, 1999)

                                   ARTICLE I
                                  INTRODUCTION

      1.1   ESTABLISHMENT OF PLAN. Novell, Inc. established the Novell, Inc.
Deferred Compensation Plan effective as of November 1, 1994.

      1.2   PURPOSE OF PLAN. Novell, Inc. established this Plan to provide
select employees with the opportunity to defer the receipt of compensation and a
vehicle through which to do so. Novell, Inc. intends to maintain the Plan
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees, within the meaning of Sections
201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act
of 1974, as amended. The Plan will be interpreted in a manner consistent with
these intentions.

                                   ARTICLE II
                                   DEFINITIONS

      Definitions are contained in this article and throughout other sections of
the Plan. The location of a definition is for convenience only and should not be
given any significance. A word or term defined in this article (or in any other
article) will have the same meaning throughout the Plan unless the context
clearly requires a different meaning.

      2.1   BASE SALARY means (i) in the case of an employee whose compensation
from the Company does not contain a commission element, the employee's base
salary for the Plan Year, and (ii) in the case of an employee whose compensation
from the Company contains a commission element, the employee's total
compensation (i.e., base salary plus commissions, whether under or over target).

      2.2   BENEFICIARY means the individual(s) or entity designated by a
Participant, or by the Plan, to receive any benefit payable upon the death of a
Participant or Beneficiary. A Beneficiary designation must be signed by the
Participant and delivered to the Committee on such form as specified by the
Committee. In the absence of a valid or effective Beneficiary designation, the
Beneficiary will be the Participant's surviving spouse, or if there is no
surviving spouse, the Participant's estate.

      2.3   BOARD means the Board of Directors of the Company.

      2.4   BONUS means the quarterly bonus compensation payable to a
Participant with respect to a Plan Year in accordance with the applicable bonus
program sponsored by the Company.



      2.5   CODE means the Internal Revenue Code of 1986, as amended from time
to time.

      2.6   COMMITTEE means the Plan Committee, the members of which are to be
appointed by the Compensation Committee of the Board. Unless specified otherwise
by the Board, the Committee shall consist of the Company's Chief Financial
Officer, its Senior Vice President, Human Resources, and another Senior Vice
President to be designated from time to time. The Committee will serve as the
"plan administrator" to manage and control the operation and administration of
the Plan, within the meaning of ERISA Section 3(16)(A).

      2.7   COMPANY means Novell, Inc., a corporation organized under the laws
of the state of Delaware, any successor of Novell, Inc., and any affiliate
thereto designated by the Committee as a participating employer.

      2.8   COMPENSATION means the employee's Base Salary plus Bonuses for the
Plan Year. In the case of an employee whose compensation from the Company
contains a commission element, Compensation means the employee's total
compensation (i.e., Base Salary plus Bonuses plus commissions, whether under or
over target). Compensation excludes any other form of compensation such as other
bonuses, restricted stock, proceeds from stock options or stock appreciation
rights, severance payments, moving expenses, car or other special allowances, or
any other amounts included in an Eligible Employee's taxable income that is not
compensation for services. Deferral elections shall be computed before taking
into account any reduction in taxable income by salary reduction under Code
Section 125 or 401(k), or under this Plan.

      2.9   DEFERRAL ACCOUNT means a bookkeeping account established for and
maintained on behalf of a Participant to which deferred Compensation amounts,
and net income (or losses) thereon, are credited.

      2.10  DEFERRAL COMPENSATION AGREEMENT means an agreement entered into by
a Participant and the Company to reduce the Participant's Compensation described
in Section 3.4 for a specified period and contribute such amounts to the Plan,
in accordance with Article III.

      2.11  DISABILITY means "disability" (or similar term) as defined in the
Company's long-term disability program and which results in payments to the
Participant under such program.

      2.12  ELIGIBLE EMPLOYEE means a common law employee of the Company who is
either (i) designated in writing by the Committee as eligible to participate in
the Plan, or (ii) eligible to participate in the Company's Employee Retirement
and Savings Plan, designated in writing by the Committee as eligible to
participate in the Plan and either a Vice President (or more senior officer) of
the Company or an employee whose Base Salary equals or exceeds $150,000. Except
as otherwise provided in Section 3.1 (concerning an individual who ceases to be
an Eligible Employee) and Section 3.3 (in connection with an individual who
first becomes an Eligible Employee), an individual's status as an Eligible
Employee for a Plan Year shall be determined immediately prior to the first day
of such Plan Year. Notwithstanding the foregoing, the Committee may determine in
writing that an otherwise Eligible Employee shall not be eligible to participate
in this Plan.

      2.13  ERISA means the Employee Retirement Income Security Act of 1974, as
amended.



      2.14  HARDSHIP means an unforeseeable and unanticipated emergency which is
caused by an event beyond the control of the Participant or Beneficiary, and
which would result in severe financial hardship to the Participant or
Beneficiary if a distribution or revocation of a deferral election were not
permitted. Hardship conditions will be evaluated in accordance with the terms of
Treasury Regulations Section 1.457-2(h)(4). The Committee will have sole
discretion to determine whether a Hardship condition exists and the Committee's
determination will be final.

      A Participant must submit a written request for a Hardship to the
Committee on such form and in such manner as the Committee prescribes. The
Hardship request must: (i) certify as to the Hardship condition and the severe
financial need; (ii) state whether the Participant desires to reduce or cease
any Compensation amounts that otherwise would be deferred after the Hardship
request is approved; and (iii) state whether the Participant requests a
withdrawal of all or a portion of his vested Deferral Account to meet the severe
financial need. The Committee will have sole discretion to determine whether a
Hardship exists and to determine the appropriate action, if any. Regardless of
whether the Participant desires to reduce or cease any Compensation amounts to
be deferred after the Hardship request is made, the Participant will be
precluded from deferring Compensation for the remainder of the Plan Year in
which a Hardship is approved by the Committee.

      2.15  INSOLVENT means the Company is (i) unable to pay its debts as they
become due or (ii) subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.

      2.16  INVESTMENT FUND OR FUNDS mean the investment funds designated by the
Committee as the basis for determining the investment return to the allocated
Participants' Deferral Accounts. The Committee may change the Investment Funds
at such times as it deems appropriate.

      2.17  PARTICIPANT means an Eligible Employee who is eligible to
participate in the Plan as provided in Section 3.1 and who has made an election
to defer compensation pursuant to the Plan.

      2.18  PLAN means the Novell, Inc. Deferred Compensation Plan, as set forth
in this document, as amended from time to time.

      2.19  PLAN YEAR means the Company's fiscal year.

      2.20  RETIREMENT AGE means, while employed by the Company, attaining age
55 with 10 Years of Vesting Service, or attaining age 65.

      2.21  YEAR OF VESTING SERVICE means, with respect to a Participant, a
"year of vesting service" as credited to such Participant under the Novell, Inc.
Employee Retirement and Savings Plan or any successor plan thereto.

                                  ARTICLE III
                                 PARTICIPATION


      3.1   ELIGIBILITY. An Eligible Employee of the Company shall participate
in the Plan only to the extent and for the period that the Eligible Employee is
selected by the Committee and is a member of a select group of management or
highly compensated employees as such group is described under Sections 201(2),
301(a)(3) and 401(a)(1) of ERISA. An individual who is an Eligible Employee as
of the first day of the Plan Year but who ceases to be an Eligible Employee
during such Plan Year shall continue to participate in the Plan with respect to
any Deferred Compensation Agreements in effect for such Plan Year, but shall not
be permitted to enter into any new Deferred Compensation Agreements with the
Company unless and until the individual again becomes an Eligible Employee.

      3.2   PARTICIPATION. An Eligible Employee who participates in the Plan may
elect to defer the receipt of Compensation under an agreement described in
Section 3.4 earned by the Eligible Employee. The Eligible Employee may make such
election in accordance with Section 3.3. The Company shall withhold amounts
deferred by the Participant in accordance with this election. The Participant's
deferred amounts shall be credited to the Deferral Account as provided in
Article V and distributed in accordance with Article VI. An election to defer
receipt of Compensation shall continue in effect for a given Plan Year unless
the Participant separates from employment.

      3.3   ELECTION PROCEDURE. An election to defer Compensation under an
agreement described in Section 3.4 is made by executing a Deferred Compensation
Agreement on such form and in such manner as prescribed by the Committee. Such
Agreement must be properly completed, signed and delivered to the Company prior
to the first day of the Plan Year for which Compensation shall be earned,
provided, however, that an individual who becomes an Eligible Employee for the
first time on or after the first day of a Plan Year but prior to the first day
of the Company's third fiscal quarter within such Plan Year shall be permitted
to make an election to defer Compensation that will be earned on and after the
first day of the third fiscal quarter by executing a Deferred Compensation
Agreement prior to such date.

      3.4   DEFERRED COMPENSATION AGREEMENT. A Deferred Compensation Agreement
shall remain in effect for one Plan Year and shall be applicable only to
Compensation described in paragraphs (a) through (c) earned after the date on
which the Agreement is effective. The Agreement shall set forth the percentage
of Compensation that shall be deferred for the Plan Year, subject to the
following:

            (a)   BASE SALARY. A Participant shall be permitted to defer a
maximum of seventy-five percent (75%) of Base Salary earned in a Plan Year.

            (b)   BONUS. A Participant shall be permitted to defer a maximum of
seventy-five percent (75%) of regularly scheduled Bonuses with respect to a Plan
Year.

            (c)   SPECIAL RULE FOR COMMISSION-BASED PARTICIPANTS. In the case of
a Participant whose Compensation contains a commission element, paragraphs (a)
and (b) of this section shall not apply. Instead, such Participant shall be
permitted to defer up to (i) seventy-five percent (75%) of Compensation
(excluding commissions) earned in the Plan Year, and up to (ii) seventy-five
percent (75%) of all commissions earned in the Plan Year.

            (d)   MINIMUM DEFERRAL. The Committee may, in its discretion,
establish a minimum deferral amount for a given Plan Year.



            (e)   HARDSHIP WITHDRAWAL REQUEST. All deferrals with respect to a
Plan Year shall cease in the event the Committee approves a request for Hardship
withdrawal for that Plan Year. No cessation of deferrals shall affect any limit
established pursuant to Section 3.4(d) above, and no deferral amounts so reduced
or not made shall be required to be made in addition to any future deferrals
that are not affected by such Hardship request.

      Notwithstanding the foregoing, no Deferred Compensation Agreement shall be
effective with respect to a Plan Year to the extent the amount deferred with
respect to such Plan Year results in the Participant receiving, on a pre-tax
basis, less than the Social Security taxable wage base in effect for such Plan
Year after taking into account all deferrals under all Company-sponsored plans.

      3.5   IRREVOCABLE ELECTIONS. A Participant's Deferred Compensation
Agreement for a given Plan Year cannot be amended by the Participant and, except
as provided in this Section 3.5, is irrevocable.

      The Company reserves the right to modify any Deferred Compensation
Agreement to reflect a change in Plan provisions or for administrative
convenience.

      A Participant's Deferred Compensation Agreement shall become null and void
upon the Participant's separation from employment with the Company, and no
Compensation that may be payable after the Participant separates from employment
with the Company and otherwise would be subject to such Agreements shall be
deferred under this Plan.

      3.6   COMMUNITY AND MARITAL PROPERTY. The spouse of a Participant may have
a community or marital property interest in the Participant's Deferral Account
which the spouse may pass to a third party upon his or her death. If it is
intended that a spouse relinquish his or her community or marital property
interest in the Participant's Deferral Account, the spouse must execute a waiver
in which he or she clearly states an intention to relinquish his or her rights
under community or marital property law with respect to the Deferral Account. A
spouse's consent to a Participant's designation of a non-spouse Beneficiary is
not sufficient to effect such a waiver.

                                   ARTICLE IV
                              COMPANY CONTRIBUTIONS

      4.1   MATCHING CONTRIBUTIONS. The Company shall contribute to the Plan an
amount equal to one hundred percent (100%) of up to four percent (4%) of each
Participant's Compensation that is deferred under this Plan, reduced by any
Company matching contributions allocated to the Participant's matching
contribution account under the Company's Employee Retirement and Savings Plan
during the Plan Year. The contribution made pursuant to this Section 4.1 shall
be credited to the Deferral Account of the appropriate Participant as provided
in Article V and distributed in accordance with Article VI.

      4.2   VESTING. A Participant's interest in (i) the Compensation deferred
to his or her Deferral Account pursuant to Sections 3.2 through 3.4 of the Plan,
(ii) any matching contributions made to the Plan for a Plan Year in accordance
with Section 4.1 of the Plan, and



(iii) any earnings credited to the Participant's Deferral Account pursuant to
Section 5.6 of the Plan, shall be at all times fully vested and nonforfeitable.

                                   ARTICLE V
                          PARTICIPANT ACCOUNT BALANCES

      5.1   ESTABLISHMENT OF ACCOUNTS. The Committee may select an independent
recordkeeper who will establish and maintain a Deferral Account on behalf of
each Participant. Contributions and net income (or losses) will be credited to
such accounts in accordance with the provision of this Article.

      5.2   BOOKKEEPING. Deferral Accounts will be primarily for accounting
purposes and will not restrict the operation of the Plan or require separate
earmarked assets to be allocated to any account. The establishment of a Deferral
Account will not give any Participant the right to receive any asset held by the
Company in connection with the Plan or otherwise.

      5.3   CREDITING DEFERRED COMPENSATION. The Committee will credit to a
Participant's Deferral Account any amount deferred by the Participant as soon as
practicable following the pay period to which such amount would have been paid
to the Participant absent a Deferred Compensation Agreement.

      5.4   CREDITING MATCHING CONTRIBUTIONS. As of the end of each Company
payroll period, the Committee shall credit to Participants' Deferral Accounts
the amount of any matching contributions made by the Company pursuant to Section
4.1; provided, however, that the Committee may, in its discretion, credit
matching contributions less frequently, but not less than annually, as the
Committee may deem necessary or appropriate in furtherance of proper Plan
administration.

      5.5   ESTABLISHMENT OF INVESTMENT FUNDS. The Committee will establish one
or more Investment Funds which will be maintained for the purpose of determining
the investment return to be credited to a Participant's Deferral Account. The
Committee may change the number, identity or composition of the Investment Funds
from time to time.

      Each Participant will indicate the Investment Funds to which contributions
under Sections 5.3 and 5.4 and any existing Deferral Account balance are to be
credited. Investment Fund elections must be made in one percent (1%) increments
and at such times and in such manner as the Committee will specify. A
Participant may change his or her Investment Fund election periodically and in
such manner as the Committee may specify.

      5.6   CREDITING INVESTMENT RESULTS. No less frequently than as of the last
day of each quarter, a Participant's Deferral Account balance will be increased
or decreased to reflect investment results. Deferral Accounts will be credited
with the investment return of the Investment Funds in which the Participant
elected to be deemed to participate. The credited investment return is intended
to reflect the actual performance of the Investment Funds net of any investment
or management fees; however, the Committee reserves the right to calculate the
investment return based on the Investment Funds' respective rate of return.



      5.7   NOTIFICATION TO PARTICIPANTS. The Committee shall notify each
Participant with respect to the status of such Participant's Deferral Account as
soon as practicable after the end of a quarter, but in no event less than once
for each Plan Year. Neither the Company nor the Committee to any extent
warrants, guarantees or represents that the value of any Participant's Deferral
Account at any time will equal or exceed the amount previously allocated or
contributed thereto.

                                   ARTICLE VI
                            DISTRIBUTION OF ACCOUNTS

      6.1   DISTRIBUTION IN THE EVENT OF HARDSHIP. Prior to a distribution under
Section 6.2, 6.3 or 6.4, payment of all or a portion of a Participant's vested
Deferral Account may be made only in the event of Hardship. The amount of any
Hardship distribution will not exceed the amount required to meet the Hardship,
including any taxes or penalties due on the distribution. A Hardship
distribution shall be made in a single lump sum cash payment as soon as
practicable after the Committee approves the Hardship withdrawal request.

      6.2   DISTRIBUTION UPON SEPARATION ON OR AFTER RETIREMENT AGE. A
Participant who separates from employment with the Company on or after attaining
Retirement Age shall receive his vested Deferral Account at the time and in the
manner elected by the Participant. An election regarding the time and manner of
payment of the Participant's vested Deferral Account balance (including all
future years' contributions) shall be made concurrent with the Participant's
most recent election to defer Compensation under Section 3.3.

            (a)   TIME OF PAYMENT. A Participant's vested Deferral Account
balance shall be paid (or commence to be paid): (i) within one hundred twenty
(120) days of separating from employment on or after attaining Retirement Age;
or (ii) on January 1st following the date of separation from employment on or
after attaining Retirement Age, as elected by the Participant.

            (b)   MANNER OF PAYMENT. A Participant's vested Deferral Account
will be paid in a lump sum cash payment unless the Participant has elected to
receive payment in substantially equal monthly installments over a period of
five (5), ten (10) or fifteen (15) years.

            (c)   VALUE OF DEFERRED ACCOUNT BALANCE. The value of a
Participant's Deferral Account to be distributed shall be determined as of the
date a payment is made, and shall be charged with distributions and adjusted for
gains and losses, through such date. To the extent payment shall be made in
installments, the amount of the installment for a particular month may be
adjusted to take into account the value of the Participant's Deferral Account
(as adjusted) and the number of remaining months over which the installments
payments are to be made.

      6.3   DISTRIBUTION UPON SEPARATION PRIOR TO DEATH OR ATTAINING RETIREMENT
AGE. A Participant who separates from employment with the Company prior to
attaining Retirement Age for any reason other than death shall receive amounts
credited to his Deferral Account and in which he has a nonforfeitable interest
in a lump sum cash payment or substantially equal monthly installments over a
period of three (3) years, as the Committee shall determine in its sole
discretion, and commencing no later than one hundred twenty (120) days after the
Participant



separates from employment. For purposes of this Section 6.3, the value of a
Participant's Deferral Account to be distributed shall be determined as of the
date the payment is made, and shall be credited with interest through such date.
To the extent payment shall be made in installments, the amount of the
installment for a particular month may be adjusted to take into account the
value of the Participant's Deferral Account (as adjusted) and the number of
remaining months over which the installments payments are to be made.

      6.4   DISTRIBUTION UPON DEATH. In the event a Participant dies prior to
receiving all of his or her vested Deferral Account, the Participant's
Beneficiary shall receive the unpaid portion of the Participant's vested
Deferral Account in the form of lump sum cash payment no later than one hundred
twenty (120) days after the Participant dies and the Committee is provided with
written proof of the Participant's death. For purposes of this Section 6.4, the
value of a Participant's Deferral Account to be distributed shall be determined
as of the date the payment is made, and shall be credited with interest through
such date and, in the case of a Participant who dies while employed with the
Company, any deferred amounts that would have been credited to the account if
the Participant had continued employment with the Company through such date.

      6.5   CASH PAYMENTS ONLY. All distributions under the Plan will be made in
cash by check.

      6.6   DISABILITY. For the purposes of Sections 6.2 and 6.3, in the event
of a Participant's Disability, the Participant will be considered to have
separated from employment as of the first day the Participant first becomes
eligible for benefits under the Company's long-term disability plan as then in
effect.

                                  ARTICLE VII
                               PLAN ADMINISTRATION

      7.1   PLAN ADMINISTRATOR. This Plan shall be administered by the
Committee, which will be the Plan Administrator. The Committee members shall be
appointed by and serve at the pleasure of the Board.

      7.2   AMENDMENT OR TERMINATION. The Compensation Committee of the Board
may amend all or any provision of this Plan, and may terminate the Plan in its
entirety, at any time and for any reason. No amendment or termination of the
Plan will reduce any Participant's Deferral Account balance as of the effective
date of such amendment or termination. Upon termination of the Plan, a
Participant's Deferral Account shall become fully vested and shall be
distributed to the Participant in a lump sum within one hundred twenty (120)
days of such termination.

      7.3   ADMINISTRATION OF THE PLAN. The Committee shall have the sole
authority to control and manage the operation and administration of the Plan and
have all powers, authority and discretion necessary or appropriate to carry out
the Plan provisions, and to interpret and apply the terms of the Plan to
particular cases or circumstances. All decisions, determinations and
interpretations of the Committee will be binding on all interested parties,
subject to the claims and appeal procedure necessary to satisfy the minimum
standard of ERISA Section 503, and will be given the maximum deference allowed
by law. The Committee may delegate in writing its responsibilities as it sees
fit.



      Committee members who are Participants will abstain from voting on any
Plan matters that relate primarily to themselves or that would cause them to be
in constructive receipt of amounts credited to their respective Deferral
Account. The Board will identify three or more individuals to serve as a
temporary replacement of the Committee members in the event that all three
members must abstain from voting.

      7.4   INDEMNIFICATION. The Company will and hereby does indemnify and hold
harmless any of its employees, officers, directors or members of the Committee
who have fiduciary or administrative responsibilities with respect to the Plan
from and against any and all losses, claims, damages, expenses and liabilities
(including reasonable attorneys' fees and amounts paid, with the approval of the
Board, in settlement of any claim) arising out of or resulting from the
implementation of a duty, act or decision with respect to the Plan, so long as
such duty, act or decision does not involve gross negligence or willful
misconduct on the part of any such individual.

      7.5   CLAIMS PROCEDURE. A Participant or his Beneficiary (the "Claimant")
may file a written claim for benefits under the Plan with the Committee. Within
sixty (60) days of the filing of the claim, the Committee shall notify the
Claimant of the Committee's decision whether to approve the claim. Such notice
shall include specific reasons for any denial of the claim. Within sixty (60)
days of the date the Claimant was notified of the denial of a claim, the
Claimant may appeal the Committee's decision by making a written submission
containing any pertinent information. Any decision not appealed within such
sixty (60)-day period shall be final, binding and conclusive. The Committee
shall review information submitted with an appeal and render a decision within
sixty (60) days of the submission of the appeal. If it is not feasible for the
Committee to render a decision on an appeal within the prescribed sixty (60)-day
period, the period may be extended to a one hundred twenty (120)-day period.

                                  ARTICLE VIII
                                  MISCELLANEOUS

      8.1   FUNDING. Such amounts as the Committee deems necessary or
appropriate to fund the obligation to pay Deferral Accounts will be held in
trust by an independent third party trustee selected by the Committee, and as
such are earmarked to pay benefits under the terms of the Plan. The Committee
will direct the Company to make periodic contributions to the trust at such
times and in such amounts as the Committee deems appropriate.

      Trust assets cannot be diverted to, or used for, any purpose except
payments to Participants and Beneficiaries under the terms of the Plan or, if
the Company is Insolvent, to pay the Company's creditors. Participants and
Beneficiaries will have no right against the Company with respect to the payment
of any portion of the Participant's Deferral Account, except as a general
unsecured creditor of the Company.

      8.2   NONALIENATION. No benefit or interest of any Participant or
Beneficiary under this Plan will be subject to any manner of assignment,
alienation, anticipation, sale transfer, pledge or encumbrance, whether
voluntary or involuntary. Notwithstanding the foregoing, the Committee will
honor a court order regarding the payment of alimony or other support payments,
or the establishment of community property or other marital property rights, to
the extent required by



law. Prior to distribution to a Participant or Beneficiary, no Deferral Account
balance will be in any manner subject to the debts, contracts, liabilities,
engagements or torts of the Participant or Beneficiary. Assets held in trust to
fund this Plan may, however, be diverted to pay the Company's creditors, if the
Company is Insolvent.

      8.3   LIMITATION OF RIGHTS. Nothing in this Plan will be construed to give
a Participant the right to continue in the employ of the Company at any
particular position or to interfere with the right of the Company to discharge,
lay off or discipline a Participant at any time and for any reason, or to give
the Company the right to require any Participant to remain in its employ or to
interfere with the Participant's right to terminate his or her employment.

      8.4   GOVERNING LAW. To the extent that state law applies, the provisions
of this Plan will be construed, enforced and administered in accordance with the
laws of the state of California, except to the extent pre-empted by ERISA.

      IN WITNESS WHEREOF, the Company by its duly authorized officer has
executed this amended and restated Novell, Inc. Deferred Compensation Plan as of
the first day of November, 1999.

                                 NOVELL, INC.

                                 ____________________________________
                                 By: Jennifer Konecny-Costa
                                 Title: Senior Vice President, Human Resources,
                                        on Behalf of the Compensation Committee


                                FIRST AMENDMENT

                                     TO THE

                                  NOVELL, INC.

                           DEFERRED COMPENSATION PLAN

                    (AS RESTATED EFFECTIVE NOVEMBER 1, 1999)

      This First Amendment to the Novell, Inc. Deferred Compensation Plan (the
"Plan") is made and adopted this ______ day of October, 2000, by Novell, Inc.,
the sponsoring Employer of the Plan, (hereinafter referred to as the
"Employer").

                              W I T N E S S E T H:

      WHEREAS, the Employer has previously adopted the Plan effective November
1, 1994, and restated the Plan in full effective November 1, 1999, and continues
to maintain the Plan, and

      WHEREAS, the Employer has reserved the right to amend the Plan in whole or
in part, and now desires to amend the Plan to adjust the fiscal year of the Plan
and to specific limitations on certain rights of distribution available from the

Plan;

      NOW THEREFORE, in consideration of the foregoing premises, the Employer
amends the Plan as follows (amended language is in BOLD ITALICS):

      1.    Section 2.2 is amended to read as follows:

            2.2   BENEFICIARY means the individual(s) or entity designated by a
      Participant, or by the Plan, to receive any benefit payable upon the death
      of a Participant or Beneficiary. A Beneficiary designation must be signed
      by the Participant and delivered to the Committee on A form specified by
      the Committee FOR THAT PURPOSE. In the absence of a valid or effective
      Beneficiary designation, the Beneficiary DESIGNATED BY THE PARTICIPANT IN
      THE BENEFICIARY DESIGNATION FORM WHICH HAS BEEN SUBMITTED TO THE NOVELL,
      INC. EMPLOYEE RETIREMENT AND SAVINGS PLAN SHALL GOVERN. IN THE ABSENCE OF
      A VALID OR EFFECTIVE BENEFICIARY DESIGNATION FORM FOR THE NOVELL, INC.
      EMPLOYEE



      RETIREMENT AND SAVINGS PLAN, THE BENEFICIARY SHALL BE (IN THE FOLLOWING
      ORDER): the Participant's surviving spouse, or if there is no surviving
      spouse, the Participant's CHILDREN, BY REPRESENTATION, AND IF THERE ARE NO
      SURVIVING CHILDREN OR ISSUE THEREOF, THE PARTICIPANT'S estate.

      2.    Section 2.14 is amended to read as follows:

            2.14  HARDSHIP means an unforeseeable and unanticipated emergency
      which is caused by an event beyond the control of the Participant or
      Beneficiary, and which would result in severe financial hardship to the
      Participant or Beneficiary if a distribution or revocation of a deferral
      election were not permitted. Hardship conditions will be evaluated in
      accordance with the terms of Treasury Regulations Section 1.457-2(h)(4).
      The Committee will have sole discretion to determine whether a Hardship
      condition exists and the Committee's determination will be final.

            A Participant must submit a written request for a Hardship to the
      Committee on THE form and in THE manner PRESCRIBED BY the Committee. The
      Hardship request must: (i) DESCRIBE AND certify the Hardship condition and
      the severe financial need; and (ii) state whether the Participant requests
      a withdrawal of all or a portion of his vested Deferral Account to meet
      the severe financial need. The Committee will have sole discretion to
      determine whether a Hardship exists and to determine the appropriate
      action, if any, PROVIDED HOWEVER, IN NO EVENT WILL THE COMMITTEE APPROVE A
      HARDSHIP DISTRIBUTION REQUEST FOR EXPENSES RELATED TO ANY MEDICAL
      CONDITION OR EXPENSES RELATED TO THE DEATH OF ANY PERSON UNLESS THE
      REQUEST FOR DISTRIBUTION IS SUBMITTED TO THE COMMITTEE AND APPROVED BY THE
      COMMITTEE FOR HARDSHIP DISTRIBUTION PRIOR TO THE DATE ON WHICH THE EXPENSE
      IS INCURRED. THE COMMITTEE, IN ITS SOLE DISCRETION, MAY MAKE EXCEPTION TO
      THE FOREGOING RULE IF IT DETERMINES THAT THE CIRCUMSTANCES CREATING THE
      EXPENSE FOR WHICH REIMBURSEMENT IS SOUGHT WERE NOT REASONABLY FORESEEABLE.
      Regardless of whether the Participant desires to reduce or cease any
      Compensation amounts to be deferred after the Hardship request is made,
      the Participant will be precluded from deferring Compensation for the
      remainder of the Plan Year in which a Hardship is approved by the
      Committee.

      3.    Section 2.19 is amended to read as follows:

            2.19  PLAN YEAR means, THROUGH OCTOBER 31, 2000, the Company's
      fiscal year. THE PLAN YEAR COMMENCING NOVEMBER 1, 2000, SHALL BE A SHORT
      YEAR AND SHALL END DECEMBER 31, 2000. THE FOLLOWING PLAN YEAR SHALL
      COMMENCE JANUARY 1, 2001, AND SHALL CONTINUE THROUGH AND END AS OF
      DECEMBER 31, 2001. THEREAFTER THE PLAN YEAR SHALL BE THE CALENDAR YEAR.
      THE SHORT PLAN YEAR FOR THE PERIOD NOVEMBER 1, 2000, THROUGH DECEMBER 31,
      2000, SHALL NOT TRIGGER ANY ELECTION RIGHT OR ANY OTHER RIGHT OF



      THE PARTICIPANT TO MODIFY ANY DEFERRAL ELECTION OR CHOICE MADE EFFECTIVE
      NOVEMBER 1, 2000.

      4.    Section 3.3 is amended to read as follows:

            3.3   ELECTION PROCEDURE. An election to defer Compensation under an
      agreement described in Section 3.4 SHALL BE made THROUGH ANY ELECTRONIC
      MEDIA ACCEPTABLE TO THE COMMITTEE. THE ELECTION must be properly completed
      and delivered ELECTRONICALLY to the Company prior to the first day of the
      Plan Year for which Compensation shall be earned, provided, however, that
      an individual who becomes an Eligible Employee for the first time on or
      after the first day of a Plan Year but prior to the first day of the third
      CALENDAR quarter within THE Plan Year shall be permitted to make an
      election to defer Compensation that will be earned on and after the first
      day of the third CALENDAR quarter by COMPLETING AND DELIVERING a Deferred
      Compensation Agreement prior to THAT date. AN ELIGIBLE EMPLOYEE MAY ALSO
      ELECT TO PARTICIPATE AND DEFER COMPENSATION by executing a WRITTEN
      Deferred Compensation Agreement on A form and in THE manner prescribed by
      the Committee. A WRITTEN ELECTION MUST NEVERTHELESS BE COMPLETED, EXECUTED
      AND SUBMITTED TO THE COMMITTEE NO LATER THAN THE TIMES SPECIFIED ABOVE FOR
      ELECTRONIC ELECTIONS IN ORDER TO BE VALID FOR THE APPLICABLE PLAN YEAR OR
      SHORTER PERIOD. WITH RESPECT TO THE PLAN YEAR COMMENCING NOVEMBER 1, 2000,
      EACH ELIGIBLE EMPLOYEE PARTICIPATING IN THE PLAN ON THAT DATE AND EACH
      ELIGIBLE EMPLOYEE WHO MAY COMMENCE PARTICIPATING AS OF THAT DATE SHALL
      HAVE A ONE-TIME ELECTION IN ADVANCE TO DETERMINE AND ELECT THE AMOUNT OF
      COMPENSATION WHICH MAY BE DEFERRED UNDER THE TERMS OF THIS PLAN FOR THE
      PERIOD NOVEMBER 1, 2000, TO DECEMBER 31, 2001. A PARTICIPANT MAY NOT
      CHANGE OR ALTER ANY ELECTION MADE FOR THIS PERIOD ON ACCOUNT OF THE SHORT
      PLAN YEAR ENDING DECEMBER 31, 2000. THE ELECTION MADE FOR THE SHORT PLAN
      YEAR SHALL CONTINUE AND APPLY AUTOMATICALLY FOR THE PLAN YEAR COMMENCING
      JANUARY 1, 2001.

      5.    The first paragraph of Section 3.4 is amended to read as follows:

            3.4   DEFERRED COMPENSATION AGREEMENT. A Deferred Compensation
      Agreement shall remain in effect for one Plan Year and shall be applicable
      only to Compensation described in paragraphs (a) through (c) earned after
      the date on which the Agreement is effective. FOR THE SHORT PLAN YEAR
      PERIOD COMMENCING NOVEMBER 1, 2000, AND ENDING DECEMBER 31, 2000, AND THE
      SUBSEQUENT PLAN YEAR PERIOD COMMENCING JANUARY 1, 2001, AND ENDING
      DECEMBER 31, 2001, EACH ELIGIBLE EMPLOYEE PARTICIPATING IN THE PLAN AS OF
      NOVEMBER 1, 2000, SHALL HAVE A ONE-TIME, IRREVOCABLE





      ELECTION IN ADVANCE TO DETERMINE AND ELECT THE AMOUNT OF COMPENSATION
      WHICH MAY BE DEFERRED UNDER THE TERMS OF THIS PLAN FOR THE ENTIRE PERIOD
      FROM NOVEMBER 1, 2000, TO DECEMBER 31, 2001. The Agreement shall set forth
      the percentage of Compensation that shall be deferred for the Plan Year,
      subject to the following:

      6.    Section 6.2 and sub-sections (a) and (b) thereof are amended to read
as follows:

            6.2   DISTRIBUTION UPON SEPARATION ON OR AFTER RETIREMENT AGE. A
      Participant who separates from employment with the Company on or after
      attaining Retirement Age shall receive his vested Deferral Account at the
      time and in the manner elected by the Participant. An election regarding
      the time and manner of payment of the Participant's vested Deferral
      Account balance (including all future years' contributions) shall be made
      AT THE TIME THE PARTICIPANT FIRST COMMENCES PARTICIPATION IN THE PLAN AND
      MAY BE AMENDED THEREAFTER AT THE ELECTION OF THE PARTICIPANT, PROVIDED
      THAT ANY AMENDMENT WILL ONLY BE VALID IF MADE concurrent with the
      Participant's most recent election to defer Compensation under Section
      3.3.

                  (a)   TIME OF PAYMENT. A Participant's vested Deferral Account
      balance shall be paid (or commence to be paid) ACCORDING TO THE ADVANCE
      ELECTION OF THE PARTICIPANT, EITHER (i) WITHIN ONE HUNDRED TWENTY (120)
      DAYS FOLLOWING SEPARATION FROM EMPLOYMENT ON OR AFTER ATTAINING RETIREMENT
      AGE, OR (ii) on THE January 1st IMMEDIATELY following the date of
      separation from employment on or after attaining Retirement Age. IF THE
      PARTICIPANT HAS NOT MADE OR HAS NO VALID ELECTION IN EFFECT AT THE TIME OF
      SEPARATION FROM EMPLOYMENT ON OR AFTER RETIREMENT AGE, DISTRIBUTION SHALL
      COMMENCE ON THE NEXT FOLLOWING JANUARY 1ST.

                  (b)   MANNER OF PAYMENT. A Participant's vested Deferral
      Account will be paid ACCORDING TO THE ADVANCE ELECTION OF THE PARTICIPANT,
      EITHER in a lump sum cash payment OR substantially equal monthly
      installments over a period of FIVE (5), TEN (10) OR FIFTEEN (15) YEARS. IF
      NO ELECTION HAS BEEN MADE BY THE PARTICIPANT, THE VESTED DEFERRAL ACCOUNT
      WILL BE PAID IN SUBSTANTIALLY EQUAL MONTHLY INSTALLMENTS OVER A PERIOD OF
      FIVE (5) YEARS.

      7.    Section 6.3 is amended to read as follows:



            6.3   DISTRIBUTION UPON SEPARATION PRIOR TO DEATH OR ATTAINING
      RETIREMENT AGE. A Participant who separates from employment with the
      Company ON OR AFTER NOVEMBER 1, 2000, BUT prior to attaining Retirement
      Age for any reason other than death shall receive amounts credited to his
      Deferral Account and in which he has a nonforfeitable interest in a lump
      sum cash payment ONLY, commencing AS SOON AS ADMINISTRATIVELY FEASIBLE
      FOLLOWING THE DATE OF SEPARATION FROM EMPLOYMENT, BUT IN NO EVENT LATER
      than one hundred twenty (120) days after the Participant separates from
      employment. IF THE PARTICIPANT'S SEPARATION FROM SERVICE SHALL OCCUR
      DURING THE LAST QUARTER OF ANY CALENDAR YEAR, THE DATE OF DISTRIBUTION
      WHICH SHALL BE ADMINISTRATIVELY FEASIBLE SHALL NOT OCCUR PRIOR TO THE NEXT
      FOLLOWING JANUARY 1ST. For purposes of this Section 6.3, the value of a
      Participant's Deferral Account to be distributed shall be determined as of
      the date the payment is made, and shall be credited with interest through
      such date.


         8. This Amendment shall be effective November 1, 2000, and shall apply
to all Eligible Employees (whether or not currently participating in the Plan)
who terminate employment on or after that date.

         9. In all other respects the Plan is ratified and approved.

         IN WITNESS WHEREOF, the Employer has caused this First Amendment to the
Plan to be duly executed as of the date and year first above written.

                                              "EMPLOYER"

                                              NOVELL, INC.

                                              By:  ____________________________

                                              Its: ____________________________





                                SECOND AMENDMENT

                                     TO THE

                                  NOVELL, INC.

                           DEFERRED COMPENSATION PLAN

                    (AS RESTATED EFFECTIVE NOVEMBER 1, 1999)

      This Second Amendment to the Novell, Inc. Deferred Compensation Plan (the
"Plan") is made and adopted this ______ day of March, 2001, by Novell, Inc., the
sponsoring Employer of the Plan, (hereinafter referred to as the "Employer").

                              W I T N E S S E T H:

      WHEREAS, the Employer has previously adopted the Plan effective November
1, 1994, and restated the Plan in full effective November 1, 1999, and continues
to maintain the Plan, and

      WHEREAS, the Employer has reserved the right to amend the Plan in whole or
in part, and now desires to amend the Plan to clarify that employee transfers
between employers affiliated with Novell, Inc. do not trigger distribution of
plan benefits;

      NOW THEREFORE, in consideration of the foregoing premises, the Employer
amends the Plan as follows:

      1. Article VI is amended by adding a new Section 6.7 at the end thereof to
read as follows:




            6.7   SEPARATION FROM EMPLOYMENT. For purposes of this Article VI a
      separation from employment with the Company shall not be deemed to occur
      merely because of a transfer between the Company and any affiliate,
      regardless of whether the affiliate is a participating employer in this
      Plan.

      2.    This Amendment shall be effective November 1, 2000, and shall apply
to all Eligible Employees (whether or not currently participating in the Plan)
who terminate employment on or after that date.

      3.    In all other respects the Plan is ratified and approved.

      IN WITNESS WHEREOF, the Employer has caused this Second Amendment to the
Plan to be duly executed as of the date and year first above written.

                                              "EMPLOYER"

                                              NOVELL, INC.

                                              By:  ____________________________

                                              Its: ____________________________




                                 THIRD AMENDMENT

                                     TO THE

                                  NOVELL, INC.

                           DEFERRED COMPENSATION PLAN

                    (AS RESTATED EFFECTIVE NOVEMBER 1, 1999)

      This Third Amendment to the Novell, Inc. Deferred Compensation Plan (the
"Plan") is made and adopted this ______ day of November, 2001, by Novell, Inc.,
the sponsoring Employer of the Plan, (hereinafter referred to as the
"Employer").

                              W I T N E S S E T H:

      WHEREAS, the Employer has previously adopted the Plan effective November
1, 1994, and restated the Plan in full effective November 1, 1999, and continues
to maintain the Plan, and

      WHEREAS, the Employer has reserved the right to amend the Plan in whole or
in part, and now desires to amend the Plan to adjust the eligibility
requirements for participation in the Plan:

      NOW THEREFORE, in consideration of the foregoing premises, the Employer
amends the Plan as follows (amended language is in BOLD ITALICS):

      1.    Section 2.12 is amended to read as follows:



            2.12  ELIGIBLE EMPLOYEE means a common law employee of the Company
      who is either (i) designated in writing by the Committee as eligible to
      participate in the Plan, or (ii) eligible to participate in the NOVELL,
      INC. 401(k) Retirement and Savings Plan, designated in writing by the
      Committee as eligible to participate in the Plan and either a Vice
      President (or more senior officer) of the Company or an employee whose
      Base Salary equals or exceeds $150,000. EFFECTIVE JANUARY 1, 2002,
      ELIGIBLE EMPLOYEE MEANS A COMMON LAW EMPLOYEE OF THE COMPANY WHO IS EITHER
      (i) DESIGNATED IN WRITING BY THE COMMITTEE AS ELIGIBLE TO PARTICIPATE IN
      THE PLAN, OR (ii) ELIGIBLE TO PARTICIPATE IN THE NOVELL, INC. 401(k)
      RETIREMENT AND SAVINGS PLAN, DESIGNATED IN WRITING BY THE COMMITTEE AS
      ELIGIBLE TO PARTICIPATE IN THE PLAN AND WHOSE BASE SALARY EQUALS OR
      EXCEEDS $200,000 (AS INDEXED EACH YEAR THEREAFTER UNDER IRC 401(a)(17)).
      Except as otherwise provided in Section 3.1 (concerning an individual who
      ceases to be an Eligible Employee) and Section 3.3 (in connection with an
      individual who first becomes an Eligible Employee), an individual's status
      as an Eligible Employee for a Plan Year shall be determined immediately
      prior to the first day of such Plan Year. Notwithstanding the foregoing,
      the Committee may determine in writing that an otherwise Eligible Employee
      shall not be eligible to participate in this Plan.

      2.    Section 3.1 is amended to read as follows:

            3.1   ELIGIBILITY. An Eligible Employee of the Company shall
      participate in the Plan only to the extent and for the period that the
      Eligible Employee is selected by the Committee and is a member of a select
      group of management or highly compensated employees as such group is
      described under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. An
      individual who is an Eligible Employee as of the first day of the Plan
      Year but who ceases to be an Eligible Employee during such Plan Year shall
      continue to participate in the Plan with respect to any Deferred
      Compensation Agreements in effect for such Plan Year, but shall not be
      permitted to enter into any new Deferred Compensation Agreements with the
      Company unless and until the individual again becomes an Eligible
      Employee. AN INDIVIDUAL WHO IS AN ELIGIBLE EMPLOYEE AND WHO HAS
      PARTICIPATED IN THE PLAN FOR THE PLAN YEAR ENDED DECEMBER 31, 2001, SHALL
      BE PERMITTED TO CONTINUE TO PARTICIPATE FOR THE PLAN YEAR COMMENCING
      JANUARY 1, 2002, IF SO ELECTED BY THE ELIGIBLE EMPLOYEE, WITHOUT REGARD TO
      WHETHER THE ELIGIBLE EMPLOYEE SATISFIES THE NEW ELIGIBILITY REQUIREMENTS
      OF SECTION 2.12 EFFECTIVE JANUARY 1, 2002. THE ELIGIBLE EMPLOYEE MAY
      CONTINUE TO PARTICIPATE FOR EACH PLAN YEAR THEREAFTER, SO LONG AS NO BREAK
      IN PARTICIPATION OCCURS AND THE ELIGIBLE EMPLOYEE OTHERWISE CONTINUES TO
      SATISFY THE REQUIREMENTS OF THIS SECTION 3.1.



      8. This Amendment shall be effective January 1, 2002, and shall apply to
all Eligible Employees (whether or not currently participating in the Plan) who
terminate employment on or after that date.

      9. In all other respects the Plan is ratified and approved.

         IN WITNESS WHEREOF, the Employer has caused this First Amendment to the
Plan to be duly executed as of the date and year first above written.

                                               "EMPLOYER"

                                               NOVELL, INC.

                                               By:  ____________________________

                                               Its: ____________________________



                                FOURTH AMENDMENT

                                     TO THE

                                  NOVELL, INC.

                           DEFERRED COMPENSATION PLAN

                (AS AMENDED AND RESTATED AS OF NOVEMBER 1, 1999)

      This Fourth Amendment to the Novell, Inc. Deferred Compensation Plan (the
"Plan"), as restated effective January 1, 1999, is adopted this 20th day of
November, 2002, by the Compensation Committee of the Board of Directors of
Novell, Inc., for and on behalf of Novell, Inc. (hereinafter referred to as the
"Employer").

                              W I T N E S S E T H:

      WHEREAS, Novell, Inc. has previously adopted the Plan, restated the Plan
in full effective January 1, 1999, and continues to maintain the Plan, and

      WHEREAS, Novell, Inc. has reserved the right to amend the Plan in whole or
in part, and now desires to amend the Plan to clarify the administrative
committee of the Plan, to allow mid-year discontinuation of deferrals under
certain limited circumstances, to provide for continuation of deferral elections
from year to year and additional distribution options,

      NOW THEREFORE, in consideration of the foregoing premises, the Employer
amends the Plan as follows (amended language is in BOLD ITALICS):



      1.    Section 2.10 is amended to read as follows:

            2.10  DEFERRED COMPENSATION AGREEMENT means an agreement entered
      into by a Participant and the Company to reduce the Participant's
      Compensation described in Section 3.4 for a specified period and
      contribute such amounts to the Plan, in accordance with Article III.

      2.    Section 2.6 is amended to read as follows:

            2.6   COMMITTEE means THE COMPENSATION COMMITTEE OF THE BOARD. The
      Committee will serve as the "plan administrator" to manage and control the
      operation and administration of the Plan, within the meaning of ERISA
      Section 3(16)(A).

      3.    Section 3.1 is amended to read as follows:

            3.1   ELIGIBILITY. An Eligible Employee of the Company shall
      participate in the Plan only to the extent and for the period that the
      Eligible Employee is selected by the Committee and is a member of a select
      group of management or highly compensated employees as such group is
      described under Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. An
      individual who is an Eligible Employee as of the first day of the Plan
      Year but who ceases to be an Eligible Employee during THE PLAN YEAR FOR
      ANY REASON OTHER THAN TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY (A
      "DISQUALIFYING EVENT") SHALL BE PERMITTED TO TERMINATE IMMEDIATELY HIS
      PARTICIPATION IN THE PLAN BY NOTIFYING THE COMMITTEE IN WRITING WITHIN
      SIXTY (60) DAYS OF THE DISQUALIFYING EVENT OF HIS ELECTION. IN THE ABSENCE
      OF AN ELECTION WITHIN THIS PERIOD THE INDIVIDUAL shall continue to
      participate in the Plan with respect to any Deferred Compensation
      Agreements in effect for such Plan Year, but shall not be permitted to
      enter into any new Deferred Compensation Agreements with the Company
      unless and until the individual again becomes an Eligible Employee.

      4.    The initial paragraph of Section 3.4 is amended to read as follows:



            3.4   DEFERRED COMPENSATION AGREEMENT. A Deferred Compensation
      Agreement shall remain in effect for THE ENTIRE Plan Year AND FOR EACH
      PLAN YEAR THEREAFTER, UNLESS AMENDED AS PERMITTED UNDER SECTION 3.1 OR
      SECTION 3.5. THE DEFERRED COMPENSATION AGREEMENT shall be applicable only
      to Compensation described in paragraphs (a) through (c) earned after the
      date on which the Agreement is effective. The Agreement shall set forth
      the percentage of Compensation that shall be deferred for the Plan Year,
      subject to the following:

      5.    Section 3.5 is amended to read as follows:

            3.5   IRREVOCABLE ELECTIONS. A Participant's Deferred Compensation
      Agreement cannot be amended by the Participant and, except as provided in
      SECTION 3.1 AND this Section 3.5, is irrevocable.

            A PARTICIPANT MAY AMEND HIS DEFERRED COMPENSATION AGREEMENT TO
      INCREASE OR REDUCE THE RATE OF DEFERRAL (INCLUDING TERMINATION OF
      DEFERRAL) ONE TIME DURING ANY PLAN YEAR. THE AMENDMENT SHALL BECOME
      EFFECTIVE AS OF THE FIRST DAY OF THE PLAN YEAR FOLLOWING THE PLAN YEAR IN
      WHICH THE AMENDMENT IS MADE AND SUBMITTED TO THE COMPANY. ANY SUCH
      AMENDMENT SHALL COMPLY WITH THE ELECTION PROCEDURES SET FORTH IN SECTION
      3.3.

            The Company reserves the right to modify any Deferred Compensation
      Agreement to reflect a change in Plan provisions or for administrative
      convenience.

            A Participant's Deferred Compensation Agreement shall become null
      and void upon the Participant's separation from employment with the
      Company, and no Compensation that may be payable after the Participant
      separates from employment with the Company and otherwise would be subject
      to such Agreements shall be deferred under this Plan.



      6.    Section 6.2(b) is amended to read as follows:

                  (b)   MANNER OF PAYMENT. A Participant's vested Deferral
            Account will be paid in a lump sum cash payment unless the
            Participant has elected to receive payment in substantially equal
            installments. INSTALLMENT PAYMENTS MAY BE MADE ANNUALLY,
            SEMI-ANNUALLY, QUARTERLY, MONTHLY, SEMI-MONTHLY OR BI-WEEKLY OVER
            ANY period FROM TWO (2) TO THIRTY (30) years. HOWEVER, NO PAYMENT
            PERIOD MAY EXTEND BEYOND THE JOINT LIFE EXPECTANCY OF THE
            PARTICIPANT AND HIS OR HER SPOUSE.

      7.    Section 6.3 is amended to read as follows:

            6.3   DISTRIBUTION UPON SEPARATION PRIOR TO DEATH OR ATTAINING
      RETIREMENT AGE. A Participant who separates from employment with the
      Company prior to attaining Retirement Age for any reason other than death
      shall receive amounts credited to his Deferral Account and in which he has
      a nonforfeitable interest in a lump sum cash payment or IN substantially
      equal installments over THE period DESIGNATED BY THE PARTICIPANT IN HIS
      MOST RECENT DISTRIBUTION ELECTION commencing no later than one hundred
      twenty (120) days after the Participant separates from employment. For
      purposes of this Section 6.3, the value of a Participant's Deferral
      Account to be distributed shall be determined as of the date the payment
      is made, and shall be credited with interest through such date. To the
      extent payment shall be made in installments, the amount of the
      installment MAY BE ADJUSTED to take into account the value of the
      Participant's Deferral Account (as adjusted) and the number of remaining
      PAYMENT PERIODS over which the installments payments are to be made.

      Except as otherwise provided herein, this Amendment shall be effective
January 1, 2003, and for Plan Years commencing thereafter, and shall apply to
all Employees who have an account balance in the Plan on or after that date.

      In all other respects the Plan is ratified and approved.



      IN WITNESS WHEREOF, the Employer has caused this Amendment to the Plan to
be duly executed as of the date and year first above written.

                                      NOVELL, INC.

                                      By: ______________________________________
                                          Alan Friedman, Senior Vice President,
                                          H.R. for the Compensation Committee

EX-21

                                                                      Exhibit 21

                                  NOVELL, INC.
                         SUBSIDIARIES OF THE REGISTRANT

      As of October 31, 2004, the following companies were subsidiaries of the
Registrant:



WHOLLY-OWNED ENTITIES                                          STATE OF INCORPORATION OR
                                                               COUNTRY IN WHICH ORGANIZED
                                                            
Cambridge PCHL L.L.C                                           Delaware
Cambridge Technology Capital Management, Inc.                  Delaware
Cambridge Technology CGP, Inc.                                 Delaware
Cambridge Technology Colombia S.A                              Columbia
Cambridge Technology Partners (Benelux) B.V                    Netherlands
Cambridge Technology Partners (France) SARL                    France
Cambridge Technology Partners (Mexico), S/A. de C.V            Mexico
Cambridge Technology Partners (Puerto Rico), Inc.              Puerto Rico
Cambridge Technology Partners (Switzerland) SA                 Switzerland
Cambridge Technology Partners (UK) LTD                         United Kingdom
Cambridge Technology Partners (Venezuela) C.A                  Venezuela
Cambridge Technology Partners Columbia S.A                     Columbia
Cambridge Technology Partners CTP, Skandinavien Aktiebolag     Sweden
Cambridge Technology Partners do Brasil s.c. Ltda              Brazil
Cambridge Technology Partners India Private Limited            India
Cambridge Technology Partners Ireland Limited                  Ireland
Cambridge Technology Partners Italia S.R.L                     Italy
Cambridge Technology Partners Limited                          Japan
Cambridge Techology Partners Deutschland GmbH                  Germany
CTP Services, S.A. de C.V                                      Mexico
IOS-Gruppen Aktiebolag                                         Sweden
Novell (Schweiz) AG                                            Switzerland
Novell (Taiwan) Co., Ltd.                                      Taiwan
Novell Austria GmbH                                            Austria
Novell Belgium N.V                                             Belgium
Novell Canada, Ltd.                                            Canada
Novell Chile S.A                                               Chile
Novell Corporation (Malaysia) Sdn Bhd                          Malaysia
Novell Danmark A/S                                             Denmark
Novell de Argentina S.A                                        Argentina
Novell de Mexico, S.A. de C.V                                  Mexico
Novell de Panama S.A                                           Panama
Novell de Puerto Rico, Inc.                                    Puerto Rico
Novell do Brasil Software Ltda                                 Brazil
Novell European Services Ltd                                   United Kingdom
Novell European Services S.A.S                                 France
Novell Finance Limited                                         Cayman
Novell Finland OY                                              Finland
Novell Germany GmbH                                            Germany
Novell Holding Deutschland GmbH                                Germany
Novell Holdings, Inc.                                          Delaware
Novell Hong Kong Limited                                       Hong Kong
Novell International Holdings, Inc.                            Delaware
Novell Ireland Real Estate Limited                             Ireland
Novell Ireland Software Limited                                Ireland
Novell Israel Software Limited                                 Israel
Novell Italia s.r.l                                            Italy
Novell Korea Co., Ltd                                          Korea
Novell Licensing International BV                              Netherlands
Novell Luxembourg SARL                                         Luxembourg
Novell Nederland B.V                                           Netherlands
Novell New Zealand Limited                                     New Zealand
Novell Norge AS                                                Norway
Novell Peru S.A                                                Peru
Novell Philippines, Incorporated                               Philippines
Novell Portugal Informatica Lda                                Portugal




WHOLLY-OWNED ENTITIES                                          STATE OF INCORPORATION OR
                                                               COUNTRY IN WHICH ORGANIZED
                                                            
Novell Pty Ltd                                                 Australia
Novell S.A.R.L                                                 France
Novell Singapore Pte Ltd                                       Singapore
Novell Software (Beijing) Ltd                                  China, PRC
Novell Software (Thailand) Ltd                                 Thailand
Novell Software de Colombia S.A                                Columbia
Novell Software Development (I) Pvt. Ltd.                      India
Novell Software International Limited                          Ireland
Novell Software Latino America Norte, C.A                      Venezuela
Novell Soluciones y Consultorya de Venezuela C.A               Venezuela
Novell South Africa (Proprietary) Limited                      South Africa
Novell Spain S.A                                               Spain
Novell Svenska AB                                              Sweden
Novell UK Limited                                              United Kingdom
Novell Uruguay S.A                                             Uruguay
Salmon Ltd.                                                    United Kingdom
SilverSolutions spol. s.r.o                                    Czech Republic
SilverStream France S.A                                        France
SilverStream Netherlands, Inc.                                 Delaware
SilverStream Securities Corporation                            Massachusetts
SilverStream Software Danmark A/S                              Denmark
SilverStream Software Sweden AB                                Sweden
SilverStream Software Switzerland GmbH                         Switzerland
SilverStream Software, LLC                                     Delaware
SUSE Inc.                                                      California
SUSE Linux CR s.r.o                                            Czech Republic
SuSE LINUX GmbH                                                Germany
SUSE Linux Products GmbH                                       Germany
SUSE Linux Werbeagentur GmbH                                   Germany

MAJORITY-OWNED ENTITIES                                        STATE OF INCORPORATION OR
                                                               COUNTRY IN WHICH ORGANIZED

Novell Japan, Ltd.                                             Japan
Onward Novell Software (I) Ltd                                 India
Empirical Acquisition Corp.                                    California
Cambridge Technology Capital Fund I, L.P.                      Delaware
Cambridge Technology GPLP, L.P.                                Delaware
Celerant Consulting Holdings Limited                           United Kingdom
Celerant Consulting (Canada) Limited                           Canada
Celerant Consulting GmbH                                       Germany
Celerant Consulting Inc.                                       Delaware
Celerant Consulting Limited                                    United Kingdom
Celerant Consulting Netherlands Holdings BV                    Netherlands
Celerant Consulting Nordic AS                                  Norway
Celerant Consulting NV                                         Belgium
Celerant Consulting Russia Ltd.                                United Kingdom
Celerant Consulting SA                                         France
PCH Investments Limited                                        United Kingdom
Peter Chadwick (Training) Limited                              United Kingdom

EX-23.1

                                                                    EXHIBIT 23.1



            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-109345, No. 333-109346, No. 33-14531, No. 33-54483, No.
33-64998, No. 33-65440, No. 33-68336, No. 333-04775, No. 333-04823, No.
333-62087, No. 333-62103, No. 333-95409, No. 333-41328, No. 333-71502 and No.
333-97713) pertaining to employee equity compensation plans of Novell, Inc. of
our report dated November 16, 2004 with respect to the consolidated financial
statements and schedule of Novell, Inc. and subsidiaries included in the Annual
Report (Form 10-K) for the year ended October 31, 2004.


                                    /s/ ERNST & YOUNG LLP


Boston, Massachusetts
January 10, 2005

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Jack L. Messman, President and Chief Executive Officer of Novell, Inc.,
certify that:

1.    I have reviewed this annual report on Form 10-K of Novell, Inc;

2.    Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5.    The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize, and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.

Date: January 13, 2005

/s/ Jack L. Messman
- -------------------------------
Jack L. Messman
President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Joseph S. Tibbetts, Jr., Senior Vice President and Chief Financial Officer of
Novell, Inc., certify that:

1.    I have reviewed this annual report on Form 10-K of Novell, Inc;

2.    Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5.    The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize, and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.

Date: January 13, 2005

/s/ Joseph S. Tibbetts, Jr.
- -------------------------------
Joseph S. Tibbetts, Jr.
Senior Vice President and
Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

            SECTION 906 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER

      I, Jack L. Messman, Chief Executive Officer of Novell, Inc., a Delaware
corporation (the "Company"), hereby certify that:

      (1)   The Company's periodic report on Form 10-K for the year ended
            October 31, 2004 (the "Form 10-K") fully complies with the
            requirements of Section 13(a) of the Securities Exchange Act of
            1934, as amended; and

      (2)   The information contained in the Form 10-K fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.

                                      * * *

CHIEF EXECUTIVE OFFICER

/s/ Jack L. Messman
- ----------------------------
Jack L. Messman

Date: January 13, 2005

EX-32.2

                                                                    EXHIBIT 32.2

            SECTION 906 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER

      I, Joseph S. Tibbetts, Jr., Chief Financial Officer of Novell, Inc., a
Delaware corporation (the "Company"), hereby certify that:

      (1)   The Company's periodic report on Form 10-K for the period ended
            October 31, 2004 (the "Form 10-K") fully complies with the
            requirements of Section 13(a) of the Securities Exchange Act of
            1934, as amended; and

      (2)   The information contained in the Form 10-K fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.

                                      * * *

CHIEF FINANCIAL OFFICER

/s/ Joseph S. Tibbetts, Jr.
- -------------------------------------------
Joseph S. Tibbetts, Jr.

Date: January 13, 2005