##### 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 July 31, 2006
 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
(State or other jurisdiction of 
incorporation or organization)
    
    87-0393339
(I.R.S. Employer
Identification No.)
 404 Wyman Street
Waltham, MA 02451
 (781) 464-8000
 N/A
 
 o þ
  þ o o
 o þ




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##### 



NOVELL, INC.
TABLE OF CONTENTS
 Explanatory Note
    
    
    3Part I  Financial Information:
    
    
    4Item 1 : Financial Statements
    
    
    4Consolidated Balance Sheets at July 31, 2006 (unaudited) and October 31, 2005
    
    
    4Consolidated Statements of Operations for the three and nine months ended July 31, 2006 and 2005
(unaudited)
    
    
    5Consolidated Statements of Cash Flows for the nine months ended July 31, 2006 and 2005 (unaudited)
    
    
    7Notes to Unaudited Consolidated Financial Statements
    
    
    8Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 4: Controls and Procedures
    
    
    51Part II  Other Information:
    
    
    51Item 1: Legal Proceedings
    
    
    51Item 1A: Risk Factors
    
    
    51Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 6: Exhibits
    
    
    57EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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EXPLANATORY NOTE
     3




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 NOVELL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  July 31,
    
    
    October 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    500,716
    
    
    $
    811,238Short-term investments
    
    
    798,615
    
    
    
    843,666Receivables (net of allowances of $7,802 and $16,638 at July 31, 2006 and October 31,
2005, respectively)
    
    
    236,112
    
    
    
    293,627Prepaid expenses
    
    
    32,159
    
    
    
    30,777Other current assets
    
    
    24,766
    
    
    
    29,745Current assets held for sale
    
    
    2,930
    
    
    
    Total current assets
    
    
    1,595,298
    
    
    
    2,009,053Property, plant and equipment, net
    
    
    186,752
    
    
    
    212,377Long-term investments
    
    
    55,064
    
    
    
    54,340Goodwill
    
    
    427,375
    
    
    
    395,509Intangible assets, net
    
    
    44,919
    
    
    
    56,421Deferred income taxes
    
    
    1,334
    
    
    
    1,384Other assets
    
    
    33,085
    
    
    
    32,774Total assets
    
    $
    2,343,827
    
    
    $
    2,761,858LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    40,320
    
    
    $
    45,445Accrued compensation
    
    
    105,934
    
    
    
    113,760Other accrued liabilities
    
    
    102,521
    
    
    
    131,105Income taxes payable
    
    
    47,879
    
    
    
    56,869Deferred revenue
    
    
    351,382
    
    
    
    376,973Current liabilities held for sale
    
    
    619
    
    
    
    Total current liabilities
    
    
    648,655
    
    
    
    724,152Deferred income taxes
    
    
    3,995
    
    
    
    4,537Long-term deferred revenue
    
    
    39,417
    
    
    
    28,778Senior convertible debentures
    
    
    600,000
    
    
    
    600,000Total liabilities
    
    
    1,292,067
    
    
    
    1,357,467Minority interests
    
    
    
    
    
    
    8,555Redeemable securities:Series B Preferred Stock, $.10 par value, Authorized  1,000 shares; Issued  1,000
shares; Outstanding  187 shares at July 31, 2006 and October 31, 2005 (at redemption
value)
    
    
    9,350
    
    
    
    9,350Stockholders 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 
354,374,087 and 400,993,898 shares; Outstanding  339,209,406 and 385,820,699 shares
at July 31, 2006 and October 31, 2005, respectively
    
    
    35,437
    
    
    
    40,099Additional paid-in capital
    
    
    303,856
    
    
    
    483,157Treasury stock, at cost  15,164,681 and 15,173,199 shares at July 31, 2006 and
October 31, 2005, respectively
    
    
    (124,805
    )
    
    
    (124,875
    )Retained earnings
    
    
    820,625
    
    
    
    984,107Accumulated other comprehensive income
    
    
    7,297
    
    
    
    7,444Unearned stock compensation
    
    
    
    
    
    
    (3,446
    )Total stockholders equity
    
    
    1,042,410
    
    
    
    1,386,486Total liabilities, redeemable securities, and stockholders equity
    
    $
    2,343,827
    
    
    $
    2,761,858
  4




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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005(unaudited)Net revenue:Software licenses
    
    $
    45,435
    
    
    $
    45,628Maintenance, subscriptions, and services
    
    
    195,917
    
    
    
    206,754Total net revenue
    
    
    241,352
    
    
    
    252,382Cost of revenue:Software licenses
    
    
    4,984
    
    
    
    4,475Maintenance, subscriptions, and services
    
    
    75,692
    
    
    
    80,171Total cost of revenue
    
    
    80,676
    
    
    
    84,646Gross profit
    
    
    160,676
    
    
    
    167,736Operating expense (income):Sales and marketing
    
    
    90,349
    
    
    
    85,721Product development
    
    
    45,993
    
    
    
    49,040General and administrative
    
    
    49,764
    
    
    
    24,453Restructuring expenses
    
    
    
    
    
    
    9,443Gain on sale of property, plant and equipment
    
    
    (3,778
    )
    
    
    Loss on Japan consulting group held for sale
    
    
    8,273
    
    
    
    Executive termination benefits
    
    
    9,409
    
    
    
    Total operating expense
    
    
    200,010
    
    
    
    168,657Loss from operations
    
    
    (39,334
    )
    
    
    (921
    )Other income (expense):Investment income
    
    
    13,281
    
    
    
    12,892Impairment of investments
    
    
    (278
    )
    
    
    (683
    )Interest expense and other, net
    
    
    (2,192
    )
    
    
    (3,859
    )Total other income
    
    
    10,811
    
    
    
    8,350Income (loss) from continuing operations before income taxes
    
    
    (28,523
    )
    
    
    7,429Income tax (benefit) expense
    
    
    (7,963
    )
    
    
    6,869Income (loss) from continuing operations
    
    
    (20,560
    )
    
    
    560Income from discontinued operations before taxes (including a gain on disposal of $11,960)
    
    
    12,165
    
    
    
    2,752Income tax (benefit) expense on discontinued operations
    
    
    (2,871
    )
    
    
    1,172Income from discontinued operations
    
    
    15,036
    
    
    
    1,580Income (loss) before cumulative effect of a change in accounting principle
    
    
    (5,524
    )
    
    
    2,140Cumulative effect of a change in accounting principle
    
    
    (897
    )
    
    
    Net (loss) income
    
    $
    (6,421
    )
    
    $
    2,140Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.00Discontinued operations
    
    
    0.04
    
    
    
    0.01Cumulative effect of a change in accounting principle
    
    
    (0.00
    )
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.02
    )
    
    $
    0.01Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.00Discontinued operations
    
    
    0.04
    
    
    
    0.00Cumulative effect of a change in accounting principle
    
    
    (0.00
    )
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.02
    )
    
    $
    0.00Weighted-average shares outstanding  basic
    
    
    340,127
    
    
    
    380,242Weighted-average shares outstanding  diluted
    
    
    340,127
    
    
    
    385,377
  5




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NOVELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Nine Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005(unaudited)Net revenue:Software licenses
    
    $
    127,600
    
    
    $
    135,692Maintenance, subscriptions, and services
    
    
    594,772
    
    
    
    615,913Total net revenue
    
    
    722,372
    
    
    
    751,605Cost of revenue:Software licenses
    
    
    13,570
    
    
    
    13,970Maintenance, subscriptions, and services
    
    
    230,081
    
    
    
    249,043Total cost of revenue
    
    
    243,651
    
    
    
    263,013Gross profit
    
    
    478,721
    
    
    
    488,592Operating expense (income):Sales and marketing
    
    
    268,466
    
    
    
    266,230Product development
    
    
    136,836
    
    
    
    146,845General and administrative
    
    
    103,427
    
    
    
    68,118Restructuring expenses (benefit)
    
    
    (1,000
    )
    
    
    19,692Purchased in-process research and development
    
    
    2,110
    
    
    
    480Gain on sale of property, plant and equipment
    
    
    (5,968
    )
    
    
    (1,589
    )Gain on settlement of potential litigation
    
    
    
    
    
    
    (447,560
    )Loss on Japan consulting group held for sale
    
    
    8,273
    
    
    
    Executive termination benefits
    
    
    9,409
    
    
    
    Total operating expense
    
    
    521,553
    
    
    
    52,216Income (loss) from continuing operations
    
    
    (42,832
    )
    
    
    436,376Other income (expense):Investment income
    
    
    43,766
    
    
    
    32,279Impairment of investments
    
    
    (891
    )
    
    
    (2,613
    )Interest expense and other, net
    
    
    (6,115
    )
    
    
    (7,850
    )Total other income
    
    
    36,760
    
    
    
    21,816Income (loss) from operations before income taxes
    
    
    (6,072
    )
    
    
    458,192Income tax expense
    
    
    7,016
    
    
    
    81,234Income (loss) from continuing operations
    
    
    (13,088
    )
    
    
    376,958Income from discontinued operations before taxes (including a gain on
disposal of $11,960)
    
    
    13,743
    
    
    
    7,642Income tax expense on discontinued operations
    
    
    972
    
    
    
    2,926Income from discontinued operations
    
    
    12,771
    
    
    
    4,716Income (loss) before cumulative effect of a change in accounting principle
    
    
    (317
    )
    
    
    381,674Cumulative effect of a change in accounting principle
    
    
    (897
    )
    
    
    Net income (loss)
    
    $
    (1,214
    )
    
    $
    381,674Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.04
    )
    
    $
    0.98Discontinued operations
    
    
    0.04
    
    
    
    0.02Cumulative effect of a change in accounting principle
    
    
    0.00
    
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.00
    )
    
    $
    1.00Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.04
    )
    
    $
    0.87Discontinued operations
    
    
    0.04
    
    
    
    0.01Cumulative effect of a change in accounting principle
    
    
    (0.00
    )
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.00
    )
    
    $
    0.88Weighted-average shares outstanding  basic
    
    
    368,106
    
    
    
    378,573Weighted-average shares outstanding  diluted
    
    
    368,106
    
    
    
    435,820
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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005(unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (1,214
    )
    
    $
    381,674Adjustments to reconcile net income (loss) to net cash provided by operating activities:Stock-based compensation expense
    
    
    29,112
    
    
    
    1,234Tax effects of stock-based compensation plans
    
    
    4,258
    
    
    
    16,166Excess tax benefits from stock-based compensation
    
    
    (4,258
    )
    
    
    Depreciation and amortization
    
    
    33,908
    
    
    
    41,074Decrease in accounts receivable allowances
    
    
    (4,660
    )
    
    
    (9,352
    )Utilization of previously reserved acquired net operating losses
    
    
    3,860
    
    
    
    29,600Purchased in-process research and development
    
    
    2,110
    
    
    
    480Gain on sale of property, plant and equipment
    
    
    (5,968
    )
    
    
    (1,589
    )Loss on Japan consulting group held for sale
    
    
    8,273
    
    
    
    Executive termination benefits
    
    
    9,409
    
    
    
    Impairment of long-term investments, net of gains
    
    
    626
    
    
    
    1,108Gain on sale of Celerant, discontinued operations, before taxes
    
    
    (11,960
    )
    
    
    Cumulative effect of a change in accounting principle
    
    
    897
    
    
    
    Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:Receivables
    
    
    30,061
    
    
    
    24,628Prepaid expenses
    
    
    (3,805
    )
    
    
    (8,196
    )Other current assets
    
    
    3,965
    
    
    
    3,873Current assets held for sale
    
    
    (2,311
    )
    
    
    Deferred income taxes
    
    
    (1,072
    )
    
    
    (420
    )Accounts payable
    
    
    (2,701
    )
    
    
    (7,720
    )Accrued liabilities
    
    
    (37,086
    )
    
    
    (21,159
    )Deferred revenue
    
    
    (14,667
    )
    
    
    (9,240
    )Net cash provided by operating activities
    
    
    36,777
    
    
    
    442,161Cash flows from financing activitiesIssuance of common stock, net
    
    
    21,674
    
    
    
    16,035Excess tax benefits from stock-based compensation
    
    
    4,258
    
    
    
    Payment of cash dividends on Series B Preferred Stock
    
    
    (141
    )
    
    
    (375
    )Repurchases of common stock, retired
    
    
    (400,000
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (374,209
    )
    
    
    15,660Cash flows from investing activitiesPurchases of property, plant and equipment
    
    
    (19,540
    )
    
    
    (20,168
    )Proceeds from the sale of property, plant and equipment
    
    
    24,992
    
    
    
    10,421Purchases of short-term investments
    
    
    (407,175
    )
    
    
    (798,735
    )Maturities of short-term investments
    
    
    110,129
    
    
    
    287,614Sales of short-term investments
    
    
    342,081
    
    
    
    664,913Cash paid for acquisition of e-Security, net of cash acquired
    
    
    (71,550
    )
    
    
    Cash paid for acquisition of Tally Systems and Immunix, net of cash acquired
    
    
    
    
    
    
    (33,829
    )Cash paid for equity investment in Open Invention Network, LLC
    
    
    (4,225
    )
    
    
    Purchase of intangible assets
    
    
    (1,159
    )
    
    
    (15,500
    )Purchases of long-term investments
    
    
    (8,608
    )
    
    
    (10,053
    )Proceeds from the sales of and distributions from long-term investments
    
    
    7,180
    
    
    
    8,701Proceeds from repayment of note receivable
    
    
    9,092
    
    
    
    Proceeds from the sale of Celerant, net of cash divested
    
    
    37,922
    
    
    
    Other
    
    
    7,771
    
    
    
    241Net cash provided by investing activities
    
    
    26,910
    
    
    
    93,605(Decrease) increase in cash and cash equivalents
    
    
    (310,522
    )
    
    
    551,426Cash and cash equivalents  beginning of period
    
    
    811,238
    
    
    
    434,404Cash and cash equivalents  end of period
    
    $
    500,716
    
    
    $
    985,830Supplemental disclosure of non-cash activities:Contribution of patents to Open Invention Network, LLC
    
    $
    14,383
    
    
    $
    
  7




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NOVELL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 July 31, 2006
 A. Quarterly Financial Statements
  Reclassifications
  B. Significant Accounting Policies
 Share-based Payments
     8




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C. Staff Accounting Bulletin No. 108
 Historical Stock-Based Compensation Practices
    9




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Administrative Corrections
 Number of Shares Approved Not Specified
 Authorization Incomplete or Received Late
    (amounts in 000s)Cumulative prior to fiscal 2004
    
    $
    18,291Fiscal 2004
    
    
    698Fiscal 2005
    
    
    201Total adjustment at November 1, 2005
    
    $
    19,190
 D. Acquisitions and Equity Investments
 e-Security
   Estimated
    
    
    EstimatedFair Value
    
    
    Useful Life(In thousands)Fair value of net tangible liabilities assumed
    
    $
    (1,135
    )
    
    
    N/AIn-process research and development
    
    
    2,110
    
    
    
    N/AIdentifiable intangible assets:Developed technology
    
    
    6,920
    
    
    3 yearsCustomer relationships
    
    
    3,640
    
    
    3 yearsTrademarks/trade names
    
    
    390
    
    
    3 yearsGoodwill
    
    
    60,908
    
    
    IndefiniteTotal net assets acquired
    
    $
    72,833
 10




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Three months ended
    
    Nine months endedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,(amounts in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    241,352
    
    
    $
    255,803
    
    
    $
    726,868
    
    
    $
    759,527Net income available to common stockholders  diluted
    
    $
    (6,468
    )
    
    $
    1,049
    
    
    $
    (6,314
    )
    
    $
    376,759Net income per share available to common
stockholders  diluted
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    0.86
 Open Invention Network LLC
  11




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Onward Novell
  E. Divestitures
 Celerant
   Three months ended
    
    
    Nine months endedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Celerant net revenue
    
    $
    11,637
    
    
    $
    37,832
    
    
    $
    83,341
    
    
    $
    125,788Celerant income before taxes
    
    $
    205
    
    
    $
    2,752
    
    
    $
    1,783
    
    
    $
    7,642Gain on sale of Celerant
    
    
    11,960
    
    
    
    
    
    
    
    11,960
    
    
    
    Income tax (benefit) expense
    
    
    (2,871
    )
    
    
    1,172
    
    
    
    972
    
    
    
    2,926Income from discontinued operations
    
    $
    15,036
    
    
    $
    1,580
    
    
    $
    12,771
    
    
    $
    4,716
  (In thousands)Sales price
    
    $
    77,014Costs to sell
    
    
    (2,405
    )74,609Net book value of Celerant:Cash
    
    
    37,344Accounts receivable, net
    
    
    35,185Other current assets
    
    
    2,418Goodwill
    
    
    24,452Other long-term assets
    
    
    1,978Current liabilities
    
    
    (26,878
    )Minority interest
    
    
    (2,993
    )Foreign exchange and other
    
    
    (8,857
    )62,649Gain on sale of Celerant before income taxes
    
    $
    11,960
 Japan Consulting Group
  12




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(In thousands)Fair value of JCG (non-contingent selling price)
    
    $
    2,800Costs to sell
    
    
    (393
    )2,407Net book value of JCG:Current assets
    
    
    2,935Goodwill
    
    
    7,106Current liabilities
    
    
    (619
    )Foreign exchange and other
    
    
    1,25810,680Impairment loss on sale of JCG before income taxes
    
    $
    8,273
  F. Cash, Cash Equivalents, and Short-Term Investments
     Fair Market(In thousands)
    
    Cost
    
    
    ValueLess than one year
    
    $
    320,304
    
    
    $
    318,633Due in one to two years
    
    
    277,746
    
    
    
    273,311Due in two to three years
    
    
    110,970
    
    
    
    109,685Due in more than three years
    
    
    88,607
    
    
    
    87,990No contractual maturity
    
    
    8,624
    
    
    
    8,996Total short-term investments
    
    $
    806,251
    
    
    $
    798,615
 13




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Three months ended
    
    Nine months endedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,(In thousands)
    
    2006
    
    2005
    
    2006
    
    2005Realized gains
    
    $
    71
    
    
    $
    60
    
    
    $
    312
    
    
    $
    445Realized losses
    
    $
    (297
    )
    
    $
    (235
    )
    
    $
    (1,831
    )
    
    $
    (793
    )
  G. Property, Plant and Equipment
  H. Long-Term Investments
   I. Goodwill and Intangible Assets
 Goodwill
  July 31,
    
    
    October 31,(In thousands)
    
    2006
    
    
    2005SUSE
    
    $
    172,086
    
    
    $
    176,963SilverStream
    
    
    110,495
    
    
    
    112,622e-Security
    
    
    59,699
    
    
    
    Ximian
    
    
    32,951
    
    
    
    33,852Cambridge Technology Partners
    
    
    
    
    
    
    25,903Tally
    
    
    15,052
    
    
    
    16,308Immunix
    
    
    14,374
    
    
    
    14,676Salmon
    
    
    11,702
    
    
    
    6,146Onward Novell
    
    
    2,010
    
    
    
    Other technology companies
    
    
    9,006
    
    
    
    9,039Total goodwill
    
    $
    427,375
    
    
    $
    395,509
  14




---



##### Table of Contents



Asia
    
    
    Celerant(In thousands)
    
    Americas
    
    
    EMEA
    
    
    Pacific
    
    
    Consulting
    
    
    TotalBalance as of October 31, 2005
    
    $
    191,498
    
    
    $
    150,487
    
    
    $
    27,621
    
    
    $
    25,903
    
    
    $
    395,509Onward Novell minority interest acquisition
    
    
    
    
    
    
    
    
    
    
    2,010
    
    
    
    
    
    
    
    2,010e-Security acquisition
    
    
    38,986
    
    
    
    16,450
    
    
    
    5,472
    
    
    
    
    
    
    
    60,908Celerant consulting divestiture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,452
    )
    
    
    (24,452
    )Impairment loss on Japan consulting group
held for sale
    
    
    
    
    
    
    
    
    
    
    (7,106
    )
    
    
    
    
    
    
    (7,106
    )Adjustments
    
    
    (1,887
    )
    
    
    4,049
    
    
    
    (205
    )
    
    
    (1,451
    )
    
    
    506Balance as of July 31, 2006
    
    $
    228,597
    
    
    $
    170,986
    
    
    $
    27,792
    
    
    $
    
    
    
    $
    427,375
  Intangible Assets
  July 31, 2006
    
    
    October 31, 2005Gross
    
    
    Accumulated
    
    
    Net Book
    
    
    Gross
    
    
    Accumulated
    
    
    Net Book(In thousands)
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Asset LivesDeveloped technology
    
    $
    30,929
    
    
    $
    (20,054
    )
    
    $
    10,875
    
    
    $
    22,850
    
    
    $
    (16,718
    )
    
    $
    6,132
    
    
    3-4 yearsTrademarks and trade names
    
    
    25,961
    
    
    
    (88
    )
    
    
    25,873
    
    
    
    25,571
    
    
    
    (20
    )
    
    
    25,551
    
    
    3 years or IndefinitePatents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,500
    
    
    
    (1,392
    )
    
    
    14,108
    
    
    10 yearsCustomer/contractual
relationships
    
    
    23,002
    
    
    
    (15,543
    )
    
    
    7,459
    
    
    
    19,362
    
    
    
    (10,454
    )
    
    
    8,908
    
    
    1-3 yearsInternal use software
    
    
    5,193
    
    
    
    (4,624
    )
    
    
    569
    
    
    
    5,193
    
    
    
    (3,700
    )
    
    
    1,493
    
    
    3 yearsNon-compete
agreement
    
    
    422
    
    
    
    (279
    )
    
    
    143
    
    
    
    422
    
    
    
    (193
    )
    
    
    229
    
    
    3 yearsTotal intangible assets
    
    $
    85,507
    
    
    $
    (40,588
    )
    
    $
    44,919
    
    
    $
    88,898
    
    
    $
    (32,477
    )
    
    $
    56,421
   J. Income Taxes
  15




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##### Table of Contents



K. Line of Credit
    16




---



##### Table of Contents



L. Restructuring and Merger Liabilities
 Restructuring Liabilities
  Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003
    
    
    Fiscal 2002
    
    
    Fiscal 2001(In thousands)
    
    Restructurings
    
    
    Restructurings
    
    
    Restructuring
    
    
    Restructuring
    
    
    Restructurings
    
    
    TotalBalance at October 31, 2005:Workforce reductions
    
    $
    28,492
    
    
    $
    1,243
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    29,735Excess facilities, property and
equipment
    
    
    6,451
    
    
    
    1,457
    
    
    
    3,121
    
    
    
    3,660
    
    
    
    327
    
    
    
    15,016Other restructuring-related costs
    
    
    259
    
    
    
    
    
    
    
    10
    
    
    
    37
    
    
    
    274
    
    
    
    580Total restructuring reserve balance
    
    
    35,202
    
    
    
    2,700
    
    
    
    3,131
    
    
    
    3,697
    
    
    
    601
    
    
    
    45,331Adjustments:Workforce reductions
    
    
    (1,702
    )
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,933
    )Excess facilities, property and
equipment
    
    
    148
    
    
    
    487
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    1,069Other restructuring-related costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    (259
    )
    
    
    (296
    )Total adjustments
    
    
    (1,554
    )
    
    
    256
    
    
    
    434
    
    
    
    (37
    )
    
    
    (259
    )
    
    
    (1,160
    )Payments:Workforce reductions
    
    
    (24,697
    )
    
    
    (1,012
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,709
    )Excess facilities, property and
equipment
    
    
    (3,712
    )
    
    
    (928
    )
    
    
    (1,067
    )
    
    
    (1,114
    )
    
    
    (327
    )
    
    
    (7,148
    )Other restructuring-related costs
    
    
    (151
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (15
    )
    
    
    (176
    )Total payments
    
    
    (28,560
    )
    
    
    (1,940
    )
    
    
    (1,077
    )
    
    
    (1,114
    )
    
    
    (342
    )
    
    
    (33,033
    )Balance at July 31, 2006:Workforce reductions
    
    
    2,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,093Excess facilities, property and
equipment
    
    
    2,887
    
    
    
    1,016
    
    
    
    2,488
    
    
    
    2,546
    
    
    
    
    
    
    
    8,937Other restructuring-related costs
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Total restructuring reserve balance
    
    $
    5,088
    
    
    $
    1,016
    
    
    $
    2,488
    
    
    $
    2,546
    
    
    $
    
    
    
    $
    11,138
  Merger Liabilities
  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atOctober 31,
    
    
    Additions From
    
    
    Payments/
    
    
    July 31,(In thousands)
    
    2005
    
    
    Acquisitions
    
    
    adjustments
    
    
    2006Facilities related
    
    $
    17,606
    
    
    $
    
    
    
    $
    (3,090
    )
    
    $
    14,516Employee related
    
    
    169
    
    
    
    437
    
    
    
    (365
    )
    
    
    241Other
    
    
    76
    
    
    
    646
    
    
    
    (596
    )
    
    
    126Total merger liabilities
    
    $
    17,851
    
    
    $
    1,083
    
    
    $
    (4,051
    )
    
    $
    14,883
   17




---



##### Table of Contents



M. Asset Retirement Obligations
    N. Senior Convertible Debentures
    18




---



##### Table of Contents



O. Guarantees
    P. Commitments and Contingencies
  Q. Legal Proceedings
    19




---



##### Table of Contents



20




---



##### Table of Contents



R. Redeemable Preferred Stock
  S. Net Income (Loss) Per Share From Continuing Operations Available to Common Stockholders
  Three Months EndedJuly 31,
    
    
    July 31,(In thousands, except per share data)
    
    2006
    
    
    2005Basic net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (20,560
    )
    
    $
    560Dividends on Series B Preferred Stock
    
    
    (47
    )
    
    
    (125
    )Allocation of earnings to holders of Series B Preferred Stock
    
    
    
    
    
    
    (5
    )Net income (loss) from continuing operations attributable to
common stockholders
    
    $
    (20,607
    )
    
    $
    430Weighted-average common shares outstanding, excluding unvested
restricted stock
    
    
    340,127
    
    
    
    380,242Basic net income (loss) per share from continuing operations
attributable to common stockholders
    
    $
    (0.06
    )
    
    $
    0.00Diluted net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (20,560
    )
    
    $
    560Dividends on Series B Preferred Stock
    
    
    (47
    )
    
    
    (125
    )Allocation of earnings to the holders of Series B Preferred Stock
    
    
    
    
    
    
    (5
    )Diluted net income (loss) from continuing operations
attributable to common stockholders
    
    $
    (20,607
    )
    
    $
    430Weighted-average common shares outstanding
    
    
    340,127
    
    
    
    380,242Incremental shares attributable to the assumed exercise of
outstanding options, unvested restricted stock, and other stock
plans
    
    
    
    
    
    
    5,135Total adjusted weighted-average common shares
    
    
    340,127
    
    
    
    385,377Diluted net income (loss) per share from continuing operations
attributable to common stockholders
    
    $
    (0.06
    )
    
    $
    0.00
  21




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##### Table of Contents



Nine Months EndedJuly 31,
    
    
    July 31,(In thousands, except per share data)
    
    2006
    
    
    2005Basic net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (13,088
    )
    
    $
    376,958Dividends on Series B Preferred Stock
    
    
    (141
    )
    
    
    (375
    )Allocation of earnings to holders of Series B Preferred Stock
    
    
    
    
    
    
    (3,937
    )Net income (loss) from continuing operations attributable to common
stockholders
    
    $
    (13,229
    )
    
    $
    372,646Weighted-average common shares outstanding, excluding unvested restricted
stock
    
    
    368,106
    
    
    
    378,573Basic net income (loss) per share from continuing operations attributable
to common stockholders
    
    $
    (0.04
    )
    
    $
    0.98Diluted net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (13,088
    )
    
    $
    376,958Dividends on Series B Preferred Stock
    
    
    (141
    )
    
    
    (375
    )Allocation of earnings to the holders of Series B Preferred Stock
    
    
    
    
    
    
    (3,937
    )Interest expense on the Debentures
    
    
    
    
    
    
    2,250Amortization of debt issuance costs
    
    
    
    
    
    
    2,229Diluted net income (loss) from continuing operations attributable to
common stockholders
    
    $
    (13,229
    )
    
    $
    377,125Weighted-average common shares outstanding
    
    
    368,106
    
    
    
    378,573Incremental shares attributable to the assumed exercise of outstanding
options, unvested restricted stock, and other stock plans
    
    
    
    
    
    
    5,173Incremental shares attributable to the assumed conversion of the Debentures
    
    
    
    
    
    
    52,074Total adjusted weighted-average common shares
    
    
    368,106
    
    
    
    435,820Diluted net income (loss) per share from continuing operations
attributable to common stockholders
    
    $
    (0.04
    )
    
    $
    0.87
  T. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (6,421
    )
    
    $
    2,140
    
    
    $
    (1,214
    )
    
    $
    381,674Change in net unrealized loss on investments
    
    
    425
    
    
    
    (984
    )
    
    
    (16
    )
    
    
    (4,810
    )Change in pension liability
    
    
    421
    
    
    
    183
    
    
    
    633
    
    
    
    573Change in cumulative translation adjustments
    
    
    (2,671
    )
    
    
    (13,191
    )
    
    
    (764
    )
    
    
    (4,704
    )Comprehensive income (loss)
    
    $
    (8,246
    )
    
    $
    (11,852
    )
    
    $
    (1,361
    )
    
    $
    372,733
 22




---



##### Table of Contents



July 31,
    
    
    October 31,2006
    
    
    2005(In thousands)Net unrealized loss on investments
    
    $
    (7,636
    )
    
    $
    (7,620
    )Minimum pension liability
    
    
    
    
    
    
    (633
    )Cumulative translation adjustment
    
    
    14,933
    
    
    
    15,697Total accumulated other comprehensive income
    
    $
    7,297
    
    
    $
    7,444
 U. Stock-Based Compensation
  Three months ended
    
    
    Three months ended
    
    
    Nine months ended
    
    
    Nine months ended(In thousands)
    
    July 31, 2006
    
    
    July 31, 2005
    
    
    July 31, 2006
    
    
    July 31, 2005Cost of revenue
    
    $
    1,034
    
    
    $
    2
    
    
    $
    3,019
    
    
    $
    4Sales and marketing
    
    
    2,819
    
    
    
    446
    
    
    
    9,395
    
    
    
    804Product development
    
    
    1,954
    
    
    
    294
    
    
    
    6,341
    
    
    
    947General and administrative
    
    
    1,880
    
    
    
    (919
    )
    
    
    10,094
    
    
    
    (521
    )Operating income
    
    
    7,687
    
    
    
    (177
    )
    
    
    28,849
    
    
    
    1,234Tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect on income from
continuing operations
    
    $
    7,687
    
    
    $
    (177
    )
    
    $
    28,849
    
    
    $
    1,234Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    263
    
    
    $
    Effect on net income
    
    $
    7,687
    
    
    $
    (177
    )
    
    $
    29,112
    
    
    $
    1,234
    Stock Plans
  23




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##### Table of Contents



Time-Based Stock Awards
  Three months ended
    
    
    Nine months endedJuly 31, 2006
    
    
    July 31, 2006Expected volatility
    
    
    50
    %
    
    
    50
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected term
    
    4 years
    
    4 yearsRisk-free interest rate
    
    
    4.9  5.1
    %
    
    
    4.3  5.1
    %
    Weighted-AverageWeighted-
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Term
    
    
    ValueStock Awards
    
    (in thousands)
    
    
    Price
    
    
    (years)
    
    
    (000s)Outstanding at November 1, 2005
    
    
    47,042
    
    
    $
    6.68Granted:Price equal to fair market value
    
    
    2,113
    
    
    $
    8.24Price less than fair market value
    
    
    4,580
    
    
    $
    0.00Exercised
    
    
    (4,536
    )
    
    $
    4.38Forfeited or expired
    
    
    (4,380
    )
    
    $
    8.06Outstanding at July 31, 2006
    
    
    44,819
    
    
    $
    6.17
    
    
    
    3.48
    
    
    $
    68,769Exercisable at July 31, 2006
    
    
    31,536
    
    
    $
    6.88
    
    
    
    3.01
    
    
    $
    33,858
   Weighted-Shares
    
    
    Average Grant Date FairUnvested Restricted Stock
    
    (in thousands)
    
    
    ValueUnvested at November 1, 2005
    
    
    984
    
    
    $
    4.85Granted
    
    
    275
    
    
    
    8.33Vested
    
    
    (156
    )
    
    
    4.29Forfeited
    
    
    (138
    )
    
    
    7.69Unvested at July 31, 2006
    
    
    965
    
    
    $
    5.55
  24




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##### Table of Contents



Performance-Based and Market-Condition Awards
     Weighted-AverageWeighted-
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Term
    
    
    ValueStock Awards
    
    (in thousands)
    
    
    Price
    
    
    (years)
    
    
    (in thousands)Outstanding at November 1, 2005
    
    
    2,413
    
    
    $
    7.49Granted
    
    
    535
    
    
    $
    8.29Exercised
    
    
    (85
    )
    
    $
    6.35Forfeited or expired
    
    
    (655
    )
    
    $
    9.06Outstanding at July 31, 2006
    
    
    2,208
    
    
    $
    7.15
    
    
    
    4.64
    
    
    $
    293Exercisable at July 31, 2006
    
    
    1,395
    
    
    $
    6.22
    
    
    
    2.42
    
    
    $
    152
   Weighted-AverageShares
    
    
    Grant DateUnvested Restricted Stock
    
    (in thousands)
    
    
    Fair ValueUnvested at November 1, 2005
    
    
    125
    
    
    $
    7.42Granted
    
    
    87
    
    
    $
    9.22Vested
    
    
    (25
    )
    
    $
    7.35Forfeited
    
    
    (60
    )
    
    $
    9.22Unvested at July 31, 2006
    
    
    127
    
    
    $
    8.85
   25




---



##### Table of Contents



Celerant Stock Awards
  Third Quarter and First Nine Months of Fiscal 2005
  Three months ended
    
    
    Nine months ended(in thousands, except per share data)
    
    July 31, 2005
    
    
    July 31, 2005Net income (loss), as reported
    
    $
    2,140
    
    
    $
    381,674Less: total stock-based compensation expense determined
under fair value-based method for all awards, net of related
tax effects
    
    
    (10,841
    )
    
    
    (36,060
    )Add: total stock-based compensation expense recorded in the
statement of operations under APB 25
    
    
    728
    
    
    
    2,139Pro forma net income (loss)
    
    $
    (7,973
    )
    
    $
    347,753Net income (loss) per share available to common stockholders:As reported basic
    
    $
    0.01
    
    
    $
    1.00Pro forma basic
    
    $
    (0.02
    )
    
    $
    0.91As reported diluted
    
    $
    0.00
    
    
    $
    0.88Pro forma diluted
    
    $
    (0.02
    )
    
    $
    0.80
  Employee Stock Purchase Plan
  V. Segment Information
   
    
    Americas  includes the United States, Canada and Latin America
    
    EMEA  includes Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  includes China, Southeast Asia, Australia, New Zealand, Japan, and India
  26




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##### Table of Contents



Three Months EndedJuly 31, 2006
    
    
    July 31, 2005Operating
    
    
    
    
    
    
    Operating(in thousands)
    
    Net revenue
    
    
    income (loss)
    
    
    Net revenue
    
    
    income (loss)Americas
    
    $
    136,660
    
    
    $
    71,324
    
    
    $
    135,476
    
    
    $
    69,102EMEA
    
    
    83,819
    
    
    
    25,529
    
    
    
    92,633
    
    
    
    27,319Asia Pacific
    
    
    20,873
    
    
    
    3,040
    
    
    
    24,273
    
    
    
    6,720Common unallocated operating (costs) income
    
    
    
    
    
    
    (131,540
    )
    
    
    
    
    
    
    (104,239
    )Stock-based compensation expenses
    
    
    
    
    
    
    (7,687
    )
    
    
    
    
    
    
    177Total per statements of operations
    
    $
    241,352
    
    
    $
    (39,334
    )
    
    $
    252,382
    
    
    $
    (921
    )
 Nine Months EndedJuly 31, 2006
    
    
    July 31, 2005Operating
    
    
    
    
    
    
    Operating(in thousands)
    
    Net revenue
    
    
    income (loss)
    
    
    Net revenue
    
    
    income (loss)Americas
    
    $
    399,781
    
    
    $
    206,204
    
    
    $
    395,024
    
    
    $
    204,035EMEA
    
    
    259,235
    
    
    
    82,562
    
    
    
    287,227
    
    
    
    73,806Asia Pacific
    
    
    63,356
    
    
    
    11,245
    
    
    
    69,354
    
    
    
    16,747Common unallocated operating (costs) income
    
    
    
    
    
    
    (313,994
    )
    
    
    
    
    
    
    143,022Stock-based compensation expenses
    
    
    
    
    
    
    (28,849
    )
    
    
    
    
    
    
    (1,234
    )Total per statements of operations
    
    $
    722,372
    
    
    $
    (42,832
    )
    
    $
    751,605
    
    
    $
    436,376
   
    
    Systems, security, and identity management (formerly Identity-driven computing solutions). Sub-categories include:
 
    
    Resource management major products include ZENworks
    
    Identity and access management major products include Identity Manager, Secure Login, iChain, and Sentinel
    
    Other systems, security, and identity management products  major products
include eDirectory and web services
 
    
    Open platform solutions. Sub-categories include:
 
    
    Linux platform products  major products include SUSE Linux Enterprise Server
and our Linux desktop products
    
    Other open platform products  major products include SUSE Linux Professional
 
    
    Workspace solutions. Sub-categories include:
 
    
    Open Enterprise Server (OES)
    
    NetWare and other NetWare-related  major products include NetWare and Cluster Services
    
    Collaboration  major products include GroupWise
    
    Other workspace  major products include BorderManager and Novell iFolder
 
    
    Global services and support  comprehensive worldwide IT consulting, training, and
technical support services that apply business solutions to our customers business
situations, providing the business knowledge and technical expertise to help our customers
implement our technology.
 27




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Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Resource management
    
    $
    33,600
    
    
    $
    32,881
    
    
    $
    100,559
    
    
    $
    94,179Identity and access management
    
    
    26,053
    
    
    
    17,845
    
    
    
    73,947
    
    
    
    51,955Other systems, security, and identity management products
    
    
    4,110
    
    
    
    5,393
    
    
    
    13,468
    
    
    
    15,398Systems, security, and identity management
    
    
    63,763
    
    
    
    56,119
    
    
    
    187,974
    
    
    
    161,532Linux platform products
    
    
    11,590
    
    
    
    8,910
    
    
    
    32,278
    
    
    
    26,008Other open platform products
    
    
    3,407
    
    
    
    4,609
    
    
    
    7,253
    
    
    
    13,689Open platform solutions
    
    
    14,997
    
    
    
    13,519
    
    
    
    39,531
    
    
    
    39,697Open Enterprise Server
    
    
    45,204
    
    
    
    30,964
    
    
    
    134,035
    
    
    
    38,791NetWare and other NetWare-related
    
    
    9,592
    
    
    
    36,533
    
    
    
    39,414
    
    
    
    165,742Collaboration
    
    
    25,276
    
    
    
    23,321
    
    
    
    71,782
    
    
    
    71,317Other workspace products
    
    
    4,141
    
    
    
    6,762
    
    
    
    16,763
    
    
    
    21,548Workspace solutions
    
    
    84,213
    
    
    
    97,580
    
    
    
    261,994
    
    
    
    297,398Total software licenses and maintenance
    
    
    162,973
    
    
    
    167,218
    
    
    
    489,499
    
    
    
    498,627Global services and support
    
    
    78,379
    
    
    
    85,164
    
    
    
    232,873
    
    
    
    252,978Total net revenue
    
    $
    241,352
    
    
    $
    252,382
    
    
    $
    722,372
    
    
    $
    751,605
    W. Derivative Instruments
   X. Share Repurchase Program
  28




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##### Table of Contents



Y. Executive Termination Benefits
  Z. Recent Accounting Pronouncements
      29




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##### Table of Contents



AA. Subsequent Events
 Sale of Venture Capital Funds
  Japan Consulting Group
  Microsoft Agreements
    
    
    Development of technologies to optimize each of SLES and Windows 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.
   30




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Conversion of Preferred Stock
  RedMojo Acquisition
  Sale of Salmon Subsidiary
 .
 31




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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 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. 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
Part II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q . Readers should carefully
review the risk factors described in this document and in other documents that we file from time to
time with the Securities and Exchange Commission.
 Introduction
   Systems, security, and identity management.
 
    
    resource management capabilities for both desktop and server environments;
    
    provisioning and de-provisioning capabilities,
    
    secure authentication and authorization services; and
    
    compliance, monitoring, and recording event management.
   32




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Open platform solutions and workspace solutions.
      Global services and support.
   33




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##### Table of Contents



Overview
     
    
    One of our most important initiatives is to increase revenue from our Linux and open
source product offerings. Revenues from our Linux platform products increased 30%
during the third quarter of fiscal 2006 over the same period in the prior year. This
quarter we delivered our next-generation platform for the open enterprise, SUSE Linux
Enterprise 10. We believe SUSE Linux Enterprise 10 is the best engineered, lowest
cost, and most interoperable platform for enterprise computing today. It takes Linux
from the desktop to the data center with transformational open technology that offers
cost savings, scalability, application security, virtualization, and integrated systems
management. The July 2006 launch of the SUSE Linux Enterprise 10 platform included the
following components:
 
    
    SUSE Linux Enterprise ServerOne of the best platforms for mission-critical workloads in the data center
    
    SUSE Linux Enterprise DesktopA general-purpose desktop designed for use across the enterprise
    
    Novell Customer CenterOne location to obtain support, updates
and renewals for all SUSE Linux Enterprise product subscriptions
 SUSE Linux Enterprise 10 demonstrates Novells continued innovation and leadership in
the Linux market, and is the basis for all of Novells next generation enterprise Linux
offerings, positioning us for growth across our entire product and technology portfolio.
    
    We continued to grow our positions in the resource management and identity markets
by offering the most comprehensive products that address customer problems in the areas
of security, compliance, risk mitigation, and systems management. Our unique
role-based, policy-driven approach has been well received, and we continue to
experience strong growth in our identity and access management category, with large
enterprise deals driving license growth. To further expand our lead in this market, we
entered the security management market via the acquisition of e-Security in the second
quarter of fiscal 2006. e-Security is a leader in compliance monitoring and reporting
capabilities, producing the enterprise-class security information and event management
product Sentinel 5. We expect revenue growth and strong performance in our systems,
security and identity management areas throughout the remainder of fiscal 2006.
    
    We continued efforts to stabilize the decline of our revenue from traditional
products, such as NetWare. Our traditional revenue base is an important source of cash
flow and a potential opportunity for us to sell more products and services. Novell
recognizes the need to continue supporting its loyal NetWare customers, and during our
second fiscal quarter we reiterated our commitment to NetWare by reminding customers
that Novell can and will support NetWare 6.5 for as long as customers choose to run it.
With the release of our OES product in March 2005, we have taken steps to help maintain
that installed base and address revenue declines of these products. Nevertheless, our
combined NetWare and NetWare related revenue combined with OES revenue declined 19%
during the third quarter of fiscal 2006 compared to the same period in the prior year.
We continue to work with our customers to help them migrate from NetWare and other
platforms of our competitors to OES using tools, training, and education emphasizing
the return on investment of upgrading to Linux versus proprietary platforms.
 34




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##### Table of Contents




    
    As we have discussed in the past, we have re-architected our sales and marketing
plans by selecting key geographies in which to deploy our resources and clearly
defining our partner and channel strategy. In addition, we have restructured our sales
incentive plans to motivate our direct sales and channel partners to focus on key
product areas globally. Now we are focused on executing on those plans.
  Critical Accounting Policies
 Share-based Payment
      35




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SAB 108
     Historical Stock-Based Compensation Practices
    36




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##### Table of Contents



Administrative Corrections
 Number of Shares Approved Not Specified
 Authorization Incomplete or Received Late
    (amounts in 000s)Cumulative prior to fiscal 2004
    
    $
    18,291Fiscal 2004
    
    
    698Fiscal 2005
    
    
    201Total adjustment at November 1, 2005
    
    $
    19,190
 Acquisitions and Equity Investments
 e-Security
  Open Invention Network, LLC (OIN)
  Onward Novell
  37




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##### Table of Contents



Divestitures
 Celerant
   Three months ended
    
    
    Nine months endedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Celerant net revenue
    
    $
    11,637
    
    
    $
    37,832
    
    
    $
    83,341
    
    
    $
    125,788Celerant income before taxes
    
    $
    205
    
    
    $
    2,752
    
    
    $
    1,783
    
    
    $
    7,642Gain on sale of Celerant
    
    
    11,960
    
    
    
    
    
    
    
    11,960
    
    
    
    Income tax (benefit) expense
    
    
    (2,871
    )
    
    
    1,172
    
    
    
    972
    
    
    
    2,926Income from discontinued operations
    
    $
    15,036
    
    
    $
    1,580
    
    
    $
    12,771
    
    
    $
    4,716
 Japan Consulting Group
   Results of Operations
 Revenue
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeSoftware licenses
    
    $
    45,435
    
    
    $
    45,628
    
    
    
    
    %
    
    $
    127,600
    
    
    $
    135,692
    
    
    
    (6
    )%Maintenance, subscriptions, and services
    
    
    195,917
    
    
    
    206,754
    
    
    
    (5
    )%
    
    
    594,772
    
    
    
    615,913
    
    
    
    (3
    )%Total net revenue
    
    $
    241,352
    
    
    $
    252,382
    
    
    
    (4
    )%
    
    $
    722,372
    
    
    $
    751,605
    
    
    
    (4
    )%
  38




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##### Table of Contents




    
    Systems, security, and identity management (formerly Identity-driven computing solutions). Sub-categories include:
 
    
    Resource management major products include ZENworks
    
    Identity and access management major products include Identity Manager, Secure Login, iChain and Sentinel
    
    Other systems, security, and identity management products  major products
include eDirectory and web services
 
    
    Open platform solutions. Sub-categories include:
 
    
    Linux platform products  major products include SUSE LINUX Enterprise Server
and our Linux desktop products
    
    Other open platform products  major products include SUSE LINUX Professional
 
    
    Workspace solutions. Sub-categories include:
 
    
    Open Enterprise Server (OES)
    
    NetWare and other NetWare-related  major products include NetWare and Cluster Services
    
    Collaboration  major products include GroupWise
    
    Other workspace  major products include BorderManager and Novell iFolder
 
    
    Global services and support  comprehensive IT consulting, training, and technical
support services that apply business solutions to our customers business situations,
providing the business knowledge and technical expertise to help our customers implement
our technology.
  39




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeResource management
    
    $
    33,600
    
    
    $
    32,881
    
    
    
    
    
    
    $
    100,559
    
    
    $
    94,179Identity and access management
    
    
    26,053
    
    
    
    17,845
    
    
    
    
    
    
    
    73,947
    
    
    
    51,955Other systems, security, and identity
management products
    
    
    4,110
    
    
    
    5,393
    
    
    
    
    
    
    
    13,468
    
    
    
    15,398Systems, security and identity management
    
    
    63,763
    
    
    
    56,119
    
    
    
    14
    %
    
    
    187,974
    
    
    
    161,532
    
    
    
    16
    %Linux platform products
    
    
    11,590
    
    
    
    8,910
    
    
    
    
    
    
    
    32,278
    
    
    
    26,008Other open platform products
    
    
    3,407
    
    
    
    4,609
    
    
    
    
    
    
    
    7,253
    
    
    
    13,689Open platform solutions
    
    
    14,997
    
    
    
    13,519
    
    
    
    11
    %
    
    
    39,531
    
    
    
    39,697
    
    
    
    
    %Open Enterprise Server
    
    
    45,204
    
    
    
    30,964
    
    
    
    
    
    
    
    134,035
    
    
    
    38,791NetWare and other NetWare-related
    
    
    9,592
    
    
    
    36,533
    
    
    
    
    
    
    
    39,414
    
    
    
    165,742Collaboration
    
    
    25,276
    
    
    
    23,321
    
    
    
    
    
    
    
    71,782
    
    
    
    71,317Other workspace products
    
    
    4,141
    
    
    
    6,762
    
    
    
    
    
    
    
    16,763
    
    
    
    21,548Workspace solutions
    
    
    84,213
    
    
    
    97,580
    
    
    
    (14
    )%
    
    
    261,994
    
    
    
    297,398
    
    
    
    (12
    )%Total software licenses and maintenance
    
    
    162,973
    
    
    
    167,218
    
    
    
    
    
    
    
    489,499
    
    
    
    498,627Global services and support
    
    
    78,379
    
    
    
    85,164
    
    
    
    (8
    )%
    
    
    232,873
    
    
    
    252,978
    
    
    
    (8
    )%Total net revenue
    
    $
    241,352
    
    
    $
    252,382
    
    
    
    (4
    )%
    
    $
    722,372
    
    
    $
    751,605
    
    
    
    (4
    )%
      Net revenue by reporting segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeAmericas
    
    $
    136,660
    
    
    $
    135,476
    
    
    
    1
    %
    
    $
    399,781
    
    
    $
    395,024
    
    
    
    1
    %EMEA
    
    
    83,819
    
    
    
    92,633
    
    
    
    (10
    )%
    
    
    259,235
    
    
    
    287,227
    
    
    
    (10
    )%Asia Pacific
    
    
    20,873
    
    
    
    24,273
    
    
    
    (14
    )%
    
    
    63,356
    
    
    
    69,354
    
    
    
    (9
    )%Total net revenue
    
    $
    241,352
    
    
    $
    252,382
    
    
    
    (4
    )%
    
    $
    722,372
    
    
    $
    751,605
    
    
    
    (4
    )%
 40




---



##### Table of Contents



Net revenue by solution category in the Americas segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeResource management
    
    $
    19,409
    
    
    $
    19,326
    
    
    
    
    
    
    $
    57,354
    
    
    $
    54,005Identity and access management
    
    
    16,226
    
    
    
    9,088
    
    
    
    
    
    
    
    42,562
    
    
    
    26,667Other systems, security, and
identity management products
    
    
    2,404
    
    
    
    3,152
    
    
    
    
    
    
    
    7,896
    
    
    
    9,334Systems, security and identity
management
    
    
    38,039
    
    
    
    31,566
    
    
    
    21
    %
    
    
    107,812
    
    
    
    90,006
    
    
    
    20
    %Linux platform products
    
    
    5,566
    
    
    
    4,462
    
    
    
    
    
    
    
    15,061
    
    
    
    12,515Other open platform products
    
    
    1,640
    
    
    
    1,504
    
    
    
    
    
    
    
    3,845
    
    
    
    4,001Open platform solutions
    
    
    7,206
    
    
    
    5,966
    
    
    
    21
    %
    
    
    18,906
    
    
    
    16,516
    
    
    
    14
    %Open Enterprise Server
    
    
    27,522
    
    
    
    17,002
    
    
    
    
    
    
    
    81,332
    
    
    
    21,073NetWare and other NetWare-related
    
    
    3,022
    
    
    
    19,604
    
    
    
    
    
    
    
    13,989
    
    
    
    90,170Collaboration
    
    
    16,607
    
    
    
    15,137
    
    
    
    
    
    
    
    45,318
    
    
    
    44,936Other workspace products
    
    
    2,038
    
    
    
    3,253
    
    
    
    
    
    
    
    7,625
    
    
    
    8,689Workspace solutions
    
    
    49,189
    
    
    
    54,996
    
    
    
    (11
    )%
    
    
    148,264
    
    
    
    164,868
    
    
    
    (10
    )%Global services and support
    
    
    42,226
    
    
    
    42,948
    
    
    
    (2
    )%
    
    
    124,799
    
    
    
    123,634
    
    
    
    1
    %Total net revenue
    
    $
    136,660
    
    
    $
    135,476
    
    
    
    1
    %
    
    $
    399,781
    
    
    $
    395,024
    
    
    
    1
    %
  Net revenue by solution category in the EMEA segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeResource management
    
    $
    11,987
    
    
    $
    11,379
    
    
    
    
    
    
    $
    36,895
    
    
    $
    34,479Identity and access management
    
    
    8,135
    
    
    
    6,318
    
    
    
    
    
    
    
    24,522
    
    
    
    19,363Other systems, security, and
identity management products
    
    
    1,400
    
    
    
    1,693
    
    
    
    
    
    
    
    4,516
    
    
    
    4,752Systems, security and
identity management
    
    
    21,522
    
    
    
    19,390
    
    
    
    11
    %
    
    
    65,933
    
    
    
    58,594
    
    
    
    13
    %Linux platform products
    
    
    4,834
    
    
    
    3,793
    
    
    
    
    
    
    
    14,058
    
    
    
    11,938Other open platform products
    
    
    1,593
    
    
    
    3,000
    
    
    
    
    
    
    
    2,735
    
    
    
    9,542Open platform solutions
    
    
    6,427
    
    
    
    6,793
    
    
    
    (5
    )%
    
    
    16,793
    
    
    
    21,480
    
    
    
    (22
    )%Open Enterprise Server
    
    
    14,945
    
    
    
    12,061
    
    
    
    
    
    
    
    45,157
    
    
    
    15,608NetWare and other NetWare-related
    
    
    3,533
    
    
    
    12,022
    
    
    
    
    
    
    
    16,257
    
    
    
    58,435Collaboration
    
    
    7,498
    
    
    
    6,904
    
    
    
    
    
    
    
    23,265
    
    
    
    22,774Other workspace products
    
    
    1,353
    
    
    
    1,726
    
    
    
    
    
    
    
    4,228
    
    
    
    6,742Workspace solutions
    
    
    27,329
    
    
    
    32,713
    
    
    
    (16
    )%
    
    
    88,907
    
    
    
    103,559
    
    
    
    (14
    )%Global services and support
    
    
    28,541
    
    
    
    33,737
    
    
    
    (15
    )%
    
    
    87,602
    
    
    
    103,594
    
    
    
    (15
    )%Total net revenue
    
    $
    83,819
    
    
    $
    92,633
    
    
    
    (10
    )%
    
    $
    259,235
    
    
    $
    287,227
    
    
    
    (10
    )%
  41




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##### Table of Contents



Net revenue by solution category in the Asia Pacific segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeResource management
    
    $
    2,205
    
    
    $
    2,177
    
    
    
    
    
    
    $
    6,309
    
    
    $
    5,695Identity and access management
    
    
    1,692
    
    
    
    2,439
    
    
    
    
    
    
    
    6,863
    
    
    
    5,925Other systems, security, and identity
management products
    
    
    305
    
    
    
    547
    
    
    
    
    
    
    
    1,056
    
    
    
    1,313Systems, security and identity management
    
    
    4,202
    
    
    
    5,163
    
    
    
    (19
    )%
    
    
    14,228
    
    
    
    12,933
    
    
    
    10
    %Linux platform products
    
    
    1,190
    
    
    
    655
    
    
    
    
    
    
    
    3,160
    
    
    
    1,555Other open platform products
    
    
    174
    
    
    
    105
    
    
    
    
    
    
    
    672
    
    
    
    147Open platform solutions
    
    
    1,364
    
    
    
    760
    
    
    
    79
    %
    
    
    3,832
    
    
    
    1,702
    
    
    
    125
    %Open Enterprise Server
    
    
    2,737
    
    
    
    1,901
    
    
    
    
    
    
    
    7,544
    
    
    
    2,110NetWare and other NetWare-related
    
    
    3,037
    
    
    
    4,906
    
    
    
    
    
    
    
    9,171
    
    
    
    17,137Collaboration
    
    
    1,171
    
    
    
    1,280
    
    
    
    
    
    
    
    3,200
    
    
    
    3,607Other workspace products
    
    
    750
    
    
    
    1,784
    
    
    
    
    
    
    
    4,909
    
    
    
    6,117Workspace solutions
    
    
    7,695
    
    
    
    9,871
    
    
    
    (22
    )%
    
    
    24,824
    
    
    
    28,971
    
    
    
    (14
    )%Global services and support
    
    
    7,612
    
    
    
    8,479
    
    
    
    (10
    )%
    
    
    20,472
    
    
    
    25,748
    
    
    
    (20
    )%Total net revenue
    
    $
    20,873
    
    
    $
    24,273
    
    
    
    (14
    )%
    
    $
    63,356
    
    
    $
    69,354
    
    
    
    (9
    )%
   Deferred revenue
  Gross profit
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSoftware licenses gross profit
    
    $
    40,451
    
    
    $
    41,153
    
    
    
    (2
    )%
    
    $
    114,030
    
    
    $
    121,722
    
    
    
    (6
    )%percentage of related revenue
    
    
    89
    %
    
    
    90
    %
    
    
    
    
    
    
    89
    %
    
    
    90
    %Maintenance, subscriptions and
services gross profit
    
    $
    120,225
    
    
    $
    126,583
    
    
    
    (5
    )%
    
    $
    364,691
    
    
    $
    366,870
    
    
    
    (1
    )%percentage of related revenue
    
    
    61
    %
    
    
    61
    %
    
    
    
    
    
    
    61
    %
    
    
    60
    %Total gross profit
    
    $
    160,676
    
    
    $
    167,736
    
    
    
    (4
    )%
    
    $
    478,721
    
    
    $
    488,592
    
    
    
    (2
    )%percentage of revenue
    
    
    67
    %
    
    
    66
    %
    
    
    
    
    
    
    66
    %
    
    
    65
    %
   42




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##### Table of Contents



Operating expenses
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales and marketing
    
    $
    90,349
    
    
    $
    85,721
    
    
    
    5
    %
    
    $
    268,466
    
    
    $
    266,230
    
    
    
    1
    %percentage of revenue
    
    
    37
    %
    
    
    34
    %
    
    
    
    
    
    
    37
    %
    
    
    35
    %Product development
    
    $
    45,993
    
    
    $
    49,040
    
    
    
    (6
    )%
    
    $
    136,836
    
    
    $
    146,845
    
    
    
    (7
    )%percentage of revenue
    
    
    19
    %
    
    
    19
    %
    
    
    
    
    
    
    19
    %
    
    
    20
    %General and administrative
    
    $
    49,764
    
    
    $
    24,453
    
    
    
    104
    %
    
    $
    103,427
    
    
    $
    68,118
    
    
    
    52
    %percentage of revenue
    
    
    21
    %
    
    
    10
    %
    
    
    
    
    
    
    14
    %
    
    
    9
    %Restructuring expenses
    
    $
    
    
    
    $
    9,443
    
    
    
    
    %
    
    $
    (1,000
    )
    
    $
    19,692
    
    
    
    105
    %percentage of revenue
    
    
    
    %
    
    
    4
    %
    
    
    
    
    
    
    
    %
    
    
    3
    %Purchased in-process research and
development
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    2,110
    
    
    $
    480
    
    
    
    340
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Gain on sale of property, plant and
equipment
    
    $
    (3,778
    )
    
    $
    
    
    
    
    
    %
    
    $
    (5,968
    )
    
    $
    (1,589
    )
    
    
    276
    %percentage of revenue
    
    
    (2
    )%
    
    
    
    %
    
    
    
    
    
    
    (1
    )%
    
    
    
    %Gain on settlement of potential litigation
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    (447,560
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    (60
    )%Loss on Japan consulting group held for
sale
    
    $
    8,273
    
    
    $
    
    
    
    
    
    %
    
    $
    8,273
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    3
    %
    
    
    
    %
    
    
    
    
    
    
    1
    %
    
    
    
    %Executive termination benefits
    
    $
    9,409
    
    
    $
    
    
    
    
    
    %
    
    $
    9,409
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    4
    %
    
    
    
    %
    
    
    
    
    
    
    1
    %
    
    
    
    %Total operating expenses
    
    $
    200,010
    
    
    $
    168,657
    
    
    
    19
    %
    
    $
    521,553
    
    
    $
    52,216
    
    
    
    899
    %percentage of revenue
    
    
    83
    %
    
    
    67
    %
    
    
    
    
    
    
    72
    %
    
    
    7
    %
      43




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##### Table of Contents



Other income (expense)
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeInvestment income
    
    $
    13,281
    
    
    $
    12,892
    
    
    
    3
    %
    
    $
    43,766
    
    
    $
    32,279
    
    
    
    36
    %percentage of revenue
    
    
    6
    %
    
    
    5
    %
    
    
    
    
    
    
    6
    %
    
    
    4
    %Impairment of investments
    
    $
    (278
    )
    
    $
    (683
    )
    
    
    59
    %
    
    $
    (891
    )
    
    $
    (2,613
    )
    
    
    66
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Interest expense and other, net
    
    $
    (2,192
    )
    
    $
    (3,859
    )
    
    
    43
    %
    
    $
    (6,115
    )
    
    $
    (7,850
    )
    
    
    22
    %percentage of revenue
    
    
    (1
    )%
    
    
    (2
    )%
    
    
    
    
    
    
    (1
    )%
    
    
    (1
    )%Total other income
    
    $
    10,811
    
    
    $
    8,350
    
    
    
    29
    %
    
    $
    36,760
    
    
    $
    21,816
    
    
    
    69
    %percentage of revenue
    
    
    4
    %
    
    
    3
    %
    
    
    
    
    
    
    5
    %
    
    
    3
    %
   .
 Income tax (benefit) expense on income before cumulative effect of a change in accounting
principle
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeIncome tax (benefit) expense
    
    $
    (10,834
    )
    
    $
    8,041
    
    
    
    (235
    )%
    
    $
    7,988
    
    
    $
    84,160
    
    
    
    (91
    )%percentage of related revenue
    
    
    (4
    )%
    
    
    3
    %
    
    
    
    
    
    
    1
    %
    
    
    11
    %Effective tax rate
    
    
    (67
    )%
    
    
    79
    %
    
    
    
    
    
    
    104
    %
    
    
    18
    %
   44




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##### Table of Contents



Net income (loss) components
 Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Income from continuing operations
    
    $
    (20,560
    )
    
    $
    560
    
    
    $
    (13,088
    )
    
    $
    376,958Discontinued operations, net of tax
    
    $
    15,036
    
    
    $
    1,580
    
    
    $
    12,771
    
    
    $
    4,716Cumulative effect of a change in
accounting principle
    
    $
    (897
    )
    
    $
    
    
    
    $
    (897
    )
    
    $
    Net income (loss)
    
    $
    (6,421
    )
    
    $
    2,140
    
    
    $
    (1,214
    )
    
    $
    381,674
    45




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##### Table of Contents



Liquidity and Capital Resources
 (dollars in thousands)
    
    July 31, 2006
    
    October 31, 2005
    
    ChangeCash, cash equivalents and short-term investments
    
    $
    1,299,331
    
    
    $
    1,654,904
    
    
    
    (21
    )%Percent of total assets
    
    
    55
    %
    
    
    60
    %
  Nine Months Ended(in thousands)
    
    July 31, 2006
    
    July 31, 2005Cash provided by operating activities, including litigation settlement
    
    $
    36,777
    
    
    $
    442,161Issuance of common stock, net
    
    
    21,674
    
    
    
    16,035Repurchases of common stock, retired
    
    
    (400,000
    )
    
    
    Purchases of property, plant and equipment
    
    
    (19,540
    )
    
    
    (20,168
    )Proceeds from the sale of property, plant and equipment
    
    
    24,992
    
    
    
    10,421Proceeds from payoff of note receivable
    
    
    9,092
    
    
    
    Proceeds from the sale of Celerant, net of cash divested
    
    
    37,922
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    
    (71,550
    )
    
    
    (33,829
    )Purchase of intangible assets
    
    
    (1,159
    )
    
    
    (15,500
    )Cash paid for equity investment in OIN
    
    
    (4,225
    )
    
    
    Other long-term investing activities
    
    
    7,771
    
    
    
    241
     46




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Recent Accounting Pronouncements
  47




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##### Table of Contents



Subsequent Events
 Sale of Venture Capital Funds
  Japan Consulting Group
  Microsoft Agreements
  48




---



##### Table of Contents




    
    Development of technologies to optimize each of SLES and Windows 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.
   Conversion of Preferred Stock
  RedMojo Acquisition
  Sale of Salmon Subsidiary
  49




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Market Risk
   Foreign Currency Risk
    50




---



##### Table of Contents



Item 4. Controls and Procedures
     
 Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Matters related to or arising out of our historical stock-based compensation practices,
including government actions, litigation matters, NASDAQ listing and downgrades in our credit
ratings, could have a material adverse effect on the Company.
   51




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##### Table of Contents



Our NetWare revenue stream continues to deteriorate.
  If our identity-driven computing solutions and Linux and platform services solutions do not grow at
the rate we anticipate, our growth will be negatively impacted.
  
    
    the growth of these markets;
    
    our development of key product solutions and upgrades;
    
    the acceptance of our solutions by clients, particularly enterprise companies, large industry partners and major accounts;
    
    enticing customers to upgrade from older versions of our products to newer versions; and
    
    successfully selling technical support and other Novell solutions along with our products.
 We may not be able to successfully compete in a challenging market for computer software and
consulting services.
  
    
    the pricing of our products and services and the pricing strategies of our competitors;
 52




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##### Table of Contents




    
    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.
  In the event claims for indemnification are brought for intellectual property infringement, we
could incur significant expenses, thereby adversely affecting our results of operations.
  Legal actions being taken by SCO could adversely affect our revenue and business plan if these
legal actions cause a reduction in demand for our SUSE Linux and Ximian ® products.
  A lawsuit filed against us by SCO could result in a substantial judgment against us and adversely
affect our revenue and business plan if SCO is successful.
  53




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##### Table of Contents



If the Free Software Foundation releases a new version of the GNU General Public License with
certain currently proposed terms, our business may suffer harm.
     We have experienced delays in the introduction of new products due to various factors, resulting in
lost revenue.
  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.
  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.
 54




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##### Table of Contents



If our relationships with other IT services organizations become impaired, we could lose business.
  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.
  
    
    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.
  Our financial and operating results vary and may fall below analysts estimates, which may cause
the price of our common stock to decline.
  
    
    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; and
    
    inability to deliver solutions as expected by our customers and systems integration partners.
  55




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##### Table of Contents



We face increased risks in conducting a global business.
  
    
    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.
  Our consulting services contracts contain pricing risks and, if our estimates prove inaccurate, we
could lose money.
  Our IT consulting clients may cancel or reduce the scope of their engagements with us on short
notice.
  Conversion of the Debentures into shares of our common stock will dilute the ownership interests of
existing stockholders.
  56




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  (c)
    
    
    (d)Total Number
    
    
    Maximumof Shares
    
    
    Dollar Value ofPurchased
    
    
    Shares thatas Part of
    
    
    May Yet Be(a)
    
    
    (b)
    
    
    Publicly
    
    
    PurchasedTotal Number
    
    
    Average
    
    
    Announced
    
    
    Under theof Shares
    
    
    Price Paid
    
    
    Plans or
    
    
    Plans orPeriod
    
    Purchased (1)
    
    
    Per Share
    
    
    Programs (2)
    
    
    Programs(in thousands, except per share amounts)May 1, 2006 through May 31, 2006
    
    
    16,279
    
    
    $
    8.14
    
    
    
    16,279
    
    
    $
    June 1, 2006 through June 30, 2006
    
    
    243
    
    
    $
    0.57
    
    
    
    
    
    
    $
    July 1, 2006 through July 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Total
    
    
    16,522
    
    
    $
    8.03
    
    
    
    16,279
    
    
    $
    
 
 (1)
    
    The total number of shares purchased includes: (i) shares purchased pursuant to the share
repurchase program described in footnote (2) below; (ii) shares surrendered to the Company to
satisfy tax withholding obligations in connection with the vesting of restricted stock issued
to employees, totaling 18,100 shares in the month of June, and (iii) shares repurchased from
terminated employees in accordance with the terms of a restricted stock agreement, totaling
225,215 shares in the month of June.(2)
    
    On September 22, 2005, Novell announced that its board of directors approved a share
repurchase program for up to $200 million of Novell common stock over the next 12 months. On
April 4, 2006, Novell announced that its board of directors amended the share repurchase
program to increase the amount of Novell common stock that may be repurchased under the
program from $200 million to $400 million and to extend the program through April 3, 2007.
Novell does not expect to make any additional repurchases under the program since,
as of July 31, 2006, Novell completed the share repurchase program by purchasing 51.5 million
shares at an average cost per share of $7.76. 
 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
 57




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##### Table of Contents



SIGNATURES
  Novell, Inc. (Registrant)Date: May 25, 2007
    By:
    /s/ DANA C. RUSSELLDana C. RussellSenior Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) 58




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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