##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended July 31, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For
the transition period from
                  to
 Commission File Number: 0-13351
 
 NOVELL, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    87-0393339(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 404 Wyman Street
Waltham, MA 02451
 (781) 464-8000
 N/A
 
 þ o
  þ o o
 o þ




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##### 



NOVELL, INC.
TABLE OF CONTENTS
 Part I  Financial Information:
    
    
    3Item 1: Financial Statements
    
    
    3Consolidated Balance Sheets at July 31, 2007 (unaudited) and October 31, 2006
    
    
    3Consolidated Statements of Operations for the three and nine months ended July 31, 2007 and 2006 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the nine months ended July 31, 2007 and 2006 (unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    8Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4: Controls and Procedures
    
    
    43Part II  Other Information:
    
    
    43Item 1: Legal Proceedings
    
    
    43Item 1A: Risk Factors
    
    
    43Item 6: Exhibits
    
    
    43Signatures
    
    
    44EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 NOVELL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  July 31,
    
    
    October 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    957,379
    
    
    $
    675,787Short-term investments
    
    
    865,259
    
    
    
    790,500Receivables (net of allowances of $4,696 and $5,574 at July 31, 2007
and October 31, 2006, respectively)
    
    
    200,831
    
    
    
    233,986Prepaid expenses
    
    
    55,593
    
    
    
    32,328Other current assets
    
    
    31,931
    
    
    
    28,524Total current assets
    
    
    2,110,993
    
    
    
    1,761,125Property, plant and equipment, net
    
    
    180,520
    
    
    
    184,084Goodwill
    
    
    415,471
    
    
    
    424,701Intangible assets, net
    
    
    32,613
    
    
    
    40,404Deferred income taxes
    
    
    4,387
    
    
    
    4,770Long-term investments
    
    
    
    
    
    
    2,263Other assets
    
    
    30,156
    
    
    
    32,376Total assets
    
    $
    2,774,140
    
    
    $
    2,449,723LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    36,131
    
    
    $
    44,419Accrued compensation
    
    
    102,080
    
    
    
    103,710Other accrued liabilities
    
    
    100,352
    
    
    
    106,837Income taxes payable
    
    
    48,743
    
    
    
    49,600Deferred revenue
    
    
    456,253
    
    
    
    380,979Total current liabilities
    
    
    743,559
    
    
    
    685,545Deferred income taxes
    
    
    5,642
    
    
    
    4,186Long-term deferred revenue
    
    
    277,642
    
    
    
    45,992Senior convertible debentures
    
    
    600,000
    
    
    
    600,000Total liabilities
    
    
    1,626,843
    
    
    
    1,335,723Redeemable securities:Series B Preferred Stock, $.10 par value, Authorized  1,000 shares;
Outstanding  0 shares at July 31, 2007 and 187 shares at October 31,
2006 (at redemption value)
    
    
    
    
    
    
    9,350Stockholders equity:Common stock, par value $.10 per share, Authorized  600,000,000
shares; Issued  364,908,612 and 358,512,471 shares at July 31, 2007
and October 31, 2006, respectively; Outstanding  349,762,800 and
343,362,534 shares at July 31, 2007 and October 31, 2006, respectively
    
    
    36,491
    
    
    
    35,851Additional paid-in capital
    
    
    394,141
    
    
    
    338,954Treasury stock, at cost  15,145,812 and 15,149,937 shares at July 31,
2007 and October 31, 2006, respectively
    
    
    (124,650
    )
    
    
    (124,684
    )Retained earnings
    
    
    814,887
    
    
    
    840,449Accumulated other comprehensive income
    
    
    26,428
    
    
    
    14,080Total stockholders equity
    
    
    1,147,297
    
    
    
    1,104,650Total liabilities, redeemable securities and stockholders equity
    
    $
    2,774,140
    
    
    $
    2,449,723
  3




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NOVELL, INC.
 
 CONSOLIDATED STATMENTS OF OPERATIONS
  Three Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006(unaudited)Net revenue:Software licenses
    
    $
    44,748
    
    
    $
    45,435Maintenance and subscriptions
    
    
    124,832
    
    
    
    117,538Services
    
    
    73,555
    
    
    
    73,298Total net revenue
    
    
    243,135
    
    
    
    236,271Cost of revenue:Software licenses
    
    
    5,286
    
    
    
    4,984Maintenance and subscriptions
    
    
    12,498
    
    
    
    13,137Services
    
    
    54,281
    
    
    
    58,537Total cost of revenue
    
    
    72,065
    
    
    
    76,658Gross profit
    
    
    171,070
    
    
    
    159,613Operating expenses (income):Sales and marketing
    
    
    84,591
    
    
    
    89,703Product development
    
    
    54,207
    
    
    
    45,993General and administrative
    
    
    32,552
    
    
    
    59,014Restructuring expenses
    
    
    6,024
    
    
    
    Impairment of intangible assets
    
    
    3,851
    
    
    
    Loss on sale of Japan consulting group
    
    
    
    
    
    
    8,273Gain on sale of property, plant and equipment
    
    
    
    
    
    
    (3,778
    )Total operating expenses
    
    
    181,225
    
    
    
    199,205Loss from operations
    
    
    (10,155
    )
    
    
    (39,592
    )Other income (expense):Investment income
    
    
    21,617
    
    
    
    13,251Impairment of investments
    
    
    
    
    
    
    (278
    )Interest expense and other, net
    
    
    (6,171
    )
    
    
    (2,192
    )Total other income, net
    
    
    15,446
    
    
    
    10,781Income (loss) from continuing operations before income taxes
    
    
    5,291
    
    
    
    (28,811
    )Income tax expense (benefit)
    
    
    8,711
    
    
    
    (11,683
    )Loss from continuing operations
    
    
    (3,420
    )
    
    
    (17,128
    )Income from discontinued operations
    
    
    
    
    
    
    12,453Income tax expense on discontinued operations
    
    
    
    
    
    
    849Income from discontinued operations
    
    
    
    
    
    
    11,604Loss before
cumulative change in accounting principle
    
    
    (3,420
    )
    
    
    (5,524
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (897
    )Net loss
    
    $
    (3,420
    )
    
    $
    (6,421
    )Basic earnings (loss) per share:Loss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )Discontinued operations
    
    
    
    
    
    
    0.03Cumulative effect of change in accounting principle
    
    
    
    
    
    
    Net loss per share available to common stockholders
    
    $
    (0.01
    )
    
    $
    (0.02
    )Diluted earnings (loss) per share:Loss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )Discontinued operations
    
    
    
    
    
    
    0.03Cumulative effect of change in accounting principle
    
    
    
    
    
    
    Net loss per share available to common stockholders
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted-average shares outstanding  basic
    
    
    348,177
    
    
    
    340,127Weighted-average shares outstanding  diluted
    
    
    348,177
    
    
    
    340,127
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NOVELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006(unaudited)Net revenue:Software licenses
    
    $
    124,822
    
    
    $
    127,600Maintenance and subscriptions
    
    
    366,403
    
    
    
    361,899Services
    
    
    215,662
    
    
    
    216,462Total net revenue
    
    
    706,887
    
    
    
    705,961Cost of revenue:Software licenses
    
    
    13,773
    
    
    
    13,570Maintenance and subscriptions
    
    
    35,423
    
    
    
    37,794Services
    
    
    162,973
    
    
    
    179,396Total cost of revenue
    
    
    212,169
    
    
    
    230,760Gross profit
    
    
    494,718
    
    
    
    475,201Operating expenses (income):Sales and marketing
    
    
    263,367
    
    
    
    266,871Product development
    
    
    153,236
    
    
    
    136,836General and administrative
    
    
    98,174
    
    
    
    112,356Restructuring expenses (benefit)
    
    
    17,898
    
    
    
    (1,000
    )Impairment of intangible assets
    
    
    3,851
    
    
    
    Loss on sale of Japan consulting group
    
    
    
    
    
    
    8,273Purchased in-process research and development
    
    
    
    
    
    
    2,110Gain on sale of property, plant and equipment
    
    
    
    
    
    
    (5,968
    )Total operating expenses
    
    
    536,526
    
    
    
    519,478Loss from operations
    
    
    (41,808
    )
    
    
    (44,277
    )Other income (expense):Investment income
    
    
    62,989
    
    
    
    43,608Gain on sale of venture capital funds
    
    
    3,591
    
    
    
    Impairment of investments
    
    
    
    
    
    
    (891
    )Interest expense and other, net
    
    
    (19,334
    )
    
    
    (6,115
    )Total other income, net
    
    
    47,246
    
    
    
    36,602Income (loss) from continuing operations before income taxes
    
    
    5,438
    
    
    
    (7,675
    )Income tax expense
    
    
    20,927
    
    
    
    5,527Loss from continuing operations
    
    
    (15,489
    )
    
    
    (13,202
    )Income (loss) from discontinued operations
    
    
    (10,137
    )
    
    
    15,346Income tax expense (benefit) on discontinued operations
    
    
    (69
    )
    
    
    2,461Income (loss) from discontinued operations
    
    
    (10,068
    )
    
    
    12,885Loss before cumulative effect of change in accounting principle
    
    
    (25,557
    )
    
    
    (317
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (897
    )Net loss
    
    $
    (25,557
    )
    
    $
    (1,214
    )Basic earnings (loss) per share:Loss from continuing operations
    
    $
    (0.04
    )
    
    $
    (0.04
    )Discontinued operations
    
    
    (0.03
    )
    
    
    0.04Cumulative effect of change in accounting principle
    
    
    
    
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.07
    )
    
    $
    0.00Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.04
    )
    
    $
    (0.04
    )Discontinued operations
    
    
    (0.03
    )
    
    
    0.04Cumulative effect of change in accounting principle
    
    
    
    
    
    
    Net income (loss) per share available to common stockholders
    
    $
    (0.07
    )
    
    $
    0.00Weighted-average shares outstanding  basic
    
    
    346,731
    
    
    
    368,106Weighted-average shares outstanding  diluted
    
    
    346,731
    
    
    
    368,106
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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006(unaudited)Cash flows from operating activitiesNet loss
    
    $
    (25,557
    )
    
    $
    (1,214
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation expense
    
    
    25,964
    
    
    
    29,112Tax effects of stock-based compensation plans
    
    
    5,452
    
    
    
    4,258Excess tax benefits from stock-based compensation
    
    
    (5,452
    )
    
    
    (4,258
    )Depreciation and amortization
    
    
    31,163
    
    
    
    33,908Change in accounts receivable allowances
    
    
    (878
    )
    
    
    (4,660
    )Utilization of previously reserved acquired net operating losses
    
    
    4,835
    
    
    
    3,860Impairment of intangibles and goodwill
    
    
    14,699
    
    
    
    Purchased in-process research and development
    
    
    
    
    
    
    2,110Net gain on sale of property, plant and equipment
    
    
    
    
    
    
    (5,968
    )Gain on sale of venture capital funds
    
    
    (3,591
    )
    
    
    (Gain on) impairment of long-term investments
    
    
    (1,738
    )
    
    
    626Gain on sale of discontinued operations, before taxes
    
    
    (628
    )
    
    
    (11,960
    )Loss on sale of Japan consulting group
    
    
    
    
    
    
    8,273Executive termination benefits, non-cash
    
    
    
    
    
    
    9,409Cumulative effect of change in accounting principle
    
    
    
    
    
    
    897Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:Receivables
    
    
    30,855
    
    
    
    30,061Prepaid expenses
    
    
    (23,265
    )
    
    
    (3,805
    )Other current assets
    
    
    (3,598
    )
    
    
    3,965Deferred income taxes
    
    
    1,839
    
    
    
    (1,072
    )Change in current assets/liabilities held for sale
    
    
    
    
    
    
    (2,311
    )Accounts payable
    
    
    (7,031
    )
    
    
    (2,701
    )Accrued liabilities
    
    
    (6,776
    )
    
    
    (37,086
    )Deferred revenue
    
    
    308,300
    
    
    
    (14,667
    )Net cash provided by operating activities
    
    
    344,593
    
    
    
    36,777Cash flows from financing activitiesIssuance of common stock, net
    
    
    14,375
    
    
    
    21,674Excess tax benefits from stock-based compensation
    
    
    5,452
    
    
    
    4,258Payment of cash dividends on Series B Preferred Stock
    
    
    (5
    )
    
    
    (141
    )Repurchases of common stock, retired
    
    
    
    
    
    
    (400,000
    )Net cash provided by (used in) financing activities
    
    
    19,822
    
    
    
    (374,209
    )Cash flows from investing activitiesPurchases of property, plant and equipment
    
    
    (17,479
    )
    
    
    (19,540
    )Proceeds from the sale of property, plant and equipment
    
    
    
    
    
    
    24,992Proceeds from repayment of note receivable
    
    
    
    
    
    
    9,092Purchases of short-term investments
    
    
    (377,765
    )
    
    
    (407,175
    )Maturities of short-term investments
    
    
    109,142
    
    
    
    110,129Sales of short-term investments
    
    
    196,290
    
    
    
    342,081Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Proceeds from the sale of Salmon/Celerant, net of cash divested
    
    
    2,749
    
    
    
    37,922Cash paid for acquisition of RedMojo/e-Security, net of cash acquired
    
    
    (9,727
    )
    
    
    (71,550
    )Cash paid for equity share of Open Invention Network, LLC
    
    
    
    
    
    
    (4,225
    )Purchases of intangible assets
    
    
    (1,175
    )
    
    
    (1,159
    )Purchases of long-term investments
    
    
    
    
    
    
    (8,608
    )Proceeds from the sale of and distribution from long-term investments
    
    
    1,738
    
    
    
    7,180Other
    
    
    8,440
    
    
    
    7,771Net cash provided by (used in) investing activities
    
    
    (82,823
    )
    
    
    26,910Increase (decrease) in cash and cash equivalents
    
    
    281,592
    
    
    
    (310,522
    )Cash and cash equivalents  beginning of period
    
    
    675,787
    
    
    
    811,238Cash and cash equivalents  end of period
    
    $
    957,379
    
    
    $
    500,716
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NOVELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
 Nine Months EndedJuly 31,
    
    July 31,2007
    
    2006(unaudited)Supplemental disclosure of non-cash activities:Conversion of Series B Preferred Stock to Common Stock
    
    $
    9,350
    
    
    $
    Contribution of patents to Open Invention Network, LLC
    
    $
    
    
    
    $
    14,383
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NOVELL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 July 31, 2007
 A. Quarterly Financial Statements
  Reclassifications
  B. Significant Accounting Policies
 Recognition Policy  Microsoft Agreements-related Revenue
    
    
    Development of technologies to optimize SLES and Windows, each running as guests in a
virtualized setting on the other operating system;
    
    Development of management tools for managing heterogeneous virtualization environments, to
enable each partys management tools to command, control and configure the other partys
operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and
OpenOffice document formats; and
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
    
    Collaboration on improving directory and identity interoperability and identity management
between Microsoft Active Directory software and Novell eDirectory software.
    C. Acquisitions
 RedMojo
   Estimated
    
    
    EstimatedFair Value
    
    
    Useful Life(in thousands)Identifiable intangible assets:Developed technology
    
    $
    2,370
    
    
    3 yearsGoodwill
    
    
    7,554
    
    
    IndefiniteTotal net assets acquired
    
    $
    9,924
   9




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D. Divestitures
 Salmon
     (in thousands)Sales price
    
    $
    4,914Costs to sell
    
    
    (102
    )4,812Net book value of Salmon:Cash
    
    
    2,165Other current assets
    
    
    4,089Goodwill
    
    
    2,177Other long-term assets
    
    
    139Liabilities
    
    
    (4,386
    )4,184Gain on sale of Salmon before taxes
    
    $
    628
 Celerant
  10




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Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Salmon net revenue
    
    $
    
    
    
    $
    5,081
    
    
    $
    7,351
    
    
    $
    16,411Celerant net revenue
    
    $
    
    
    
    $
    11,637
    
    
    $
    
    
    
    $
    83,341Salmon income before taxes
    
    $
    
    
    
    $
    288
    
    
    $
    83
    
    
    $
    1,603Celerant income before taxes
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    1,783Impairment of long-lived assets of Salmon
    
    
    
    
    
    
    
    
    
    
    (10,848
    )
    
    
    Gain on sale of Salmon
    
    
    
    
    
    
    
    
    
    
    628
    
    
    
    Gain on sale of Celerant
    
    
    
    
    
    
    11,960
    
    
    
    
    
    
    
    11,960Income tax expense (benefit)
    
    
    
    
    
    
    849
    
    
    
    (69
    )
    
    
    2,461Income (loss) from discontinued operations
    
    $
    
    
    
    $
    11,604
    
    
    $
    (10,068
    )
    
    $
    12,885
 E. Microsoft Agreements
   F. Cash, Cash Equivalents, and Short-Term Investments
     Fair Market(in thousands)
    
    Cost
    
    
    ValueLess than one year
    
    $
    220,428
    
    
    $
    219,550Due in one to two years
    
    
    136,279
    
    
    
    135,870Due in two to three years
    
    
    153,540
    
    
    
    153,395Due in more than three years
    
    
    239,650
    
    
    
    239,250No contractual maturity
    
    
    116,503
    
    
    
    117,194Total short-term investments
    
    $
    866,400
    
    
    $
    865,259
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Three months ended
    
    Nine months endedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Realized gains
    
    $
    179
    
    
    $
    71
    
    
    $
    346
    
    
    $
    312Realized losses
    
    $
    362
    
    
    $
    297
    
    
    $
    1,005
    
    
    $
    1,831
  G. Long-Term Investments
  H. Goodwill and Intangible Assets
 Goodwill
  July 31,
    
    
    October 31,2007
    
    
    2006(in thousands)SUSE
    
    $
    172,086
    
    
    $
    172,086SilverStream
    
    
    104,502
    
    
    
    108,253e-Security
    
    
    59,699
    
    
    
    59,699Ximian
    
    
    31,992
    
    
    
    32,605Tally
    
    
    14,655
    
    
    
    14,909Immunix
    
    
    13,967
    
    
    
    14,227Salmon
    
    
    
    
    
    
    11,906RedMojo
    
    
    7,554
    
    
    
    Onward Novell
    
    
    2,010
    
    
    
    2,010Other technology companies
    
    
    9,006
    
    
    
    9,006Total goodwill
    
    $
    415,471
    
    
    $
    424,701
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
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
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
  (in thousands)
    
    Americas
    
    
    EMEA
    
    
    Asia Pacific
    
    
    TotalOpen platform solutions
    
    $
    35,565
    
    
    $
    32,394
    
    
    $
    7,960
    
    
    $
    75,919Systems and resource management
    
    
    72,688
    
    
    
    30,023
    
    
    
    525
    
    
    
    103,236Identity and security management
    
    
    14,120
    
    
    
    62,576
    
    
    
    10,640
    
    
    
    87,336Workgroup
    
    
    104,766
    
    
    
    29,075
    
    
    
    8,513
    
    
    
    142,354Business consulting
    
    
    
    
    
    
    15,856
    
    
    
    
    
    
    
    15,856Balance as of October 31, 2006
    
    $
    227,139
    
    
    $
    169,924
    
    
    $
    27,638
    
    
    $
    424,701
  Systems and
    
    
    Identity andOpen Platform
    
    
    Resource
    
    
    Security
    
    
    
    
    
    
    Business(in thousands)
    
    Solutions
    
    
    Management
    
    
    Management
    
    
    Workgroup
    
    
    Consulting
    
    
    TotalBalance as of October 31, 2006
    
    $
    75,919
    
    
    $
    103,236
    
    
    $
    87,336
    
    
    $
    142,354
    
    
    $
    15,856
    
    
    $
    424,701RedMojo acquisition
    
    
    
    
    
    
    7,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,554Salmon impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,207
    )
    
    
    (10,207
    )Salmon disposition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,177
    )
    
    
    (2,177
    )Adjustments
    
    
    (897
    )
    
    
    (1,219
    )
    
    
    (1,031
    )
    
    
    (1,684
    )
    
    
    431
    
    
    
    (4,400
    )Balance as of July 31, 2007
    
    $
    75,022
    
    
    $
    109,571
    
    
    $
    86,305
    
    
    $
    140,670
    
    
    $
    3,903
    
    
    $
    415,471
   13




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##### Table of Contents



Intangible Assets
  July 31, 2007
    
    
    October 31, 2006Gross
    
    
    Accumulated
    
    
    Net Book
    
    
    Gross
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Asset Lives(in thousands)Developed technology
    
    $
    32,033
    
    
    $
    (25,020
    )
    
    $
    7,013
    
    
    $
    30,929
    
    
    $
    (21,128
    )
    
    $
    9,801
    
    
    3-4 yearsTrademarks and trade names
    
    
    24,731
    
    
    
    (396
    )
    
    
    24,335
    
    
    
    24,731
    
    
    
    (131
    )
    
    
    24,600
    
    
    3 years or IndefiniteCustomer/contractual relationships
    
    
    18,311
    
    
    
    (17,066
    )
    
    
    1,245
    
    
    
    23,002
    
    
    
    (17,381
    )
    
    
    5,621
    
    
    3 yearsInternal use software
    
    
    5,057
    
    
    
    (5,037
    )
    
    
    20
    
    
    
    5,193
    
    
    
    (4,921
    )
    
    
    272
    
    
    3 yearsNon-compete agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    422
    
    
    
    (312
    )
    
    
    110
    
    
    3 yearsTotal intangible assets
    
    $
    80,132
    
    
    $
    (47,519
    )
    
    $
    32,613
    
    
    $
    84,277
    
    
    $
    (43,873
    )
    
    $
    40,404
     I. Income Taxes
  14




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J. Line of Credit
  K. Restructuring and Merger Liabilities
 Restructuring Liabilities
   15




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##### Table of Contents



Fiscal 2007
    
    
    Fiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003
    
    
    Fiscal 2002(in thousands)
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructuring
    
    
    Restructuring
    
    
    TotalBalance at
October 31, 2006:Workforce reductions
    
    $
    
    
    
    $
    3,097
    
    
    $
    1,333
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,430Excess facilities,
property and
equipment
    
    
    
    
    
    
    15
    
    
    
    3,866
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    9,206Other
restructuring-related
costs
    
    
    
    
    
    
    128
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Total
restructuring
reserve balance
    
    
    
    
    
    
    3,240
    
    
    
    5,256
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    13,821Adjustments/Original
Charge:Workforce reductions
    
    
    14,946
    
    
    
    (286
    )
    
    
    (98
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,562Excess facilities,
property and
equipment
    
    
    2,894
    
    
    
    
    
    
    
    370
    
    
    
    (100
    )
    
    
    (60
    )
    
    
    (102
    )
    
    
    3,002Other
restructuring-related
costs
    
    
    294
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334Total adjustments/
Original charge
    
    
    18,134
    
    
    
    (286
    )
    
    
    312
    
    
    
    (100
    )
    
    
    (60
    )
    
    
    (102
    )
    
    
    17,898Payments:Workforce reductions
    
    
    (11,801
    )
    
    
    (2,811
    )
    
    
    (460
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,072
    )Excess facilities,
property and
equipment
    
    
    (1,779
    )
    
    
    (15
    )
    
    
    (641
    )
    
    
    (387
    )
    
    
    (931
    )
    
    
    (654
    )
    
    
    (4,407
    )Other
restructuring-related
costs
    
    
    (238
    )
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (322
    )Total payments
    
    
    (13,818
    )
    
    
    (2,910
    )
    
    
    (1,101
    )
    
    
    (387
    )
    
    
    (931
    )
    
    
    (654
    )
    
    
    (19,801
    )Balance at July 31,
2007:Workforce reductions
    
    
    3,145
    
    
    
    
    
    
    
    775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,920Excess facilities,
property and
equipment
    
    
    1,115
    
    
    
    
    
    
    
    3,595
    
    
    
    390
    
    
    
    1,221
    
    
    
    1,480
    
    
    
    7,801Other
restructuring-related
costs
    
    
    56
    
    
    
    44
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197Total
restructuring
reserve
balance
    
    $
    4,316
    
    
    $
    44
    
    
    $
    4,467
    
    
    $
    390
    
    
    $
    1,221
    
    
    $
    1,480
    
    
    $
    11,918
  16




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Merger Liabilities
  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atOctober 31,
    
    
    Additions from
    
    
    Payments/
    
    
    July 31,(in thousands)
    
    2006
    
    
    Acquisitions
    
    
    adjustments
    
    
    2007Facilities related
    
    $
    14,457
    
    
    $
    
    
    
    $
    (1,281
    )
    
    $
    13,176Employee related
    
    
    85
    
    
    
    
    
    
    
    (85
    )
    
    
    Other
    
    
    102
    
    
    
    149
    
    
    
    20
    
    
    
    271Total merger liabilities
    
    $
    14,644
    
    
    $
    149
    
    
    $
    (1,346
    )
    
    $
    13,447
   L. Senior Convertible Debentures
    17




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M. Guarantees
    N. Legal Proceedings
    18




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19




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##### Table of Contents



O. Redeemable Preferred Stock
  P. Net Income (Loss) Per Share From Continuing Operations Available to Common Stockholders
  Three Months EndedJuly 31,
    
    
    July 31,(in thousands, except per share data)
    
    2007
    
    
    2006Basic net income (loss) per share computation:Net loss from continuing operations
    
    $
    (3,420
    )
    
    $
    (17,128
    )Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Net loss from continuing operations available to common stockholders
    
    $
    (3,420
    )
    
    $
    (17,175
    )Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    348,177
    
    
    
    340,127Basic net loss per share from continuing operations available to common stockholders
    
    $
    (0.01
    )
    
    $
    (0.05
    )Diluted net income (loss) per share computation:Net loss from continuing operations
    
    $
    (3,420
    )
    
    $
    (17,128
    )Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Diluted net loss from continuing operations available to common stockholders
    
    $
    (3,420
    )
    
    $
    (17,175
    )Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    348,177
    
    
    
    340,127Incremental shares attributable to the assumed exercise of outstanding options,
unvested restricted stock, and other stock plans
    
    
    
    
    
    
    Total adjusted weighted-average common shares
    
    
    348,177
    
    
    
    340,127Diluted net loss per share from continuing operations available to common stockholders
    
    $
    (0.01
    )
    
    $
    (0.05
    )
  20




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##### Table of Contents



Nine months EndedJuly 31,
    
    
    July 31,(in thousands, except per share data)
    
    2007
    
    
    2006Basic net income (loss) per share computation:Net loss from continuing operations
    
    $
    (15,489
    )
    
    $
    (13,202
    )Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (141
    )Net loss from continuing operations available to common stockholders
    
    $
    (15,489
    )
    
    $
    (13,343
    )Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    346,731
    
    
    
    368,106Basic net loss per share from continuing operations available to common stockholders
    
    $
    (0.04
    )
    
    $
    (0.04
    )Diluted net income (loss) per share computation:Net loss from continuing operations
    
    $
    (15,489
    )
    
    $
    (13,202
    )Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (141
    )Diluted net loss from continuing operations available to common stockholders
    
    $
    (15,489
    )
    
    $
    (13,343
    )Weighted-average common shares outstanding, excluding unvested restricted stock
    
    
    346,731
    
    
    
    368,106Incremental shares attributable to the assumed exercise of outstanding options,
unvested restricted stock, and other stock plans
    
    
    
    
    
    
    Total adjusted weighted-average common shares
    
    
    346,731
    
    
    
    368,106Diluted net loss per share from continuing operations available to common stockholders
    
    $
    (0.04
    )
    
    $
    (0.04
    )
  Q. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (3,420
    )
    
    $
    (6,421
    )
    
    $
    (25,557
    )
    
    $
    (1,214
    )Change in net unrealized loss on investments
    
    
    (375
    )
    
    
    425
    
    
    
    2,426
    
    
    
    (16
    )Change in pension liability
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    633Change in cumulative translation adjustments
    
    
    2,896
    
    
    
    (2,671
    )
    
    
    9,922
    
    
    
    (764
    )Comprehensive loss
    
    $
    (899
    )
    
    $
    (8,246
    )
    
    $
    (13,209
    )
    
    $
    (1,361
    )
  July 31,
    
    
    October 31,2007
    
    
    2006(in thousands)Net unrealized loss on investments
    
    $
    (1,141
    )
    
    $
    (3,567
    )Cumulative translation adjustment
    
    
    27,569
    
    
    
    17,647Total accumulated other comprehensive income
    
    $
    26,428
    
    
    $
    14,080
 21




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R. Stock-Based Compensation
 Share-Based
Payment
   Nine months ended(shares/units in thousands)
    
    July 31, 2007
    
    July 31, 2006Stock options:Performance-based
    
    
    728
    
    
    
    1,036Time-based
    
    
    2,567
    
    
    
    2,113Restricted stock:Performance-based
    
    
    
    
    
    
    175Time-based
    
    
    
    
    
    
    275Restricted stock units:Performance-based
    
    
    1,104
    
    
    
    34Time-based
    
    
    4,360
    
    
    
    4,565
 Stock Options
 Performance-based.
 Time-based.
 Restricted Stock
 Performance-based.
 Time-based
 Restricted Stock Units
 Performance-based
 22




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Time-based.
   Three months ended
    
    
    Three months ended
    
    
    Nine months ended
    
    
    Nine months ended(in thousands)
    
    July 31, 2007
    
    
    July 31, 2006
    
    
    July 31, 2007
    
    
    July 31, 2006Cost of revenue
    
    $
    1,257
    
    
    $
    1,034
    
    
    $
    3,241
    
    
    $
    3,019Sales and marketing
    
    
    2,831
    
    
    
    2,819
    
    
    
    7,091
    
    
    
    9,394Product development
    
    
    2,684
    
    
    
    1,954
    
    
    
    7,370
    
    
    
    6,341General and administrative
    
    
    2,760
    
    
    
    1,880
    
    
    
    8,262
    
    
    
    10,095Operating expenses
    
    
    8,275
    
    
    
    6,653
    
    
    
    22,723
    
    
    
    25,830Tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense from
continuing operations
    
    
    9,532
    
    
    
    7,687
    
    
    
    25,964
    
    
    
    28,849Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263Total stock-based compensation expense
    
    $
    9,532
    
    
    $
    7,687
    
    
    $
    25,964
    
    
    $
    29,112
  Employee Stock Purchase Plan
  S. Segment Information
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
  23




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
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
  Three Months EndedJuly 31, 2007
    
    
    July 31, 2006Income (loss)
    
    
    
    
    
    
    
    
    Income (loss)(in thousands)
    
    Net revenue
    
    
    Gross profit
    
    
    from operations
    
    
    Net revenue
    
    
    Gross profit
    
    
    from operationsOpen platform solutions
    
    $
    32,236
    
    
    $
    21,541
    
    
    $
    7,902
    
    
    $
    20,116
    
    
    $
    11,014
    
    
    $
    (1,064
    )Systems and resource management
    
    
    45,481
    
    
    
    36,848
    
    
    
    26,701
    
    
    
    43,582
    
    
    
    35,174
    
    
    
    28,961Identity and security management
    
    
    51,743
    
    
    
    23,378
    
    
    
    7,849
    
    
    
    54,674
    
    
    
    23,482
    
    
    
    8,917Workgroup
    
    
    107,330
    
    
    
    89,752
    
    
    
    77,544
    
    
    
    109,690
    
    
    
    88,991
    
    
    
    77,808Business consulting
    
    
    6,345
    
    
    
    808
    
    
    
    808
    
    
    
    8,209
    
    
    
    1,986
    
    
    
    1,986Stock-based compensation expense
    
    
    
    
    
    
    (1,257
    )
    
    
    (9,532
    )
    
    
    
    
    
    
    (1,034
    )
    
    
    (7,687
    )Common unallocated operating costs
    
    
    
    
    
    
    
    
    
    
    (121,427
    )
    
    
    
    
    
    
    
    
    
    
    (148,513
    )Total per statements of operations
    
    $
    243,135
    
    
    $
    171,070
    
    
    $
    (10,155
    )
    
    $
    236,271
    
    
    $
    159,613
    
    
    $
    (39,592
    )
 Nine Months EndedJuly 31, 2007
    
    
    July 31, 2006Income (loss)
    
    
    
    
    
    
    
    
    
    
    Income (loss)(in thousands)
    
    Net revenue
    
    
    Gross profit
    
    
    from operations
    
    
    Net revenue
    
    
    Gross profit
    
    
    from operationsOpen platform solutions
    
    $
    87,100
    
    
    $
    57,032
    
    
    $
    17,976
    
    
    $
    53,374
    
    
    $
    30,130
    
    
    $
    (4,921
    )Systems and resource management
    
    
    129,949
    
    
    
    104,672
    
    
    
    79,002
    
    
    
    129,690
    
    
    
    105,324
    
    
    
    85,647Identity and security management
    
    
    150,020
    
    
    
    66,190
    
    
    
    20,925
    
    
    
    155,989
    
    
    
    64,368
    
    
    
    23,547Workgroup
    
    
    320,494
    
    
    
    267,350
    
    
    
    231,475
    
    
    
    342,280
    
    
    
    273,175
    
    
    
    238,229Business consulting
    
    
    19,324
    
    
    
    2,715
    
    
    
    2,715
    
    
    
    24,628
    
    
    
    5,223
    
    
    
    5,223Stock-based compensation expense
    
    
    
    
    
    
    (3,241
    )
    
    
    (25,964
    )
    
    
    
    
    
    
    (3,019
    )
    
    
    (29,112
    )Common unallocated operating costs
    
    
    
    
    
    
    
    
    
    
    (367,937
    )
    
    
    
    
    
    
    
    
    
    
    (362,890
    )Total per statements of operations
    
    $
    706,887
    
    
    $
    494,718
    
    
    $
    (41,808
    )
    
    $
    705,961
    
    
    $
    475,201
    
    
    $
    (44,277
    )
    24




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T. Derivative Instruments
   U. Recent Accounting Pronouncements
     25




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##### Table of Contents



V. Subsequent Events
  26




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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 and
other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of historical fact,
regarding our strategy, future operations, financial position, estimated revenue, projected costs,
projected savings, prospects, plans, opportunities, and objectives constitute forward-looking
statements. The words may, will, expect, plan, anticipate, believe, estimate,
potential, or continue and similar types of expressions identify such statements, although not
all forward-looking statements contain these identifying words. These statements are based upon
information that is currently available to us and/or managements current expectations, speak only
as of the date hereof, and are subject to risks and uncertainties. We expressly disclaim any
obligation, except as required by law, or undertaking to update or revise any forward-looking
statements contained herein to reflect any change or expectations with regard thereto or to reflect
any change in events, conditions, or circumstances on which any such forward-looking statement is
based, in whole or in part. Our actual results may differ materially from the results discussed in
or implied by such forward-looking statements. We are subject to a number of risks, some of which
may be similar to those of other companies of similar size in our industry, including pre-tax
losses, rapid technological changes, competition, limited number of suppliers, customer
concentration, failure to successfully integrate acquisitions, adverse government regulations,
failure to manage international activities, and loss of key individuals. Risks that may affect our
operating results include, but are not limited to, those discussed in the Risk Factors section of
our Annual Report on Form 10-K for fiscal 2006 filed with the Securities and Exchange Commission
(SEC) on May 25, 2007. Readers should carefully review the risk factors described in the Annual
Report on Form 10-K for fiscal 2006 and in other documents that we file from time to time with the
Securities and Exchange Commission.
 Introduction
    Open Platform Solutions.
 Linux platform products:
 
    
    SUSE Linux Enterprise Server
    
    SUSE Linux Enterprise Desktop
 Other open platform products:
 
    
    openSUSE
    
    SUSE Engineering
 27




---



##### Table of Contents



Systems and Resource Management.
 ZENworks products:
 
    
    ZENworks Suite
    
    ZENworks Patch Management
    
    ZENworks Asset Management
    
    ZENworks Linux Management
    
    ZENworks Configuration Management
    
    ZENworks Orchestrator
 Identity and Security Management.
 Identity and access management products:
 
    
    Identity Manager
    
    Access Manager
    
    SecureLogin
    
    Sentinel
 Other identity and security management products:
 
    
    eDirectory
 Workgroup.
 Open Enterprise Server (OES)NetWare and other NetWare-related products:
 
    
    NetWare
    
    Cluster Services
 Collaboration products:
 
    
    GroupWise
 28




---



##### Table of Contents



Other workgroup products:
 
    
    BorderManager
    
    Novell Open Workgroup Suite
 Overview
  
    
    Within our Open Platform Solutions business unit segment, Linux and open source
products remain an important growth business. Revenue from our Linux Platform Products
increased 77% year-over-year during the third quarter of fiscal 2007. In November 2006,
we announced a significant partnership with Microsoft which contributed to our strong
revenue growth rates. We expect continued strong revenue performance in open platform
solutions through the remainder of fiscal 2007.
    
    Systems and Resource Management products continue to be an important part of our
product offering. Our strategy is to provide a complete desktop to data center
offering, with leadership in virtualization for both Linux and mixed-source environments.
We recently announced the general availability of two products, ZENworks Configuration
Management and ZENworks Orchestrator. We believe these products will become a new source
of growth in the future.
    
    We continue to expand our product offerings in the Identity and Security Management
market by offering products that deliver a complete, integrated solution in the areas of
security, compliance and governance issues.
    
    Our Workgroup revenue base is an important source of cash flow and provides us
potential opportunity to sell additional products and services. Our Workgroup business
declined 2% in the third quarter of fiscal 2007 compared to the same period of fiscal
2006. Excluding the impact of the Microsoft agreement, our Workgroup business declined
7% in the third quarter of fiscal 2007 as compared to the same period a year ago. The
lower-than-expected decline was due to several factors, including increased demand for
our bundled offering, Novell Open Workgroup Suite.
   Critical Accounting Policies
 Microsoft Agreements-related Revenue
   29




---



##### Table of Contents




    
    Development of technologies to optimize SLES and Windows, each running as guests in a virtualized setting on the other
operating system;
    
    Development of management tools for managing heterogeneous virtualization environments, to enable each partys management
tools to command, control and configure the other partys operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and OpenOffice document formats; and
    
    Collaboration on improving directory and identity interoperability and identity management between Microsoft Active
Directory software and Novell eDirectory software.
    Acquisitions
 RedMojo
  30




---



##### Table of Contents



Divestitures
 Salmon
    Celerant
   Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    July 31,
    
    
    July 31,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Salmon net revenue
    
    $
    
    
    
    $
    5,081
    
    
    $
    7,351
    
    
    $
    16,411Celerant net revenue
    
    $
    
    
    
    $
    11,637
    
    
    $
    
    
    
    $
    83,341Salmon income before taxes
    
    $
    
    
    
    $
    288
    
    
    $
    83
    
    
    $
    1,603Celerant income before taxes
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    1,783Impairment of long-lived assets of Salmon
    
    
    
    
    
    
    
    
    
    
    (10,848
    )
    
    
    Gain on sale of Salmon
    
    
    
    
    
    
    
    
    
    
    628
    
    
    
    Gain on sale of Celerant
    
    
    
    
    
    
    11,960
    
    
    
    
    
    
    
    11,960Income tax expense (benefit)
    
    
    
    
    
    
    849
    
    
    
    (69
    )
    
    
    2,461Income (loss) from discontinued operations
    
    $
    
    
    
    $
    11,604
    
    
    $
    (10,068
    )
    
    $
    12,885
 Results of Operations
 Revenue
  31




---



##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    44,748
    
    
    $
    45,435
    
    
    
    (2
    )%
    
    $
    124,822
    
    
    $
    127,600
    
    
    
    (2
    )%Maintenance and subscriptions
    
    
    124,832
    
    
    
    117,538
    
    
    
    6
    %
    
    
    366,403
    
    
    
    361,899
    
    
    
    1
    %Services
    
    
    73,555
    
    
    
    73,298
    
    
    
    
    %
    
    
    215,662
    
    
    
    216,462
    
    
    
    
    %Total net revenue
    
    $
    243,135
    
    
    $
    236,271
    
    
    
    3
    %
    
    $
    706,887
    
    
    $
    705,961
    
    
    
    
    %
    
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
 Net revenue in the open platform solutions segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    3
    
    
    $
    123
    
    
    
    (98
    )%
    
    $
    197
    
    
    $
    601
    
    
    
    (67
    )%Maintenance and subscriptions
    
    
    22,067
    
    
    
    14,874
    
    
    
    48
    %
    
    
    60,301
    
    
    
    38,931
    
    
    
    55
    %Services
    
    
    10,166
    
    
    
    5,119
    
    
    
    99
    %
    
    
    26,602
    
    
    
    13,842
    
    
    
    92
    %Total net revenue
    
    $
    32,236
    
    
    $
    20,116
    
    
    
    60
    %
    
    $
    87,100
    
    
    $
    53,374
    
    
    
    63
    %
  32




---



##### Table of Contents



Net revenue in the systems and resource management segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    9,686
    
    
    $
    8,760
    
    
    
    11
    %
    
    $
    24,801
    
    
    $
    22,237
    
    
    
    12
    %Maintenance and subscriptions
    
    
    25,164
    
    
    
    24,840
    
    
    
    1
    %
    
    
    74,631
    
    
    
    78,320
    
    
    
    (5
    )%Services
    
    
    10,631
    
    
    
    9,982
    
    
    
    7
    %
    
    
    30,517
    
    
    
    29,133
    
    
    
    5
    %Total net revenue
    
    $
    45,481
    
    
    $
    43,582
    
    
    
    4
    %
    
    $
    129,949
    
    
    $
    129,690
    
    
    
    
    %
   Net revenue in the identity and security management segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    12,967
    
    
    $
    12,986
    
    
    
    
    %
    
    $
    35,502
    
    
    $
    35,240
    
    
    
    1
    %Maintenance and subscriptions
    
    
    16,832
    
    
    
    17,177
    
    
    
    (2
    )%
    
    
    48,423
    
    
    
    52,177
    
    
    
    (7
    )%Services
    
    
    21,944
    
    
    
    24,511
    
    
    
    (10
    )%
    
    
    66,095
    
    
    
    68,572
    
    
    
    (4
    )%Total net revenue
    
    $
    51,743
    
    
    $
    54,674
    
    
    
    (5
    )%
    
    $
    150,020
    
    
    $
    155,989
    
    
    
    (4
    )%
   Net revenue in the workgroup segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    22,092
    
    
    $
    23,566
    
    
    
    (6
    )%
    
    $
    64,322
    
    
    $
    69,522
    
    
    
    (7
    )%Maintenance and subscriptions
    
    
    60,769
    
    
    
    60,647
    
    
    
    
    %
    
    
    183,048
    
    
    
    192,471
    
    
    
    (5
    )%Services
    
    
    24,469
    
    
    
    25,477
    
    
    
    (4
    )%
    
    
    73,124
    
    
    
    80,287
    
    
    
    (9
    )%Total net revenue
    
    $
    107,330
    
    
    $
    109,690
    
    
    
    (2
    )%
    
    $
    320,494
    
    
    $
    342,280
    
    
    
    (6
    )%
  33




---



##### Table of Contents



Net revenue in the business consulting segment was as follows:
 Three Months Ended
    
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,
    
    
    
    
    
    
    July 31,
    
    
    July 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Maintenance and subscriptions
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    
    %Services
    
    
    6,345
    
    
    
    8,209
    
    
    
    (23
    )%
    
    
    19,324
    
    
    
    24,628
    
    
    
    (22
    )%Total net revenue
    
    $
    6,345
    
    
    $
    8,209
    
    
    
    (23
    )%
    
    $
    19,324
    
    
    $
    24,628
    
    
    
    (22
    )%
  Deferred revenue
  Gross profit
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSoftware licenses gross profit
    
    $
    39,462
    
    
    $
    40,451
    
    
    
    (2
    )%
    
    $
    111,049
    
    
    $
    114,030
    
    
    
    (3
    )%percentage of related revenue
    
    
    88
    %
    
    
    89
    %
    
    
    
    
    
    
    89
    %
    
    
    89
    %Maintenance and subscriptions gross profit
    
    $
    112,334
    
    
    $
    104,401
    
    
    
    8
    %
    
    $
    330,980
    
    
    $
    324,105
    
    
    
    2
    %percentage of related revenue
    
    
    90
    %
    
    
    89
    %
    
    
    
    
    
    
    90
    %
    
    
    90
    %Services gross profit
    
    $
    19,274
    
    
    $
    14,761
    
    
    
    31
    %
    
    $
    52,689
    
    
    $
    37,066
    
    
    
    42
    %percentage of related revenue
    
    
    26
    %
    
    
    20
    %
    
    
    
    
    
    
    24
    %
    
    
    17
    %Total gross profit
    
    $
    171,070
    
    
    $
    159,613
    
    
    
    7
    %
    
    $
    494,718
    
    
    $
    475,201
    
    
    
    4
    %percentage of revenue
    
    
    70
    %
    
    
    68
    %
    
    
    
    
    
    
    70
    %
    
    
    67
    %
   34




---



##### Table of Contents



Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOpen platform solutions
    
    $
    21,541
    
    
    $
    11,014
    
    
    
    96
    %
    
    $
    57,032
    
    
    $
    30,130
    
    
    
    89
    %percentage of related revenue
    
    
    67
    %
    
    
    55
    %
    
    
    
    
    
    
    65
    %
    
    
    56
    %Systems and resource management
    
    $
    36,848
    
    
    $
    35,174
    
    
    
    5
    %
    
    $
    104,672
    
    
    $
    105,324
    
    
    
    (1
    )%percentage of related revenue
    
    
    81
    %
    
    
    81
    %
    
    
    
    
    
    
    81
    %
    
    
    81
    %Identity and security management
    
    $
    23,378
    
    
    $
    23,482
    
    
    
    
    %
    
    $
    66,190
    
    
    $
    64,368
    
    
    
    3
    %percentage of related revenue
    
    
    45
    %
    
    
    43
    %
    
    
    
    
    
    
    44
    %
    
    
    41
    %Workgroup
    
    $
    89,752
    
    
    $
    88,991
    
    
    
    1
    %
    
    $
    267,350
    
    
    $
    273,175
    
    
    
    (2
    )%percentage of related revenue
    
    
    84
    %
    
    
    81
    %
    
    
    
    
    
    
    83
    %
    
    
    80
    %Business consulting
    
    $
    808
    
    
    $
    1,986
    
    
    
    (59
    )%
    
    $
    2,715
    
    
    $
    5,223
    
    
    
    (48
    )%percentage of related revenue
    
    
    13
    %
    
    
    24
    %
    
    
    
    
    
    
    14
    %
    
    
    21
    %Stock-based compensation expense
    
    $
    (1,257
    )
    
    $
    (1,034
    )
    
    
    (22
    )%
    
    $
    (3,241
    )
    
    $
    (3,019
    )
    
    
    (7
    )%percentage of related revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Total gross profit
    
    $
    171,070
    
    
    $
    159,613
    
    
    
    7
    %
    
    $
    494,718
    
    
    $
    475,201
    
    
    
    4
    %percentage of revenue
    
    
    70
    %
    
    
    68
    %
    
    
    
    
    
    
    70
    %
    
    
    67
    %
  
    
    Open platform solutions  increased due primarily to higher related revenue and economies of scale.
    
    Systems and resource management  remained flat.
    
    Identity and security management  increased due primarily to improved
profitability from related IT consulting engagements and lower royalty costs.
    
    Workgroup  increased due primarily to lower IT consulting costs.
    
    Business consulting  decreased due primarily to increased costs, fewer
consulting contracts, and a planned shift away from providing business consulting.
 Operating expenses
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSales and marketing
    
    $
    84,591
    
    
    $
    89,703
    
    
    
    (6
    )%
    
    $
    263,367
    
    
    $
    266,871
    
    
    
    (1
    )%percentage of revenue
    
    
    35
    %
    
    
    38
    %
    
    
    
    
    
    
    37
    %
    
    
    38
    %Product development
    
    $
    54,207
    
    
    $
    45,993
    
    
    
    18
    %
    
    $
    153,236
    
    
    $
    136,836
    
    
    
    12
    %percentage of revenue
    
    
    22
    %
    
    
    19
    %
    
    
    
    
    
    
    22
    %
    
    
    19
    %General and administrative
    
    $
    32,552
    
    
    $
    59,014
    
    
    
    (45
    )%
    
    $
    98,174
    
    
    $
    112,356
    
    
    
    (13
    )%percentage of revenue
    
    
    13
    %
    
    
    25
    %
    
    
    
    
    
    
    14
    %
    
    
    16
    %Restructuring expenses (benefit)
    
    $
    6,024
    
    
    $
    
    
    
    
    
    %
    
    $
    17,898
    
    
    $
    (1,000
    )
    
    
    
    %percentage of revenue
    
    
    2
    %
    
    
    
    %
    
    
    
    
    
    
    3
    %
    

 
    
    %Impairment of intangible assets
    
    $
    3,851
    
    
    $
    
    
    
    
    
    %
    
    $
    3,851
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    2
    %
    
    
    
    %
    

    
    
    
    
    
    1
    %
    
    
    
    %Loss on sale of Japan consulting group
    
    $
    
    
    
    $
    8,273
    
    
    
    
    %
    
    $
    
    
    
    $
    8,273
    
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    4
    %
    
 
    
    
    

    
    
    %
    
    
    1
    %Purchased in-process research and
development
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    2,110
    
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
 
    
    
    

    
    
    %
    
    
    
    %Gain on sale of property, plant and
equipment
    
    $
    
    
    
    $
    (3,778
    )
    
    
    
    %
    
    $
    
    
    
    $
    (5,968
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    (2
    )%
    
 
    
    
    

    
    
    %
    
    
    (1
    )%Total operating expenses
    
    $
    181,225
    
    
    $
    199,205
    
    
    
    (9
    )%
    
    $
    536,526
    
    
    $
    519,478
    
    
    
    3
    %percentage of revenue
    
    
    75
    %
    
    
    84
    %
    
    
    
    
    
    
    76
    %
    
    
    74
    %
 35




---



##### Table of Contents



Other income (expense), net
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeInvestment income
    
    $
    21,617
    
    
    $
    13,251
    
    
    
    63
    %
    
    $
    62,989
    
    
    $
    43,608
    
    
    
    44
    %percentage of revenue
    
    
    9
    %
    
    
    6
    %
    
    
    
    
    
    
    9
    %
    
    
    6
    %Gain on sale of venture capital funds
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    3,591
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    1
    %
    
    
    
    %Impairment of investments
    
    $
    
    
    
    $
    (278
    )
    
    
    
    %
    
    $
    
    
    
    $
    (891
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Interest expense and other, net
    
    $
    (6,171
    )
    
    $
    (2,192
    )
    
    
    (182
    )%
    
    $
    (19,334
    )
    
    $
    (6,115
    )
    
    
    (216
    )%percentage of revenue
    
    
    3
    %
    
    
    (1)
    %
    
    
    
    
    
    
    3
    %
    
    
    (1)
    %Total other income, net
    
    $
    15,446
    
    
    $
    10,781
    
    
    
    43
    %
    
    $
    47,246
    
    
    $
    36,602
    
    
    
    29
    %percentage of revenue
    
    
    6
    %
    
    
    5
    %
    
    
    
    
    
    
    7
    %
    
    
    5
    %
 36




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##### Table of Contents



.
 Income tax expense on income from continuing operations
 Three Months Ended
    
    
    
    
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    
    
    
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeIncome tax expense (benefit)
    
    $
    8,711
    
    
    $
    (11,683
    )
    
    
    (175
    )%
    
    $
    20,927
    
    
    $
    5,527
    
    
    
    279
    %percentage of related revenue
    
    
    4
    %
    
    
    (5
    )%
    
    
    
    
    
    
    3
    %
    
    
    1
    %Effective tax rate
    
    
    165
    %
    
    
    (41
    )%
    
    
    
    
    
    
    385
    %
    
    
    72
    %
  37




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##### Table of Contents



Net income (loss) components
 Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,
    
    July 31,
    
    July 31,(dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Loss from continuing operations
    
    $
    (3,420
    )
    
    $
    (17,128
    )
    
    $
    (15,489
    )
    
    $
    (13,202
    )Income (loss) from discontinued operations, net of tax
    
    $
    
    
    
    $
    11,604
    
    
    $
    (10,068
    )
    
    $
    12,885Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    (897
    )
    
    $
    
    
    
    $
    (897
    )Net loss
    
    $
    (3,420
    )
    
    $
    (6,421
    )
    
    $
    (25,557
    )
    
    $
    (1,214
    )
  Forward-looking Information
  38




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##### Table of Contents



Liquidity and Capital Resources
 (dollars in thousands)
    
    July 31, 2007
    
    October 31, 2006
    
    ChangeCash, cash equivalents and short-term investments
    
    $
    1,822,638
    
    
    $
    1,466,287
    
    
    
    24
    %Percent of total assets
    
    
    66
    %
    
    
    60
    %
  Nine Months Ended(in thousands)
    
    July 31, 2007
    
    July 31, 2006Cash provided by operating activities
    
    $
    344,593
    
    
    $
    36,777Issuance of common stock, net
    
    
    14,375
    
    
    
    21,674Repurchases of common stock, retired
    
    
    
    
    
    
    (400,000
    )Purchases of property, plant and equipment
    
    
    (17,479
    )
    
    
    (19,540
    )Proceeds from the sale of property, plant and equipment
    
    
    
    
    
    
    24,992Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Proceeds from the sales of and distributions from long-term investments
    
    
    1,738
    
    
    
    7,180Proceeds from the sale of Salmon/Celerant, net of cash divested
    
    
    2,749
    
    
    
    37,922Proceeds from repayment of note receivable
    
    
    
    
    
    
    9,092Cash paid for acquisition of RedMojo/e-Security, net of cash acquired
    
    
    (9,727
    )
    
    
    (71,550
    )Cash paid for equity share of Open Invention Network, LLC
    
    
    
    
    
    
    (4,225
    )Purchases of long-term investments
    
    
    
    
    
    
    (8,608
    )Purchases of intangible assets
    
    
    (1,175
    )
    
    
    (1,159
    )Other long-term investing activities
    
    
    8,440
    
    
    
    7,771
      39




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##### Table of Contents



Recent Accounting Pronouncements
     40




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##### Table of Contents



Subsequent Events
  41




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Market Risk
  Foreign Currency Risk
    42




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##### Table of Contents



Item 4. Controls and Procedures
     
 Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification31.2
    
    Rule 13a-14(a) Certification32.1
    
    18 U.S.C. Section 1350 Certification32.2
    
    18 U.S.C. Section 1350 Certification
 43




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##### Table of Contents



SIGNATURES
  Novell, Inc. (Registrant)Date: September 7, 2007
    
    By:
    
    /s/ DANA C. RUSSELLDana C. RussellSenior Vice President, Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)
 44




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##### Table of Contents



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