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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|For the Quarterly Period Ended April 30, 2004                
|or                                                           
|o                                                             | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|For the transition period
from                             to

Commission File Number: 0-13351

NOVELL, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)                  |  | 87-0393339(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------
|404 Wyman Street
Waltham, MA 02451(Address of principal executive offices and zip code)
|(781) 464-8000(Registrant's telephone number, including area code)                     

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

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

As of June 1, 2004, there were 386,682,146 shares of the registrant's common stock outstanding.



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NOVELL, INC.  TABLE OF CONTENTS



|                                                                                             
|---------------------------------------------------------------------------------------------
|Part IFinancial Information:                                                                
|Item 1: Financial Statements                                                                 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4: Controls and Procedures                                                              
|Part IIOther Information:                                                                   
|Item 1: Legal Proceedings                                                                    
|Item 2: Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      
|Item 4: Submission of Matters to a Vote of Security Holders                                  
|ITEM 6: Exhibits and Reports on Form 8-K                                                     
|Signatures                                                                                   

---





Part I. Financial Information

Item 1. Financial Statements

NOVELL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)

|                                                                                                                                                                                      |                                                                                                                                                            | April 30, 2004                                                    |         | October 31, 2003 |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------- | ---------------- | ---------
|
|Assets                                                                                                                                                                                |                                                                                                                                                            |                                                                   |         |                  |          
|Current assets:                                                                                                                                                                       |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      | Cash, cash equivalents and short-term investments                                                                                                          |                                                                   | $       | 636,134          |          
|                                                                                                                                                                                      | Receivables, less allowances ($25,781 at April 30, 2004 and $26,852 at October 31, 2003)                                                                   |                                                                   |         | 214,731          |          
|                                                                                                                                                                                      | Prepaid expenses                                                                                                                                           |                                                                   |         | 28,732           |          
|                                                                                                                                                                                      | Other current assets                                                                                                                                       |                                                                   |         | 28,389           |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total current assets                                              |         |                  | 907,986  
|Property, plant and equipment, net                                                                                                                                                    |                                                                                                                                                            |                                                                   | 248,448 |                  |          
|Long-term investments                                                                                                                                                                 |                                                                                                                                                            |                                                                   | 52,936  |                  |          
|Goodwill                                                                                                                                                                              |                                                                                                                                                            |                                                                   | 401,969 |                  |          
|Intangible assets                                                                                                                                                                     |                                                                                                                                                            |                                                                   | 50,057  |                  |          
|Other assets                                                                                                                                                                          |                                                                                                                                                            |                                                                   | 6,298   |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total assets                                                      |         | $                | 1,667,694
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|Liabilities, Redeemable Securities and Stockholders' Equity                                                                                                                           |                                                                                                                                                            |                                                                   |         |                  |          
|Current liabilities:                                                                                                                                                                  |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      | Accounts payable                                                                                                                                           |                                                                   | $       | 53,405           |          
|                                                                                                                                                                                      | Accrued compensation                                                                                                                                       |                                                                   |         | 100,816          |          
|                                                                                                                                                                                      | Other accrued liabilities                                                                                                                                  |                                                                   |         | 102,606          |          
|                                                                                                                                                                                      | Income taxes payable                                                                                                                                       |                                                                   |         | 37,911           |          
|                                                                                                                                                                                      | Deferred revenue                                                                                                                                           |                                                                   |         | 296,115          |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total current liabilities                                         |         |                  | 590,853  
|                                                                                                                                                                                      | Deferred income taxes                                                                                                                                      |                                                                   |         | 16,458           |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total liabilities                                                 |         |                  | 607,311  
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|Minority interests                                                                                                                                                                    |                                                                                                                                                            |                                                                   | 6,712   |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|Series B Redeemable convertible preferred stock, Authorized500,000 shares, Issued 1,000 shares at April 30, 2004; 0 shares at October 31, 2003 (at liquidation and redemption value) |                                                                                                                                                            |                                                                   | 50,000  |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|Stockholders' equity:                                                                                                                                                                 |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      | Common stock, par value $.10 per share, Authorized600,000,000 shares, Issued386,581,069 shares at April 30, 2004; 376,460,107 shares at October 31, 2003 |                                                                   |         | 38,658           |          
|                                                                                                                                                                                      | Additional paid-in capital                                                                                                                                 |                                                                   |         | 395,222          |          
|                                                                                                                                                                                      | Retained earnings                                                                                                                                          |                                                                   |         | 571,496          |          
|                                                                                                                                                                                      | Accumulated other comprehensive income                                                                                                                     |                                                                   |         | 6,745            |          
|                                                                                                                                                                                      | Other                                                                                                                                                      |                                                                   |         | (8,450           | )        
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total stockholders' equity                                        |         |                  | 1,003,671
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          
|                                                                                                                                                                                      |                                                                                                                                                            | Total liabilities, redeemable securities and stockholders' equity |         | $                | 1,667,694
|                                                                                                                                                                                      |                                                                                                                                                            |                                                                   |         |                  |          

The
accompanying notes are an integral part of these consolidated financial statements.

2

---



NOVELL, INC.  UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (Amounts in thousands, except per share data)

|                                                                            |                                  | Three Months Ended       |        
|--------------------------------------------------------------------------- | -------------------------------- | ------------------------ | -------
|
|Net revenue:                                                                |                                  |                          |        
|                                                                            | New software licenses            |                          | $      
|                                                                            | Maintenance and services         |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total net revenue        |        
|                                                                            |                                  |                          |        
|Cost of revenue:                                                            |                                  |                          |        
|                                                                            | New software licenses            |                          |        
|                                                                            | Maintenance and services         |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total cost of revenue    |        
|                                                                            |                                  |                          |        
|Gross profit                                                                |                                  |                          | 187,114
|                                                                            |                                  |                          |        
|Operating expenses:                                                         |                                  |                          |        
|                                                                            | Sales and marketing              |                          |        
|                                                                            | Product development              |                          |        
|                                                                            | General and administrative       |                          |        
|                                                                            | Restructuring                    |                          |        
|                                                                            | Gain on sale of long-lived asset |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total operating expenses |        
|                                                                            |                                  |                          |        
|Income (loss) from operations                                               |                                  |                          | 14,462 
|                                                                            |                                  |                          |        
|Other income (expense), net:                                                |                                  |                          |        
|                                                                            | Investment income (expense)      |                          |        
|                                                                            | Other (expense), net             |                          |        
|                                                                            |                                  |                          |        
|Other income (expense), net                                                 |                                  |                          | 375    
|                                                                            |                                  |                          |        
|Income (loss) before taxes                                                  |                                  |                          | 14,837 
|Income tax expense (benefit)                                                |                                  |                          | 4,454  
|                                                                            |                                  |                          |        
|Net income (loss)                                                           |                                  |                          | 10,383 
|Deemed dividend related to beneficial conversion feature of preferred stock |                                  |                          | (25,680
|Dividend on preferred stock                                                 |                                  |                          | (102   
|                                                                            |                                  |                          |        
|Net loss attributable to common stockholders                                |                                  | $                        | (15,399
|                                                                            |                                  |                          |        
|Net loss per share attributable to common stockholdersbasic and diluted    |                                  | $                        | (0.04  
|                                                                            |                                  |                          |        
|Weighted average common shares outstanding:                                 |                                  |                          |        
|                                                                            | Basic and diluted                |                          |        

The
accompanying notes are an integral part of these consolidated financial statements.

3

---





NOVELL, INC.  UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (Amounts in thousands, except per share data)

|                                                                            |                                  | Six Months Ended         |        
|--------------------------------------------------------------------------- | -------------------------------- | ------------------------ | -------
|
|Net revenue:                                                                |                                  |                          |        
|                                                                            | New software licenses            |                          | $      
|                                                                            | Maintenance and services         |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total net revenue        |        
|                                                                            |                                  |                          |        
|Cost of revenue:                                                            |                                  |                          |        
|                                                                            | New software licenses            |                          |        
|                                                                            | Maintenance and services         |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total cost of revenue    |        
|                                                                            |                                  |                          |        
|Gross profit                                                                |                                  |                          | 359,345
|                                                                            |                                  |                          |        
|Operating expenses:                                                         |                                  |                          |        
|                                                                            | Sales and marketing              |                          |        
|                                                                            | Product development              |                          |        
|                                                                            | General and administrative       |                          |        
|                                                                            | Restructuring                    |                          |        
|                                                                            | Gain on sale of long-lived asset |                          |        
|                                                                            |                                  |                          |        
|                                                                            |                                  | Total operating expenses |        
|                                                                            |                                  |                          |        
|Income (loss) from operations                                               |                                  |                          | 28,468 
|                                                                            |                                  |                          |        
|Other income (expense), net:                                                |                                  |                          |        
|                                                                            | Investment income (expense)      |                          |        
|                                                                            | Other (expense), net             |                          |        
|                                                                            |                                  |                          |        
|Other income (expense), net                                                 |                                  |                          | 2,852  
|                                                                            |                                  |                          |        
|Income (loss) before taxes                                                  |                                  |                          | 31,320 
|Income tax expense (benefit)                                                |                                  |                          | 10,802 
|                                                                            |                                  |                          |        
|Net income (loss)                                                           |                                  |                          | 20,518 
|Deemed dividend related to beneficial conversion feature of preferred stock |                                  |                          | (25,680
|Dividend on preferred stock                                                 |                                  |                          | (102   
|                                                                            |                                  |                          |        
|Net loss attributable to common stockholders                                |                                  | $                        | (5,264 
|                                                                            |                                  |                          |        
|Net loss per share attributable to common stockholdersbasic and diluted    |                                  | $                        | (0.01  
|                                                                            |                                  |                          |        
|Weighted average shares outstanding:                                        |                                  |                          |        
|                                                                            | Basic and diluted                |                          |        

The
accompanying notes are an integral part of these consolidated financial statements.

4

---



NOVELL, INC.  UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Amounts in thousands)

|                                                                                                   |                                   | Six Months Ended                                    |         
|-------------------------------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | --------
|
|Cash flows from operating activities:                                                              |                                   |                                                     |         
|Net income (loss)                                                                                  |                                   | $                                                   | 20,518  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                   |                                                     |         
|                                                                                                   | Gain on sale of fixed assets      |                                                     |         
|                                                                                                   | Depreciation and amortization     |                                                     |         
|                                                                                                   | Loss on impaired investments      |                                                     |         
|                                                                                                   | Decrease in receivables           |                                                     |         
|                                                                                                   | Increase in prepaid expenses      |                                                     |         
|                                                                                                   | Increase in deferred income taxes |                                                     |         
|                                                                                                   | Increase in other current assets  |                                                     |         
|                                                                                                   | Increase in accounts payable      |                                                     |         
|                                                                                                   | Decrease in accrued liabilities   |                                                     |         
|                                                                                                   | Decrease in deferred revenue      |                                                     |         
|                                                                                                   |                                   |                                                     |         
|                                                                                                   |                                   | Net cash provided by (used in) operating activities |         
|                                                                                                   |                                   |                                                     |         
|Cash flows from financing activities:                                                              |                                   |                                                     |         
|Issuance of preferred stock                                                                        |                                   |                                                     | 50,000  
|Issuance of common stock                                                                           |                                   |                                                     | 49,051  
|Payment of preferred stock dividend                                                                |                                   |                                                     | (102    
|                                                                                                   |                                   |                                                     |         
|                                                                                                   |                                   | Net cash provided by financing activities           |         
|                                                                                                   |                                   |                                                     |         
|Cash flows from investing activities:                                                              |                                   |                                                     |         
|Expenditures for property, plant and equipment                                                     |                                   |                                                     | (12,013 
|Proceeds from the sale of property, plant and equipment                                            |                                   |                                                     | 1,977   
|Purchases of short-term investments                                                                |                                   |                                                     | (399,596
|Maturities of short-term investments                                                               |                                   |                                                     | 103,663 
|Sales of short-term investments                                                                    |                                   |                                                     | 295,986 
|Cash paid for Volera minority interest shares                                                      |                                   |                                                     |        
|Cash paid for acquisition of SUSE, net of cash acquired                                            |                                   |                                                     | (200,298
|Other                                                                                              |                                   |                                                     | (4,865  
|                                                                                                   |                                   |                                                     |         
|                                                                                                   |                                   | Net cash used in investing activities               |         
|                                                                                                   |                                   |                                                     |         
|Total decrease in cash and cash equivalents                                                        |                                   |                                                     | (113,460
|Cash and cash equivalentsbeginning of period                                                      |                                   |                                                     | 366,932 
|                                                                                                   |                                   |                                                     |         
|Cash and cash equivalentsend of period                                                            |                                   |                                                     | 253,472 
|Short-term investmentsend of period                                                               |                                   |                                                     | 382,662 
|                                                                                                   |                                   |                                                     |         
|Cash, cash equivalents and short-term investmentsend of period                                    |                                   | $                                                   | 636,134 
|                                                                                                   |                                   |                                                     |         

The
accompanying notes are an integral part of these consolidated financial statements.

5

---





NOVELL, INC.        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS        April 30, 2004

A. Quarterly Financial Statements

The interim consolidated financial statements as of and for the quarter and the six months ended April 30, 2004 have been prepared by Novell, Inc.
("Novell") pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ materially from those estimates. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to
Form 10-Q but do not include all of the information and notes required by accounting principles generally accepted in the United States and should, therefore, be read in conjunction
with our fiscal 2003 Annual Report on Form 10-K. These financial statements are unaudited and include all normal recurring adjustments that we believe are necessary for a fair
presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net income (loss), have
been made to the prior year's amounts in order to conform to the current year's presentation.

B. Redeemable Convertible Preferred Stock

Novell has 500,000 authorized shares of preferred stock, par value $.10 per share, which may be issued in various classes.

On
March 23, 2004, Novell entered into a definitive agreement with International Business Machines Corporation ("IBM") in connection with IBM's previously announced
$50 million investment in Novell. Publicized in conjunction with Novell's offer to acquire SUSE LINUX AG ("SUSE") in November 2003, the investment, the primary terms of which were
negotiated in November 2003, entailed the purchase by IBM of 1,000 shares of Novell Series B redeemable preferred shares that are convertible into 8 million shares of Novell
common stock at a price of $6.25 per share. The shares are entitled to a dividend of 2% per annum, payable quarterly in cash. Cash dividends paid during the quarter ended April 30, 2004 were
$0.1 million.

Because
the fair value of Novell's common stock of $9.46 per share on March 23, 2004 was greater than the conversion price of $6.25 per share, we recorded a one-time,
non-cash deemed dividend of $25.7 million pursuant to Emerging Issues Task Force ("EITF") Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios." This had no impact on net income, but did reduce earnings attributable to common stockholders and thus reduced basic and diluted
earnings per share by approximately $0.07 in the current quarter.

The
preferred stock is convertible at any time at the option of the holder and has a liquidation value equal to $50,000 per share. Each share of preferred stock issued and outstanding is
entitled to the number of votes equal to the number of shares of common stock into which it is convertible. The preferred shares are senior to the common stock with respect to dividends and
liquidation preferences. The preferred stock is redeemable at Novell's option, and by IBM under certain change in control circumstances. Because the redemption is not certain to occur, the preferred
stock is not required to be classified as a liability. The redemption features do require the preferred stock to be classified in the mezzanine section of the balance sheet.

6

---



C. Acquisition of SUSE LINUX AG

On January 12, 2004, we purchased substantially all of the outstanding stock of SUSE, a privately-held company and a leading provider of
Linux-based products, for approximately $210 million in cash, plus estimated merger and transaction costs of $7 million. The acquisition of SUSE enables us to offer a full range of
enterprise solutions on the Linux platform, from the server to the desktop. This transaction was accounted for as a purchase. SUSE's results of operations have been incorporated into ours beginning on
the acquisition date of January 12, 2004.

The
purchase price was preliminarily allocated as follows:

Estimated
Acquisition
Cost

Asset Life(Amounts in
thousands)Fair value of net tangible assets acquired

$
1,599

N/AIdentifiable intangible assets:Customer relationships


13,385

3 yearsInternal use software


5,864

3 yearsTrademarks/trade names


24,221

IndefiniteGoodwill


188,669

Indefinite$
233,738


In
addition, we recorded a deferred income tax liability of $17 million resulting from the future tax consequences of the non-deductibility of identified net
intangible assets recorded in connection with this acquisition.

Goodwill
from the SUSE acquisition resulted from our belief that SUSE's technology is valuable to our product offerings. The purchase price allocation will be adjusted as integration
plans, including restructuring, are finalized, as allowed by Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." We used an independent valuation firm to
estimate the fair values of the intangible assets.

Revenues
of $12.1 million and expenses of $17.9 million were recorded by SUSE for the period from January 12, 2004 to April 30, 2004. These revenues are
included in the cross platform services solutions group. If the SUSE acquisition had occurred at November 1, 2003, Novell's estimated pro forma
revenues, net loss attributable to common stockholders and net loss per share attributable to common stockholders (basic and diluted) for the six months ended April 30, 2004 would have
been $568.5 million, $5.3 million and $0.01 per share, respectively. If the SUSE acquisition had occurred at November 1, 2002, Novell's estimated pro forma revenues, net loss
attributable to common stockholders and net loss per share attributable to common stockholders (basic and diluted) for the six months ended April 30, 2003 would have been
$553.3 million, $48.5 million and $0.13 per share, respectively.

D. Cash, Cash Equivalents and Short-Term Investments

We consider all investments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are
diversified, primarily consisting of investment grade securities that either mature within the next 12 months or have other characteristics of short-term investments.

7

---



All
marketable debt and equity securities that are included in cash, cash equivalents and short-term investments are considered available-for-sale and
are carried at fair market value. Fair market values are based on quoted market prices where available; if quoted market prices are not available, the fair market values are based on quoted market
prices of similar instruments of companies that are comparable in size, product offerings, and market sector. When securities are sold, their cost is determined based on the specific identification
method. The unrealized gains and losses related to these securities are included in accumulated other comprehensive income (loss), net of tax, after any applicable tax valuation allowances (see
Note P). Gross unrealized gains and losses at April 30, 2004 were $0.8 million and $1.3 million, respectively. Gross unrealized gains and losses at October 31, 2003
were $2.1 million and $0.3 million, respectively.

At
April 30, 2004, we had cash and cash equivalents of $253 million and short-term investments of $383 million. During the second quarter of fiscal 2004,
we realized gains of $0.9 million and realized losses of $0.2 million from the sale of short-term investments. During the second quarter of fiscal 2003, we realized gains of
$0.7 million and realized losses of $0.2 million from the sale of short-term investments. During the first six months of fiscal 2004, we realized gains of
$2.8 million and realized losses of $0.3 million from the sale of short-term investments. During the first six months of fiscal 2003, we realized gains of
$1.1 million and realized losses of $0.3 million from the sale of short-term investments. We did not record any impairment losses on short-term investments during
the first six months of fiscal 2004 and fiscal 2003.

E. Foreign Currency Translation

The functional currency for most of our international subsidiaries is the local currency. These subsidiaries generate and expend cash primarily in their
respective local currency. Assets and liabilities of these subsidiaries are translated at current month-end exchange rates. Revenues and expenses are translated monthly at the average
monthly exchange rate. Such translation adjustments are recorded in accumulated other comprehensive income. The functional currency of our Irish operating subsidiaries and related entities is the U.S.
dollar.

F. Long-Term Investments

At April 30, 2004, long-term investments primarily consisted of investments made in venture capital partnerships and other direct investments
in equity securities of privately-held companies. Long-term investments are accounted for initially at cost and written down to fair value when indicators of impairment are
deemed to be other than temporary.

We
routinely review our long-term investments for impairment. To assess impairment we analyze forecasted financial performance of the investees, the liquidation preference
value of the stock we hold, and our estimate of the potential for investment recovery based on all these factors. During the second quarter and first six months of fiscal 2004, we recognized
impairment losses on long-term investments totaling $0.8 million and $1.9 million, respectively. During the second quarter and first six months of fiscal 2003, we
recognized impairment losses on long-term investments totaling $13.7 million and $24.5 million, respectively.

8

---



G. Goodwill and Intangible Assets



The following is a summary of goodwill resulting from the following acquisitions:

April 31,
2004

October 31,
2003(Amounts in thousands)SUSE

$
188,669

$
SilverStream


126,689


126,689Cambridge Technology Partners


42,500


42,500Ximian


35,002


35,002Other technology companies


9,109


9,109Total goodwill

$
401,969

$
213,300


Goodwill
is allocated to our operating segments that we consider to be the reporting units for allocating and evaluating goodwill.

Goodwill
is allocated to our operating segments as follows:

Americas

EMEA

Asia
Pacific

Celerant
Management
Consulting

Total(Amounts in thousands)Balance as of October 31, 2003

$
86,817

$
74,100

$
9,883

$
42,500

$
213,300Acquisition of SUSE


101,637


69,323


17,709





188,669Balance as of April 30, 2004

$
188,454

$
143,423

$
27,592

$
42,500

$
401,969


Goodwill
is not amortized but is reviewed for impairment at least annually.



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

April 30,
2004

October 31,
2003(Amounts in thousands)Developed technology

$
6,825

$
8,410Customer relationships


11,898


Internal use software


5,213


Trademarks/trade names


26,121


2,390Total identifiable intangible assets

$
50,057

$
10,800


Developed
technology, customer relationships and internal use software are amortized over three years. Trade names have indefinite lives and are not amortized but are reviewed for
impairment at least annually. Amortization of intangible assets for the second quarter and first six months of fiscal

9

---



2004
was $2.7 million and $4.2 million, respectively. Amortization of intangible assets for the second quarter and first six months of fiscal 2003 was $3.0 million and
$6.3 million, respectively.

In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we do not amortize goodwill or intangible assets with indefinite lives. We review these assets
periodically for potential impairment. During the fourth quarter of fiscal 2003, we completed our annual impairment review and determined that no goodwill or intangible asset impairments existed.

H. Income Taxes

Income tax expense for the first six months of fiscal 2004 was $10.8 million and relates primarily to income tax expenses incurred on foreign
earnings. The effective tax rate on income for the second quarter of fiscal 2004 was 31.0% and the effective tax rate on income for the first six months of fiscal 2004 was 35.0%. The effective
tax rate for fiscal 2003 was 194.3%. The fiscal 2004 effective tax rate differed from the effective tax rate for 2003 because of the establishment of a full valuation allowance against deferred tax
assets, resulting in an additional tax expense of $131 million during fiscal 2003, related principally to U.S. net operating loss carryforwards. This valuation allowance was recorded as a
result of our analysis of the facts and circumstances at the time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required
by SFAS No. 109, "Accounting for Income Taxes." Our cumulative pre-tax book loss for three consecutive years ended October 31, 2003, imposed a high standard for
compelling, positive evidence of the likelihood of, and ability to forecast, future taxable income in the near term.

Deferred
income taxes decreased slightly from the first quarter of fiscal 2004 to the second quarter of fiscal 2004, which resulted from the amortization of acquired intangibles for
which deferred tax liabilities were recorded at the time of purchase.

We
paid cash for income taxes in the amount of $4.0 million in the first six months of fiscal 2004 and $6.7 million during the same period of fiscal 2003.

I. Line of Credit

We have a $25 million bank line of credit available for letter of credit purposes. At April 30, 2004, there were standby letters of credit of
$14.8 million outstanding under this line, all of which are secured by cash. The bank line expires on April 1, 2005. The bank line is subject to the terms of a credit agreement
containing financial covenants and restrictions, none of which are expected to affect our operations. We are in compliance with all financial covenants as of April 30, 2004. In addition, at
April 30, 2004, we had outstanding letters of credit of an insignificant amount at other banks.

J. Restructuring

During the second quarter of fiscal 2004, we recorded a restructuring charge of approximately $5.3 million in connection with our strategy of taking a
competitive position in the Linux market and related acquisitions of SUSE. Specific actions taken include reducing our workforce by approximately 54 employees mainly in consulting, sales and product
development in EMEA and the Americas. By operating segment, the Americas, EMEA and Asia Pacific accounted for 25%, 74% and 1% of the restructuring charge, respectively.

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The
following table summarizes the restructuring activity during the first six months of fiscal 2004:

|                                                             |  | 2004
Restructuring |       | 2003
Restructuring |   | 2002 and 2001
Restructurings |   | Total |       
|------------------------------------------------------------ |  | ------------------ | ----- | ------------------ | - | ---------------------------- | - | ----- | ------
|
|Balance at October 31, 2003:                                 |  |                    |       |                    |   |                              |   |       |       
|Employee termination costs                                   |  | $                  |      |                    | $ | 6,879                        |   | $     | 1,110 
|Contract termination costs                                   |  |                    |      |                    |   | 8,434                        |   |       | 9,527 
|Other restructuring-related costs                            |  |                    |      |                    |   | 1,842                        |   |       | 485   
|                                                             |  |                    |       |                    |   |                              |   |       |       
|                                                             |  |                    |      |                    |   | 17,155                       |   |       | 11,122
|                                                             |  |                    |       |                    |   |                              |   |       |       
|Payments/adjustments during first six months of fiscal 2004: |  |                    |       |                    |   |                              |   |       |       
|Restructuring charges during first six months of fiscal 2004 |  |                    | 5,314 |                    |   |                             |   |       | (577  
|Employee termination costs                                   |  |                    | (814  | )                  |   | (6,879                       | ) |       | (276  
|Contract termination costs                                   |  |                    |      |                    |   | (3,843                       | ) |       | (1,736
|Other restructuring-related costs                            |  |                    |      |                    |   | (371                         | ) |       | 337   
|                                                             |  |                    |       |                    |   |                              |   |       |       
|Balance at April 30, 2004:                                   |  |                    |       |                    |   |                              |   |       |       
|Employee termination costs                                   |  |                    | 4,500 |                    |   |                             |   |       | 834   
|Contract termination costs                                   |  |                    |      |                    |   | 4,591                        |   |       | 7,214 
|Other restructuring-related costs                            |  |                    |      |                    |   | 1,471                        |   |       | 821   
|                                                             |  |                    |       |                    |   |                              |   |       |       
|                                                             |  | $                  | 4,500 |                    | $ | 6,062                        |   | $     | 8,869 
|                                                             |  |                    |       |                    |   |                              |   |       |       

As
of April 30, 2004, the remaining unpaid balances include accrued liabilities related to severance and benefits, which will be paid out over the remaining severance obligation
period, lease costs for
redundant facilities, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be primarily paid over the next twelve months.

K. Guarantees

During the first quarter of fiscal 2002, we sold our subsidiary in the Czech Republic. As a part of this transaction, we provided a guarantee to the landlord of
the building we leased in the Czech Republic whereby we agreed to pay any and all monies due under the lease, including legal fees if the new lessee defaults on the lease. During fiscal 2003, we paid
approximately $100,000 against this guarantee and at April 30, 2004, we had accrued an additional $0.3 million, which represents our liability exposure if the new lessee continues in
default, excluding legal fees. In addition, we have provided a guarantee in the amount of $2 million related to a foreign tax audit. No amounts have been paid against this guarantee. It is
expected that the term of the guarantee will continue until the conclusion of the audit. We have also provided other guarantees of insignificant amounts for various purposes.

As
an element of our standard contract terms, we include an indemnification clause in our agreements with our customers that indemnify the licensee against certain liability and damages
arising from intellectual property infringement claims resulting from their use or distribution of our software. Additionally during the first quarter of fiscal 2004, we implemented our Novell Linux
Indemnification Program. Under this program, indemnification is offered for copyright infringement claims made by

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third
parties against registered Novell customers who obtain certain Novell Linux products and who meet other requirements relating to technical support. We do not record a liability for potential
litigation claims related to indemnification agreements with our customers, unless and until we conclude the likelihood of a material obligation is probable and estimable.

L. Commitments and Contingencies

As of April 30, 2004, we had a carrying value of $49.3 million related to long-term investments in various venture capital funds and had
commitments to contribute an additional $43.0 million to these funds at times and amounts as requested by the fund managers.

M. Legal Proceedings

In January 2004, the SCO Group, Inc. ("SCO") filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. Novell
removed the claim to the U.S. District Court, District of Utah. SCO alleges that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO's
business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. SCO seeks to require us to assign all copyrights that we have registered in UNIX and UnixWare to
SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights and to require us to withdraw all representations we have made regarding our ownership of
the UNIX and UnixWare copyrights, and to pay actual, special and punitive damages in an amount to be proven at trial. We believe that we have meritorious defenses to these claims and intend to
vigorously defend ourselves in this suit. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material
adverse effect on our financial position, results of operations or cash flows.

In
May 2002, France Telecom SA and U.S. Philips Corporation, alleged co-owners of a U.S. patent, filed suit in the U.S. District Court, District of Delaware, against
Novell. The plaintiffs allege that Novell's NetWare client software infringes the patent. In the suit, the plaintiffs sought unspecified monetary damages and an injunction prohibiting infringement of
the patent. On April 20, 2004 this suit was dismissed with prejudice.

SilverStream
Software, Inc. ("SilverStream") and several of its former officers and directors, as well as the underwriters, who handled SilverStream's two public offerings, were
named as defendants in several class action complaints that were filed on behalf of certain former stockholders of SilverStream who purchased shares of SilverStream common stock between
August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs have brought against other issuers and
underwriters. These complaints all allege violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. In particular, they allege, among other things,
that there was undisclosed compensation received by the underwriters of the public offerings of all of these issuers, including SilverStream's. The plaintiffs are seeking monetary damages, statutory
compensation and other relief that may be deemed appropriate by the court. A Consolidated Amended Complaint with respect to all of these companies was filed in the U.S. District Court, Southern
District of New York, on April 19, 2002. While Novell believes that SilverStream and its former officers and directors have meritorious defenses to the claims, a Memorandum of Understanding has
been reached between many of the defendants and the plaintiffs, which contemplate a settlement of the claims. The finalization of any settlement, however, has not been completed. While

12

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there
can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations
or cash flows.

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

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

N. Segment Information

Beginning November 1, 2002, we reorganized our operations and began reporting our financial results in four new segments; three are based on geographic
area and a fourth is Celerant Management Consulting. The geographic segments are Americas, EMEA, and Asia Pacific. Performance is evaluated by our Chief Executive Officer and Worldwide Management
Committee, our chief decision makers, and is based on reviewing revenue and segment operating income (loss) information for each of the segments. These geographic segments include:



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All
geographic segments sell our products, services and solution offerings. These offerings are sold direct or via OEM, reseller, and distributor channels. Operating results by segment
are as follows:

|                                                |                                    | Three Months Ended |        
|----------------------------------------------- | ---------------------------------- | ------------------ | -------
|
|
|
|                                                | Americas                           |                    | $      
|                                                | EMEA                               |                    |        
|                                                | Asia pacific                       |                    |        
|                                                | Common unallocated operating costs |                    |        
|                                                |                                    |                    |        
|Total geographical segments                     |                                    |                    | 251,763
|Celerant management consulting                  |                                    |                    | 41,793 
|Unallocated integration and restructuring costs |                                    |                    |       
|                                                |                                    |                    |        
|Total per statements of operations              |                                    | $                  | 293,556
|                                                |                                    |                    |        

|                                                |                                    | Six Months Ended |        
|----------------------------------------------- | ---------------------------------- | ---------------- | -------
|
|
|
|                                                | Americas                           |                  | $      
|                                                | EMEA                               |                  |        
|                                                | Asia pacific                       |                  |        
|                                                | Common unallocated operating costs |                  |        
|                                                |                                    |                  |        
|Total geographical segments                     |                                    |                  | 481,537
|Celerant management consulting                  |                                    |                  | 79,126 
|Unallocated integration and restructuring costs |                                    |                  |       
|                                                |                                    |                  |        
|Total per statements of operations              |                                    | $                | 560,663
|                                                |                                    |                  |        

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

In
addition, the chief decision makers review revenue by solution category, all of which are included in the geographic segment revenue. These solution categories are:



14

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Revenues
by solution category are as follows:

|                                        |                                 | Three Months Ended |         | Six Months Ended
|--------------------------------------- | ------------------------------- | ------------------ | ------- | ----------------
|
|
|Identity management and web services    |                                 | $                  | 24,051  |                 
|Cross platform services                 |                                 |                    | 151,260 |                 
|                                        |                                 |                    |         |                 
|Total software licenses and maintenance |                                 |                    | 175,311 |                 
|Worldwide services                      |                                 |                    | 76,452  |                 
|                                        |                                 |                    |         |                 
|                                        | Total IT software and solutions |                    |         | 251,763         
|Celerant management consulting          |                                 |                    | 41,793  |                 
|                                        |                                 |                    |         |                 
|                                        | Total net revenue               |                    | $       | 293,556         
|                                        |                                 |                    |         |                 

For
the second quarters of fiscal 2004 and fiscal 2003, revenues in the U.S were $123.4 million and $125.8 million, respectively, and revenues to customers outside the U.S.
were $170.2 million and $150.1 million, respectively. In the second quarters of fiscal 2004 and fiscal 2003, 80% and 75%, respectively, of our international revenues were in EMEA.

For
the first six months of fiscal 2004 and fiscal 2003, revenues in the U.S were $240.0 million and $249.6 million, respectively, and revenues to customers outside
the U.S. were $320.7 million and $286.3 million, respectively. In the second quarters of fiscal 2004 and fiscal 2003, 80% and 75%, respectively, of our international revenues were in
EMEA.

No
single customer and no single country outside the United States accounted for more than 10% of our total revenue for each period presented.

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

The assumed exercise of outstanding stock options and conversion of preferred stock have an anti-dilutive effect for each of the periods presented
because of the net loss attributable to common stockholders after deducting preferred stock dividends. As a result, these common stock equivalents have been excluded in the calculation of diluted net
loss per share for all periods presented. The weighted average of common stock equivalents for the second quarter of fiscal 2004 included stock options of 12,946,344 and convertible preferred shares
of 3,466,667.

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P. Comprehensive Loss

The components of comprehensive loss, net of tax, are as follows:

|                                                   |  | Three Months Ended |         | Six Months Ended |  
|-------------------------------------------------- |  | ------------------ | ------- | ---------------- | -
|
|
|Net loss attributable to common stockholders       |  | $                  | (15,399 | )                | $
|Change in net unrealized gain (loss) on investment |  |                    | (1,864  | )                |  
|Change in pension liability                        |  |                    | (132    | )                |  
|Change in cumulative translation adjustments       |  |                    | (5,503  | )                |  
|                                                   |  |                    |         |                  |  
|Comprehensive loss                                 |  | $                  | (22,898 | )                | $
|                                                   |  |                    |         |                  |  

The
components of accumulated other comprehensive income, net of related tax, are as follows:

April 30,
2004

October 31,
2003(Amounts in thousands)Net unrealized gain (loss) on investment

$
(706
)
$
1,499Net increase in pension liability


(1,481
)

Net cumulative translation adjustment


8,932


5,569Accumulated other comprehensive income

$
6,745

$
7,068


Q. Stock-Based Compensation

We account for our stock-based compensation under the intrinsic value method of accounting as defined by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations. We apply the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended
by SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure."

At
April 30, 2004, we had authorized several stock-based compensation plans. Under these plans, options to purchase shares of our common stock can be granted to employees,
consultants, and outside directors. We generally grant employees stock options at an exercise price equal to the fair market value of our common stock. Thus, in accordance with the intrinsic value
method, no compensation expense (except compensation expense related to restricted stock purchase rights, restricted units, below-market option grants, and grants to non-employees) has
been recognized for our stock-based compensation.

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If
compensation expense for our stock option and other equity plans had been determined based on the fair value of the stock grants, our net income (loss) and net income (loss) per share
would have been the pro forma amounts indicated below:

|                                                        |                                                                                                                                  | Three Months Ended |   | Six Months Ended |  
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------ | - | ---------------- | -
|
|
|Net loss attributable to common stockholders            |                                                                                                                                  |                    |   |                  |  
|                                                        | As reported                                                                                                                      |                    | $ | (15,399          | )
|                                                        | Less: total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects |                    |   | (14,052          | )
|                                                        | Add: total stock-based compensation expense recorded in the statement of operations                                              |                    |   | 1,376            |  
|                                                        |                                                                                                                                  |                    |   |                  |  
|                                                        | Pro forma                                                                                                                        |                    | $ | (28,075          | )
|                                                        |                                                                                                                                  |                    |   |                  |  
|Net loss per share attributable to common stockholders: |                                                                                                                                  |                    |   |                  |  
|                                                        | As reported basic and diluted                                                                                                    |                    | $ | (0.04            | )
|                                                        | Pro forma basic and diluted                                                                                                      |                    | $ | (0.08            | )

For
the purpose of the above table, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in the second quarters of fiscal 2004 and fiscal 2003: a risk-free interest rate of approximately 3.0% and 2.8%, respectively; a dividend yield
of 0.0% for both quarters; a weighted-average expected life of five years for both quarters, except for the shares tendered as part of an exchange program which have an average expected life of
three years; and a volatility factor of the expected market price of our common stock of 0.76 and 0.88, respectively. The weighted average fair value of options granted in the second quarters
of fiscal 2004 and fiscal 2003 was $7.49 and $1.65, respectively.

For
the first six months of fiscal 2004 and fiscal 2003 assumptions included: a risk-free interest rate of approximately 3.1% and 2.9%, respectively; a dividend yield
of 0.0% for both periods; a weighted-average expected life of five years for both periods, except for the shares tendered as part of an exchange program which have an average expected life of
three years; and a volatility factor of the expected market price of our common stock of 0.77 and 0.88, respectively. The weighted average fair value of options granted in the first six months
of fiscal 2004 and fiscal 2003 was $5.66 and $2.06, respectively.

For
purposes of the above table, pro forma compensation expense is estimated for the fair value of the employees' purchase rights using the Black-Scholes option pricing model with the
following assumptions as if shares had been issued in the second quarters of fiscal 2004 and fiscal 2003: risk-free interest rate of approximately 1.1% and 2.3%, respectively; a dividend
yield of 0.0% for both periods; a weighted-average expected life of six months for both periods; and a volatility factor of the expected market price of our common stock of 0.76 and 0.88,
respectively. The weighted average fair value of the purchase rights issued in the second quarters of fiscal 2004 and fiscal 2003 was $2.20 and $0.93, respectively.

R. Derivative Instruments

A large portion of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. We do not currently hedge currency risks related to
revenue or expenses denominated in foreign currencies. However, we hedge currency risks of some assets and liabilities denominated in foreign currencies to protect against reductions in value caused
by changes in foreign exchange rates.

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We
have established balance sheet and intercompany hedging programs that use one-month foreign currency forward contracts, primarily on the euro, Japanese yen, and certain other European,
Latin American and Asian currencies.

We
enter into these one-month hedging contracts two business days before the end of each month and settle them at the end of the following month. Due to the short
period of time between entering into the forward contracts and the quarter-end, the fair value of the derivatives as of April 30, 2004 is insignificant. Gains and losses recognized
during the quarter on these foreign currency contracts are recorded as other income or expense and generally offset corresponding gains and losses on the underlying hedged assets and liabilities,
resulting in negligible effect to our financial statements.

S. Subsequent Event

On May 28, 2004, Novell was paid $18.5 million from Canopy Group, Inc. ("Canopy") in satisfaction of a judgment against Canopy. The judgment
arose out of a collection action filed by Novell against Canopy, wherein Novell sought to recover a royalty payment due Novell under a licensing agreement and arising out of a settlement payment from
Microsoft Corporation to Canopy.

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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 ("MD&A") and other parts of this
Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. In some cases, such
forward-looking statements may be identified by the use of words such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue" or the negative thereof or other
comparable words. Such forward-looking statements include statements regarding, among other things, our revenue expectations, future business strategies, market conditions and opportunities, and
liquidity. All forward-looking statements are based on management's current expectations and information currently available to us. Our actual results may differ materially from management's
expectations and the results discussed in any of our forward-looking statements as a result of a number of factors, which include, but are not limited to, those set forth in the section titled
"Risk Factors Affecting Future Results of Operations," which is incorporated by reference from our Registration Statement on Form S-3 that was filed with the Securities and Exchange
Commission on April 7, 2004. We assume no obligation to update any of our forward-looking statements for any reason, except as required by law.

Executive Overview and Introduction

Novell, Inc. ("Novell") is dedicated to enabling customers to create agile and secure business environments where information systems of all types work
well together and connect the right people to the right information at the right timea vision that we refer to as "one Net." Novell has been a leader in building and selling computer
networking products and services since its inception in 1983 and is a global organization with 5,900 employees worldwide and over 50% of its annual revenues of $1 billion generated outside the
United States. We recently made important steps in furthering our "one Net" vision by developing for and supporting the Linux platform, which will augment the many other platforms that Novell already
supports, including NetWare, Windows, Solaris and UNIX. Our Linux offerings include server and desktop operating systems, a desktop office productivity suite, systems management and development tools
and a standards-based development environment. Through our acquisitions of Ximian, Inc. ("Ximian") in August 2003 and SUSE LINUX AG ("SUSE") in January 2004 and through changes to
our legacy products to enable them to work on Linux, we believe we have become the only company that is positioned to provide complete network services on Linuxfrom the server to the
desktop. Thus, we are able to give existing and new customers a cost-effective, secure, reliable and supported alternative.

While
Linux provides a significant growth opportunity for Novell, we believe we are well positioned to take advantage of other high growth opportunities including identity management and
web services. We believe our recently released products, including Identity Manager 2.0, BorderManager 3.8, and exteNd 5.0, will continue to influence the market. Also, significant opportunities exist
with our ZENworks and Ximian Red Carpet Enterprise Linux management products, which ideally position Novell as the cross platform management solution of choice for our customers.

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



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In
operating our business, our executives also evaluate revenue growth and performance by solution categories (product and services lines). These solution categories are as follows:



Our
business is defined by constant and rapid changes in technology and competition. To stay competitive and grow, we continually evaluate the markets and potential applications for our
products and services so that we can meet the technological and cost demands of existing and potential customers worldwide. At the same time, we must respond appropriately to economic conditions in
the United States and the rest of the worldboth general economic conditions and economic conditions that are specific to the IT market. These conditions affect the confidence, spending
ability and growth potential of our existing and potential customers and, consequently, the demand of those customers for our products and services. As a result, we are proactive in reviewing and
restructuring our operations in response to changes in customer preferences and the IT market. Such changes have been and may be accomplished in the future though the acquisition of companies and
technology that expand and/or complement the products and services that we offer our customers.

We
face risks and challenges in managing a global company and implementing new strategies. Some of these include the following:



20

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Critical Accounting Policies

An accounting policy is deemed to be critical if 1.) the policy requires us to make an accounting estimate based on assumptions about matters that are highly
uncertain; 2.) different estimates that reasonably could have been used could materially change the financial statements; and 3.) changes in the estimate that are reasonably likely to occur
periodically could materially change the financial statements. We consider certain accounting policies related to revenue recognition, impairment of long-lived assets, and valuation of
deferred tax assets to be critical policies due to the estimation processes involved in each.

Revenue Recognition.Revenue from software license fees is recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable and collection is probable. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments
become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. We recognize revenue on the sale of shrink-wrapped box product through our
distributor channel on a sell-through basis.

Revenue
from maintenance contracts, support and other similar services, is recognized as services are performed. Certain sales require continuing service, support and performance by us,
and

21

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accordingly,
a portion of the revenue is deferred until the future service, support, and performance are provided. Revenue recognized on multiple-element arrangements is allocated to each element of
the arrangement based on the relative fair values of the elements, which may include software products, unspecified product upgrade protection, software support services, consulting, and training.
Fair value is determined by vendor-specific objective evidence of the price charged to other customers when each element is sold separately. We have established sufficient vendor-specific objective
evidence of the fair value of all elements of a multiple element arrangement.

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

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

Long-lived Assets.At April 30, 2004, our long-lived assets included $248 million of
property, plant and equipment, $53 million of long-term investments, $402 million of goodwill, and $50 million of other intangible assets.

Property, Plant, and Equipment.We periodically review our property, plant, and equipment for impairment in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In determining whether an asset is impaired, we must
make assumptions regarding recoverability of costs, estimated future cash flows from the asset, intended use of the asset and other related factors. If these estimates or their related assumptions
change, we may be required to record impairment charges for these assets.

Long-term Investments.The fair value of our long-term investments is affected by the actual
financial performance of the companies or venture funds in which we have invested, the investee's market value, and the volatility inherent in the external markets for these investments. In assessing
potential impairment for these private equity investments, we consider these factors as well as the forecasted financial performance of the investees, liquidation preference value of the stock we
hold, and the estimated potential for investment recovery based on all these factors. If any of these factors indicate that the investment has become other-than-temporarily
impaired, we may have to record additional impairment charges not previously recognized. During the second quarters of fiscal 2004 and fiscal 2003, we recognized $0.8 million and
$13.7 million, respectively, of impairment losses related to our long-term investments. During the first six months of fiscal 2004, and fiscal 2003, we recognized
$1.9 million and $24.5 million, respectively, of impairment losses related to our long-term investments.

Goodwill and Intangible Assets.In assessing the recoverability of our goodwill and other intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This process is subjective and requires judgment at many points throughout the
analysis. If these estimates or their related assumptions change in the future, or if actual cash flows are below our estimates, we may be required to record impairment charges for these assets not
previously recorded. During the fourth quarters of fiscal 2002 and fiscal 2003, we completed our annual impairment review based on August 1, 2002 and 2003 balances and determined that there was
no impairment as of those dates.

22

---



Additionally,
during our review of goodwill and intangible assets during the second quarter of fiscal 2004, we noted no significant changes in market conditions, our assumptions and
other factors since we
performed our annual impairment test. However, changes in the assumptions used in the analysis could have changed the resulting outcome. For example, to estimate the fair value of our reporting units,
we made estimates and judgments about future cash flows based on our fiscal 2004 forecast and current long-range plans used to manage the business. These long-range estimates
could change in the future depending on internal changes in our company as well as external factors. Future changes in estimates or in the manner we report and evaluate our operating segments could
possibly result in a non-cash goodwill impairment charge that could have a material adverse impact on our results of operations.

During
the third quarter of fiscal 2003, we determined that impairment indicators existed related to the developed technology and trade names we acquired from SilverStream, mainly as a
result of failure to achieve revenue growth targets for the exteNd products. Based on an independent valuation of these assets, we recorded a $23.6 million impairment charge to write down these
assets to their estimated fair value. This charge was included in cost of revenue.

As
a result of the impairment recorded on these intangible assets, we also analyzed our other long-lived assets for indicators of impairment, as required by SFAS
No. 142, "Goodwill and Other Intangible Assets," in the third quarter of fiscal 2003. This analysis included goodwill and property, plant and equipment acquired from SilverStream. Applying the
provisions of SFAS No. 142 and SFAS No. 144, we noted no additional indicators of impairment.

Developed
technology and internal use software are amortized over three years as a cost of revenue. Goodwill and trade names have an indefinite life and therefore are not
amortized but are reviewed for impairment at least annually.

Deferred Tax Assets.We perform quarterly and annual assessments of the realization of our deferred tax assets considering
all available evidence, both positive and negative. Assessments of the realization of deferred tax assets require that management make significant judgments about many factors, including the amount
and likelihood of future taxable income. As a result of these assessments, prior to the first quarter of fiscal 2003, we established valuation allowances on select deferred tax assets that were
considered to be at risk due to their unique characteristics and limitations, such as capital loss carryovers and acquired tax attributes. We concluded that it was more likely than not that the
remaining recognized deferred tax assets would be realized. A valuation allowance was recorded in the fourth quarter of fiscal 2003 as a result of our analysis of the facts and circumstances at that
time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required by SFAS No. 109, "Accounting for Income Taxes." The
Company's cumulative pre-tax book loss for three consecutive years ended October 31, 2003 imposed a high standard for compelling, positive evidence of the likelihood of, and ability
to forecast, future taxable income in the near term. As a result, in the fourth fiscal quarter of 2003 and the first two fiscal quarters of 2004, we provided a full valuation allowance against net
deferred tax assets carried on our balance sheet. As deferred tax assets or liabilities increase or decrease in the future, or if a portion or all of the valuation allowance is no longer deemed to be
necessary, the adjustments to the valuation allowance will increase or decrease future income tax expense provisions.

Results of Operations



We sell our products, services, and solutions primarily to large-scale corporations, government entities, educational institutions, resellers, and distributors
both domestically and internationally.

23

---



Revenues
by operating segment were as follows:

|                               |                   | Three Months Ended |         |         |   | Six Months Ended |         |    |  
|------------------------------ | ----------------- | ------------------ | ------- | ------- | - | ---------------- | ------- | -- | -
|
|Americas                       |                   | $                  | 130,179 |         | $ | 129,503          |         | 1  | %
|EMEA                           |                   |                    | 99,015  |         |   | 88,673           |         | 12 | %
|Asia pacific                   |                   |                    | 22,569  |         |   | 20,908           |         | 8  | %
|Celerant management consulting |                   |                    | 41,793  |         |   | 36,883           |         | 13 | %
|                               |                   |                    |         |         |   |                  |         |    |  
|                               | Total net revenue |                    | $       | 293,556 |   | $                | 275,967 |    | 6
|                               |                   |                    |         |         |   |                  |         |    |  

Further,
we analyze revenue by solution categories within each operating segment. Revenues by solution category in the Americas segment were as follows:

|                                   |                   | Americas |       
|---------------------------------- | ----------------- | -------- | ------
|
|
|Identity management & web services |                   | $        | 12,784
|Cross platform services            |                   |          | 77,812
|Worldwide services                 |                   |          | 39,583
|                                   |                   |          |       
|                                   | Total net revenue |          | $     
|                                   |                   |          |       

The
9% increase in identity management and web services revenue for the second quarter of fiscal 2004 was driven primarily by changes in foreign exchange rates and improved performance
of our exteNd and DirXML product lines. Revenues increased by $948,000 or 83% and $741,000 or 21%,
respectively, offset by decreases in revenue of approximately $400,000 related primarily to our NDS & Account Management product line.

The
6% decline in identity management & web services revenue for the first half of the year is due to a decrease in revenues in the United States during the first quarter of
fiscal 2004 resulting from a sluggish economy and disappointing performances from our DirXML and Portal Services products.

The
1% and 4% declines in cross platform services revenue are primarily due to a 6% decline for the second quarter of fiscal 2004 and a 5% decline for the first six months of
fiscal 2004 of revenues from our NetWare products. However, we are encouraged because the decline in NetWare revenue has slowed. See our discussion regarding forward-looking revenue trends listed
below. The decline in NetWare revenue for the first six months of fiscal 2004 was also offset by changes in foreign exchange rates and by an increase in revenues of $1.4 million or 5% of
ZENworks revenue for the same time period, when compared to the first six months of fiscal 2003.

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

|                                   |                   | EMEA |       
|---------------------------------- | ----------------- | ---- | ------
|
|
|Identity management & web services |                   | $    | 9,101 
|Cross platform services/SUSE       |                   |      | 59,814
|Worldwide services                 |                   |      | 30,100
|                                   |                   |      |       
|                                   | Total net revenue |      | $     
|                                   |                   |      |       

24

---



The
5% and 13% increases in identity management and web services revenue in EMEA are primarily due to changes in foreign exchange rates and improved performance of our BorderManager,
exteNd and Secure-Login product lines. Revenues increased by $767,000 or 22%, $597,000 or 30% and $707,000 or 22%, respectively, for each of these products during the first six months of fiscal
2004 compared to the same period in the prior year.

The
17% and 14% increases in cross platform services/SUSE revenue are primarily due to the inclusion of approximately $10 million of SUSE revenue during the first
six months of fiscal 2004 compared to no SUSE revenue in the same period for the prior year. NetWare revenue increased by nearly $1.0 million for the second quarter and first
six months of fiscal 2004 compared to the same periods in the prior year. This increase is due to changes in foreign exchange rates and the influence that our Linux strategy is having on
NetWare revenues.

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

|                                   |                   | Asia Pacific |       
|---------------------------------- | ----------------- | ------------ | ------
|
|
|Identity management & web services |                   | $            | 2,167 
|Cross platform services/SUSE       |                   |              | 13,635
|Worldwide services                 |                   |              | 6,767 
|                                   |                   |              |       
|                                   | Total net revenue |              | $     
|                                   |                   |              |       

The
11% and 10% increases in identity management and web services revenue are due to changes in foreign exchange rates and to improved performance of our BorderManager and iChain product
lines.
Revenues increased by $199,000 or 34% and $187,000 or 65%, respectively, for each of these products during the first six months of fiscal 2004 compared to the same period in the prior year.

The
7% and 13% increases in cross platform services revenue are due to changes in foreign exchange rates and to improved trends with our NetWare, ZENworks and Collaboration products.
Revenues increased by $1.7 million or 12%, $1.1 million or 45% and $439,000 or 18%, respectively, offset primarily by a decrease in revenue of the Nterprise product line of approximately
$400,000 during the first six months of fiscal 2004 compared to the same period in the prior year.

The
9% and 8% increases in worldwide services revenue is due primarily to improved performance from the Novell Technical Services Group. Revenues increased by $443,000 or 27% for the
quarter and $902,000 or 30% for the first six months of fiscal 2004 as compared to the same period in the prior year.

Revenues
by solution category in the Celerant Management Consulting segment were as follows:

|                               |  | Celerant Management Consulting |       
|------------------------------ |  | ------------------------------ | ------
|
|
|Celerant management consulting |  | $                              | 41,793

The
increase in Celerant Management Consulting revenue is due to an improving performance from the European business (driven by strong new sales) and changes in foreign exchange rates.

Forward-looking revenue trends.NetWare revenue for the quarter decreased by 2% compared to the same quarter in the prior
year, which is improved from the 8% decrease in revenues from the

25

---



second
quarter of fiscal 2002 compared to the same quarter in 2003. NetWare revenue for the first six months of fiscal 2004 decreased by 5% as compared to an average company-wide
decline of approximately 15% over the last three years. This improvement in historical trends is attributable to changes in foreign exchange rates and, we believe, to customers who are choosing
NetWare in response to our message of choice and flexibility surrounding Linux. We are encouraged by the improved historical trends and believe our Linux strategy is positively influencing our NetWare
sales. As previously discussed, a significant aspect of our overall corporate strategy is to embrace the open source movement, specifically, the Linux operating system. Our acquisitions of Ximian and
SUSE enable us to be the only major company to offer a complete vertically-integrated Linux system from server to desktop. Accordingly, we believe that our Linux initiatives provide revenue
opportunities for the sale of new products and will help assist and augment our existing product revenue streams and trends as the Linux market grows in the future.

At
April 30, 2004, we had $296 million of deferred revenue representing revenue that is expected to be recognized in future periods. The majority of this deferred revenue
relates to maintenance contracts and is recognized ratably over the maintenance period, typically one year. We have either received payment or recorded a receivable for the deferred revenue, and have
determined collectability to be probable. Direct costs incurred to fulfill these maintenance obligations are recognized as work is performed.

Gross profit

|                                                 |                               | Three Months Ended |         | Six Months Ended |  
|------------------------------------------------ | ----------------------------- | ------------------ | ------- | ---------------- | -
|
|New software license gross profit                |                               | $                  | 54,219  |                  | $
|As a percentage of software license revenue      |                               |                    | 90      | %                |  
|Maintenance and services gross profit            |                               | $                  | 132,895 |                  | $
|As a percent of maintenance and services revenue |                               |                    | 57      | %                |  
|                                                 | Total gross profit            |                    | $       | 187,114          |  
|                                                 | As a percent of total revenue |                    |         | 64               | %

The
decrease in gross profit from new software licenses as a percentage of related revenue is primarily a result of competitive pricing pressure on new license sales.

The
increase in gross profit from maintenance and services as a percentage of related revenue is primarily due to improved resource utilization in our IT consulting services by reducing
our workforce by approximately 250 consultants, mainly in the Americas and EMEA.

26

---



Operating expenses

|                                  |  | Three Months Ended |         |    |   | Six Months Ended |   |     |   
|--------------------------------- |  | ------------------ | ------- | -- | - | ---------------- | - | --- | --
|
|Sales and marketing               |  | $                  | 93,646  |    | $ | 101,737          |   | (8  | %)
|As a percentage of revenue        |  |                    | 32      | %  |   | 37               | % |     |   
|Product development               |  | $                  | 52,031  |    | $ | 48,354           |   | 8   | % 
|As a percentage of revenue        |  |                    | 18      | %  |   | 18               | % |     |   
|General and administrative        |  | $                  | 24,215  |    | $ | 30,939           |   | (22 | %)
|As a percentage of revenue        |  |                    | 8       | %  |   | 11               | % |     |   
|Restructuring                     |  | $                  | 4,737   |    | $ | 8,675            |   | (45 | %)
|As a percentage of revenue        |  |                    | 2       | %  |   | 3                | % |     |   
|Gain on sale of long-lived assets |  | $                  | (1,977  | )  |   |                 |   |    |   
|As a percentage of revenue        |  |                    | (1      | %) |   |                 |   |     |   
|Total operating expenses          |  | $                  | 172,652 |    | $ | 189,705          |   | (9  | %)
|As a percentage of revenue        |  |                    | 59      | %  |   | 69               | % |     |   

The
decline in sales and marketing expenses in dollars and as a percentage of revenue for the second quarter and the first six months of fiscal 2004 is due to our efforts to
improve resource utilization via reducing our workforce by approximately 260 employees, primarily in sales in the United States and lower marketing spending of $7.4 million for the second
quarter and $18.7 million for the first six months of fiscal 2004. This decline was offset by increased marketing expenses of $2.5 million associated with our annual BrainShare
Conference and the addition of 73 SUSE sales employees. The SUSE acquisition was finalized on January 12, 2004.

The
decline in general and administrative expenses in dollars and as a percentage of revenue for the second quarter and first six months of fiscal 2004, is primarily a result of a
reduction of $5.0 million in legal reserves relating to favorable developments in current litigation matters and a reduction in our workforce of 125 employees in prior periods offset by the
addition of 53 new SUSE employees during the first quarter of fiscal 2004.

During
the second quarter of fiscal 2004, we recorded a restructuring charge of approximately $5.3 million in connection with our strategy of taking a competitive position in the
Linux market and related acquisitions of SUSE. Specific actions taken include reducing our workforce by approximately 54 employees mainly in consulting, sales and product development in EMEA and the
Americas. By operating segment, the Americas, EMEA and Asia Pacific accounted for 25%, 74% and 1% of the restructuring charge, respectively.

The
gain on sale of long-lived assets represents the gain recorded from the sale of a building during the second quarter of fiscal 2004.

Other income (expense), net

|                            |  | Three Months Ended |        |   |   | Six Months Ended |   |     |   
|--------------------------- |  | ------------------ | ------ | - | - | ---------------- | - | --- | --
|
|Investment impairments      |  | $                  | (750   | ) | $ | (13,723          | ) | 95  | % 
|Investment income           |  |                    | 3,214  |   |   | 3,265            |   | (2  | %)
|Other                       |  |                    | (2,089 | ) |   | (2,017           | ) | (4  | %)
|                            |  |                    |        |   |   |                  |   |     |   
|Other income (expense), net |  | $                  | 375    |   | $ | (12,475          | ) | 103 | % 
|                            |  |                    |        |   |   |                  |   |     |   

27

---





Novell's long-term investments consist primarily of venture capital partnerships and other direct investments in equity securities of privately-held securities.
The decline in investment impairments is primarily the result of improved market conditions as compared to the same periods in the prior year.

The
increase in investment income is a direct result of improving interest rates on our short-term investments.

Income tax expense (benefit)

|                             |  | Three Months Ended |       |   |   | Six Months Ended |    |      |   
|---------------------------- |  | ------------------ | ----- | - | - | ---------------- | -- | ---- | --
|
|Income tax expense (benefit) |  | $                  | 4,454 |   | $ | (6,372           | )  | (170 | %)
|Percentage of revenue        |  |                    | 2     | % |   | (2               | %) |     |   
|Effective tax (benefit) rate |  |                    | 31    | % |   | (18              | %) |     |   

The
income tax provision primarily represents income tax expenses incurred on foreign earnings that cannot be offset by U.S. net operating loss carryforwards. Our actual effective tax
provision rate for the second quarter of fiscal 2004 was 31% compared to the effective tax benefit rate of (18%) for the same period in 2003. Our actual effective tax provision rate for the first
six months of fiscal 2004 was 34.5% compared to the effective tax benefit rate of (14%) for the same period in 2003. The rate differs primarily because of the full valuation of deferred tax
assets recorded in the fourth quarter of fiscal 2003 and differences in the amount of non-deductible investment impairments taken in each period.

Preferred stock dividends

|                                                                                     |  | Three Months Ended |         |   |   | Six Months Ended |  |  
|------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | - | ---------------- |  | -
|
|Non-cash deemed dividend related to beneficial conversion feature of preferred stock |  | $                  | (25,680 | ) | $ |                 |  | 
|Preferred stock cash dividends                                                       |  |                    | (102    | ) |   |                 |  | 

On
March 23, 2004, Novell entered into a definitive agreement with IBM providing for an investment of $50 million by IBM in Novell. The primary terms of the investment,
which were negotiated in November 2003, entailed the purchase by IBM of Novell Series B redeemable preferred shares that are convertible into 8 million shares of Novell common
stock at a price of $6.25 per share. The shares are entitled to a dividend of 2% per annum, payable quarterly in cash. Cash dividends paid during the quarter ended April 30, 2004 were
$0.1 million.

Because
the fair value of Novell's common stock of $9.40 per share on the date the definitive agreements were entered into was greater than the agreed-upon conversion price
of $6.25 per share, we recorded a one-time, non-cash deemed dividend of $25.7 million attributable to the value of the preferred stock's conversion feature. This
beneficial conversion feature had no impact on net income, but did reduce earnings attributable to common stockholders and thus reduced basic and diluted earnings per share by approximately $0.07 in
the current quarter.

28

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Liquidity and Capital Resources

|(Amounts in thousands)                            |  | April 30,
2004 |         | October 31,
2003 |   | Change  |  
|------------------------------------------------- |  | -------------- | ------- | ---------------- | - | ------- | -
|Cash, cash equivalents and short-term investments |  | $              | 636,134 |                  | $ | 751,852 |  
|Percent of total assets                           |  |                | 38      | %                |   | 48      | %

An
overview of cash flows for the six months ended April 30, 2004 and April 30, 2003 are as follows:

Six Months Ended(Amounts in thousands)

April 30, 2004

April 30, 2003Cash provided by (used in) operating activities


2,737


(3,487
)Cash provided by financing activities


98,949


7,047Cash used for purchase of property, plant and equipment


(12,013
)

(21,177
)Cash used for acquisition of SUSE, net of cash acquired

$
(200,298
)
$



The
15% decline in cash and short-term investments is due to net cash payments of $200 million in connection with our purchase of SUSE ($210 million of cash
paid, less $10 million of cash acquired) and $12.0 million for the purchases of property and equipment (primarily office and computer equipment) in the first six months of fiscal
2004. This decrease was offset by the increase in cash of $50 million in connection with IBM's purchase of convertible preferred stock and $49 million from the issuance of common stock.

As
of April 30, 2004, we had cash and other short-term investments of $265 million held in accounts outside the United States. Our short-term
investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a portion of our investment portfolio is invested in equity
securities and mutual funds, which incur market risk. Our short-term investment portfolio includes gross unrealized gains and losses of $0.8 million and $1.3 million,
respectively, as of April 30, 2004. We monitor our investments and record losses when a decline in the investment's market value is determined to be other than temporary.

We
also invest excess cash in long-term investments mainly consisting of investments made in venture capital partnerships for the promotion of our business and strategic
objectives. As of April 30, 2004, we had a carrying value of $49.3 million related to investments in various venture capital
funds and had commitments to contribute an additional $43.0 million to these funds, of which we estimate approximately $9.3 million could be contributed in fiscal 2004, approximately
$16.2 million in fiscal 2005, and approximately $17.5 million thereafter as requested by the fund managers. We intend to fund these investments with cash from operations and cash on
hand.

As
of April 30, 2004, we have various operating leases related to our facilities with remaining terms of more than one year. These leases have minimum annual lease commitments of
$32 million in fiscal 2004, $27 million in fiscal 2005, $22 million in fiscal 2006, $18 million in fiscal 2007, $13 million in fiscal 2008, and $16 million
thereafter. Furthermore, we have $40 million of minimum rentals to be received in the future from subleases.

Our
principal source of liquidity continues to be from operations, cash on hand, and short-term investments. At April 30, 2004, our principal unused sources of
liquidity consisted of cash in the amount of $253.4 million and short-term investments in the amount of $382.7 million. During the first six months of fiscal 2004 and
during fiscal 2003, we generated $2.7 million and $55 million, respectively, of cash flow from operations. We anticipate generating positive cash flows from operations in addition to
investment income in fiscal 2004 sufficient to fund operations. Our liquidity needs are principally for

29

---



financing
of accounts receivable, property, plant and equipment, strategic investments, product development, and flexibility in a dynamic and competitive operating environment.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates, and market prices of equity securities. To
mitigate some of our foreign currency exchange risks, we utilize currency forward contracts and currency options. We do not use derivative financial instruments for speculative or trading purposes,
and no significant derivative financial instruments were outstanding at April 30, 2004.

Interest Rate Risk

The primary objective of our short-term investment activities is to preserve principal while maximizing yields without significantly increasing risk.
Our strategy is to invest in widely diversified short-term investments, consisting primarily of investment grade securities,
substantially all of which either mature within the next twelve months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates
would result in an approximately $1.0 million decrease (less than 0.5%) in the fair value of our available-for-sale securities.

Market Risk

We also hold available-for-sale equity securities in our short-term investment portfolio. As of April 30, 2004, gross
unrealized gains, before tax effect on the short-term public equity securities totaled $0.5 million. A reduction in prices of 10% of these short-term equity securities
would result in approximately a $0.5 million decrease (less than 0.5%) in the fair value of our short-term investments.

In
addition, we invest in equity securities issued by privately-held companies that are included in our long-term portfolio of investments, primarily for the
promotion of business and strategic objectives. These investments are generally in thinly capitalized companies in the high-technology industry sector or venture capital funds. Because of
the nature of these investments, we are exposed to equity price risks. We typically do not attempt to reduce or eliminate our market exposure on these securities. A 10% adverse change in equity prices
of long-term equity securities would result in an approximate $5 million decrease in the fair value of our long-term securities.

Foreign Currency Risk

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

30

---



$5.1 million.
This number represents the exposure related to balance sheet re-measurement only and assumes that all currencies move in the same direction at the same time relative
to the U.S. dollar.

All
of the potential changes noted above are based on sensitivity analyses performed on our financial position at April 30, 2004. Actual results may differ materially.

Item 4. Controls and Procedures



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



No
change in Novell's internal control procedures occurred during the most recent fiscal quarter that materially affects, or is reasonably likely to materially affect, internal controls
over financial reporting.

Part II. Other Information

Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative.

Item 1. Legal Proceedings

The information required by this item is incorporated herein by reference to Notes L and M of our financial statements contained in Part I, Item 1 of this
Form 10-Q.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

The information required by this item is incorporated herein by reference to Note B of our financial statements contained in Part I, Item 1 of this
Form 10-Q.

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

Novell's 2004 Annual Meeting of Stockholders was held at 404 Wyman Street, Waltham, Massachusetts, on April 15, 2004 at 10:00 a.m. Out of the
383,762,531 shares of common stock that were outstanding and entitled to vote at the meeting as of February 20, 2004 (the record date), a total of 334,430,083 shares were present in person or
represented by proxy at the meeting, representing 87.15% of the outstanding shares.

31

---



The
following are the voting results for the items considered by stockholders:

Nominees:

Votes For

Votes WithheldAlbert Aiello

293,418,096

41,011,987Fred Corrado

293,001,798

41,428,285Richard L. Crandall

293,393,720

41,036,363Wayne Mackie

291,187,780

43,242,303Claudia B. Malone

320,465,221

13,964,862Jack L. Messman

322,054,025

12,376,058Richard L. Nolan

322,639,367

11,790,716Thomas G. Plaskett

309,827,112

24,602,971John W. Poduska, Sr.

322,612,280

11,817,803James D. Robinson, III

320,886,950

13,543,133Kathy Brittain White

295,187,112

39,242,971


A
non-binding stockholder proposal to request that the Board of Directors establish a policy of expensing the costs of all future stock options issued by Novell passed.

Votes For

146,668,543

58.78
%Votes Against

95,120,977

38.12
%Votes Abstaining

7,735,227

3.10
%


A
non-binding stockholder proposal to request that the Board of Directors adopt a policy that 75% of future equity compensation of senior executives shall be
performance-based, and details of such compensation shall be disclosed to stockholders did not pass.

Votes For

106,545,717

42.70
%Votes Against

138,469,376

55.59
%Votes Abstaining

4,509,654

1.81
%


A
non-binding stockholder proposal to request that the Board of Directors adopt a policy stating that the public accounting firm retained by us to audit our financial
statements will perform only "audit" and "audit-related" work did not pass.

Votes For

56,228,178

22.53
%Votes Against

190,037,257

76.16
%Votes Abstaining

3,259,312

1.31
%


32

---



Item 6. Exhibits and Reports on Form 8-K.



Exhibit
Number

Description3.1

Certificate of Incorporation of Novell, Inc.31.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




Form 8-K
dated February 3, 2004, reporting the date and time of Novell's earnings conference call for the quarter ended January 31, 2004.

Form 8-K
dated February 23, 2004, reporting the release of Novell's financial results for the quarter ended January 31, 2004, including financial
statements.

Form 8-K
dated March 23, 2004, providing additional information about tax fees that Novell reported in its proxy statement in response to a request from
Institutional Shareholder Services.

Form 8-K
dated March 25, 2004, announcing the entry into an agreement with IBM relating to IBM's investment of $50 million in Novell and the entry into
expanded commercial relationships with IBM.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                    |  | Novell, Inc. (Registrant)
|------------------- |  | -------------------------
|Date: June 14, 2004 |  | By:                      

34

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