##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended April 30, 2007
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 404 Wyman Street
Waltham, MA 02451
 (781) 464-8000
 N/A
 
 þ o
  þ o o
 o þ




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##### 



NOVELL, INC.
TABLE OF CONTENTS
 Part I  Financial Information:
    
    
    3Item 1: Financial Statements
    
    
    3Consolidated Balance Sheets at April 30, 2007 (unaudited) and October 31, 2006
    
    
    3Consolidated Statements of Operations for the three and six months ended April 30, 2007 and 2006 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the six months ended April 30, 2007 and 2006 (unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4: Controls and Procedures
    
    
    38Part II  Other Information:
    
    
    38Item 1: Legal Proceedings
    
    
    38Item 1A: Risk Factors
    
    
    38Item 6: Exhibits
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 NOVELL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  April 30,
    
    
    October 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    950,992
    
    
    $
    675,787Short-term investments
    
    
    840,721
    
    
    
    790,500Receivables (net of allowances of $5,123 and $5,574 at April 30, 2007
and October 31, 2006, respectively)
    
    
    178,269
    
    
    
    233,986Prepaid expenses
    
    
    37,406
    
    
    
    32,328Other current assets
    
    
    30,710
    
    
    
    28,524Total current assets
    
    
    2,038,098
    
    
    
    1,761,125Property, plant and equipment, net
    
    
    183,491
    
    
    
    184,084Goodwill
    
    
    415,815
    
    
    
    424,701Intangible assets, net
    
    
    38,035
    
    
    
    40,404Deferred income taxes
    
    
    4,805
    
    
    
    4,770Long-term investments
    
    
    
    
    
    
    2,263Other assets
    
    
    31,131
    
    
    
    32,376Total assets
    
    $
    2,711,375
    
    
    $
    2,449,723LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    43,386
    
    
    $
    44,419Accrued compensation
    
    
    90,643
    
    
    
    103,710Other accrued liabilities
    
    
    97,891
    
    
    
    106,837Income taxes payable
    
    
    44,837
    
    
    
    49,600Deferred revenue
    
    
    412,007
    
    
    
    380,979Total current liabilities
    
    
    688,764
    
    
    
    685,545Deferred income taxes
    
    
    5,004
    
    
    
    4,186Long-term deferred revenue
    
    
    287,494
    
    
    
    45,992Senior convertible debentures
    
    
    600,000
    
    
    
    600,000Total liabilities
    
    
    1,581,262
    
    
    
    1,335,723Redeemable securities:Series B Preferred Stock, $.10 par value, Authorized  1,000 shares;
Outstanding  0 shares at April 30, 2007 and 187 shares at October 31,
2006 (at redemption value)
    
    
    
    
    
    
    9,350Stockholders equity:Common stock, par value $.10 per share, Authorized  600,000,000
shares; Issued  361,888,884 and 358,512,471 shares at April 30, 2007
and October 31, 2006, respectively; Outstanding  346,742,418 and
343,362,534 shares at April 30, 2007 and October 31, 2006,
respectively
    
    
    36,189
    
    
    
    35,851Additional paid-in capital
    
    
    376,365
    
    
    
    338,954Treasury stock, at cost  15,146,466 and 15,149,937 shares at April
30, 2007 and October 31, 2006, respectively
    
    
    (124,655
    )
    
    
    (124,684
    )Retained earnings
    
    
    818,307
    
    
    
    840,449Accumulated other comprehensive income
    
    
    23,907
    
    
    
    14,080Total stockholders equity
    
    
    1,130,113
    
    
    
    1,104,650Total liabilities, redeemable securities and stockholders equity
    
    $
    2,711,375
    
    
    $
    2,449,723
  3




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##### Table of Contents



NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006(unaudited)Net revenue:Software licenses
    
    $
    41,723
    
    
    $
    40,063Maintenance, subscriptions and services
    
    
    197,433
    
    
    
    193,086Total net revenue
    
    
    239,156
    
    
    
    233,149Cost of revenue:Software licenses
    
    
    4,260
    
    
    
    4,041Maintenance, subscriptions and services
    
    
    65,785
    
    
    
    73,281Total cost of revenue
    
    
    70,045
    
    
    
    77,322Gross profit
    
    
    169,111
    
    
    
    155,827Operating expenses (income):Sales and marketing
    
    
    88,447
    
    
    
    89,453Product development
    
    
    52,562
    
    
    
    47,119General and administrative
    
    
    34,625
    
    
    
    24,690Restructuring expenses
    
    
    4,523
    
    
    
    Purchased in-process research and development
    
    
    
    
    
    
    2,110Gain on sale of property, plant and equipment
    
    
    
    
    
    
    (2,190
    )Total operating expenses
    
    
    180,157
    
    
    
    161,182Loss from operations
    
    
    (11,046
    )
    
    
    (5,355
    )Other income (expense):Investment income
    
    
    20,669
    
    
    
    15,577Impairment of investments
    
    
    
    
    
    
    (226
    )Interest expense and other, net
    
    
    (6,914
    )
    
    
    (2,434
    )Total other income, net
    
    
    13,755
    
    
    
    12,917Income from continuing operations before income taxes
    
    
    2,709
    
    
    
    7,562Income tax expense
    
    
    2,819
    
    
    
    5,607Income (loss) from continuing operations
    
    
    (110
    )
    
    
    1,955Income from discontinued operations
    
    
    574
    
    
    
    3,279Income tax expense on discontinued operations
    
    
    2,656
    
    
    
    1,892Income (loss) from discontinued operations
    
    
    (2,082
    )
    
    
    1,387Net income (loss)
    
    $
    (2,192
    )
    
    $
    3,342Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.00
    )
    
    $
    0.01Discontinued operations
    
    
    (0.01
    )
    
    
    0.00Net income (loss) per share available to common stockholders
    
    $
    (0.01
    )
    
    $
    0.01Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.00
    )
    
    $
    0.00Discontinued operations
    
    
    (0.01
    )
    
    
    0.01Net income (loss) per share available to common stockholders
    
    $
    (0.01
    )
    
    $
    0.01Weighted-average shares outstanding  basic
    
    
    346,492
    
    
    
    378,403Weighted-average shares outstanding  diluted
    
    
    346,492
    
    
    
    385,320
  4




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##### Table of Contents



NOVELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Six Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006(unaudited)Net revenue:Software licenses
    
    $
    80,074
    
    
    $
    82,165Maintenance, subscriptions and services
    
    
    383,678
    
    
    
    387,525Total net revenue
    
    
    463,752
    
    
    
    469,690Cost of revenue:Software licenses
    
    
    8,487
    
    
    
    8,585Maintenance, subscriptions and services
    
    
    131,617
    
    
    
    145,517Total cost of revenue
    
    
    140,104
    
    
    
    154,102Gross profit
    
    
    323,648
    
    
    
    315,588Operating expenses (income):Sales and marketing
    
    
    178,776
    
    
    
    177,168Product development
    
    
    99,029
    
    
    
    90,843General and administrative
    
    
    65,622
    
    
    
    53,342Restructuring expenses (benefit)
    
    
    11,874
    
    
    
    (1,000
    )Purchased in-process research and development
    
    
    
    
    
    
    2,110Gain on sale of property, plant and equipment
    
    
    
    
    
    
    (2,190
    )Total operating expenses
    
    
    355,301
    
    
    
    320,273Loss from operations
    
    
    (31,653
    )
    
    
    (4,685
    )Other income (expense):Investment income
    
    
    41,372
    
    
    
    30,357Gain on sale of venture capital funds
    
    
    3,591
    
    
    
    Impairment of investments
    
    
    
    
    
    
    (613
    )Interest expense and other, net
    
    
    (13,163
    )
    
    
    (3,923
    )Total other income, net
    
    
    31,800
    
    
    
    25,821Income from continuing operations before income taxes
    
    
    147
    
    
    
    21,136Income tax expense
    
    
    12,216
    
    
    
    17,210Income (loss) from continuing operations
    
    
    (12,069
    )
    
    
    3,926Income (loss) from discontinued operations
    
    
    (10,137
    )
    
    
    2,893Income tax expense (benefit) on discontinued operations
    
    
    (69
    )
    
    
    1,612Income (loss) from discontinued operations
    
    
    (10,068
    )
    
    
    1,281Net income (loss)
    
    $
    (22,137
    )
    
    $
    5,207Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.01Discontinued operations
    
    
    (0.03
    )
    
    
    0.00Net income (loss) per share available to common stockholders
    
    $
    (0.06
    )
    
    $
    0.01Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.03
    )
    
    $
    0.01Discontinued operations
    
    
    (0.03
    )
    
    
    0.00Net income (loss) per share available to common stockholders
    
    $
    (0.06
    )
    
    $
    0.01Weighted-average shares outstanding  basic
    
    
    346,007
    
    
    
    382,095Weighted-average shares outstanding  diluted
    
    
    346,007
    
    
    
    389,657
  5




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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006(unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (22,137
    )
    
    $
    5,207Adjustments to reconcile net income (loss) to net cash provided by operating activities:Stock-based compensation expense
    
    
    16,432
    
    
    
    21,425Tax effects of stock-based compensation plans
    
    
    4,063
    
    
    
    5,286Excess tax benefits from stock-based compensation
    
    
    (4,063
    )
    
    
    (5,286
    )Depreciation and amortization
    
    
    21,473
    
    
    
    22,378Change in accounts receivable allowances
    
    
    (451
    )
    
    
    (4,903
    )Utilization of previously reserved acquired net operating losses
    
    
    4,825
    
    
    
    3,520Impairment of long-lived assets
    
    
    10,848
    
    
    
    Purchased in-process research and development
    
    
    
    
    
    
    2,110Net gain on sale of property, plant and equipment
    
    
    
    
    
    
    (2,190
    )Gain on sale of venture capital funds
    
    
    (3,591
    )
    
    
    Impairment of long-term investments, net of gains on sale
    
    
    (1,738
    )
    
    
    498Gain on sale of discontinued operations, before taxes
    
    
    (628
    )
    
    
    Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:Receivables
    
    
    52,990
    
    
    
    81,683Prepaid expenses
    
    
    (5,078
    )
    
    
    (5,195
    )Other current assets
    
    
    (3,291
    )
    
    
    (1,326
    )Deferred income taxes
    
    
    783
    
    
    
    (669
    )Accounts payable
    
    
    224
    
    
    
    268Accrued liabilities
    
    
    (25,634
    )
    
    
    (60,276
    )Deferred revenue
    
    
    273,906
    
    
    
    (61,353
    )Net cash provided by operating activities
    
    
    318,933
    
    
    
    1,177Cash flows from financing activitiesIssuance of common stock, net
    
    
    8,127
    
    
    
    18,082Excess tax benefits from stock-based compensation
    
    
    4,063
    
    
    
    5,286Payment of cash dividends on Series B Preferred Stock
    
    
    (5
    )
    
    
    (47
    )Repurchases of common stock, retired
    
    
    
    
    
    
    (267,479
    )Net cash provided by (used in) financing activities
    
    
    12,185
    
    
    
    (244,158
    )Cash flows from investing activitiesPurchases of property, plant and equipment
    
    
    (12,508
    )
    
    
    (14,554
    )Proceeds from the sale of property, plant and equipment
    
    
    
    
    
    
    7,258Proceeds from repayment of note receivable
    
    
    
    
    
    
    9,092Purchases of short-term investments
    
    
    (238,237
    )
    
    
    (327,575
    )Maturities of short-term investments
    
    
    73,213
    
    
    
    84,809Sales of short-term investments
    
    
    117,604
    
    
    
    289,024Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Cash paid for acquisition of RedMojo/eSecurity, net of cash acquired
    
    
    (9,727
    )
    
    
    (71,550
    )Proceeds from the sale of Salmon, net of cash divested
    
    
    2,749
    
    
    
    Cash paid for equity share of Open Invention Network, LLC
    
    
    
    
    
    
    (4,225
    )Purchases of intangible assets
    
    
    (875
    )
    
    
    Purchases of long-term investments
    
    
    
    
    
    
    (7,129
    )Proceeds from the sales of and distributions from long-term investments
    
    
    1,738
    
    
    
    4,115Other
    
    
    5,166
    
    
    
    4,552Net cash used in investing activities
    
    
    (55,913
    )
    
    
    (26,183
    )Increase (decrease) in cash and cash equivalents
    
    
    275,205
    
    
    
    (269,164
    )Cash and cash equivalents  beginning of period
    
    
    675,787
    
    
    
    811,238Cash and cash equivalents  end of period
    
    $
    950,992
    
    
    $
    542,074Supplemental disclosure of non-cash activities:Conversion of Series B Preferred Stock to Common Stock
    
    $
    9,350
    
    
    $
    Contribution of patents to Open Invention Network, LLC
    
    $
    
    
    
    $
    14,383
  6




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NOVELL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 April 30, 2007
 A. Quarterly Financial Statements
  Reclassifications
  B. Significant Accounting Policies
 Recognition Policy  Microsoft Agreements-related Revenue
    
    
    Development of technologies to optimize SLES and Windows, each running as guests in a
virtualized setting on the other operating system;
    
    Development of management tools for managing heterogeneous virtualization environments, to
enable each partys management tools to command, control and configure the other partys
operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and
OpenOffice document formats; and
    
    Collaboration on improving directory and identity interoperability and identity management
between Microsoft Active Directory software and Novell eDirectory software.
 7




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C. Acquisitions
 RedMojo
   Estimated
    
    
    EstimatedFair Value
    
    
    Useful Life(In thousands)Identifiable intangible assets:Developed technology
    
    $
    2,370
    
    
    3 yearsGoodwill
    
    
    7,554
    
    
    IndefiniteTotal net assets acquired
    
    $
    9,924
    8




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##### Table of Contents



D. Divestitures
 Salmon
     (In thousands)Sales price
    
    $
    4,914Costs to sell
    
    
    (102
    )4,812Net book value of Salmon:Cash
    
    
    2,165Other current assets
    
    
    4,089Goodwill
    
    
    2,177Other long-term assets
    
    
    139Liabilities
    
    
    (4,386
    )4,184Gain on sale of Salmon before taxes
    
    $
    628
 Celerant
   Three months ended
    
    
    Six months endedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Salmon net revenue
    
    $
    2,371
    
    
    $
    5,577
    
    
    $
    7,351
    
    
    $
    11,330Celerant net revenue
    
    $
    
    
    
    $
    39,590
    
    
    $
    
    
    
    $
    71,704Salmon income (loss) before taxes
    
    $
    (54
    )
    
    $
    658
    
    
    $
    83
    
    
    $
    1,315Celerant income before taxes
    
    
    
    
    
    
    2,621
    
    
    
    
    
    
    
    1,578Impairment of long-lived assets of Salmon
    
    
    
    
    
    
    
    
    
    
    (10,848
    )
    
    
    Gain on sale of Salmon
    
    
    628
    
    
    
    
    
    
    
    628
    
    
    
    Income tax expense (benefit)
    
    
    2,656
    
    
    
    1,892
    
    
    
    (69
    )
    
    
    1,612Income (loss) from discontinued operations
    
    $
    (2,082
    )
    
    $
    1,387
    
    
    $
    (10,068
    )
    
    $
    1,281
 9




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E. Microsoft Agreements
   F. Cash, Cash Equivalents, and Short-Term Investments
     Fair Market(In thousands)
    
    Cost
    
    
    ValueLess than one year
    
    $
    227,769
    
    
    $
    226,636Due in one to two years
    
    
    163,061
    
    
    
    162,251Due in two to three years
    
    
    134,391
    
    
    
    134,482Due in more than three years
    
    
    212,812
    
    
    
    213,111No contractual maturity
    
    
    103,454
    
    
    
    104,241Total short-term investments
    
    $
    841,487
    
    
    $
    840,721
  Three months ended
    
    

Six
months endedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Realized gains
    
    $
    62
    
    
    $
    115
    
    
    $
    167
    
    
    $
    241Realized losses
    
    $
    (306
    )
    
    $
    (312
    )
    
    $
    (643
    )
    
    $
    (1,534
    )
  10




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##### Table of Contents



G. Long-Term Investments
  H. Goodwill and Intangible Assets
 Goodwill
  April 30,
    
    
    October 31,2007
    
    
    2006(In thousands)SUSE
    
    $
    172,086
    
    
    $
    172,086SilverStream
    
    
    104,555
    
    
    
    108,253e-Security
    
    
    59,990
    
    
    
    59,699Ximian
    
    
    31,992
    
    
    
    32,605Tally
    
    
    14,655
    
    
    
    14,909Immunix
    
    
    13,967
    
    
    
    14,227Salmon
    
    
    
    
    
    
    11,906RedMojo
    
    
    7,554
    
    
    
    Onward Novell
    
    
    2,010
    
    
    
    2,010Other technology companies
    
    
    9,006
    
    
    
    9,006Total goodwill
    
    $
    415,815
    
    
    $
    424,701
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
  
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
  (In thousands)
    
    Americas
    
    
    EMEA
    
    
    Asia Pacific
    
    
    TotalOpen platform solutions
    
    $
    35,565
    
    
    $
    32,394
    
    
    $
    7,960
    
    
    $
    75,919Systems and resource management
    
    
    72,688
    
    
    
    30,023
    
    
    
    525
    
    
    
    103,236Identity and security management
    
    
    14,120
    
    
    
    62,576
    
    
    
    10,640
    
    
    
    87,336Workgroup
    
    
    104,766
    
    
    
    29,075
    
    
    
    8,513
    
    
    
    142,354Business consulting
    
    
    
    
    
    
    15,856
    
    
    
    
    
    
    
    15,856Balance as of November 1, 2006
    
    $
    227,139
    
    
    $
    169,924
    
    
    $
    27,638
    
    
    $
    424,701
 11




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##### Table of Contents



Systems and
    
    
    Identity andOpen Platform
    
    
    Resource
    
    
    Security
    
    
    
    
    
    
    Business(In thousands)
    
    Solutions
    
    
    Management
    
    
    Management
    
    
    Workgroup
    
    
    Consulting
    
    
    TotalBalance as of October 31, 2006
    
    $
    75,919
    
    
    $
    103,236
    
    
    $
    87,336
    
    
    $
    142,354
    
    
    $
    15,856
    
    
    $
    424,701RedMojo acquisition
    
    
    
    
    
    
    7,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,554Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,207
    )
    
    
    (10,207
    )Salmon disposition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,177
    )
    
    
    (2,177
    )Adjustments
    
    
    (834
    )
    
    
    (1,133
    )
    
    
    (959
    )
    
    
    (1,564
    )
    
    
    434
    
    
    
    (4,056
    )Balance as of April 30, 2007
    
    $
    75,085
    
    
    $
    109,657
    
    
    $
    86,377
    
    
    $
    140,790
    
    
    $
    3,906
    
    
    $
    415,815
   Intangible Assets
  April 30, 2007
    
    

October
31, 2006Gross
    
    
    Accumulated
    
    
    Net Book
    
    
    Gross
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Asset Lives(In thousands)Developed technology
    
    $
    34,174
    
    
    $
    (23,668
    )
    
    $
    10,506
    
    
    $
    30,929
    
    
    $
    (21,128
    )
    
    $
    9,801
    
    
    3-4 yearsTrademarks and trade names
    
    
    24,731
    
    
    
    (217
    )
    
    
    24,514
    
    
    
    24,731
    
    
    
    (131
    )
    
    
    24,600
    
    
    3 years orIndefiniteCustomer/contractual relationships
    
    
    19,585
    
    
    
    (16,598
    )
    
    
    2,987
    
    
    
    23,002
    
    
    
    (17,381
    )
    
    
    5,621
    
    
    3 yearsInternal use software
    
    
    5,193
    
    
    
    (5,165
    )
    
    
    28
    
    
    
    5,193
    
    
    
    (4,921
    )
    
    
    272
    
    
    3 yearsNon-compete agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    422
    
    
    
    (312
    )
    
    
    110
    
    
    3 yearsTotal intangible assets
    
    $
    83,683
    
    
    $
    (45,648
    )
    
    $
    38,035
    
    
    $
    84,277
    
    
    $
    (43,873
    )
    
    $
    40,404
    I. Income Taxes
  12




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##### Table of Contents



J. Line of Credit
   K. Restructuring and Merger Liabilities
 Restructuring Liabilities
  13




---



##### Table of Contents



Fiscal 2007
    
    
    Fiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003
    
    
    Fiscal 2002(In thousands)
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructuring
    
    
    Restructuring
    
    
    TotalBalance at October
31, 2006:Workforce reductions
    
    $
    
    
    
    $
    3,097
    
    
    $
    1,333
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,430Excess facilities,
property and equipment
    
    
    
    
    
    
    15
    
    
    
    3,866
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    9,206Other
restructuring-related
costs
    
    
    
    
    
    
    128
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Total restructuring
reserve balance
    
    
    
    
    
    
    3,240
    
    
    
    5,256
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    13,821Adjustments/Original
Charge:Workforce reductions
    
    
    9,947
    
    
    
    (160
    )
    
    
    (98
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,689Excess facilities,
property and equipment
    
    
    1,516
    
    
    
    
    
    
    
    530
    
    
    
    
    
    
    
    (60
    )
    
    
    (102
    )
    
    
    1,884Other
restructuring-related
costs
    
    
    280
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318Total adjustments/
Original charge
    
    
    11,743
    
    
    
    (160
    )
    
    
    470
    
    
    
    
    
    
    
    (60
    )
    
    
    (102
    )
    
    
    11,891Payments:Workforce reductions
    
    
    (7,146
    )
    
    
    (2,857
    )
    
    
    (263
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,266
    )Excess facilities,
property and equipment
    
    
    (820
    )
    
    
    (15
    )
    
    
    (124
    )
    
    
    (252
    )
    
    
    (672
    )
    
    
    (390
    )
    
    
    (2,273
    )Other
restructuring-related
costs
    
    
    (243
    )
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (256
    )Total payments
    
    
    (8,209
    )
    
    
    (2,885
    )
    
    
    (387
    )
    
    
    (252
    )
    
    
    (672
    )
    
    
    (390
    )
    
    
    (12,795
    )Balance at April 30,
2007:Workforce reductions
    
    
    2,801
    
    
    
    80
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,853Excess facilities,
property and equipment
    
    
    696
    
    
    
    
    
    
    
    4,272
    
    
    
    625
    
    
    
    1,480
    
    
    
    1,744
    
    
    
    8,817Other
restructuring-related
costs
    
    
    37
    
    
    
    115
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247Total restructuring
reserve balance
    
    $
    3,534
    
    
    $
    195
    
    
    $
    5,339
    
    
    $
    625
    
    
    $
    1,480
    
    
    $
    1,744
    
    
    $
    12,917
  14




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##### Table of Contents



Merger Liabilities
  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atOctober 31,
    
    
    Additions From
    
    
    Payments/
    
    
    April 30,(In thousands)
    
    2006
    
    
    Acquisitions
    
    
    adjustments
    
    
    2007Facilities related
    
    $
    14,457
    
    
    $
    
    
    
    $
    (827
    )
    
    $
    13,630Employee related
    
    
    85
    
    
    
    
    
    
    
    (85
    )
    
    
    Other
    
    
    102
    
    
    
    149
    
    
    
    85
    
    
    
    336Total merger liabilities
    
    $
    14,644
    
    
    $
    149
    
    
    $
    (827
    )
    
    $
    13,966
   L. Senior Convertible Debentures
    15




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##### Table of Contents



M. Guarantees
    N. Legal Proceedings
    16




---



##### Table of Contents



O. Redeemable Preferred Stock
  17




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##### Table of Contents



P. Net Income (Loss) Per Share From Continuing Operations Available to Common Stockholders
  Three Months EndedApril 30,
    
    
    April 30,(In thousands, except per share data)
    
    2007
    
    
    2006Basic net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (110
    )
    
    $
    1,955Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Allocation of earnings to holders of Series B Preferred Stock
    
    
    
    
    
    
    (8
    )Net income (loss) from continuing operations available to common stockholders
    
    $
    (110
    )
    
    $
    1,900Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    346,492
    
    
    
    378,403Basic net income (loss) per share from continuing operations available to common stockholders
    
    $
    (0.00
    )
    
    $
    0.01Diluted net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (110
    )
    
    $
    1,955Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Allocation of earnings to the holders of Series B Preferred Stock
    
    
    
    
    
    
    (8
    )Diluted net income (loss) from continuing operations available to common stockholders
    
    $
    (110
    )
    
    $
    1,900Weighted-average common shares outstanding
    
    
    346,492
    
    
    
    378,403Incremental shares attributable to the assumed exercise of outstanding options, unvested
restricted stock, and other stock plans
    
    
    
    
    
    
    6,917Total adjusted weighted-average common shares
    
    
    346,492
    
    
    
    385,320Diluted net income (loss) per share from continuing operations available to common stockholders
    
    $
    (0.00
    )
    
    $
    0.00
  18




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##### Table of Contents



Six Months EndedApril 30,
    
    
    April 30,(In thousands, except per share data)
    
    2007
    
    
    2006Basic net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (12,069
    )
    
    $
    3,926Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (94
    )Allocation of earnings to holders of Series B Preferred Stock
    
    
    
    
    
    
    (15
    )Net income (loss) from continuing operations available to common stockholders
    
    $
    (12,069
    )
    
    $
    3,817Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    346,007
    
    
    
    382,095Basic net income (loss) per share from continuing operations available to common stockholders
    
    $
    (0.03
    )
    
    $
    0.01Diluted net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (12,069
    )
    
    $
    3,926Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (94
    )Allocation of earnings to the holders of Series B Preferred Stock
    
    
    
    
    
    
    (15
    )Diluted net income (loss) from continuing operations available to common stockholders
    
    $
    (12,069
    )
    
    $
    3,817Weighted-average common shares outstanding
    
    
    346,007
    
    
    
    382,095Incremental shares attributable to the assumed exercise of outstanding options, unvested
restricted stock, and other stock plans
    
    
    
    
    
    
    7,562Total adjusted weighted-average common shares
    
    
    346,007
    
    
    
    389,657Diluted net income (loss) per share from continuing operations available to common stockholders
    
    $
    (0.03
    )
    
    $
    0.01
  Q. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (2,192
    )
    
    $
    3,342
    
    
    $
    (22,137
    )
    
    $
    5,207Change in net unrealized loss on investments
    
    
    3,136
    
    
    
    (1,711
    )
    
    
    2,801
    
    
    
    (441
    )Change in pension liability
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    212Change in cumulative translation adjustments
    
    
    5,083
    
    
    
    1,266
    
    
    
    7,026
    
    
    
    1,907Comprehensive income (loss)
    
    $
    6,027
    
    
    $
    3,003
    
    
    $
    (12,310
    )
    
    $
    6,885
  April 30,
    
    
    October 31,2007
    
    
    2006(In thousands)Net unrealized loss on investments
    
    $
    (766
    )
    
    $
    (3,567
    )Cumulative translation adjustment
    
    
    24,673
    
    
    
    17,647Total accumulated other comprehensive income
    
    $
    23,907
    
    
    $
    14,080
 19




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##### Table of Contents



R. Stock-Based Compensation
 Share-Based
Payment
   Six months ended(shares/units in 000s)
    
    April 30, 2007
    
    April 30, 2006Stock options:Performance-based
    
    
    728
    
    
    
    1,036Time-based
    
    
    2,179
    
    
    
    1,667Restricted stock:Performance-based
    
    
    
    
    
    
    175Time-based
    
    
    
    
    
    
    275Restricted stock units:Performance-based
    
    
    1,104
    
    
    
    34Time-based
    
    
    744
    
    
    
    3,984
 Stock Options
 Performance-based.
 Time-based.
 Restricted Stock
 Performance-based.
 Time-based
 Restricted Stock Units
 Performance-based
 Time-based.
 20




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##### Table of Contents



Three months ended
    
    
    Three months ended
    
    
    Six months ended
    
    
    Six months ended(In thousands)
    
    April 30, 2007
    
    
    April 30, 2006
    
    
    April 30, 2007
    
    
    April 30, 2006Cost of revenue
    
    $
    937
    
    
    $
    923
    
    
    $
    1,984
    
    
    $
    1,985Sales and marketing
    
    
    2,400
    
    
    
    3,043
    
    
    
    4,260
    
    
    
    6,575Product development
    
    
    2,535
    
    
    
    1,750
    
    
    
    4,686
    
    
    
    4,387General and administrative
    
    
    4,061
    
    
    
    1,944
    
    
    
    5,502
    
    
    
    8,215Operating expenses
    
    
    8,996
    
    
    
    6,737
    
    
    
    14,448
    
    
    
    19,177Tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense from
continuing operations
    
    
    9,933
    
    
    
    7,660
    
    
    
    16,432
    
    
    
    21,162Discontinued operations
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    263Total stock-based compensation expense
    
    $
    9,933
    
    
    $
    7,730
    
    
    $
    16,432
    
    
    $
    21,425
  Employee Stock Purchase Plan
  S. Segment Information
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
   
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
 21




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##### Table of Contents



Three Months EndedApril 30, 2007
    
    
    April 30, 2006Operating
    
    
    
    
    
    
    
    
    
    
    Operating(in thousands)
    
    Net revenue
    
    
    Gross profit
    
    
    income (loss)
    
    
    Net revenue
    
    
    Gross profit
    
    
    income (loss)Open platform solutions
    
    $
    31,230
    
    
    $
    20,347
    
    
    $
    6,741
    
    
    $
    15,956
    
    
    $
    8,675
    
    
    $
    (3,494
    )Systems and resource
management
    
    
    42,193
    
    
    
    34,039
    
    
    
    25,467
    
    
    
    43,664
    
    
    
    35,641
    
    
    
    28,646Identity and security
management
    
    
    50,662
    
    
    
    23,315
    
    
    
    7,923
    
    
    
    51,042
    
    
    
    20,215
    
    
    
    6,312Workgroup
    
    
    108,302
    
    
    
    91,051
    
    
    
    78,583
    
    
    
    114,255
    
    
    
    90,672
    
    
    
    78,324Business consulting
    
    
    6,769
    
    
    
    1,296
    
    
    
    1,296
    
    
    
    8,232
    
    
    
    1,547
    
    
    
    1,547Stock-based compensation
expense
    
    
    
    
    
    
    (937
    )
    
    
    (9,933
    )
    
    
    
    
    
    
    (923
    )
    
    
    (7,660
    )Common unallocated
operating costs
    
    
    
    
    
    
    
    
    
    
    (121,123
    )
    
    
    
    
    
    
    
    
    
    
    (109,030
    )Total per statements of
operations
    
    $
    239,156
    
    
    $
    169,111
    
    
    $
    (11,046
    )
    
    $
    233,149
    
    
    $
    155,827
    
    
    $
    (5,355
    )
 Six Months EndedApril 30, 2007
    
    
    April 30, 2006Operating
    
    
    
    
    
    
    
    
    
    
    Operating(in thousands)
    
    Net revenue
    
    
    Gross profit
    
    
    income (loss)
    
    
    Net revenue
    
    
    Gross profit
    
    
    income (loss)Open platform solutions
    
    $
    54,864
    
    
    $
    35,488
    
    
    $
    10,068
    
    
    $
    33,258
    
    
    $
    19,106
    
    
    $
    (3,879
    )Systems and resource
management
    
    
    84,468
    
    
    
    67,823
    
    
    
    52,298
    
    
    
    86,108
    
    
    
    70,156
    
    
    
    56,685Identity and security
management
    
    
    98,277
    
    
    
    42,818
    
    
    
    13,079
    
    
    
    101,316
    
    
    
    40,881
    
    
    
    14,612Workgroup
    
    
    213,164
    
    
    
    177,596
    
    
    
    153,926
    
    
    
    232,590
    
    
    
    184,192
    
    
    
    160,415Business consulting
    
    
    12,979
    
    
    
    1,907
    
    
    
    1,907
    
    
    
    16,418
    
    
    
    3,238
    
    
    
    3,238Stock-based compensation
expense
    
    
    
    
    
    
    (1,984
    )
    
    
    (16,432
    )
    
    
    
    
    
    
    (1,985
    )
    
    
    (21,162
    )Common unallocated
operating costs
    
    
    
    
    
    
    
    
    
    
    (246,499
    )
    
    
    
    
    
    
    
    
    
    
    (214,594
    )Total per statements of
operations
    
    $
    463,752
    
    
    $
    323,648
    
    
    $
    (31,653
    )
    
    $
    469,690
    
    
    $
    315,588
    
    
    $
    (4,685
    )
    22




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##### Table of Contents



T. Derivative Instruments
   U. Recent Accounting Pronouncements
    23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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, expect, plan, anticipate, believe, estimate,
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 of the date hereof, and are subject to risks and uncertainties. We expressly disclaim any
obligation, except as required by law, or undertaking to update or revise any forward-looking
statements contained 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. We are subject to a number of risks, some of which
may be similar to those of other companies of similar size in our industry, including pre-tax
losses, rapid technological changes, competition, limited number of suppliers, customer
concentration, failure to successfully integrate acquisitions, adverse government regulations,
failure to manage international activities, and loss of key individuals. Risks that may affect our
operating results include, but are not limited to, those discussed in the Risk Factors section of
our Annual Report on Form 10-K for fiscal 2006 filed with the Securities and Exchange Commission on
May 25, 2007. Readers should carefully review the risk factors described in the Annual Report on
Form 10-K for fiscal 2006 and in other documents that we file from time to time with the Securities
and Exchange Commission.
 Introduction
    Open Platform Solutions.
  
    
    SUSE Linux Enterprise Server 10
    
    SUSE Linux Enterprise Desktop 10
    
    openSUSE (formerly SUSE LINUX Professional)
    
    SUSE Engineering
 Systems and Resource Management.
 24




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##### Table of Contents




    
    ZENworks Suite
    
    ZENworks Patch Management
    
    ZENworks Asset Management
    
    ZENworks Linux Management
 Identity and Security Management.
  
    
    Identity Manager
    
    Access Manager
    
    SecureLogin
    
    Sentinel
    
    eDirectory
    
    Web services
 Workgroup.
  
    
    Open Enterprise Server (OES)
    
    GroupWise
    
    NetWare
 Overview
  
    
    Within our Open Platform Solutions business unit, Linux and Open Source products
remain an important growth business. Revenue from our Linux Platform Products
increased 83% year-over-year during the second quarter of fiscal 2007. In November
2006, we announced a significant partnership with Microsoft which contributed to our
strong revenue growth rates. The agreement accounted for 25% of Linux Platform Product
revenue in the second quarter of fiscal 2007. We expect strong revenue performance in
open platform solutions in fiscal 2007.
    
    Systems and Resource Management products continue to be an important part of our
product offering. Our strategy is to provide a complete desktop to data center
offering, with leadership in virtualization for both Linux and mixed-source
environments. Revenue has been relatively flat for our desktop products as the market
has been anticipating our refreshed product offering which we expect to ship this
summer.
 25




---



##### Table of Contents




    
    We continue to expand our position in the Identity and Security Management market
by offering products that deliver a complete, integrated solution in the areas of
security, compliance and governance issues. Our unique role-based,
policy-driven approach has been well received. We recently released significant, new
enhancements for our Identity Manager and Sentinel solutions.
    
    Our Workgroup revenue base is an important source of cash flow and provides us
potential opportunity to sell additional products and services. Our Workgroup business
declined 4% in the second quarter of fiscal 2007 as compared to the same period a year
ago. The better-than-expected decline was due to several factors, including increased
demand for our bundled offering, Novell Open Workgroup Suite.
   Critical Accounting Policies
 Microsoft Agreements-related Revenue
    
    
    Development of technologies to optimize SLES and Windows, each running as guests in a
virtualized setting on the other operating system;
    
    Development of management tools for managing heterogeneous virtualization environments, to
enable each partys management tools to command, control and configure the other partys
operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and
OpenOffice document formats; and
    
    Collaboration on improving directory and identity interoperability and identity management
between Microsoft Active Directory software and Novell eDirectory software.
   26




---



##### Table of Contents



Acquisitions
 RedMojo
  Divestitures
 Salmon
    Celerant
  27




---



##### Table of Contents



Three months ended
    
    
    Six months endedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Salmon net revenue
    
    $
    2,371
    
    
    $
    5,577
    
    
    $
    7,351
    
    
    $
    11,330Celerant net revenue
    
    $
    
    
    
    $
    39,590
    
    
    $
    
    
    
    $
    71,704Salmon income (loss) before taxes
    
    $
    (54
    )
    
    $
    658
    
    
    $
    83
    
    
    $
    1,315Celerant income before taxes
    
    
    
    
    
    
    2,621
    
    
    
    
    
    
    
    1,578Impairment of long-lived assets of Salmon
    
    
    
    
    
    
    
    
    
    
    (10,848
    )
    
    
    Gain on sale of Salmon
    
    
    628
    
    
    
    
    
    
    
    628
    
    
    
    Income tax expense (benefit)
    
    
    2,656
    
    
    
    1,892
    
    
    
    (69
    )
    
    
    1,612Income (loss) from discontinued operations
    
    $
    (2,082
    )
    
    $
    1,387
    
    
    $
    (10,068
    )
    
    $
    1,281
 Results of Operations
 Revenue
  Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    41,723
    
    
    $
    40,063
    
    
    
    4
    %
    
    $
    80,074
    
    
    $
    82,165
    
    
    
    (3
    )%Maintenance, subscriptions and services
    
    
    197,433
    
    
    
    193,086
    
    
    
    2
    %
    
    
    383,678
    
    
    
    387,525
    
    
    
    (1
    )%Total net revenue
    
    $
    239,156
    
    
    $
    233,149
    
    
    
    3
    %
    
    $
    463,752
    
    
    $
    469,690
    
    
    
    (1
    )%
    
    
    Open platform solutions. Products include:
 
    
    Linux platform products  major products include SUSE Linux Enterprise Server
and our SUSE Linux Enterprise Desktop
    
    Other open platform products  major products include openSUSE (formerly SUSE
LINUX Professional) and SUSE Engineering
 
    
    Systems and resource management. Products include:
 
    
    ZENworks
 28




---



##### Table of Contents




    
    Identity and security management. Products include:
 
    
    Identity and access management major products include Identity Manager,
Access Manager, SecureLogin and Sentinel
    
    Other identity and security management  major products include eDirectory and Web services
 
    
    Workgroup. Products include:
 
    
    Open Enterprise Server (OES)
    
    NetWare and other NetWare-related  major products include NetWare and Cluster Services
    
    Collaboration  major products include GroupWise
    
    Other workgroup  major products include BorderManager
 
    
    Business consulting  Non-Novell product-related, general business consulting
 Net revenue in the open platform solutions segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    
    
    
    $
    74
    
    
    
    
    %
    
    $
    194
    
    
    $
    478
    
    
    
    (59
    )%Maintenance, subscriptions and services
    
    
    21,041
    
    
    
    11,334
    
    
    
    86
    %
    
    
    38,234
    
    
    
    24,057
    
    
    
    59
    %Global services
    
    
    10,189
    
    
    
    4,548
    
    
    
    124
    %
    
    
    16,436
    
    
    
    8,723
    
    
    
    88
    %Total net revenue
    
    $
    31,230
    
    
    $
    15,956
    
    
    
    96
    %
    
    $
    54,864
    
    
    $
    33,258
    
    
    
    65
    %
  Net revenue in the systems and resource management segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    7,650
    
    
    $
    7,105
    
    
    
    8
    %
    
    $
    15,115
    
    
    $
    13,477
    
    
    
    12
    %Maintenance, subscriptions and services
    
    
    24,770
    
    
    
    26,694
    
    
    
    (7
    )%
    
    
    49,467
    
    
    
    53,480
    
    
    
    (8
    )%Global services
    
    
    9,773
    
    
    
    9,865
    
    
    
    (1
    )%
    
    
    19,886
    
    
    
    19,151
    
    
    
    4
    %Total net revenue
    
    $
    42,193
    
    
    $
    43,664
    
    
    
    (3
    )%
    
    $
    84,468
    
    
    $
    86,108
    
    
    
    (2
    )%
  29




---



##### Table of Contents



Net revenue in the identity and security management segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    11,128
    
    
    $
    9,537
    
    
    
    17
    %
    
    $
    22,535
    
    
    $
    22,254
    
    
    
    1
    %Maintenance, subscriptions and services
    
    
    15,570
    
    
    
    17,871
    
    
    
    (13
    )%
    
    
    31,591
    
    
    
    35,000
    
    
    
    (10
    )%Global services
    
    
    23,964
    
    
    
    23,634
    
    
    
    1
    %
    
    
    44,151
    
    
    
    44,062
    
    
    
    
    %Total net revenue
    
    $
    50,662
    
    
    $
    51,042
    
    
    
    (1
    )%
    
    $
    98,277
    
    
    $
    101,316
    
    
    
    (3
    )%
   Net revenue in the workgroup segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    22,945
    
    
    $
    23,347
    
    
    
    (2
    )%
    
    $
    42,230
    
    
    $
    45,956
    
    
    
    (8
    )%Maintenance, subscriptions and services
    
    
    61,084
    
    
    
    63,978
    
    
    
    (5
    )%
    
    
    122,279
    
    
    
    131,824
    
    
    
    (7
    )%Global services
    
    
    24,273
    
    
    
    26,930
    
    
    
    (10
    )%
    
    
    48,655
    
    
    
    54,810
    
    
    
    (11
    )%Total net revenue
    
    $
    108,302
    
    
    $
    114,255
    
    
    
    (5
    )%
    
    $
    213,164
    
    
    $
    232,590
    
    
    
    (8
    )%
  Net revenue in the business consulting segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    April 30,
    
    
    
    
    
    
    April 30,
    
    
    April 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Maintenance, subscriptions and services
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    
    %Global services
    
    
    6,769
    
    
    
    8,232
    
    
    
    18
    %
    
    
    12,979
    
    
    
    16,418
    
    
    
    (21
    )%Total net revenue
    
    $
    6,769
    
    
    $
    8,232
    
    
    
    18
    %
    
    $
    12,979
    
    
    $
    16,418
    
    
    
    (21
    )%
  Deferred revenue
  30




---



##### Table of Contents



Gross profit
 Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    April 30,
    
    
    
    
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSoftware licenses gross profit
    
    $
    37,463
    
    
    $
    36,022
    
    
    
    4
    %
    
    $
    71,587
    
    
    $
    73,580
    
    
    
    (3
    )%percentage of related revenue
    
    
    90
    %
    
    
    90
    %
    
    
    
    
    
    
    89
    %
    
    
    90
    %Maintenance, subscriptions and
services gross profit
    
    $
    131,648
    
    
    $
    119,805
    
    
    
    10
    %
    
    $
    252,061
    
    
    $
    242,008
    
    
    
    4
    %percentage of related revenue
    
    
    67
    %
    
    
    62
    %
    
    
    
    
    
    
    66
    %
    
    
    62
    %Total gross profit
    
    $
    169,111
    
    
    $
    155,827
    
    
    
    9
    %
    
    $
    323,648
    
    
    $
    315,588
    
    
    
    3
    %percentage of revenue
    
    
    71
    %
    
    
    67
    %
    
    
    
    
    
    
    70
    %
    
    
    67
    %
    Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    April 30,
    
    
    
    
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOpen platform solutions
    
    $
    20,347
    
    
    $
    8,675
    
    
    
    135
    %
    
    $
    35,488
    
    
    $
    19,106
    
    
    
    86
    %percentage of related revenue
    
    
    65
    %
    
    
    54
    %
    
    
    
    
    
    
    65
    %
    
    
    57
    %Systems and resource management
    
    $
    34,039
    
    
    $
    35,641
    
    
    
    (4
    )%
    
    $
    67,823
    
    
    $
    70,156
    
    
    
    (3
    )%percentage of related revenue
    
    
    81
    %
    
    
    82
    %
    
    
    
    
    
    
    80
    %
    
    
    81
    %Identity and security management
    
    $
    23,315
    
    
    $
    20,215
    
    
    
    15
    %
    
    $
    42,818
    
    
    $
    40,881
    
    
    
    5
    %percentage of related revenue
    
    
    46
    %
    
    
    40
    %
    
    
    
    
    
    
    44
    %
    
    
    40
    %Workgroup
    
    $
    91,051
    
    
    $
    90,672
    
    
    
    
    %
    
    $
    177,596
    
    
    $
    184,192
    
    
    
    (4
    )%percentage of related revenue
    
    
    84
    %
    
    
    79
    %
    
    
    
    
    
    
    83
    %
    
    
    79
    %Business consulting
    
    $
    1,296
    
    
    $
    1,547
    
    
    
    (16
    )%
    
    $
    1,907
    
    
    $
    3,238
    
    
    
    (41
    )%percentage of related revenue
    
    
    19
    %
    
    
    19
    %
    
    
    
    
    
    
    15
    %
    
    
    20
    %Stock-based compensation expense
    
    $
    (937
    )
    
    $
    (923
    )
    
    
    (2
    )%
    
    $
    (1,984
    )
    
    $
    (1,985
    )
    
    
    
    %percentage of related revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Total gross profit
    
    $
    169,111
    
    
    $
    155,827
    
    
    
    9
    %
    
    $
    323,648
    
    
    $
    315,588
    
    
    
    3
    %percentage of revenue
    
    
    71
    %
    
    
    67
    %
    
    
    
    
    
    
    70
    %
    
    
    67
    %
  
    
    open platform solutions  increased primarily due to the increase in related revenue and economies of scale
    
    systems and resource management  remained relatively flat
    
    identity and security management   increased due primarily to improved
profitability from related consulting contracts and lower royalty costs
    
    workgroup  increased due primarily to lower consulting costs
    
    business consulting   decreased due primarily to increased costs and fewer consulting contracts.
 31




---



##### Table of Contents



Operating expenses
 Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    April 30,
    
    
    
    
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSales and marketing
    
    $
    88,447
    
    
    $
    89,453
    
    
    
    (1
    )%
    
    $
    178,776
    
    
    $
    177,168
    
    
    
    1
    %percentage of revenue
    
    
    37
    %
    
    
    38
    %
    
    
    
    
    
    
    38
    %
    
    
    38
    %Product development
    
    $
    52,562
    
    
    $
    47,119
    
    
    
    12
    %
    
    $
    99,029
    
    
    $
    90,843
    
    
    
    9
    %percentage of revenue
    
    
    22
    %
    
    
    20
    %
    
    
    
    
    
    
    21
    %
    
    
    19
    %General and administrative
    
    $
    34,625
    
    
    $
    24,690
    
    
    
    40
    %
    
    $
    65,622
    
    
    $
    53,342
    
    
    
    23
    %percentage of revenue
    
    
    14
    %
    
    
    11
    %
    
    
    
    
    
    
    14
    %
    
    
    11
    %Restructuring expenses (benefit)
    
    $
    4,523
    
    
    $
    
    
    
    
    
    %
    
    $
    11,874
    
    
    $
    (1,000
    )
    
    
    
    %percentage of revenue
    
    
    2
    %
    
    
    
    %
    
    
    
    
    
    
    3
    %
    
    
    
    %Purchased in-process research
and development
    
    $
    
    
    
    $
    2,110
    
    
    
    
    %
    
    $
    
    
    
    $
    2,110
    
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    1
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Gain on sale of property,
plant, and equipment
    
    $
    
    
    
    $
    (2,190
    )
    
    
    
    %
    
    $
    
    
    
    $
    (2,190
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    (1
    )%
    
    
    
    
    
    
    
    %
    
    
    
    %Total operating expenses
    
    $
    180,157
    
    
    $
    161,182
    
    
    
    12
    %
    
    $
    355,301
    
    
    $
    320,273
    
    
    
    11
    %percentage of revenue
    
    
    75
    %
    
    
    69
    %
    
    
    
    
    
    
    77
    %
    
    
    68
    %
       32




---



##### Table of Contents



Other income (expense), net
 Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    April 30,
    
    
    
    
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeInvestment income
    
    $
    20,669
    
    
    $
    15,577
    
    
    
    33
    %
    
    $
    41,372
    
    
    $
    30,357
    
    
    
    36
    %percentage of revenue
    
    
    9
    %
    
    
    7
    %
    
    
    
    
    
    
    9
    %
    
    
    6
    %Gain on sale of venture capital funds
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    3,591
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    1
    %
    
    
    
    %Impairment of investments
    
    $
    
    
    
    $
    (226
    )
    
    
    
    %
    
    $
    
    
    
    $
    (613
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Interest expense and other, net
    
    $
    (6,914
    )
    
    $
    (2,434
    )
    
    
    184
    %
    
    $
    (13,163
    )
    
    $
    (3,923
    )
    
    
    (235
    )%percentage of revenue
    
    
    (3
    )%
    
    
    (1
    )%
    
    
    
    
    
    
    (3
    )%
    
    
    (1
    )%Total other income, net
    
    $
    13,755
    
    
    $
    12,917
    
    
    
    6
    %
    
    $
    31,800
    
    
    $
    25,821
    
    
    
    23
    %percentage of revenue
    
    
    6
    %
    
    
    6
    %
    
    
    
    
    
    
    7
    %
    
    
    5
    %
   .
 33




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##### Table of Contents



Income tax expense on income from continuing operations
 Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    April 30,
    
    
    
    
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeIncome tax expense
    
    $
    2,819
    
    
    $
    5,607
    
    
    
    (50
    )%
    
    $
    12,216
    
    
    $
    17,210
    
    
    
    (29
    )%percentage of related revenue
    
    
    1
    %
    
    
    2
    %
    
    
    
    
    
    
    3
    %
    
    
    4
    %Effective tax rate
    
    
    104
    %
    
    
    74
    %
    
    
    
    
    
    
    8,310
    %
    
    
    81
    %
     34




---



##### Table of Contents



Net income (loss) components
 Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,
    
    April 30,
    
    April 30,(dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Income (loss) from continuing operations
    
    $
    (110
    )
    
    $
    1,955
    
    
    $
    (12,069
    )
    
    $
    3,926Income (loss) from discontinued operations,
net of tax
    
    $
    (2,082
    )
    
    $
    1,387
    
    
    $
    (10,068
    )
    
    $
    1,281Net income (loss)
    
    $
    (2,192
    )
    
    $
    3,342
    
    
    $
    (22,137
    )
    
    $
    5,207
  Forward- looking Information
  Liquidity and Capital Resources
 (dollars in thousands)
    
    April 30, 2007
    
    October 31, 2006
    
    ChangeCash, cash equivalents and short-term investments
    
    $
    1,791,713
    
    
    $
    1,466,287
    
    
    
    22
    %Percent of total assets
    
    
    66
    %
    
    
    60
    %
  Six Months Ended(in thousands)
    
    April 30, 2007
    
    April 30, 2006Cash provided by operating activities
    
    $
    318,933
    
    
    $
    1,177Issuance of common stock, net
    
    
    8,127
    
    
    
    18,082Repurchases of common stock, retired
    
    
    
    
    
    
    (267,479
    )Purchases of property, plant and equipment
    
    
    (12,508
    )
    
    
    (14,554
    )Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Proceeds from the sales of and distributions from long-term investments
    
    
    1,738
    
    
    
    4,115Proceeds from the sale of Salmon, net of cash divested
    
    
    2,749
    
    
    
    Proceeds from repayment of note receivable
    
    
    
    
    
    
    9,092Cash paid for acquisitions, net of cash acquired
    
    
    (9,727
    )
    
    
    (71,550
    )Cash paid for equity share in OIN
    
    
    
    
    
    
    (4,225
    )Purchases of long-term investments
    
    
    
    
    
    
    (7,129
    )Other long-term investing activities
    
    
    5,166
    
    
    
    4,552
   35




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##### Table of Contents



Recent Accounting Pronouncements
  36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Market Risk
  Foreign Currency Risk
   37




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##### Table of Contents



Item 4. Controls and Procedures
     
 Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification31.2
    
    Rule 13a-14(a) Certification32.1
    
    18 U.S.C. Section 1350 Certification32.2
    
    18 U.S.C. Section 1350 Certification
 38




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##### Table of Contents



SIGNATURES
  Novell, Inc. (Registrant)Date: June 8, 2007
    By:
    /s/ DANA C. RUSSELLDana C. RussellSenior  Vice President, Chief
Financial Officer
(Principal Financial Officer and Principal Accounting Officer) 39




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification31.2
    
    Rule 13a-14(a) Certification32.1
    
    18 U.S.C. Section 1350 Certification32.2
    
    18 U.S.C. Section 1350 Certification