**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form10-Q**

 

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| **(Mark  One)** |
|-----------------|
| **x**           | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|            |   |
|            | **For  the Quarterly Period Ended April 30, 2006** |
|            |   |
| **or**          |
|            |   |
| **o**           | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|            |   |
| ** **      | **For  the transition period from               to** |

 

**CommissionFile Number: 0-13351**

 

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**NOVELL,INC.**

**(Exact name of registrant as specified in its charter)**

 

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

 

**404Wyman Street**

**Waltham,MA 02451**

(Address of principal executive offices andzip code)

 

**(781)464-8000**

(Registrant’s telephone number, including areacode)

 

**NA**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act  (Check one)

 
| Large accelerated filer    x | Accelerated  filer o | Non-accelerated  filer o |
|----------------------------------------|---------------------------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of theAct)    Yes  o    No  x

 

As of May 31, 2006 there were 339,011,438 shares ofthe registrant’s common stock outstanding.

 

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**NOVELL,INC.**

**TABLEOF CONTENTS**

 
| ** **                                                                                                    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Part  I — Financial Information:                                                                         |       | 3          |       |
|                                                                                                          |       |       |       |
| Item  1 : Financial Statements                                                                                |       | 3          |       |
|                                                                                                          |       |       |       |
| Consolidated Balance Sheets at April 30, 2006  (unaudited) and October 31, 2005                               |       | 3          |       |
|                                                                                                          |       |       |       |
| Consolidated Statements of Operations for the three  and six months ended April 30, 2006 and 2005 (unaudited) |       | 4          |       |
|                                                                                                          |       |       |       |
| Consolidated Statements of Cash Flows for the six  months ended April 30, 2006 and 2005 (unaudited)           |       | 6          |       |
|                                                                                                          |       |       |       |
| Notes to Unaudited Consolidated Financial Statements                                                          |       | 7          |       |
|                                                                                                          |       |       |       |
| Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations           |       | 25         |       |
|                                                                                                          |       |       |       |
| Item 3: Quantitative and Qualitative Disclosures About  Market Risk                                           |       | 39         |       |
|                                                                                                          |       |       |       |
| Item  4: Controls and Procedures                                                                              |       | 40         |       |
|                                                                                                          |       |       |       |
| Part  II — Other Information:                                                                            |       | 40         |       |
|                                                                                                          |       |       |       |
| Item  1: Legal Proceedings                                                                                    |       | 40         |       |
|                                                                                                          |       |       |       |
| Item  1A: Risk Factors                                                                                        |       | 40         |       |
|                                                                                                          |       |       |       |
| Item 2: Unregistered Sales of Equity Securities and  Use of Proceeds                                          |       | 41         |       |
|                                                                                                          |       |       |       |
| Item 4: Submission of Matters to a Vote of Security  Holders                                                  |       | 41         |       |
|                                                                                                          |       |       |       |
| Item 6:  Exhibits                                                                                             |       | 42         |       |

 

 

2

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**PartI. Financial Information**

**Item1. Financial Statements**

 

**NOVELL, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(amounts inthousands, except share and per share data)

 
| ** **                                                                                                                                                                                                                                    | ** ** | **April 30,  2006** | ** ** | **October 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** | **(unaudited)**     | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                                                                                                        |       |                |       |                  |       |
| Current assets:                                                                                                                                                                                                                               |       |                |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                    |       | $                   | 542,074    |                  | $          | 811,238 |   |
| Short-term  investments                                                                                                                                                                                                                       |       | 796,967             |       | 843,666               |       |
| Receivables (net  of allowances of $12,054 and $16,638 at April 30, 2006 and October 31, 2005,  respectively)                                                                                                                                 |       | 219,242             |       | 293,627               |       |
| Prepaid expenses                                                                                                                                                                                                                              |       | 36,047              |       | 30,777                |       |
| Other current  assets                                                                                                                                                                                                                         |       | 31,234              |       | 29,745                |       |
| Total current  assets                                                                                                                                                                                                                         |       | 1,625,564           |       | 2,009,053             |       |
| Property, plant  and equipment, net                                                                                                                                                                                                           |       | 204,274             |       | 212,377               |       |
| Long-term  investments                                                                                                                                                                                                                        |       | 56,856              |       | 54,340                |       |
| Goodwill                                                                                                                                                                                                                                      |       | 454,163             |       | 395,509               |       |
| Intangible  assets, net                                                                                                                                                                                                                       |       | 47,484              |       | 56,421                |       |
| Deferred income  taxes                                                                                                                                                                                                                        |       | 1,582               |       | 1,384                 |       |
| Other assets                                                                                                                                                                                                                                  |       | 32,677              |       | 32,774                |       |
| Total assets                                                                                                                                                                                                                                  |       | $                   | 2,422,600  |                  | $          | 2,761,858 |   |
|                                                                                                                                                                                                                                          |       |                |       |                  |       |
| LIABILITIES, REDEEMABLE  SECURITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       |                |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                          |       |                |       |                  |       |
| Accounts payable                                                                                                                                                                                                                              |       | $                   | 46,713     |                  | $          | 45,445 |   |
| Accrued  compensation                                                                                                                                                                                                                         |       | 105,146             |       | 113,760               |       |
| Other accrued  liabilities                                                                                                                                                                                                                    |       | 80,022              |       | 131,105               |       |
| Income taxes  payable                                                                                                                                                                                                                         |       | 57,829              |       | 56,869                |       |
| Deferred revenue                                                                                                                                                                                                                              |       | 345,768             |       | 405,751               |       |
| Total current  liabilities                                                                                                                                                                                                                    |       | 635,478             |       | 752,930               |       |
| Deferred income taxes                                                                                                                                                                                                                         |       | 4,066               |       | 4,537                 |       |
| Senior convertible debentures                                                                                                                                                                                                                 |       | 600,000             |       | 600,000               |       |
| Total liabilities                                                                                                                                                                                                                             |       | 1,239,544           |       | 1,357,467             |       |
| Minority interests                                                                                                                                                                                                                            |       | 2,974               |       | 8,555                 |       |
| Redeemable securities:                                                                                                                                                                                                                        |       |                |       |                  |       |
| Series B  Preferred Stock, $.10 par value, Authorized — 1,000 shares; Issued — 1,000  shares; Outstanding — 187 shares at April 30, 2006 and October 31, 2005 (at  redemption value)                                           |       | 9,350               |       | 9,350                 |       |
| Stockholders’  equity:                                                                                                                                                                                                                   |       |                |       |                  |       |
| Series A  Preferred Stock, $.10 par value, Authorized — 499,000 shares; no shares  issued                                                                                                                                                |       | —              |       | —                |       |
| Common stock, par  value $.10 per share, Authorized — 600,000,000 shares; Issued — 370,214,569  and 400,993,898 shares; Outstanding — 355,043,195 and 385,820,699 shares at  April 30, 2006 and October 31, 2005, respectively |       | 37,021              |       | 40,099                |       |
| Additional  paid-in capital                                                                                                                                                                                                                   |       | 351,878             |       | 483,157               |       |
| Treasury stock,  at cost — 15,171,374 and 15,173,199 shares at April 30, 2006 and October 31,  2005, respectively                                                                                                                        |       | (124,860            | )          | (124,875              | )          |
| Retained earnings                                                                                                                                                                                                                             |       | 897,571             |       | 984,107               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                       |       | 9,122               |       | 7,444                 |       |
| Unearned stock  compensation                                                                                                                                                                                                                  |       | —              |       | (3,446                | )          |
| Total  stockholders’ equity                                                                                                                                                                                                              |       | 1,170,732           |       | 1,386,486             |       |
| Total  liabilities, redeemable securities, and stockholders’ equity                                                                                                                                                                      |       | $                   | 2,422,600  |                  | $          | 2,761,858 |   |
|                                                                                                                                                                                                                                               |            |                     |            |                       |            |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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**NOVELL, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(amounts inthousands, except per share data)

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** |
| ** **                                                                             | ** ** | **(unaudited)**        | ** ** |
| Net revenue:                                                                           |       |                   |       |   |   |
| Software licenses                                                                      |       | $                      | 40,063     |   | $ | 45,768 |   |
| Maintenance and services                                                               |       | 238,253                |       | 251,283 |   |
| Total net revenue                                                                      |       | 278,316                |       | 297,051 |   |
|                                                                                   |       |                   |       |   |   |
| Cost of revenue:                                                                       |       |                   |       |   |   |
| Software licenses                                                                      |       | 4,041                  |       | 4,863 |   |
| Maintenance and services                                                               |       | 100,408                |       | 112,478 |   |
| Total cost of revenue                                                                  |       | 104,449                |       | 117,341 |   |
| Gross profit                                                                           |       | 173,867                |       | 179,710 |   |
|                                                                                   |       |                   |       |   |   |
| Operating expense  (income):                                                           |       |                   |       |   |   |
| Sales and marketing                                                                    |       | 96,003                 |       | 98,479 |   |
| Product development                                                                    |       | 48,328                 |       | 51,652 |   |
| General and administrative                                                             |       | 33,377                 |       | 30,140 |   |
| Restructuring expenses                                                                 |       | —                 |       | 5,361 |   |
| Purchased in-process research and development                                          |       | 2,110                  |       | 480 |   |
| Gain on sale of property, plant and equipment                                          |       | (2,190                 | )          | — |   |
| Gain on legal settlement                                                               |       | (1,225                 | )          | — |   |
| Total operating expense                                                                |       | 176,403                |       | 186,112 |   |
| Loss from operations                                                                   |       | (2,536                 | )          | (6,402 | ) |
|                                                                                   |       |                   |       |   |   |
| Other income (expense):                                                                |       |                   |       |   |   |
| Investment income                                                                      |       | 15,816                 |       | 10,240 |   |
| Impairment of investments                                                              |       | (226                   | )          | (917 | ) |
| Interest expense and other, net                                                        |       | (2,213                 | )          | (1,868 | ) |
| Total other income                                                                     |       | 13,377                 |       | 7,455 |   |
| Income before income taxes                                                             |       | 10,841                 |       | 1,053 |   |
| Income tax expense                                                                     |       | 7,499                  |       | 16,680 |   |
| Net income (loss)                                                                      |       | $                      | 3,342      |   | $ | (15,627 | ) |
| Net income (loss)  available to common stockholders — basic                       |       | $                      | 3,282      |   | $ | (15,752 | ) |
| Net income (loss)  available to common stockholders — diluted                     |       | $                      | 3,178      |   | $ | (15,752 | ) |
|                                                                                   |       |                   |       |   |   |
| Weighted-average shares  outstanding — basic                                      |       | 378,403                |       | 378,219 |   |
| Weighted-average shares  outstanding — diluted                                    |       | 385,320                |       | 378,219 |   |
|                                                                                   |       |                   |       |   |   |
| Net income (loss) per  share available to common stockholders — basic and diluted |       | $                      | 0.01       |   | $ | (0.04 | ) |
|                                                                                   |       |                   |       |   |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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**NOVELL, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(amounts inthousands, except per share data)

 
| ** **                                                            | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **April 30,  2006**  | ** ** | **April 30,  2005** | ** ** |
| ** **                                                            | ** ** | **(unaudited)**      | ** ** |
| Net revenue:                                                          |       |                 |       |   |   |
| Software licenses                                                     |       | $                    | 82,165     |   | $ | 90,064 |   |
| Maintenance and services                                              |       | 470,559              |       | 497,115 |   |
| Total net revenue                                                     |       | 552,724              |       | 587,179 |   |
|                                                                  |       |                 |       |   |   |
| Cost of revenue:                                                      |       |                 |       |   |   |
| Software licenses                                                     |       | 8,337                |       | 9,495 |   |
| Maintenance and services                                              |       | 197,374              |       | 219,897 |   |
| Total cost of revenue                                                 |       | 205,711              |       | 229,392 |   |
| Gross profit                                                          |       | 347,013              |       | 357,787 |   |
|                                                                  |       |                 |       |   |   |
| Operating expense  (income):                                          |       |                 |       |   |   |
| Sales and marketing                                                   |       | 189,212              |       | 192,488 |   |
| Product development                                                   |       | 93,389               |       | 100,645 |   |
| General and administrative                                            |       | 68,831               |       | 58,380 |   |
| Restructuring expenses (benefit)                                      |       | (1,064               | )          | 11,780 |   |
| Purchased in-process research and development                         |       | 2,110                |       | 480 |   |
| Gain on sale of property, plant and equipment                         |       | (2,190               | )          | (1,589 | ) |
| Gain on legal settlement                                              |       | (1,225               | )          | (447,560 | ) |
| Total operating expense (income)                                      |       | 349,063              |       | (85,376 | ) |
| Income (loss) from  operations                                        |       | (2,050               | )          | 443,163 |   |
|                                                                  |       |                 |       |   |   |
| Other income (expense):                                               |       |                 |       |   |   |
| Investment income                                                     |       | 30,805               |       | 19,693 |   |
| Impairment of investments                                             |       | (623                 | )          | (1,930 | ) |
| Interest expense and other, net                                       |       | (4,103               | )          | (5,273 | ) |
| Total other income                                                    |       | 26,079               |       | 12,490 |   |
| Income before income taxes                                            |       | 24,029               |       | 455,653 |   |
| Income tax expense                                                    |       | 18,822               |       | 76,119 |   |
| Net income                                                            |       | $                    | 5,207      |   | $ | 379,534 |   |
| Net income available to  common stockholders — basic             |       | $                    | 5,093      |   | $ | 375,310 |   |
| Net income available to  common stockholders — diluted           |       | $                    | 5,021      |   | $ | 378,296 |   |
|                                                                  |       |                 |       |   |   |
| Weighted-average shares  outstanding — basic                     |       | 382,095              |       | 377,738 |   |
| Weighted-average shares  outstanding — diluted                   |       | 389,657              |       | 434,962 |   |
|                                                                  |       |                 |       |   |   |
| Net income per share  available to common stockholders — basic   |       | $                    | 0.01       |   | $ | 0.99 |   |
| Net income per share  available to common stockholders — diluted |       | $                    | 0.01       |   | $ | 0.87 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**NOVELL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(amounts inthousands)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **April 30,  2006**  | ** ** | **April 30,  2005** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**      | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                    | 5,207      |   | $ | 379,534 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                 |       |   |   |
| Stock-based compensation expense                                                   |       | 21,425               |       | 1,411 |   |
| Tax effects of stock-based compensation plans                                      |       | 5,286                |       | 13,260 |   |
| Excess tax benefits from stock-based compensation                                  |       | (5,286               | )          | — |   |
| Depreciation and amortization                                                      |       | 22,378               |       | 29,790 |   |
| Decrease in accounts receivable allowances                                         |       | (4,903               | )          | (5,789 | ) |
| Utilization of previously reserved acquired net operating losses                   |       | 3,520                |       | 29,600 |   |
| Gain on sale of property, plant and equipment                                      |       | (2,190               | )          | (1,589 | ) |
| Impairment of long-term investments, net of gains                                  |       | 498                  |       | 1,930 |   |
| Purchased in-process research and development                                      |       | 2,110                |       | 480 |   |
| Changes in current assets and liabilities, excluding the effect of  acquisitions:  |       |                 |       |   |   |
| Receivables                                                                        |       | 81,683               |       | 66,815 |   |
| Prepaid expenses                                                                   |       | (5,195               | )          | (5,298 | ) |
| Other current assets                                                               |       | (1,326               | )          | (264 | ) |
| Deferred income taxes                                                              |       | (198                 | )          | (401 | ) |
| Accounts payable                                                                   |       | 268                  |       | (8,184 | ) |
| Accrued liabilities                                                                |       | (60,747              | )          | (21,208 | ) |
| Deferred revenue                                                                   |       | (61,353              | )          | (53,424 | ) |
| Net cash provided by operating activities                                          |       | 1,177                |       | 426,663 |   |
| **Cash flows from financing  activities**                                          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Issuance of common stock,  net                                                     |       | 18,082               |       | 12,979 |   |
| Excess tax benefits from  stock-based compensation                                 |       | 5,286                |       | — |   |
| Payment of cash dividends  on Series B Preferred Stock                             |       | (47                  | )          | (250 | ) |
| Repurchases of common  stock — retired                                        |       | (267,479             | )          | — |   |
| Net cash (used in) provided by financing activities                                |       | (244,158             | )          | 12,729 |   |
| **Cash flows from investing  activities**                                          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Purchases of property,  plant and equipment                                        |       | (14,554              | )          | (11,684 | ) |
| Proceeds from the sale of  property, plant and equipment                           |       | 7,258                |       | 10,421 |   |
| Purchases of short-term  investments                                               |       | (327,575             | )          | (596,085 | ) |
| Maturities of short-term  investments                                              |       | 84,809               |       | 191,049 |   |
| Sales of short-term  investments                                                   |       | 289,024              |       | 567,411 |   |
| Cash paid for acquisition  of e-Security, net of cash acquired                     |       | (71,550              | )          | — |   |
| Cash paid for acquisition  of Tally Systems and Immunix, net of cash acquired      |       | —               |       | (33,829 | ) |
| Cash paid for equity  investment in Open Invention Network, LLC                    |       | (4,225               | )          | — |   |
| Purchase of intangible  assets                                                     |       | —               |       | (15,500 | ) |
| Purchases of long-term investments                                                 |       | (7,129               | )          | (6,070 | ) |
| Proceeds from the sales of  and distributions from long-term investments           |       | 4,115                |       | 3,052 |   |
| Proceeds from repayment of  note receivable                                        |       | 9,092                |       | — |   |
| Other                                                                              |       | 4,552                |       | 4,318 |   |
| Net cash (used in) provided by investing activities                                |       | (26,183              | )          | 113,083 |   |
| Total (decrease) increase  in cash and cash equivalents                            |       | (269,164             | )          | 552,475 |   |
| Cash and cash equivalents  — beginning of period                              |       | 811,238              |       | 434,404 |   |
| Cash and cash equivalents  — end of period                                    |       | $                    | 542,074    |   | $ | 986,879 |   |
|                                                                               |       |                 |       |   |   |
| **Supplemental disclosure of  non-cash activities:**                               | ** ** | ** **           | ** ** | ** ** | ** ** |
| Contribution of patents to  Open Invention Network, LLC                            |       | $                    | 14,383     |   | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

6

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**NOVELL, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**April30, 2006**

 

**A.Quarterly Financial Statements**

 

The interim consolidatedfinancial statements as of April 30, 2006 and for the three and six monthsended April 30, 2006 and 2005 were prepared by Novell, Inc. (“Novell”) pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”)for interim financial reporting. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ materially from those estimates. The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q but do not include all of the information and notesrequired by accounting principles generally accepted in the United States andshould, therefore, be read in conjunction with our Annual Report on Form 10-K forthe fiscal year ended October 31, 2005. The accompanying financial statementsare unaudited and include all normal recurring adjustments that we believe arenecessary for a fair statement of the financial condition and results ofoperations of Novell as of and for the interim periods presented. The interimoperating results are not necessarily indicative of the results for a fullyear.

 

*Reclassifications*

 

Certain amounts reportedin prior years have been reclassified from what was previously reported toconform to the current year’s presentation. These reclassifications did nothave any impact on net income and net income per share available to commonstockholders.

 

**B.  Significant Accounting Policies**

 

*Share-basedPayments*

 

OnNovember 1, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”)No. 123(R), “Share-Based Payment,” whichrequires us to account for share-based payment transactions using a fairvalue-based method and recognize the related expense in the results ofoperations.  Prior to our adoption ofSFAS No. 123(R), as permitted by SFAS No. 123, we accounted forshare-based payments to employees using the Accounting Principles BoardOpinion  No. 25 (“APB 25”), “Accountingfor Stock Issued to Employees,” intrinsic value method and, therefore, wegenerally recognized compensation expense for restricted stock awards and didnot recognize compensation cost for employee stock options.  SFASNo. 123(R) allows companies to choose one of two transition methods: themodified prospective transition method or the modified retrospective transitionmethod. We chose to use the modified prospective transition methodology, andaccordingly, we have not restated the results of prior periods.

 

Under the fair valuerecognition provisions of SFAS No. 123(R), stock-based compensation cost isestimated at the grant date based on the fair value of the award and isrecognized as expense over the requisite service period of the award.  The fair value of restricted stock awards isdetermined by reference to the fair market value of our common stock on thedate of grant.  Consistent with thevaluation method we used for disclosure-only purposes under the provisions ofSFAS No. 123, we use the Black-Scholes model to value service condition andperformance condition option awards under SFAS No. 123(R).  For awards with market conditions grantedsubsequent to our adoption of SFAS No. 123(R), we use a lattice valuation modelto estimate fair value. For awards with only service conditions andgraded-vesting features, we recognize compensation cost on a straight-linebasis over the requisite service period. For awards with performance or market conditions granted subsequent toour adoption of SFAS No. 123(R), we recognize compensation cost based on thegraded-vesting method.

 

Determining the appropriatefair value model and related assumptions requires judgment, includingestimating stock price volatility, forfeiture rates, and expected terms.  The expected volatility rates are estimated basedon historical and implied volatilities of our common stock.  The expected term represents the average timethat options that vest are expected to be outstanding based on the vestingprovisions and our historical exercise, cancellation and expirationpatterns.  We estimate pre-vestingforfeitures when recognizing compensation expense based on historical rates andforward-looking factors. We will update these assumptions at least on an annualbasis and on an interim basis if significant changes to the assumptions arewarranted.

 

We issue performance-basedequity awards, typically to certain senior executives, which vest upon theachievement of certain financial performance goals, including revenue andincome targets.    Determining theappropriate amount to expense based on the anticipated achievement of thestated goals requires judgment, including forecasting future financialresults.  The estimate of expense isrevised periodically based on the probability of achieving the requiredperformance targets and adjustments are made as appropriate.  The cumulative impact of any revision isreflected in the period of change.  Ifthe financial performance goals are not met, the award does not vest, so nocompensation cost is recognized and any previously recognized compensation costis reversed.

 

7

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In the past, we have issuedmarket condition equity awards, typically granted to certain senior executives,the vesting of which is accelerated or contingent upon the price of Novellcommon stock meeting specified pre-established stock price targets.  For awards granted prior to our adoption ofSFAS No. 123(R), the fair value of each market condition award was estimated asof the grant date using the same option valuation model used for time-basedoptions without regard to the market condition criteria.  As a result of our adoption of SFAS No.123(R), compensation cost is recognized over the estimated requisite serviceperiod and is not reversed if the market condition target is not met.   If the pre-established stock price targetsare achieved, any remaining expense on the date the target is achieved isrecognized either immediately or, in situations where there is a remainingminimum time vesting period, ratably over that period.

 

**C.Acquisitions and Equity Investments**

 

*e-Security*

 

On April 19, 2006, we acquired 100% of the outstandingstock of e-Security, Inc. (“e-Security”), a privately held companyheadquartered in Vienna, Virginia. e-Security provides security information, event management andcompliance software. e-Security’s products are now part of our identity andaccess management sub-category. The purchase price was approximately $71.7million in cash, plus transaction costs of $1.1 million.  e-Security’s results of operations wereincluded in our consolidated financial statements beginning on the acquisitiondate.

 

The purchase price was allocated as follows:

 
| ** **                                      | ** ** | **Estimated  Fair Value** | ** ** | **Estimated  Useful Life** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**        | ** ** |
| Fair value of net tangible  liabilities assumed |       | $                         | (670       | )                          | N/A        |   |
| In-process research and  development            |       | 2,110                     |       | N/A                        |       |
| Identifiable intangible  assets:                |       |                      |       |                       |       |
| Developed technology                            |       | 6,920                     |       | 3  years                   |       |
| Customer relationships                          |       | 3,640                     |       | 3  years                   |       |
| Trademarks/trade names                          |       | 390                       |       | 3  years                   |       |
| Goodwill                                        |       | 60,443                    |       | Indefinite                 |       |
| Total net assets acquired                       |       | $                         | 72,833     |                       |       |   |

 

We estimated the fair values of the intangible assetsas further described below. Developed technology, customer relationships,and  trademarks/trade names are beingamortized over their estimated useful lives. Goodwill is not amortized but isperiodically evaluated for impairment.

 

The net tangible liabilities of e-Security consistedmainly of accounts payable and other liabilities reduced by cash and cashequivalents, accounts receivable, and fixed assets.

 

In-process research and development valued in theamount of $2.1 million pertains to technology that was not technologicallyfeasible at the date of the acquisition, meaning it had not reached the workingmodel stage, did not contain all of the major functions planned for theproduct, and was not ready for initial customer testing. At the acquisitiondate, e-Security was working on the next two releases of its product calledSentinel, which were scheduled to be released for the third calendar quarter of2006 and in the first calendar half of 2007. These future releases had not yetachieved technological feasibility. The in-process research and development wasvalued based on discounting estimated future cash flows from the relatedproducts. Completion of the development of the future upgrades of theseproducts is dependent upon our successful integration of the e-Securityproducts with Novell products and services. The in-process research anddevelopment does not have any alternative future use and did not otherwisequalify for capitalization. As a result, this amount was expensed uponacquisition.

 

Developed technology relates to e-Security productsthat are commercially available and can be combined with Novell products andservices. Discounted expected future cash flows attributable to the productswere used to determine the value of developed technology. This resulted in avaluation of approximately $6.9 million related to developed technology thathad reached technological feasibility.

 

The valuation of customer relationships in the amountof $3.6 million, which relates primarily to customers under maintenanceagreements, was determined based on discounted expected future cash flows to bereceived as a result of the agreements and assumptions about their renewalrates.

 

8

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Goodwill from the acquisition resulted from our beliefthat the Sentinel products developed by e-Security are a valuable addition toour identity and access management offerings. We believe they will help us remain competitive in the security andcompliance markets and increase our identity and access management revenue. Thegoodwill from the e-Security acquisition was allocated among our geographicoperating segments (see Note G).

 

If the e-Securityacquisition had occurred on November 1, 2004, the unaudited pro forma resultsof operations for the three and six months ended April 30, 2006 and 2005 wouldhave been:

 
| ** **                                                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(amounts in thousands)**                                                   | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005**  | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
| Net revenue                                                                  |       | $                      | 281,048    |                 | $          | 299,455 |   | $ | 557,220 |   | $ | 591,686 |   |
| Net  income (loss) available to common stockholders — diluted           |       | $                      | 1,505      |                 | $          | (17,250 | ) | $ | 30 |   | $ | 372,713 |   |
| Net  income (loss) per share available to common stockholders — diluted |       | $                      | 0.00       |                 | $          | (0.05 | ) | $ | 0.00 |   | $ | 0.86 |   |
|                                                                              |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*OpenInvention Network LLC*

 

InNovember 2005, Open Invention Network LLC (“OIN”) was established by us, IBM,Philips, Red Hat and Sony.  OIN is aprivately held company that has and will acquire patents to promote Linux andopen source by offering its patents on a royalty-free basis to any company,institution or individual that agrees not to assert its patents against theLinux operating system or certain Linux-related applications.  In addition, OIN, in its discretion, willenforce its patents to the extent it believes such action will serve to furtherprotect and promote Linux and open source. Each party contributed capital with a fair value of $20.0 million toOIN.  We account for our 20% ownershipinterest using the equity method of accounting. Our $20.0 million contribution consisted of patents with a fair value of$15.8 million, including $0.3 million of prepaid acquisition costs, and cash of$4.2 million.  At the time of thecontribution, the patents had a book value of $14.4 million, including $0.3million of prepaid acquisition costs. The $1.4 million difference between the fair value and book value of thepatents will be amortized to our investment in OIN account and equity incomeover the remaining estimated useful life of the patents, which is approximatelynine years.  Our investment in OIN of$18.7 million is classified as other assets in the consolidated balance sheets.

 

*Onward Novell*

 

In December 2005, weacquired the remaining 50% ownership of our sales and marketing joint venturein India from our joint venture partner for approximately $7.5 million in cashand other consideration. At October 31, 2005, $7.5 million of our cash was heldin an escrow account for the acquisition and classified as other assets in theconsolidated balance sheet. The cash was paid out of the escrow account duringthe first quarter of fiscal 2006.  At thetime of the acquisition, the net book value of the minority interest was $5.3million.  The $2.0 million difference betweenthe net book value of the minority interest and the amount we paid for theremaining 50% ownership was recorded as goodwill.

 

**D. Cash,Cash Equivalents, and Short-Term Investments**

 

We consider all investmentswith an initial term to maturity of three months or less at the date ofpurchase to be cash equivalents. Short-term investments are diversified,primarily consisting of investment grade securities that either mature withinthe next 12 months or have other characteristics of short-term investments,such as auction dates within at least six months of the prior auction date orbeing available to be used for current operations even if some maturities mayextend beyond one year. All auction rate securities are classified asshort-term investments.

 

All marketable debt andequity securities that are included in cash, cash equivalents, and short-terminvestments are considered available-for-sale and are carried at fair value.The unrealized gains and losses related to these securities are included inaccumulated other comprehensive income in the consolidated balance sheets.Other than temporary declines in fair value are recorded in the consolidatedstatements of operations.  Fair valuesare based on quoted market prices where available. If quoted market prices arenot available, we use third-party pricing services to assist in determiningfair value. In many instances, these services examine the pricing of similarinstruments to estimate fair value.

 

At April 30, 2006,approximately $7.0 million of our equity securities were designated fordeferred compensation payments, which are paid out as requested by theparticipants of the plan.

 

9

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At April 30, 2006,contractual maturities of our short-term investments were:

 
| **(In thousands)**            | ** ** | **Cost** | ** ** | **Fair Market  Value** | ** ** |
|-------------------------------|------------|----------|------------|------------------------|------------|
| Less than one year            |       | $        | 274,896    |                   | $          | 273,810 |   |
| Due in one to two years       |       | 279,596  |       | 275,323                |       |
| Due in two to three years     |       | 134,746  |       | 132,724                |       |
| Due in more than three  years |       | 106,898  |       | 105,372                |       |
| No contractual maturity       |       | 8,892    |       | 9,738                  |       |
| Total short-term investments  |       | $        | 805,028    |                   | $          | 796,967 |   |
|                               |            |          |            |                        |            |  |  |  |

 

When securities are sold,their cost is determined based on the first-in first-out method. The realizedgains and losses related to these securities are included in investment incomein the consolidated statements of operations. Realized gains and losses on short-term investments were as follows:

 
| ** **         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands)** | ** ** | **April 30,  2006**              | ** ** | **April 30,  2005**            | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
| Realized gains     |       | $                                | 115        |                           | $          | 100 |   | $ | 241 |   | $ | 385 |   |
| Realized losses    |       | $                                | 312        |                           | $          | 262 |   | $ | 1,534 |   | $ | 558 |   |

 

We had net unrealized lossesrelated to short-term investments of $8.1 million at April 30, 2006 compared tonet unrealized losses of $7.6 million at October 31, 2005.  Our short-term investment portfolio includesgross unrealized gains and losses of $0.8 million and $8.9 million, respectively,as of April 30, 2006.  We did not recordany impairment losses on short-term investments during the first six months offiscal 2006 or fiscal 2005.

 

**E.Property, Plant and Equipment**

 

At April 30, 2006, we had acorporate aviation asset with a net book value of approximately $13.8 millionthat was classified as held for sale. We anticipate selling this asset duringfiscal 2006 for at least net book value. During the second quarter of fiscal 2006, we sold one of our corporateaviation assets with a net book value of $5.1 million for $7.3 million, net ofcommissions, resulting in a gain of $2.2 million.

 

**F.  Long-Term Investments**

 

At April 30, 2006,long-term investments primarily consisted of investments made in venturecapital partnerships. Long-term investments, over which we do not have theability to exercise significant influence, are accounted for initially at costand written down to fair value when indicators of impairment are deemed to beother than temporary.

 

We routinely review ourlong-term investments for impairment. To assess impairment, we analyze theforecasted financial performance of the investees and our estimate of thepotential for investment recovery based on the financial performance factors.During the second quarters of fiscal 2006 and 2005, we recognized impairmentlosses on long-term investments totaling $0.2 million and $0.9 million,respectively.  During the first sixmonths of fiscal 2006 and 2005, we recognized impairment losses on long-terminvestments totaling $0.6 million and $1.9 million, respectively.

 

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**G.Goodwill and Intangible Assets**

 

*Goodwill*

 

The following is asummary of goodwill as of the dates shown resulting from the indicatedacquisitions:

 
| **(In thousands)**             | ** ** | **April 30,  2006** | ** ** | **October 31,  2005** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| SUSE                           |       | $                   | 176,963    |                  | $          | 176,963 |   |
| SilverStream                   |       | 111,117             |       | 112,622               |       |
| e-Security                     |       | 60,443              |       | —                |       |
| Ximian                         |       | 33,607              |       | 33,852                |       |
| Cambridge Technology  Partners |       | 24,452              |       | 25,903                |       |
| Tally                          |       | 16,147              |       | 16,308                |       |
| Immunix                        |       | 14,518              |       | 14,676                |       |
| Salmon                         |       | 5,867               |       | 6,146                 |       |
| Onward Novell                  |       | 2,010               |       | —                |       |
| Other technology companies     |       | 9,039               |       | 9,039                 |       |
| Total goodwill                 |       | $                   | 454,163    |                  | $          | 395,509 |   |

 

Goodwill is allocated toour reporting segments.  In fiscal 2006,we changed our reporting segments to Americas, EMEA, Asia Pacific, and Celerantconsulting (see Note S).  Previously,Latin America was separate from North America, and Japan was separate from AsiaPacific.

 

Goodwill by reporting segment is as follows:

 
| **(In thousands)**              | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Asia****Pacific** | ** ** | **Celerant****Consulting** | ** ** | **Total** | ** ** |
|---------------------------------|------------|--------------|------------|----------|------------|---------------------|------------|----------------------------|------------|-----------|------------|
| Balance as of October 31,  2005 |       | $            | 191,498    |     | $          | 150,487             |       | $                          | 27,621     |      | $          | 25,903 |   | $ | 395,509 |   |
| Onward Novell                   |       | —       |       | —   |       | 2,010               |       | —                     |       | 2,010     |       |
| e-Security                      |       | 38,683       |       | 16,320   |       | 5,440               |       | —                     |       | 60,443    |       |
| Adjustments                     |       | (1,054       | )          | (1,178   | )          | (116                | )          | (1,451                     | )          | (3,799    | )          |
| Balance as of April 30,  2006   |       | $            | 229,127    |     | $          | 165,629             |       | $                          | 34,955     |      | $          | 24,452 |   | $ | 454,163 |   |
|                                 |            |              |            |          |            |                     |            |                            |            |           |            |  |  |  |  |  |  |  |  |

 

The adjustments togoodwill during the first six months of fiscal 2006 totaling $3.8 millionincluded an adjustment of approximately $3.5 million, attributable toSilverStream, Celerant consulting (acquired through the acquisition ofCambridge Technology Partners), Ximian, Tally, and Immunix, related to thereversal of deferred tax asset valuation allowances attributable to acquirednet operating loss carryforwards that were utilized by income generated in thefirst six months of fiscal 2006. Goodwill was reduced for this adjustmentbecause a portion of it related to the valuation allowances on acquired netoperating losses that were established during the allocation of the purchaseprice for each of these acquisitions.

 

*IntangibleAssets*

 

The following is a summaryof intangible assets:

 
| ** **                          | ** ** | **April 30, 2006** | ** ** | **October 31, 2005**          | ** ** | ** **          | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------------------------|------------|---------------------|------------|
| **(In thousands)**                  | ** ** | **Gross  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Asset Lives** | ** ** |
| ** **                          | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology                |       | $                  | 29,770     |                          | $          | (18,541             | )          | $ | 11,229 |   | $ | 22,850 |   | $ | (16,718 | ) | $ | 6,132 |   | 3-4 years |   |
| Trademarks and trade names          |       | 25,961             |       | (45                           | )          | 25,916              |       | 25,571 |   | (20 | ) | 25,551 |   | 3 years or Indefinite |   |
| Patents                             |       | —             |       | —                        |       | —              |       | 15,500 |   | (1,392 | ) | 14,108 |   | 10 years |   |
| Customer/contractual  relationships |       | 23,002             |       | (13,695                       | )          | 9,307               |       | 19,362 |   | (10,454 | ) | 8,908 |   | 1-3 years |   |
| Internal use software               |       | 5,193              |       | (4,321                        | )          | 872                 |       | 5,193 |   | (3,700 | ) | 1,493 |   | 3 years |   |
| Non-compete agreement               |       | 422                |       | (262                          | )          | 160                 |       | 422 |   | (193 | ) | 229 |   | 3 years |   |
| Total intangible  assets            |       | $                  | 84,348     |                          | $          | (36,864             | )          | $ | 47,484 |   | $ | 88,898 |   | $ | (32,477 | ) | $ | 56,421 |   |   |   |
|                                     |            |                    |            |                               |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the second quarterof fiscal 2006, we recorded $0.4 million for trademarks, $3.6 million forcustomer relationships, and $6.9 million for developed technology related tothe acquisition of e-Security.  Duringthe first quarter of fiscal 2006, we contributed our patent portfolio towardsour 20% ownership interest in OIN.  Atthe time of the contribution, these patents, which we acquired for $15.5million, had a net book value of $14.1 million.

 

11

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Amortization ofintangible assets for the second quarters of fiscal 2006 and 2005 was $3.0million and $3.4 million, respectively. Amortization of intangible assets forthe first six months of fiscal 2006 and 2005 was $5.8 million and $6.4 million,respectively. Amortization of intangibles is estimated to be approximately $6.9million for the remainder of fiscal 2006, $7.9 million in fiscal 2007, $5.2million in fiscal 2008, and $2.0 million in fiscal 2009.

 

**H.Income Taxes**

 

We are subject to incometaxes in numerous jurisdictions and the use of estimates is required indetermining our provision for income taxes. For the second quarter and first six months of fiscal 2006, we providedincome taxes of $7.5 million and $18.8 million, respectively, based on theestimated annual effective tax rate for the year applied to “ordinary” income(pre-tax income excluding unusual or infrequently occurring discreteitems).  Due to the utilization of asignificant amount of our net operating loss carryforwards during fiscal 2005,substantially all of the future benefit received from our remaining netoperating loss carryforwards used to offset U.S. taxable income will becredited to additional paid-in capital or goodwill and not income taxexpense.  In addition, the windfall taxbenefits associated with stock-based compensation will be credited toadditional paid-in capital. In connection with our adoption of SFAS No. 123(R),we elected to follow the tax ordering laws to determine the sequence in whichdeductions and net operating loss carryforwards are utilized.  Accordingly, during the second quarter andfirst six months of fiscal 2006, a tax benefit relating to stock options of$1.2 million and $5.2 million, respectively, was credited to additional paid-incapital and a benefit of $3.0 million and $3.5 million, respectively, wascredited to goodwill.

 

The effective tax ratediffers from the federal statutory rate of 35% primarily due to the effects ofstock-based compensation plans, differences between book and tax items andforeign taxes.  The effective tax ratefor the second quarter of fiscal 2006 was 69% compared to the effective taxrate of 1,584% for the same period in 2005. The effective tax rate for the first six months of fiscal 2006 was 78%compared to the effective tax rate of 17% for the same period in 2005.  The effective tax rates for the secondquarter and the first six months of fiscal 2006 differ from the effective tax ratesfor the second quarter and the first six months of fiscal 2005 due to the useof net operating losses in the first quarter of fiscal 2005, which offsetincome tax expense associated primarily with the income generated from asettlement we reached with Microsoft in the first quarter of fiscal 2005.  The effective tax rate for fiscal 2006 will be higher than the rate forfiscal 2005 primarily because the fiscal 2005 rate reflected a benefit recordedto income tax expense from the use of a significant amount of our net operatingloss carryforwards.

 

In accordance withdeterminations made pursuant to the applicable accounting standards, wecontinue to believe that it is more likely than not that our remaining U.S. netdeferred tax assets will not be realized based on the weight of all availableevidence. As a result, we have provided a full valuation allowance on our U.S.net deferred tax assets. As deferred tax assets or liabilities increase ordecrease in the future, or if a portion or all of the valuation allowance is nolonger deemed to be necessary, the adjustments to the valuation allowance willincrease or decrease future income tax provisions, goodwill or additionalpaid-in capital.  It is reasonablypossible that an adjustment to our valuation allowance will be required in thenear term and the amount could be material.

 

Wepaid cash for income taxes of $6.0 million in the second quarter of fiscal 2006and $9.5 million during the same period of fiscal 2005. We paid cash for incometaxes of $10.5 million in the first six months of fiscal 2006 and $12.9 millionduring the same period of fiscal 2005. We continue to evaluate our tax reservesunder SFAS No. 5, “Accounting for Contingencies,” which requires us to accruefor losses we believe are probable and can be reasonably estimated.  The amount reflected in the consolidatedbalance sheet at April 30, 2006 is considered adequate based on our assessmentof many factors including, results of tax audits, past experience andinterpretations of tax law applied to the facts of each matter. It isreasonably possible that our tax reserves could be increased or decreased inthe near term based on these factors.

 

 **I. Line of Credit**

 

We have a $25.0 million bank line of creditavailable for letter of credit purposes. At April 30, 2006, there were standbyletters of credit of $15.1 million outstanding under this line, all of whichare collateralized by cash. The bank line of credit expires on April 1, 2007.The bank line of credit is subject to the terms of a credit agreementcontaining financial covenants and restrictions, none of which are expected toaffect our operations. We are in compliance with all financial covenantsrelating to this line of credit as of April 30, 2006. In addition, at April 30,2006, we had outstanding letters of credit of an insignificant amount at otherbanks.

 

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**J.Restructuring and Merger Liabilities**

 

*RestructuringLiabilities*

 

Our restructuringactivities in previous periods are disclosed in detail in our Annual Report onForm 10-K for fiscal 2005. The following table summarizes the restructuringreserve balance and activity during the first six months of fiscal 2006:

 
| **(In thousands)**                         | ** ** | **Fiscal 2005****Restructurings** | ** ** | **Fiscal 2004  Restructurings** | ** ** | **Fiscal 2003****Restructuring** | ** ** | **Fiscal 2002****Restructuring** | ** ** | **Fiscal 2001****Restructurings** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------|------------|
| **Balance  at October 31, 2005:**          | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Workforce reductions                       |       | $                                 | 28,492     |                            | $          | 1,243                            |       | $                                | —     |                              | $          | —     |       | $ | — |   | $ | 29,735 |   |
| Excess  facilities, property and equipment |       | 6,451                             |       | 1,457                           |       | 3,121                            |       | 3,660                            |       | 327                               |       | 15,016     |       |
| Other  restructuring-related costs         |       | 259                               |       | —                          |       | 10                               |       | 37                               |       | 274                               |       | 580        |       |
| Total restructuring reserve balance        |       | 35,202                            |       | 2,700                           |       | 3,131                            |       | 3,697                            |       | 601                               |       | 45,331     |       |
| **Adjustments:**                           | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Workforce reductions                       |       | (707                              | )          | —                          |       | —                           |       | —                           |       | —                            |       | (707       | )          |
| Excess  facilities, property and equipment |       | (61                               | )          | —                          |       | —                           |       | —                           |       | —                            |       | (61        | )          |
| Other  restructuring-related costs         |       | —                            |       | —                          |       | —                           |       | (37                              | )          | (259                              | )          | (296       | )          |
| Total adjustments                          |       | (768                              | )          |                            |       |                             |       | (37                              | )          | (259                              | )          | (1,064     | )     |
| **Payments:**                              | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Workforce reductions                       |       | (23,172                           | )          | (112                            | )          | —                           |       | —                           |       | —                            |       | (23,284    | )          |
| Excess  facilities, property and equipment |       | (3,266                            | )          | (806                            | )          | (747                             | )          | (803                             | )          | (310                              | )          | (5,932     | )          |
| Other  restructuring-related costs         |       | (187                              | )          | —                          |       | (10                              | )          | —                           |       | (15                               | )          | (212       | )          |
| Total payments                             |       | (26,625                           | )          | (918                            | )          | (757                             | )          | (803                             | )          | (325                              | )          | (29,428    | )          |
| **Balance at April 30, 2006:**             | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Workforce reductions                       |       | 4,613                             |       | 1,131                           |       | —                           |       | —                           |       | —                            |       | 5,744      |       |
| Excess  facilities, property and equipment |       | 3,124                             |       | 651                             |       | 2,374                            |       | 2,857                            |       | 17                                |       | 9,023      |       |
| Other  restructuring-related costs         |       | 72                                |       | —                          |       | —                           |       | —                           |       | —                            |       | 72         |       |
| Total restructuring reserve balance        |       | $                                 | 7,809      |                            | $          | 1,782                            |       | $                                | 2,374      |                              | $          | 2,857      |       | $ | 17 |   | $ | 14,839 |   |
|                                            |            |                                   |            |                                 |            |                                  |            |                                  |            |                                   |            |            |            |  |  |  |  |  |  |  |  |

 

Adjustments to reduce therestructuring reserves during the first six months of fiscal 2006 of $1.1million related to changes in estimates, of which $0.4 million was related toAsia Pacific, $0.3 million was related to the Americas, $0.3 million wasrelated to EMEA, and $0.1 million was related to Celerant consulting.

 

*MergerLiabilities*

 

The following tablesummarizes the merger liabilities balance and activity during the first sixmonths of fiscal 2006:

 
| **(In thousands)**       | ** ** | **Balance at****October 31,  2005** | ** ** | **Additions FromAcquisitions** | ** ** | **Payments/****adjustments** | ** ** | **Balance at****April 30,  2006** | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| Facilities related       |       | $                                             | 17,606     |                           | $          | —                       |       | $                                      | (1,132     | ) | $ | 16,474 |   |
| Employee related         |       | 169                                           |       | 437                            |       | (105                         | )          | 501                                    |       |
| Other                    |       | 76                                            |       | 646                            |       | 33                           |       | 755                                    |       |
| Total merger liabilities |       | $                                             | 17,851     |                           | $          | 1,083                        |       | $                                      | (1,204     | ) | $ | 17,730 |   |

 

Additions fromacquisitions relates to merger liabilities from the acquisition of e-Securityin April 2006.

 

As of April 30, 2006, theremaining unpaid restructuring and merger liability balances include accruedliabilities related to severance benefits which will be paid out over theremaining severance obligation period, lease costs for redundant facilitieswhich will be paid over the respective remaining contract terms, and variousemployee-related severance costs which will be primarily paid over the nexttwelve months.

 

**K.Senior Convertible Debentures**

 

On July 2, 2004, weissued and sold $600.0 million aggregate principal amount of our seniorconvertible debentures (“Debentures”) due 2024. The Debentures pay interest at0.50% per annum, payable semi-annually on January 15 and July 15 of each yearuntil maturity, commencing January 15, 2005. During the second quarter andfirst six months of fiscal 2006, we incurred interest expense of $0.8 millionand $1.5 million, respectively, related to the Debentures and made cashpayments for interest of $1.5 million during the first six months of fiscal2006.

 

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In connection with theissuance of the Debentures, we incurred $14.9 million of issuance costs, whichprimarily consisted of investment banker, legal and other professional fees.These costs are classified within Other Assets and are being amortized asinterest expense using the effective interest method over the term fromissuance through the date that the holders can first require repurchase of theDebentures (July 15, 2009). Amortization expense related to the issuance costswas $0.7 million and $1.5 million for both the second quarter and first sixmonths of fiscal 2006 and fiscal 2005, respectively.

 

**L.Guarantees**

 

We have provided a guaranteeto a foreign taxing authority in the amount of $2.5 million related to aforeign tax audit. It is expected that the term of the foreign tax auditguarantee will continue until the conclusion of the audit. In addition, we haveprovided a guarantee to a customer for the performance of one of our foreignsubsidiaries on a maintenance contract in the amount of $0.4 million, and a$0.2 million guarantee to a vendor of our foreign subsidiaries to guaranteelease payments. At April 30, 2006, we had $2.5 million accrued for theseguarantees. We have also provided other guarantees of insignificant amounts forvarious purposes.

 

Like most software vendors,we are party to a variety of agreements, primarily with customers, resellers,distributors, and independent hardware and software vendors (generally, “customers”),pursuant to which we may be obligated to indemnify the customer against thirdparty allegations of intellectual property infringement resulting from thecustomer’s use of our offerings or distribution of our software, either ofwhich may include proprietary and/or open source materials. In suchcircumstances, the customer must satisfy specified conditions to qualify forindemnification. Our obligations under these agreements may be limited in termsof time and/or amount, and in some instances we may have recourse against thirdparties.

 

It is not possible topredict the maximum potential amount of future payments under these guaranteesand indemnifications, or similar agreements, due to the conditional nature ofour obligations and the unique facts and circumstances involved in eachparticular agreement. To date, we have not been required to make any paymentunder these guarantees and indemnifications. We do not record a liability forpotential litigation claims related to indemnification agreements with ourcustomers unless and until we conclude the likelihood of a material obligationis probable and estimable.

 

**M.Commitments and Contingencies**

 

As of April 30, 2006, wehad a carrying value of $55.4 million related to long-term investments invarious venture capital funds and had commitments to contribute an additional$14.5 million to these funds at times and amounts as requested by the fund managers.

 

**N. LegalProceedings**

 

On November 12, 2004, we filed suit againstMicrosoft in the U.S. District Court, District of Utah. We are seeking trebledamages under the Clayton Act, plus interest, in an amount to be determined attrial based on claims that Microsoft eliminated competition in the officeproductivity software market during the time that we owned the WordPerfectword-processing application and the Quattro Pro spreadsheet application. Amongother claims, we allege that Microsoft withheld certain critical technicalinformation about Windows from us, thereby impairing our ability to develop newversions of WordPerfect and other office productivity applications, and thatMicrosoft integrated certain technologies into Windows designed to exclude WordPerfectand other Novell applications from relevant markets. In addition, we allegethat Microsoft used its monopoly power to prevent OEMs from offeringWordPerfect and other applications to customers. On June 10, 2005, Microsoft’smotion to dismiss the complaint was granted in part and denied in part. OnSeptember 2, 2005, Microsoft sought appellate review of the District Court’sdenial of its motion.  On January 31,2006, the Fourth Circuit Court granted interlocutory review of Microsoft’sappeal with respect to the question of whether Novell lacked standing to assert the antitrust claims allowed by theDistrict Court.  As a result of Microsoft’sappeal, on February 21, 2006 Novell filed a notice of appeal of the DistrictCourt’s dismissal of Novell’s other causes of action.  Both Novell and Microsoft have filed openingbriefs with the Court of Appeals, however, it is uncertain when a finaldecision can be expected.  While there canbe no assurance as to the ultimate disposition of the litigation, we do notbelieve that its resolution will have a material adverse effect on ourfinancial position, results of operations, or cash flows.

 

On January 20, 2004, the SCO Group, Inc. (“SCO”)filed suit against us in the Third Judicial District Court of Salt Lake County,State of Utah. We removed the claim to the U.S. District Court, District ofUtah. SCO’s original complaint alleged that our public statements and filingsregarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’sbusiness reputation and affected its efforts to protect its ownership interestin UNIX and UnixWare. The District Court dismissed the original complaint, butallowed SCO an opportunity to file an amended complaint, which SCO did on July9, 2004. On June 27, 2005, our motion to dismiss SCO’s amended complaint wasdenied. On July 29, 2005, we filed an answer to the complaint setting forthnumerous affirmative defenses and counterclaims alleging slander of title andbreach of contract, and seeking declaratory actions and actual, special andpunitive damages in an amount to be proven at trial. On February 3, 2006, SCOfiled a Second Amended Complaint alleging that Novell has violated thenon-competition provisions of the agreement under which we sold our Unixbusiness to SCO, that we failed to transfer all of the Unix business, that weinfringe SCO’s copyrights, and that we are engaging in unfair competition byattempting to deprive SCO of the value of the Unix technology.  SCO seeks to require us to assign allcopyrights that 

 

14

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we have registered in UNIX and UnixWare to SCO, to prevent us fromrepresenting that we have any ownership interest in the UNIX and UnixWarecopyrights, to require us to withdraw all representations we have maderegarding our ownership of the UNIX and UnixWare copyrights, and to cause us topay actual, special and punitive damages in an amount to be proven attrial.  Novell has filed separate motionsto stay SCO’s claims pending the outcome of an arbitration proceeding filed bySUSE as well as a motion for more definitive statement as to SCO’s allegedunfair competition claim.  As referenced,SUSE recently filed a demand for arbitration before the International Court ofArbitration in Zurich, Switzerland, pursuant to a “UnitedLinux Agreement” inwhich SCO and SUSE were parties.  Theresult of such arbitration may impact our U.S. litigation with SCO and for thatpurpose, Novell has sought to stay such litigation pending the outcome of thearbitration proceeding.  We believe thatwe have meritorious defenses to SCO’s claims and meritorious support for ourcounterclaims. Accordingly, we intend to vigorously pursue our claims whiledefending against the allegations in SCO’s complaint. Although there can be noassurance as to the ultimate disposition of the suit, we do not believe thatthe resolution of this litigation will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

On July 12, 2002, Amer Jneid and otherrelated plaintiffs filed a complaint in the Superior Court of California,Orange County alleging claims for breach of contract, fraud in the inducement,misrepresentation, infliction of emotional distress, rescission, slander andother claims against Novell in connection with Novell’s purchase of so-called “DeFrame”technology from the plaintiffs and two affiliated corporations (TriPoleCorporation and Novetrix), and employment agreements Novell entered into withthe plaintiffs in connection with the purchase. The complaint seeks unspecified damages including “punitive damages.”  The dispute (resulting in these claims)arises out of the plaintiffs’ assertion that Novell failed to properly accountfor license distributions which the plaintiffs claim would have entitled themto certain bonus payouts under the purchase and employment agreements.  After several preliminary motions andsubsequent amendments to the complaint, Novell filed an answer andcross-complaint against the plaintiffs for breach of the purchase and employmentagreements. Although certain of the plaintiffs’ claims have been dismissed, theremaining claims, including Novell’s counterclaims, are currently scheduled fortrial to begin on July 17, 2006. We believe that we have meritorious defensesto plaintiffs’ claims and meritorious support for our counterclaims.Accordingly, we intend to vigorously pursue our claims while defending againstthe allegations in the complaint. Although there can be no assurance as to theultimate disposition of the suit, we do not believe that the resolution of thislitigation will have a material adverse effect on our financial position,results of operations or cash flows.

 

In a related case, TriPole Corporation fileda complaint against Novell on March 17, 2005 seeking to recover up to $12million in bonus “earn out” payments and for unspecified punitive damages forfraudulent inducement in connection with Novell’s purchase of the DeFrametechnology.  Essentially, Tripole’sclaims are very much the same as those asserted by the plaintiffs in the casenoted above, relative to the claim that Novell failed to properly account forlicense distributions which would have otherwise entitled Tripole to certainbonus payments under the purchase agreement. These claims have now been consolidated with the plaintiffs’ casereferenced above and are also scheduled for trial to begin  on July 17, 2006.  We believe that we have meritorious defensesto TriPole’s claims and meritorious support for our counterclaims. Accordingly,we intend to vigorously pursue our claims while defending against theallegations in Tripole’s complaint. Although there can be no assurance as tothe ultimate disposition of the suit, we do not believe that the resolution ofthis litigation will have a material adverse effect on our financial position,results of operations or cash flows.

 

SilverStream, which we acquired in July 2002,and several of its former officers and directors, as well as the underwriterswho handled SilverStream’s two public offerings, were named as defendants inseveral class action complaints that were filed on behalf of certain formerstockholders of SilverStream who purchased shares of SilverStream common stockbetween August 16, 1999 and December 6, 2000. These complaints are closely relatedto several hundred other complaints that the same plaintiffs have broughtagainst other issuers and underwriters. These complaints all allege violationsof the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. In particular, theyallege, among other things, that there was undisclosed compensation received bythe underwriters of the public offerings of all of the issuers, includingSilverStream. A Consolidated Amended Complaint with respect to all of thesecompanies was filed in the U.S. District Court, Southern District of New York,on April 19, 2002. The plaintiffs are seeking monetary damages, statutorycompensation and other relief that may be deemed appropriate by the Court.While we believe that SilverStream and its former officers and directors havemeritorious defenses to the claims, a tentative settlement has been reachedbetween many of the defendants and the plaintiffs, which contemplates asettlement of the claims, including the ones against SilverStream and itsformer directors and officers. The settlement agreement, however, has not beenfinally approved by the Court. While there can be no assurance as to theultimate disposition of the litigation, we do not believe that its resolutionwill have a material adverse effect on our financial position, results ofoperations or cash flows.

 

During the second quarter of fiscal 2006, we recordeda gain of $1.2 million related to a settlement we received from one of ourinsurance companies for past legal expenses that were covered under ourinsurance policies.

 

We account for legalreserves under SFAS No. 5, which requires us to accrue for losses we believeare probable and can be reasonably estimated. We evaluate the adequacy of ourlegal reserves based on our assessment of many factors, including ourinterpretations of the law and our assumptions about the future outcome of eachcase based on current information.  It isreasonably 

 

15

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possible that our legalreserves could be increased or decreased in the near term based on ourassessment of these factors. We are currently party to various legalproceedings and claims including former employees, either asserted orunasserted, which arise in the ordinary course of business. While the outcomeof these matters cannot be predicted with certainty, we do not believe that theoutcome of any of these claims or any of the above mentioned legal matters willhave a material adverse effect on our consolidated financial position, resultsof operations or cash flows.

 

**O.Redeemable Preferred Stock**

 

Holders of our Series BPreferred Stock are entitled to dividends of 2% of the redemption value perannum, payable quarterly in cash. Dividends on the Series B Preferred Stockduring the first six months of fiscal 2006 amounted to $94,000. We paid $47,000in dividends during the first six months of fiscal 2006.

 

**P. NetIncome Per Share Available to Common Stockholders**

 

The following tablereconciles the numerators and denominators of the net income per sharecalculation for the second quarters of fiscal 2006 and 2005:

 
| ** **                                                                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| **(In thousands, except per share  data)**                                                                                        | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** |
| **Basic net income per share  computation:**                                                                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                                 |       | $                      | 3,342      |   | $ | (15,627 | ) |
| Dividends on Series B  Preferred Stock                                                                                            |       | (47                    | )          | (125 | ) |
| Allocation of earnings to  holders of Series B Preferred Stock                                                                    |       | (13                    | )          | — |   |
| Net income (loss)  attributable to common stockholders                                                                            |       | $                      | 3,282      |   | $ | (15,752 | ) |
| Weighted-average common shares outstanding, excluding unvested  restricted stock                                                  |       | 378,403                |       | 378,219 |   |
| Basic net income (loss) per share attributable to common stockholders                                                             |       | $                      | 0.01       |   | $ | (0.04 | ) |
| **Diluted net income per share  computation:**                                                                                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                                 |       | $                      | 3,342      |   | $ | (15,627 | ) |
| Dividends on Series B  Preferred Stock                                                                                            |       | (47                    | )          | (125 | ) |
| Allocation of earnings to the holders of Series B Preferred Stock                                                                 |       | (13                    | )          | — |   |
| Minority interest in  diluted net income                                                                                          |       | (104                   | )          | — |   |
| Diluted net income (loss) attributable to common stockholders                                                                     |       | $                      | 3,178      |   | $ | (15,752 | ) |
| Weighted-average common  shares outstanding                                                                                       |       | 378,403                |       | 378,219 |   |
| Incremental shares attributable to the assumed exercise of  outstanding options, unvested restricted stock, and other stock plans |       | 6,917                  |       | — |   |
| Total adjusted  weighted-average common shares                                                                                    |       | 385,320                |       | 378,219 |   |
| Diluted net income (loss) per share attributable to common  stockholders                                                          |       | $                      | 0.01       |   | $ | (0.04 | ) |

 

The 1.5 million shares ofcommon stock attributable to the assumed conversion of outstanding Series BPreferred Stock and the 52.0 million shares attributable to the assumedconversion of outstanding Debentures were not included in the calculation ofdiluted net income per share in the second quarters of fiscal 2006 and 2005 astheir effects were antidilutive. Incremental shares attributable to optionswith exercise prices that were at or greater than the average market price (“outof the money”) at April 30, 2006 were also not included in the calculation ofdiluted net income per share as their effect would have been antidilutive. Outof the money options for the second quarters of fiscal 2006 and 2005 totaled21,160,302 and 26,509,643, respectively.

 

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The following tablereconciles the numerators and denominators of the net income per share calculationfor the first six months of fiscal 2006 and 2005:

 
| ** **                                                                                                                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| **(In thousands, except per share  data)**                                                                                        | ** ** | **April 30,  2006**  | ** ** | **April 30,  2005** | ** ** |
| **Basic net income per share  computation:**                                                                                      | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net income                                                                                                                        |       | $                    | 5,207      |   | $ | 379,534 |   |
| Dividends on Series B  Preferred Stock                                                                                            |       | (94                  | )          | (250 | ) |
| Allocation of earnings to  holders of Series B Preferred Stock                                                                    |       | (20                  | )          | (3,974 | ) |
| Net income attributable to  common stockholders                                                                                   |       | $                    | 5,093      |   | $ | 375,310 |   |
| Weighted-average common shares outstanding, excluding unvested  restricted stock                                                  |       | 382,095              |       | 377,738 |   |
| Basic net income per share attributable to common stockholders                                                                    |       | $                    | 0.01       |   | $ | 0.99 |   |
| **Diluted net income per share  computation:**                                                                                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net income                                                                                                                        |       | $                    | 5,207      |   | $ | 379,534 |   |
| Dividends on Series B  Preferred Stock                                                                                            |       | (94                  | )          | (250 | ) |
| Allocation of earnings to the holders of Series B Preferred Stock                                                                 |       | (20                  | )          | (3,974 | ) |
| Interest expense on the  Debentures                                                                                               |       | —               |       | 1,500 |   |
| Amortization of debt  issuance costs                                                                                              |       | —               |       | 1,486 |   |
| Minority interest in  diluted net income                                                                                          |       | (72                  | )          | — |   |
| Diluted net income  attributable to common stockholders                                                                           |       | $                    | 5,021      |   | $ | 378,296 |   |
| Weighted-average common  shares outstanding                                                                                       |       | 382,095              |       | 377,738 |   |
| Incremental shares attributable to the assumed exercise of  outstanding options, unvested restricted stock, and other stock plans |       | 7,562                |       | 5,150 |   |
| Incremental shares attributable to the assumed conversion of the  Debentures                                                      |       | —               |       | 52,074 |   |
| Total adjusted  weighted-average common shares                                                                                    |       | 389,657              |       | 434,962 |   |
| Diluted net income per share attributable to common stockholders                                                                  |       | $                    | 0.01       |   | $ | 0.87 |   |

 

The 1.5 million shares ofcommon stock attributable to the assumed conversion of outstanding Series BPreferred Stock and the 52.0 million shares attributable to the assumedconversion of outstanding Debentures were not included in the calculation ofdiluted net income per share in the first six months of fiscal 2006 as theireffects were antidilutive. Incremental shares attributable to options withexercise prices that were at or greater than the average market price (“out ofthe money”) at April 30, 2006 were also not included in the calculation ofdiluted net income per share as their effect would have been antidilutive. Outof the money options as of April 30, 2006 and 2005 totaled 21,413,161 and25,253,010, respectively.

 

**Q.Comprehensive Income**

 

The components ofcomprehensive income (loss) are as follows:

 
| ** **                                   | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| **(In thousands)**                           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
| Net income (loss)                            |       | $                        | 3,342      |                     | $          | (15,627 | ) | $ | 5,207 |   | $ | 379,534 |   |
| Change in net unrealized loss on investments |       | (1,711                   | )          | (1,615                   | )          | (441 | ) | (3,826 | ) |
| Change in pension  liability                 |       | 106                      |       | 425                      |       | 212 |   | 390 |   |
| Change in cumulative translation adjustments |       | 1,266                    |       | 1,631                    |       | 1,907 |   | 8,487 |   |
| Comprehensive income  (loss)                 |       | $                        | 3,003      |                     | $          | (15,186 | ) | $ | 6,885 |   | $ | 384,585 |   |

 

Our accumulated othercomprehensive income is comprised of the following:

 
| ** **                                   | ** ** | **April 30,  2006** | ** ** | **October 31,  2005** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **(In thousands)**       | ** ** |
| Net unrealized loss on  investments          |       | $                        | (8,061     | )                     | $          | (7,620 | ) |
| Minimum pension liability                    |       | (421                     | )          | (633                  | )          |
| Cumulative translation  adjustment           |       | 17,604                   |       | 15,697                |       |
| Total accumulated other comprehensive income |       | $                        | 9,122      |                  | $          | 7,444 |   |

 

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**R.Stock-Based Compensation**

 

As discussed in footnoteB, we adopted SFAS No. 123(R) on November 1, 2005.  Prior to fiscal 2006, we accounted for stockbased compensation under APB 25.  Theadoption of SFAS No. 123(R) had a significant impact on our results of operations.   Our consolidated statement of operations forthe second quarter and first six months of fiscal 2006 and 2005 includes thefollowing stock-based compensation expense:

 
| **(In thousands)**         | ** ** | **Three months ended  April 30, 2006** | ** ** | **Three months ended  April 30, 2005** | ** ** | **Six months ended  April 30, 2006** | ** ** | **Six months ended  April 30, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Cost of revenue            |       | $                                           | 923        |                                        | $          | 1                                         |       | $                                         | 1,985      |   | $ | 2 |   |
| Sales and marketing        |       | 3,044                                       |       | 224                                         |       | 6,576                                     |       | 358                                       |       |
| Product development        |       | 1,750                                       |       | 329                                         |       | 4,387                                     |       | 653                                       |       |
| General and administrative |       | 2,013                                       |       | 398                                         |       | 8,477                                     |       | 398                                       |       |
| Operating income           |       | 7,730                                       |       | 952                                         |       | 21,425                                    |       | 1,411                                     |       |
| Tax benefit                |       | —                                      |       | —                                      |       | —                                    |       | —                                    |       |
| Net income                 |       | $                                           | 7,730      |                                        | $          | 952                                       |       | $                                         | 21,425     |   | $ | 1,411 |   |

 

Total unrecognizedstock-based compensation expense expected to be recognized over an estimatedweighted-average amortization period of 2.70 years was $74.6 million at April30, 2006.

 

SFAS No. 123(R) alsorequires the benefits of tax deductions in excess of recognized compensationcost to be reported as a financing cash flow, rather than as an operating cashflow as required under APB 25 and related interpretations. This requirementreduced our net operating cash flows and increased our net financing cash flowsby $5.3 million during the first six months of fiscal 2006.  Our deferred compensation cost at October 31,2005 of $3.4 million, which was accounted for under APB 25, was reclassifiedinto additional paid-in capital as required under SFAS No. 123(R).  The cumulative effect related to outstandingrestricted stock awards as of October 31, 2005, which are not expected to vestbased on an estimate of forfeitures, was not material.

 

If we had not adoptedSFAS 123(R) on November 1, 2005, our net income before income taxes, dilutednet income attributable to common stockholders and our diluted netincome per share attributable to common stockholders would have been the following pro forma amounts:

 
| **(In thousands)**                                                | ** ** | **Three months ended  April 30, 2006** | ** ** | **Six months ended  April 30, 2006** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| Income before income taxes                                        |       | $                                           | 16,205     |                                      | $          | 42,002 |   |
| Diluted net income  attributable to common stockholders           |       | $                                           | 8,521      |                                      | $          | 25,910 |   |
| Diluted net income per  share attributable to common stockholders |       | $                                           | 0.02       |                                      | $          | 0.06 |   |

 

*StockPlans*

 

We currently have fivestock award plans that allow us to grant stock options, restricted stock,restricted units and other equity based awards to employees and consultants,and one stock option plan that allows us to grant stock options to members ofthe Board of Directors. All stock-based compensation awards are issued underone of these six stock award plans.  Whengranting stock options, we typically grant nonstatutory options at fair marketvalue on the date of grant. We also grant restricted stock and restricted stockunits.   These plans are discussed inmore detail in our fiscal 2005 Form 10-K, Note R.

 

*Time-Based Stock Awards*

 

Our weighted-averageassumptions used in the Black-Scholes valuation model for equity awards withtime-based vesting provisions granted during the second quarter and first sixmonths ended April 30, 2006 are shown below:

 
| ** **              | ** ** | **Three months ended  April 30, 2006** | ** ** | **Six months ended  April 30, 2006** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|
| Expected volatility     |       | 50%                                         |       | 50%                                            |       |
| Expected dividends      |       | 0%                                          |       | 0%                                             |       |
| Expected term           |       | 4 years                                     |       | 4  years                                       |       |
| Risk-free interest rate |       | 4.6 – 4.8%                             |       | 4.3  – 4.8%                               |       |

 

The expected volatilityrate was estimated based on equal weighting of the historical volatility ofNovell common stock over a four year period and the implied volatilities ofNovell common stock.  The expected termwas estimated based on our historical experience of exercise, cancellation, andexpiration patterns.  The risk-freeinterest rates are based on four year U.S. Treasury STRIPS.

 

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The pre-vestingforfeiture rate used for the six****months endedApril 30, 2006 was 10%, which was based on historical rates and forward-lookingfactors.  As required under SFAS No.123(R), we will adjust the estimated forfeiture rate to our actual experience.

 

A summary of thetime-based stock awards, which includes stock options and restricted stockunits, as of April 30, 2006, and changes during the six months then ended, isas follows:

 
| ** **                        | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term  (years)** | ** ** | **Aggregate  Intrinsic  Value  (000s)** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Stock Awards**                  | ** ** | ** **                 | ** ** | ** **                              | ** ** | ** **                                                    | ** ** | ** **                              | ** ** |
| Outstanding at November 1, 2005   |       | 47,042                     |       | $                                       | 6.68       |                                                          |       |                                    |       |   |
| Granted                           |       |                       |       |                                    |       |                                                          |       |                                    |       |
| Price equal to fair market value  |       | 1,667                      |       | $                                       | 8.38       |                                                          |       |                                    |       |   |
| Price less than fair market value |       | 3,994                      |       | $                                       | 0.00       |                                                          |       |                                    |       |   |
| Exercised                         |       | (3,996                     | )          | $                                       | 4.39       |                                                          |       |                                    |       |   |
| Forfeited or expired              |       | (2,731                     | )          | $                                       | 8.56       |                                                          |       |                                    |       |   |
| Outstanding at April 30, 2006     |       | 45,976                     |       | $                                       | 6.25       |                                                          | 4.76       |                                    | $          | 122,691 |   |
| Exercisable at April 30, 2006     |       | 30,404                     |       | $                                       | 6.82       |                                                          | 4.28       |                                    | $          | 65,805 |   |
|                                   |            |                            |            |                                         |            |                                                               |            |                                         |            |  |  |  |

 

The weighted-averagegrant-date fair value of time-based stock awards granted during the secondquarter and  first six months ended April30, 2006 was $6.68 and $6.07, respectively. The total intrinsic value of stock options exercised during the secondquarter and first six months ended April 30, 2006 was $5.1 million and $16.3million, respectively. As of April 30, 2006, there was $66.6 million ofunrecognized compensation cost related to time-based stock awards.  That cost is expected to be recognized over aweighted-average period of 2.73 years.

 

A summary of time-basedunvested restricted stock as of April 30, 2006, and changes during the sixmonths then ended, is as follows:

 
| ** **                    | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-  Average Grant Date Fair  Value** | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| **Unvested Restricted Stock** | ** ** | ** **                 | ** ** | ** **                                    | ** ** |
| Unvested at November 1,  2005 |       | 984                        |       | $                                             | 4.85       |   |
| Granted                       |       | 275                        |       | 8.33                                          |       |
| Vested                        |       | (100                       | )          | 3.64                                          |       |
| Forfeited                     |       | (20                        | )          | 7.33                                          |       |
| Unvested at April 30, 2006    |       | 1,139                      |       | $                                             | 5.77       |   |

 

As of April 30, 2006,there was $3.7 million of unrecognized compensation cost related to unvestedrestricted stock.  That cost is expectedto be recognized over a weighted-average period of one and a half years.  The total fair value of time-based restrictedstock that vested during the six months ended April 30, 2006 was $702,000.

 

*Performance-Basedand Market-Condition Awards*

 

We have issuedperformance-based equity awards to certain senior executives.  These awards have the potential to vest overone to four years upon the achievement of certain Novell-specific financialperformance goals, specifically related to the achievement of budgeted revenueand operating income targets in each fiscal year.  The performance-based options were granted atan exercise price equal to the fair market value of Novell common stock on thedate the option was legally granted and have a contractual life ranging fromtwo to eight years.

 

We have issuedmarket-condition equity awards to certain senior executives the vesting ofwhich is accelerated or contingent upon the price of Novell common stockmeeting certain pre-established stock price targets.  Certain of these awards will vest on thesixth anniversary of the grant date if the market-condition was not previously achieved.  The market-condition options are generallygranted at an exercise price equal to the fair market value of Novell commonstock on the date of the grant and have a contractual life of eight years.   No market-condition awards were grantedduring the six months ended April 30, 2006.

 

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The fair value of eachperformance-based and market-condition option was estimated on the grant dateusing the Black-Scholes option valuation model without consideration of theperformance measures or market conditions. The inputs for expected volatility, expected term, expected dividends,and risk-free interest rate used in estimating the fair value ofperformance-based awards in the six months ended April 30, 2006, are the sameas those noted above under time-based stock awards.

 

A summary of theperformance-based and market-condition awards as of April 30, 2006, and changesduring the six months then ended, is as follows:

 
| ** **                       | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term  (years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|----------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Stock Awards**                 | ** ** | ** **                 | ** ** | ** **                              | ** ** | ** **                                                    | ** ** | ** **                                      | ** ** |
| Outstanding at November 1,  2005 |       | 2,413                      |       | $                                       | 7.49       |                                                          |       |                                            |       |   |
| Granted                          |       | 535                        |       | $                                       | 8.29       |                                                          |       |                                            |       |   |
| Exercised                        |       | (85                        | )          | $                                       | 6.35       |                                                          |       |                                            |       |   |
| Forfeited or expired             |       | (115                       | )          | $                                       | 8.66       |                                                          |       |                                            |       |   |
| Outstanding at April 30,  2006   |       | 2,748                      |       | $                                       | 7.72       |                                                          | 6.45       |                                            | $          | 2,892 |   |
| Exercisable at April 30,  2006   |       | 1,295                      |       | $                                       | 6.54       |                                                          | 6.62       |                                            | $          | 2,433 |   |

 

The weighted-averagegrant-date fair value of options granted during the second quarter and firstsix months ended April 30, 2006 was $4.46. As of April 30, 2006, there was $3.2 million of unrecognizedcompensation cost related to performance-based and market-condition awards.  That cost is expected to be recognized over aweighted-average period of 2.7 years.

 

A status of the unvested,performance-based and market-condition restricted stock as April 30, 2006, andchanges during the six months then ended, is as follows:

 
| ** **                    | ** ** | **Shares  (in thousands)** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|
| **Unvested Restricted Stock** | ** ** | ** **                 | ** ** | ** **                                     | ** ** |
| Unvested at November 1,  2005 |       | 125                        |       | $                                              | 7.42       |   |
| Granted                       |       | 87                         |       | $                                              | 9.22       |   |
| Vested                        |       | (25                        | )          | $                                              | 7.35       |   |
| Forfeited                     |       | (7                         | )          | $                                              | 9.22       |   |
| Unvested at April 30, 2006    |       | 180                        |       | $                                              | 8.96       |   |

 

As of April 30, 2006,there was $1.0 million of unrecognized compensation cost related to unvested,performance-based and market-condition restricted stock.  That cost is expected to be recognizedratably over a one to four year period. No performance-based restricted stock vested during the six months endedApril 30, 2006.  The total fair value ofmarket-condition restricted stock that vested during the six months ended April30, 2006 was $227,500.

 

As of April 30, 2006,there were 736,618 stock awards that have been legally granted but have not yetbeen valued because all of the conditions necessary to establish the grant datefor SFAS No. 123(R) purposes have not yet occurred.  The grant date of these stock awards will notoccur until budgets are approved by our Board of Directors for the respective yearsspecified in the performance targets.

 

*CelerantStock Awards*

 

Duringthe first six months of fiscal 2006, Celerant granted 135,700 time-based stockawards with the following terms: one-third of the options vest each year and the options are exercisableafter five years from the date of grant, unless the employee leaves Celerant,in which case the vested options are subject to an earlier exercise date.  Upon adoption of SFAS No. 123(R), we applieda forfeiture rate of 16% to the Celerant option expense, which was based on historical rates.    As of April 30, 2006, there were 2.6million time-based options outstanding for Celerant stock, of which 1.8 millionwere exercisable, and 1.7 million performance-based options outstanding for Celerantstock, of which 0.2 million were exercisable. The performance-based options vest upon meeting specified financialperformance goals or five years from the date of grant, if the performancecriteria are not met.

 

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*Second Quarter and First SixMonths of Fiscal 2005*

 

For the second quarterand first six months ended April 30, 2005, had we accounted for all employeestock-based compensation based on the fair value method as prescribed by SFASNo. 123, our net income and net income (loss) per share would have been thefollowing pro forma amounts:

 
| **(in thousands, except per share data)**                                                                                         | ** ** | **Three months ended  April 30, 2005** | ** ** | **Six months ended  April 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| Net income (loss), as  reported                                                                                                   |       | $                                           | (15,627    | )                                         | $          | 379,534 |   |
| Less: total stock-based compensation expense determined under fair  value-based method for all awards, net of related tax effects |       | (12,809                                     | )          | (25,219                                   | )          |
| Add: total stock-based compensation expense recorded in the statement  of operations under APB 25                                 |       | 952                                         |       | 1,411                                     |       |
| Pro forma net income (loss)                                                                                                       |       | $                                           | (27,484    | )                                         | $          | 355,726 |   |
| Net  income (loss) per share available to common stockholders:                                                                    |       |                                        |       |                                      |       |
| As reported basic                                                                                                                 |       | $                                           | (0.04      | )                                         | $          | 0.99 |   |
| Pro forma basic                                                                                                                   |       | $                                           | (0.07      | )                                         | $          | 0.93 |   |
| As reported diluted                                                                                                               |       | $                                           | (0.04      | )                                         | $          | 0.87 |   |
| Pro forma diluted                                                                                                                 |       | $                                           | (0.07      | )                                         | $          | 0.81 |   |

 

For the purpose of theabove table, the fair value of each option grant was estimated as of the dateof grant using the Black-Scholes option pricing model with the followingweighted-average assumptions used for grants in the second quarter and firstsix months of fiscal 2005: a risk-free interest rate of approximately 4.01% and3.90%; a dividend yield of 0% in both periods; a weighted-average expected lifeof 3.97 years and 4.47 years; and a volatility rate of 0.49 and 0.57,respectively. The expected volatility was estimated using the historicalvolatility over a period of five years. The weighted-average fair value of options granted in the second quarterand first six months of fiscal 2005 was $2.45 and $3.03.

 

*EmployeeStock Purchase Plan*

 

Subsequent to theissuance of SFAS No. 123(R), we amended and re-introduced our Employee StockPurchase Plan (“ESPP”).  The amended ESPPeliminated the “look back” feature of the plan and reduced the purchasediscount to 5% off of the end of offering period stock price.  As a result of these amendments, our ESPP isconsidered non-compensatory under SFAS No. 123(R) and, accordingly, nocompensation expense has been recorded for issuances under the ESPP.

 

**S.Segment Information**

 

We operate and report ourfinancial results in four operating segments: three are based on geographicareas and the fourth is Celerant consulting. Our performance is evaluated by our Chief Executive Officer and ourother chief decision makers based on reviewing revenue and segment operatingincome (loss) information for each segment.

 

The geographic segmentsare:

 

•                  Americas — includes the United States, Canada and Latin America

 

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

 

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

 

Prior to fiscal 2006,Latin America and Japan were separate operating segments.  All segment information has been recast toconform to the new segment presentation.

 

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All geographic segmentssell our software and services. These offerings are sold in the United Statesdirectly and through original equipment manufacturers, resellers, anddistributor channels, and internationally directly and through originalequipment manufacturers and distributors who sell to dealers and end users.Operating results by segment are as follows:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **April 30, 2006**     | ** ** | **April 30, 2005** | ** ** |
| **(in thousands)**                           | ** ** | **Net revenue**   | ** ** | **Operating****income (loss)** | ** ** | **Net revenue** | ** ** | **Operating****income (loss)** | ** ** |
| Americas                                     |       | $                      | 129,344    |   | $ | 62,988 |   | $ | 130,565 |   | $ | 64,744 |   |
| EMEA                                         |       | 86,580                 |       | 26,448 |   | 99,044 |   | 24,410 |   |
| Asia Pacific                                 |       | 22,802                 |       | 5,774 |   | 23,535 |   | 5,554 |   |
| Common unallocated  operating (costs) income |       | —                 |       | (92,887 | ) | — |   | (104,449 | ) |
| Stock-based compensation  expenses           |       | —                 |       | (7,662 | ) | — |   | (952 | ) |
| Total geographic segments                    |       | 238,726                |       | (5,339 | ) | 253,144 |   | (10,693 | ) |
| Celerant consulting                          |       | 39,590                 |       | 2,871 |   | 43,907 |   | 4,291 |   |
| Stock-based compensation  expenses           |       | —                 |       | (68 | ) | — |   | — |   |
| Total Celerant consulting                    |       | 39,590                 |       | 2,803 |   | 43,907 |   | 4,291 |   |
| Total per statements of operations           |       | $                      | 278,316    |   | $ | (2,536 | ) | $ | 297,051 |   | $ | (6,402 | ) |

 
| ** **                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **April 30, 2006**   | ** ** | **April 30, 2005** | ** ** |
| **(in thousands)**                           | ** ** | **Net revenue** | ** ** | **Operating****income (loss)** | ** ** | **Net revenue** | ** ** | **Operating****income (loss)** | ** ** |
| Americas                                     |       | $                    | 263,121    |   | $ | 131,509 |   | $ | 259,548 |   | $ | 131,620 |   |
| EMEA                                         |       | 175,416              |       | 56,666 |   | 194,595 |   | 45,606 |   |
| Asia Pacific                                 |       | 42,483               |       | 8,095 |   | 45,080 |   | 10,418 |   |
| Common unallocated  operating (costs) income |       | —               |       | (179,178 | ) | — |   | 249,533 |   |
| Stock-based compensation  expenses           |       | —               |       | (21,164 | ) | — |   | (1,411 | ) |
| Total geographic segments                    |       | 481,020              |       | (4,072 | ) | 499,223 |   | 435,766 |   |
| Celerant consulting                          |       | 71,704               |       | 2,283 |   | 87,956 |   | 7,397 |   |
| Stock-based compensation  expenses           |       | —               |       | (261 | ) | — |   | — |   |
| Total Celerant consulting                    |       | 71,704               |       | 2,022 |   | 87,956 |   | 7,397 |   |
| Total per statements of operations           |       | $                    | 552,724    |   | $ | (2,050 | ) | $ | 587,179 |   | $ | 443,163 |   |

 

Common unallocatedoperating (costs) income include corporate services common to all geographicsegments such as corporate sales and marketing, product development, corporategeneral and administrative costs, corporate infrastructure costs, andlitigation settlement income or expense.  For management reporting purposes, Celerant consulting does not receivean allocation for these corporate services.  In addition, common unallocated operating (costs)income in the first three months of fiscal 2005 also includes a $447.6 millionnet gain on settlement of potential litigation with Microsoft. Stock-basedcompensation expenses have not been allocated for management reporting purposes

 

In addition to reviewinggeographic and Celerant consulting segment results, our Chief Executive Officerand chief decision makers review net revenue by solution category. Thesesolution categories are:

 

•                  Systems, security, and identity management (formerly Identity-drivencomputing solutions).  Sub-categoriesinclude:

•                  Resource management— major products include ZENworks

•                  Identity and access management— major products includeIdentity Manager, Secure Login, iChain, and Sentinel

•                  Other systems, security, and identity managementproducts — major products include eDirectory and web services

 

•                  Open platform solutions. Sub-categories include:

•                  Open Enterprise Server (OES)

•                  Linux platform products — major products include SUSELINUX Enterprise Server and Novell Linux Desktop

•                  Other open platform products — major products includeSUSE LINUX Professional

 

•                  Workspace solutions. Sub-categories include:

•                  NetWare and other NetWare-related — major productsinclude NetWare and Cluster Services

•                  Collaboration — major products include GroupWise

•                  Other workspace — major products include BorderManagerand Novell iFolder

 

•   Globalservices and support — comprehensive worldwide IT consulting, training, andtechnical support services that apply business solutions to our customers’business situations, providing the business knowledge and technical expertiseto help our customers implement our technology.

 

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•                  Celerant consulting — operationalstrategy and implementation consulting services offered to a wide range ofcustomers across various sectors, worldwide.

 

Prior to fiscal 2006,Open platform solutions and Workspace solutions were combined in a category calledLinux and platform services solutions. Prior periods have been recast to conform to the new presentation.  Net revenue by solution category and Celerantconsulting are as follows:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(in thousands)**                                        | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005**  | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** |
| Resource management                                       |       | $                      | 33,799     |                 | $          | 31,329 |   | $ | 66,957 |   | $ | 61,298 |   |
| Identity and access management                            |       | 22,347                 |       | 16,256               |       | 47,895 |   | 34,110 |   |
| Other systems, security, and identity management products |       | 5,061                  |       | 5,170                |       | 9,358 |   | 10,005 |   |
| Systems, security, and identity management                |       | 61,207                 |       | 52,755               |       | 124,210 |   | 105,413 |   |
| Open Enterprise Server                                    |       | 45,719                 |       | 7,827                |       | 88,831 |   | 7,827 |   |
| Linux platform products                                   |       | 10,307                 |       | 8,606                |       | 20,689 |   | 17,099 |   |
| Other open platform products                              |       | 1,101                  |       | 3,541                |       | 3,846 |   | 9,080 |   |
| Open platform solutions                                   |       | 57,127                 |       | 19,974               |       | 113,366 |   | 34,006 |   |
| NetWare and other NetWare-related                         |       | 11,566                 |       | 60,463               |       | 29,822 |   | 129,210 |   |
| Collaboration                                             |       | 22,830                 |       | 23,656               |       | 46,507 |   | 47,996 |   |
| Other workspace products                                  |       | 7,210                  |       | 8,879                |       | 12,621 |   | 14,785 |   |
| Workspace solutions                                       |       | 41,606                 |       | 92,998               |       | 88,950 |   | 191,991 |   |
| Total software licenses and maintenance                   |       | 159,940                |       | 165,727              |       | 326,526 |   | 331,410 |   |
| Global services and support                               |       | 78,786                 |       | 87,417               |       | 154,494 |   | 167,813 |   |
| Total IT software and solutions                           |       | 238,726                |       | 253,144              |       | 481,020 |   | 499,223 |   |
| Celerant consulting                                       |       | 39,590                 |       | 43,907               |       | 71,704 |   | 87,956 |   |
| Total net revenue                                         |       | $                      | 278,316    |                 | $          | 297,051 |   | $ | 552,724 |   | $ | 587,179 |   |
|                                                           |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

For the second quartersof fiscal 2006 and 2005, revenues in the United States were $121.0 million and$127.7 million, respectively.  Revenuesfrom customers outside the United States were $157.3 million and $169.4 millionin the second quarters of fiscal 2006 and 2005, respectively.  For the second quarters of fiscal 2006 and 2005,74% and 76%, respectively, of our revenues outside the United States were inEMEA. During the second quarter of fiscal 2006, sales to customers in theUnited Kingdom accounted for 11% of our net revenue. During thesecond quarter of fiscal 2005, sales to customers in the United Kingdomaccounted for 12% of our net revenue. No single customer accounted for more than 10% of ourtotal revenue for any period presented.

 

For the first six monthsof fiscal 2006 and 2005, revenues in the United States were $244.0 million and$250.2 million, respectively.  Revenuesfrom customers outside the United States were $308.7 million and $337.0 millionin the first six months of fiscal 2006 and 2005, respectively.  For the first six months of fiscal 2006 and2005, 74% and 77%, respectively, of our revenues outside the United States werein EMEA. During the first six months of fiscal 2006, sales to customers in theUnited Kingdom accounted for 10% of our net revenue. During thefirst six months of fiscal 2005, sales to customers in the United Kingdomaccounted for 11% of our net revenue. No single customer accounted for more than 10% of ourtotal revenue for any period presented.

 

**T.Derivative Instruments**

 

A large portion of ourrevenue, expense, and capital purchasing activities is transacted in U.S.dollars. We do not currently hedge currency risks related to revenue orexpenses denominated in foreign currencies. However, we hedge currency risks ofsome assets and liabilities denominated in foreign currencies to protectagainst reductions in value caused by changes in foreign exchange rates. Wehave established balance sheet and intercompany hedging programs that useone-month foreign currency forward contracts, primarily on the Euro, BritishPound, and certain other European, Latin American, and Asian currencies.

 

We enter into theseone-month hedging contracts two business days before the end of each month andsettle them at the end of the following month. Due to the short period of timebetween entering into the forward contracts and the quarter-end, the fair valueof the derivatives as of April 30, 2006 is insignificant. Gains and lossesrecognized during a quarter on these foreign currency contracts are recorded asother income or expense and generally offset corresponding gains and losses onthe underlying hedged assets and liabilities, resulting in negligible effect toour financial statements.

 

**U.  Share Repurchase Program**

 

On September 22, 2005, ourboard of directors approved a share repurchase program for up to $200.0 millionof our common stock through September 21, 2006. On April 4, 2006, our board ofdirectors approved an amendment to the share repurchase program increasing thelimit on repurchase from $200.0 million to $400.0 million and extending theprogram through April 3, 2007.  As of 

 

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April 30, 2006, 35.2 millionshares of common stock had been repurchased and retired under this program atan average price of $7.59 per share.  Thetotal amount paid for the repurchase of our common stock was $267.5million.  Subsequent to April 30, 2006,we completed the share repurchase program by purchasing 16.3 million additionalshares at a total cost of $132.5 million.

 

**V.   Subsequent Events**

 

OnMay 24, 2006, we sold our shares in Celerant consulting to a group comprised ofCelerant management and Caledonia Investments plc for $77.0 million incash.  There will be no furthershareholding or operational relationship between us and Celerant goingforward.  The sale of Celerantconsulting does not have an impact on our IT consulting business.  We anticipate recording a gain, for bookpurposes, of approximately $12.0 to $14.0 million on the sale of Celerant.  We will begin classifying Celerant’s resultsof operations and cash flows as discontinued operations in our consolidatedstatement of operations beginning in our third quarter of fiscal 2006.

 

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** **

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (“MD&A”) and other parts of this Form 10-Q containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Act of 1934, asamended. All statements, other than statements of historical fact, regardingour strategy, future operations, financial position, estimated revenue,projected costs, projected savings, prospects, plans, opportunities, andobjectives constitute “forward-looking statements.” The words “may,” “will,” “expects,”“plans,” “anticipates,” “believe,” “estimates,” “potential,” or “continue” andsimilar types of expressions identify such statements, although not allforward-looking statements contain these identifying words. These statementsare based upon information that is currently available to us and/or management’sexpectations, speak only as of the date hereof, and are subject to risks anduncertainties. We expressly disclaim any obligation, except as required by law,or undertaking to update or revise forward-looking statements contained hereinto reflect any change or expectations with regard thereto or to reflect anychange in events, conditions, or circumstances on which any suchforward-looking statement is based, in whole or in part. Our actual results maydiffer materially from the results discussed in or implied by suchforward-looking statements. We are subject to a number of risks, some of whichmay be similar to those of other companies of similar size in our industry,including pre-tax losses, rapid technological changes, competition, limitednumber of suppliers, customer concentration, failure to successfully integrateacquisitions, adverse government regulations, failure to manage internationalactivities, and loss of key individuals. Risks that may affect our operatingresults include, but are not limited to, those discussed in the “Risk Factors”section of our Annual Report on Form 10-K for fiscal 2005 filed with theSecurities and Exchange Commission on January 10, 2006.*

 

**Introduction**

 

Novell designs, develops,maintains, implements, and supports proprietary and open source software foruse in business solutions. With approximately 5,300 employees globally(approximately 4,800 without Celerant), we help our worldwide customers manage,simplify, secure and integrate their technology environments by leveragingbest-of-breed, open source and open standards-based software. With over 20 yearsof experience, our employees, partners and support centers around the worldhelp customers gain control over their information technology (“IT”) operatingenvironments while reducing the cost, complexity, and vulnerabilities of thoseenvironments. We provide security and identity management, resource management,desktop, workgroup, and data center solutions on several operating systems,including Linux, NetWare(R), Windows, and Unix. All of our solutions aresupported by our global services and support, including consulting, trainingand technical support services.

 

We deliver this value to ourcustomers by developing, maintaining and delivering information solutions inthe following categories:

 

*Systems,security, and identity management ( formerly called Identity-driven computingsolutions).*  Our systems,security, and identity management products include applications that offer abroad set of capabilities that manage resources, assets, and people through theassignment of digital identities, including the following:

 

•             resource managementcapabilities for both desktop and server environments;

 

•             provisioning andde-provisioning capabilities; and

 

•             secure authentication andauthorization services.

 

We believe that customershave recognized the need to manage the access, utilization and optimization ofassets through information systems that can help them understand, implement andadminister business policies, not only within organizations, but also betweenorganizations and their customers and trading partners. Our software solutionsenable organizations to balance growing user demands for services andinformation with demands for increased security and agility. By using ourproducts, customers can integrate business processes and systems, extendingthem within and across enterprise boundaries to interact with customers,employees, suppliers and partners. This affords organizations the opportunityto make changes to their business operations without incurring the cost ofconstantly changing individual software application components.

 

These identity-basedtechnologies not only regulate user access to data and applications, but areincreasingly becoming the basis for securing and managing other informationassets, including devices such as mobile phones and the components that make uptoday’s modern data centers. We believe that identity management willincreasingly become the preferred means by which businesses will efficientlyutilize all IT assets, and we have developed products for this market to helpour customers take advantage of these opportunities. These products can bedeployed across a number of systems, including Linux, Unix, NetWare, andWindows, recognizing the heterogeneous nature of today’s IT departments. Ourdevelopment strategy has been to develop systems, security and identitymanagement technologies as a set of discrete software services that can bedeployed as needed, as opposed to the use of a single monolithic applicationthat can take years to implement and deploy without any immediate businessbenefit.

 

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*Openplatform solutions and workspace solutions.*  Both our open platform solutions andworkspace solutions categories include solutions that offer effective and openapproaches to networking and collaboration services, including file, print,messaging, scheduling, and workspace while using a cross-platformapproach.  Both consist of operatingsystems, network services, and workgroup computing software solutions. We offertwo major operating system platforms, SUSE(R) Linux Enterprise Server andNetWare.

 

Our open platform solutionscategory is comprised of our offerings based on Linux, Open Enterprise Sever (“OES”)and other related products. These solutions provide the foundation for value addednetwork and workspace computing solutions deployed on both servers anddesktops. OES consists of enterprise-ready, scalable networking andcollaboration services — including file, print, messaging, scheduling anddirectory-based management modules that allow customers to manage theircomputing environment from a single, central console deployed on either of ourmajor operating systems platforms.

 

A major focus of our openplatform solutions is to embrace and promote open source computing. Open sourceis a term used to describe software source code that generally allows free use,modification, and distribution of source code, subject to certain conditions.Open source software is generally built by a community of developers, many ofwhom are unaffiliated with each other. Corporations also fund open sourceprojects or contribute code into open source to further assist the developmentefforts. We believe that a major shift toward the use of open source softwareis underway as companies are more critically evaluating the cost effectivenessof their information technology investments, seeing value in having access tothe source code, and looking for ways to avoid vendor lock-in.

 

We believe that we areuniquely positioned to drive the transition to greater use of open sourcesoftware, as well as to benefit from this trend. Widespread adoption of Linuxand open source software was initially hindered by weak technical support, ashortcoming that we are particularly well positioned to address. We leverageour financial stability, experience, and global services and supportcapabilities to help our customers integrate Linux and other open sourcesoftware into their existing IT environments. While the flexibility and costsavings of Linux and open source have made it attractive to enterprisecustomers, we believe they continue to look to proprietary software vendors toprovide applications, management and security. With our SUSE Linux EnterpriseServer open source platform and our other Linux and platform services solutions,our customers can deploy the best of proprietary and open source software thatmany businesses find more attractive. As an example, our GroupWise productallows customers to collaborate seamlessly across their Windows and Linuxenvironments. We also provide solutions allowing IT managers to centrallycontrol Linux, NetWare and Windows systems in a consistent and straightforwardway.

 

Our workspace solutionscategory is comprised of proprietary software products that provide customerswith powerful solutions that are designed to operate within existingheterogeneous computing environments as well as to provide tools and strategiesto allow easy migration between platforms to fit better with our customers’technology plans.  Our primary serverproduct in this solution category is NetWare. Our workspace solutions category also includes our GroupWise andcollaboration technologies, Cluster Services, and BorderManager.

 

*Globalservices and support.*  Weprovide worldwide IT consulting, training and technical support services toaddress our customers’ needs. Our worldwide IT consulting practice provides thebusiness knowledge and technical expertise our customers need to implement andachieve maximum benefit from our products and solutions. We also offer opensource and identity-driven services that are focused on aiding our clients inrapidly integrating applications or migrating existing platforms to Linux.

 

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

 

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

 

*Celerantconsulting.*  Celerant, amajority-owned subsidiary of Novell, provides value-based, operational strategyand implementation consulting services to a wide variety of customers mainly inEurope and the United States. Celerant specializes in improving the valuederived from existing business processes by accelerating time to value andeliminating non-value creating activities. On May 24, 2006, we sold our shares in Celerant consulting to a groupcomprised of Celerant management and Caledonia Investments plc for $77.0million in cash.

 

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**Overview**

 

With respect to the U.S. economy, spendingcontinues to improve in many of the areas of IT that we target such assecurity, regulatory compliance and server/function consolidation. We believethat strategic IT security projects put on hold in previous years are now beingapproved. Overall, increased IT funding is helping to attract new Linux andidentity management business, which is driven by an increased focus on gainingefficiencies and lowering expenses.  Sales cycles of our products and services are still relatively long,with customers frequently requiring a product pilot before a larger purchase willoccur.

 

Internationally,following a period of sluggish growth, the European area of our EMEA segment isshowing signs of recovery, particularly in the government sector.  However, market spending is still below ourexpectations with long sales cycles and a clear focus on IT cost savings.Consolidation of platforms and security remain high priority items for ourcustomers. Our EMEAsegment remains a focus for our management and we expect to face continuedfinancial challenges in that region. The economy in Asia Pacific, includingJapan, is mixed as some regions continue to struggle with core economic issuesand others are growing at or above global rates.

 

We continued to make progress on our keyinitiatives this quarter.

 

•     Oneof our most important initiatives is to increase revenue from our Linux andopen source product offerings.  Revenuesfrom our Linux platform products increased 20% during the second quarter offiscal 2006 over the same period in the prior year. This quarter we announced our next-generation platformfor the open enterprise, SUSE Linux Enterprise 10.  With enhanced performance, scalability,security and usability, SUSE Linux Enterprise 10 is the basis for all of Novell’snext-generation enterprise Linux offerings, including SUSE Linux EnterpriseServer and the recently announced SUSE Linux Enterprise Desktop. SUSE LinuxEnterprise Desktop and Server offerings are scheduled to be available in thesecond half of calendar 2006.  We alsointroduced the first workgroup suite for the open enterprise, the Novell OpenWorkgroup Suite, which includes server and desktop components with robustmanagement tools, e-mail, collaboration and the most advanced open sourceoffice products in the market.  Strengthening our position as a leader indriving open source software adoption, we announced a near doubling in the sizeof our Market Start program in the second fiscal quarter.  Launched in2005 to accelerate open source adoption worldwide, Market Start givesenterprise open source companies access to Novell’s global sales and marketingchannels to bring their solutions to the marketplace.

 

•     Wecontinued to grow our positions in the resource management and identity marketsby offering the most comprehensive products that address customer problems in theareas of security, compliance, risk mitigation and systems management. Ourunique role-based, policy-driven approach has been well received, and wecontinue to experience strong growth in our identity and access managementcategory, with large enterprise deals driving license growth.  To further expand our lead in this market, weentered the security management market via the acquisition of e-Security in thesecond quarter of fiscal 2006. e-Security is a leader in compliance monitoring and reporting capabilities,producing the enterprise-class security information and event managementproduct Sentinel 5.  We expect revenuegrowth and strong performance in our systems, security and identity managementareas throughout the remainder of fiscal 2006.

 

•     Wecontinued efforts to stabilize the decline of our revenue from traditionalproducts, such as NetWare. Our traditional revenue base is an important sourceof cash flow and a potential opportunity for us to sell more products andservices. Novellrecognizes the need to continue supporting its loyal NetWare customers, andduring our second fiscal quarter we reiterated our commitment to NetWare byreminding customers that Novell can and will support NetWare 6.5 for as long ascustomers choose to run it.  With therelease of our OES product in March 2005, we have taken steps to help maintainthat installed base and address revenue declines of these products.Nevertheless, our combined NetWare and OES business declined 16% during thesecond quarter of fiscal 2006 compared to the same period in the prioryear.  We continue to work with ourcustomers to help them migrate from NetWare and other platforms of ourcompetitors to OES using tools, training and education emphasizing the returnon investment of upgrading to Linux versus proprietary platforms.

 

•     Aswe have discussed in the past, we have re-architected our go to market plans,selecting key geographies in which to deploy our resources and clearly definingour partner and channel strategy.  Inaddition, we have restructured our sales incentive plans to motivate our directsales and channel partners to focus on key product areas globally.  Now we are focused on executing on thoseplans.

 

On May 24, 2006, we completed the sale of ourmajority-owned management consultancy subsidiary, Celerant, for $77.0 millionin cash to a group comprised of Celerant management and Caledonia Investmentsplc.  We acquired Celerant as part of ourpurchase of Cambridge Technology Partners in 2001.  The sale was the result of our previouslyannounced plan to explore strategic alternatives for Celerant. There will be nofurther shareholding or operational relationship between us and Celerant goingforward.  With the sale of our interestin Celerant, we will focus on our core businesses of Linux and open source;systems, security and identity 

 

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management; and workgroup computing. The Celerant divestiture has noimpact on our existing IT consulting business. We will continue to offer IT consultingservices around its core businesses.

 

**Resultsof Operations**

 

*CriticalAccounting Policies*

 

*Share-basedPayment*

 

OnNovember 1, 2005, we adopted SFAS No. 123(R), “Share-Based Payment,” which requires us to account forshare-based payment transactions using a fair value-based method and recognizethe related expense in the results of operations.  Prior to our adoption of SFAS No. 123(R), aspermitted by SFAS No. 123, we accounted for share-based payments to employeesusing the APB No. 25, “Accounting for Stock Issued to Employees,” intrinsicvalue method and, therefore, we generally recognized compensation expense forrestricted stock awards and did not recognize compensation cost for employeestock options.  SFAS No. 123(R) allows companies tochoose one of two transition methods: the modified prospective transitionmethod or the modified retrospective transition method. We chose to use themodified prospective transition methodology, and, accordingly, we have notrestated the results of prior periods.

 

Under the fair valuerecognition provisions of SFAS No. 123(R), stock-based compensation cost isestimated at the grant date based on the fair value of the award and isrecognized as expense over the requisite service period of the award.  The fair value of restricted stock awards isdetermined by reference to the fair market value of our common stock on thedate of grant.  Consistent with thevaluation method we used for disclosure-only purposes under the provisions ofSFAS No. 123, we use the Black-Scholes model to value service condition andperformance condition option awards under SFAS No. 123(R).  For awards with market conditions grantedsubsequent to our adoption of SFAS No. 123(R), we use a lattice valuation modelto estimate fair value. For awards with only service conditions andgraded-vesting features, we recognize compensation cost on a straight-linebasis over the requisite service period. For awards with performance or market conditions granted subsequent toour adoption of SFAS No. 123(R), we recognize compensation cost based on thegraded-vesting method.

 

Determining the appropriatefair value model and related assumptions requires judgment, includingestimating stock price volatility, forfeiture rates, and expected terms.  The expected volatility rates are estimatedbased on historical and implied volatilities of our common stock.  The expected term represents the average timethat options that vest are expected to be outstanding based on the vesting provisionsand our historical exercise, cancellation and expiration patterns.  We estimate pre-vesting forfeitures whenrecognizing compensation expense based on historical rates and forward-lookingfactors. We will update these assumptions at least on an annual basis and on aninterim basis if significant changes to the assumptions are warranted.

 

We issue performance-basedequity awards, typically to certain senior executives, which vest upon theachievement of contingent upon meeting certain financial performance goals,including revenue and income targets.   Determining the appropriate amount to expense based on the anticipatedachievement of the stated goals requires judgment, including forecasting futurefinancial results.  The estimated expenseis revised periodically based on the probability of achieving the requiredperformance targets and adjustments are made as appropriate.  The cumulative impact of any revision isreflected in the period of change.  Ifthe financial performance goals are not met, the award does not vest, so nocompensation cost is recognized and any previously recognized compensation costis reversed.

 

In the past, we have issuedmarket condition equity awards, typically granted to certain senior executives,the vesting of which is accelerated or contingent upon the price of Novellcommon stock meeting specified pre-established stock price targets.  For awards granted prior to our adoption ofSFAS No. 123(R), the fair value of each market condition award was estimated asof the grant date using the same option valuation model used for time-basedoptions without regard to the market condition criteria.  As a result of our adoption of SFAS No.123(R), compensation cost is recognized over the estimated requisite serviceperiod and is not reversed if the market condition target is not met.   If the pre-established stock price targetsare achieved, any remaining expense on the date the target is achieved isrecognized either immediately or, in situations where there is a remainingminimum time vesting period, ratably over that period.

 

28

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*Acquisitionsand Equity Investments*

 

*e-Security*

 

On April 19, 2006, we acquired 100% of the outstandingstock of e-Security, Inc., a privately held company headquartered in Vienna,Virginia.  e-Security provides securityinformation, event management and compliance software. e-Security’s productsare now part of our identity and access management sub-category. The purchaseprice was approximately $71.7 million in cash, plus transaction costs of $1.1million. e-Security’s results of operations have been included in ourconsolidated financial statements beginning on the acquisition date.

 

*OpenInvention Network, LLC*

 

InNovember 2005, OIN was established by us, IBM, Philips, Red Hat and Sony.  OIN is a privately held company that has andwill acquire patents to promote Linux and open source by offering its patentson a royalty-free basis to any company, institution or individual that agreesnot to assert its patents against the Linux operating system or certainLinux-related applications.  In addition,OIN, in its discretion, will enforce its patents to the extent it believes suchaction will serve to further protect and promote Linux and open source.  Each party contributed capital with a fairvalue of $20.0 million to OIN.  Weaccount for our 20% ownership interest using the equity method ofaccounting.  Our $20.0 millioncontribution consisted of patents with a fair value of $15.8 million, including$0.3 million of prepaid acquisition costs, and cash of $4.2 million.  At the time of the contribution, the patentshad a book value of $14.4 million, including $0.3 million of prepaidacquisition costs.  The $1.4 milliondifference between the fair value and book value of the patents will beamortized to our investment in OIN account and equity income over the remainingestimated useful life of the patents, which is approximately nine years. Ourinvestment in OIN of $18.7 million is classified as other assets in theconsolidated balance sheet.

 

*OnwardNovell*

 

In December 2005, weacquired the remaining 50% ownership of our sales and marketing joint venturein India from our joint venture partner for approximately $7.5 million in cashand other consideration. At October 31, 2005, $7.5 million of our cash was heldin an escrow account for the acquisition and classified as other assets in theconsolidated balance sheet. The cash was paid out of the escrow account duringthe first quarter of fiscal 2006. At the time of the acquisition, the net bookvalue of the minority interest was $5.3 million.  The $2.0 million difference between the netbook value of the minority interest and the amount we paid for the remaining50% ownership was recorded as goodwill.

 

*Revenue*

 

We sell our products,services, and solutions primarily to corporations, government entities,educational institutions, resellers and distributors both domestically andinternationally. In the consolidated statements of operations, we categorizerevenue as software licenses or maintenance and services. Software licensesrevenue includes sales of proprietary licenses, upgrade licenses and certainroyalties. Maintenance and services revenue includes all other revenue,including Linux subscriptions and upgrade protection contracts.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|----------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)** | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Software licenses          |       | $                      | 40,063     |                | $          | 45,768               |       | (12                 | )%         | $ | 82,165 |   | $ | 90,064 |   | (9 | )% |
| Maintenance and services   |       | 238,253                |       | 251,283             |       | (5                   | )%         | 470,559             |       | 497,115 |   | (5 | )% |
| Total net revenue          |       | $                      | 278,316    |                | $          | 297,051              |       | (6                  | )%         | $ | 552,724 |   | $ | 587,179 |   | (6 | )% |

 

Software licenses revenuedecreased in the second quarter and first six months of fiscal 2006 compared tothe same periods of fiscal 2005 primarily due to more of our customerspurchasing under multiple product, multiple year subscriptions, which we recordas maintenance and services revenue, as well as declines in our installed basemainly due to NetWare.

 

The decrease inmaintenance and services revenue during the second quarter of fiscal 2006compared to the same period of fiscal 2005 is primarily due to a decrease in ITconsulting and services revenue of $10.1 million that was expected as a resultof the restructuring plan we established in the fourth quarter of fiscal 2005and a $4.3 million decrease in Celerant revenue.  The decrease in maintenance and servicesrevenue during the first six months of fiscal 2006 compared to the same periodof fiscal 2005 is primarily due to a $16.3 million decrease in Celerant revenuedue to poor performance and effect of foreign exchange rates and a $15.6million decrease in IT consulting and services revenue that was expected as aresult of the restructuring plan we established in the fourth quarter of fiscal2005.  The decreases in the secondquarter and first six months of fiscal 2006 were offset somewhat by increasedmaintenance revenue, including subscriptions.  The change in the mix of our revenue towards more maintenance andsubscription contracts has also driven an increase in revenue in themaintenance and services category compared to the software licenses category.

 

29

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Overall, foreign currencyexchange rates decreased revenue in the second quarter and first six months offiscal 2006 by approximately $6.2 million and $13.0 million, respectively,compared to the same period in fiscal 2005 due to a stronger U.S. dollar.

 

We also analyze revenue bysolution categories. These solution categories are:

 

•                  Systems, security, and identitymanagement (formerly Identity-driven computing solutions).  Sub-categories include:

•                  Resource management— major products include ZENworks

•                  Identity and access management— major products includeIdentity Manager, Secure Login, iChain and Sentinel

•                  Other systems, security, and identity managementproducts — major products include eDirectory and web services

 

•                  Open platform solutions.  Sub-categories include:

•                  Open Enterprise Server (“OES”)

•                  Linux platform products — major products include SUSELINUX Enterprise Server and Novell Linux Desktop

•                  Other open platform products — major products includeSUSE LINUX Professional

 

•                  Workspace solutions.  Sub-categories include:

•                  NetWare and other NetWare-related — major productsinclude NetWare and Cluster Services

•                  Collaboration — major products include GroupWise

•                  Other workspace — major products include BorderManagerand Novell iFolder

 

•                   Global services and support— comprehensive IT consulting, training, and technical support services thatapply business solutions to our customers’ business situations, providing thebusiness knowledge and technical expertise to help our customers implement ourtechnology.

 

•                  Celerant consulting — operationalstrategy and implementation consulting services offered to a wide range ofcustomers across various sectors, worldwide.

 

Prior to fiscal 2006,Open platform solutions and Workspace solutions were combined in a categorycalled Linux and platform services solutions.

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                                | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Resource management                                       |       | $                      | 33,799     |                | $          | 31,329               |       |                |       | $ | 66,957 |   | $ | 61,298 |   |   |   |   |
| Identity and access management                            |       | 22,347                 |       | 16,256              |       |                 |       | 47,895              |       | 34,110 |   |   |   |
| Other systems, security, and identity management products |       | 5,061                  |       | 5,170               |       |                 |       | 9,358               |       | 10,005 |   |   |   |
| Systems, security and identity management                 |       | 61,207                 |       | 52,755              |       | 16                   | %          | 124,210             |       | 105,413 |   | 18 | % |
| Open Enterprise Server                                    |       | 45,719                 |       | 7,827               |       |                 |       | 88,831              |       | 7,827 |   |   |   |
| Linux platform products                                   |       | 10,307                 |       | 8,606               |       |                 |       | 20,689              |       | 17,099 |   |   |   |
| Other open platform products                              |       | 1,101                  |       | 3,541               |       |                 |       | 3,846               |       | 9,080 |   |   |   |
| Open platform solutions                                   |       | 57,127                 |       | 19,974              |       | 186                  | %          | 113,366             |       | 34,006 |   | 233 | % |
| NetWare and other NetWare-related                         |       | 11,566                 |       | 60,463              |       |                 |       | 29,822              |       | 129,210 |   |   |   |
| Collaboration                                             |       | 22,830                 |       | 23,656              |       |                 |       | 46,507              |       | 47,996 |   |   |   |
| Other workspace products                                  |       | 7,210                  |       | 8,879               |       |                 |       | 12,621              |       | 14,785 |   |   |   |
| Workspace solutions                                       |       | 41,606                 |       | 92,998              |       | (55                  | )%         | 88,950              |       | 191,991 |   | (54 | )% |
| Total software licenses and maintenance                   |       | 159,940                |       | 165,727             |       |                 |       | 326,526             |       | 331,410 |   |   |   |
| Global services and support                               |       | 78,786                 |       | 87,417              |       | (10                  | )%         | 154,494             |       | 167,813 |   | (8 | )% |
| Total IT software and solutions                           |       | 238,726                |       | 253,144             |       |                 |       | 481,020             |       | 499,223 |   |   |   |
| Celerant consulting                                       |       | 39,590                 |       | 43,907              |       | (10                  | )%         | 71,704              |       | 87,956 |   | (18 | )% |
| Total net revenue                                         |       | $                      | 278,316    |                | $          | 297,051              |       | (6                  | )%         | $ | 552,724 |   | $ | 587,179 |   | (6 | )% |
|                                                           |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Systems,security and identity management increased in the second quarter and first sixmonths of fiscal 2006 compared to the same periods of fiscal 2005 primarily dueto strong sales growth in our identity and access management products, whichincreased $6.1 million and $13.8 million, respectively, and increases in ourresource management products of $2.5 million and $5.7 million, respectively.

 

Openplatform solutions increased in the second quarter and first six months offiscal 2006 compared to the same periods of fiscal 2005, primarily as a resultof the release of OES in the middle of the second quarter of fiscal 2005.  Additionally, our Linux platform productrevenue increased $1.7 million and $3.6 million in the second quarter and firstsix months of fiscal 2006 compared to the same period of fiscal 2005, primarilyfrom additional sales of  SUSE LinuxEnterprise Server and Novell Linux Desktop. These 

 

30

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increases were offsetsomewhat by a decrease in other open platform product revenue of $2.4 millionand $5.2 million in the second quarter and first six months of fiscal 2006 comparedto the same period of fiscal 2005, primarily due to planned reductions in salesof our consumer product, SUSE Linux (formerly SUSE Professional).

 

Workspacesolutions decreased in the second quarter and first six months of fiscal 2006compared to the same periods of fiscal 2005 by $48.9 million and $99.4 million,respectively, primarily due to a decrease in our NetWare-related revenue,resulting from NetWare customers migrating to our OES product and declines inour installed base.  NetWare and OES revenuecombined decreased $10.1 million or 16% and $16.6 million or 13% in the secondquarter and first six months of fiscal 2006 compared to the same periods offiscal 2005.

 

Globalservices and support decreased in the second quarter and first six months offiscal 2006 compared to the same periods of fiscal 2005 primarily due toexpected decreases in  IT consulting revenue in the EMEA andAsia Pacific segments as a result of our decision to focus on Novellproduct-related consulting, thereby reducing revenue from general IT consultingprojects.  These decreases were offsetsomewhat by an increase in consulting in the Americas.

 

Celerant revenuedecreased primarily due to poor performance in the U.S. and Europe as well asthe effect of foreign exchange rates.

 

We further analyzerevenue by solution categories within each geographic segment.

 

**Netrevenue by reporting segment was as follows:**

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|----------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)** | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Americas                   |       | $                      | 129,344    |                | $          | 130,565              |       | (1                  | )%         | $ | 263,121 |   | $ | 259,548 |   | 1 | % |
| EMEA                       |       | 86,580                 |       | 99,044              |       | (13                  | )%         | 175,416             |       | 194,595 |   | (10 | )% |
| Asia Pacific               |       | 22,802                 |       | 23,535              |       | (3                   | )%         | 42,483              |       | 45,080 |   | (6 | )% |
| Celerant                   |       | 39,590                 |       | 43,907              |       | (10                  | )%         | 71,704              |       | 87,956 |   | (18 | )% |
| Total net revenue          |       | $                      | 278,316    |                | $          | 297,051              |       | (6                  | )%         | $ | 552,724 |   | $ | 587,179 |   | (6 | )% |
|                            |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

**Netrevenue by solution category in the Americas segment was as follows:**

** **
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                                | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Resource management                                       |       | $                      | 19,601     |                | $          | 17,747               |       |                |       | $ | 37,945 |   | $ | 34,678 |   |   |   |
| Identity and access management                            |       | 10,356                 |       | 8,208               |       |                 |       | 26,268              |       | 17,579 |   |   |   |
| Other systems, security, and identity management products |       | 3,308                  |       | 3,486               |       |                 |       | 5,492               |       | 6,182 |   |   |   |
| Systems, security and identity management                 |       | 33,265                 |       | 29,441              |       | 13                   | %          | 69,705              |       | 58,439 |   | 19 | % |
| Open Enterprise Server                                    |       | 25,853                 |       | 4,071               |       |                 |       | 51,706              |       | 4,071 |   |   |   |
| Linux platform products                                   |       | 4,629                  |       | 3,996               |       |                 |       | 9,495               |       | 8,053 |   |   |   |
| Other open platform products                              |       | 629                    |       | 1,169               |       |                 |       | 2,273               |       | 2,497 |   |   |   |
| Open platform solutions                                   |       | 31,111                 |       | 9,236               |       | 237                  | %          | 63,474              |       | 14,621 |   | 334 | % |
| NetWare and other NetWare-related                         |       | 5,769                  |       | 32,966              |       |                 |       | 13,072              |       | 70,566 |   |   |   |
| Collaboration                                             |       | 14,482                 |       | 14,684              |       |                 |       | 28,710              |       | 29,799 |   |   |   |
| Other workspace products                                  |       | 2,764                  |       | 2,751               |       |                 |       | 5,587               |       | 5,436 |   |   |   |
| Workspace solutions                                       |       | 23,015                 |       | 50,401              |       | (54                  | )%         | 47,369              |       | 105,801 |   | (55 | )% |
| Global services and support                               |       | 41,953                 |       | 41,487              |       | 1                    | %          | 82,573              |       | 80,687 |   | 2 | % |
| Total net revenue                                         |       | $                      | 129,344    |                | $          | 130,565              |       | (1                  | )%         | $ | 263,121 |   | $ | 259,548 |   | 1 | % |
|                                                           |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |

 

Revenue from the Americasdecreased in the second quarter of fiscal 2006 compared to the same quarter infiscal 2005 due primarily to decreased NetWare revenue of $29.3 million, offsetsomewhat by increased revenue from OES of $21.8 million, increased identity andaccess management revenue of $2.1 million and increased resource managementrevenue of $1.9 million.  Revenue fromthe Americas increased in the first six months of fiscal 2006 compared to thesame period in fiscal 2005 due to increased revenue from resource managementproducts of $3.3 million and identity and access management products of $8.7million.  In addition, we had revenuefrom OES for the entire period in fiscal 2006 compared to only one and a halfmonths in fiscal 2005.  These increaseswere offset somewhat by decreased NetWare revenue of $59.7 million.

 

31

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**Netrevenue by solution category in the EMEA segment was as follows:**

** **
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                                | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Resource management                                       |       | $                      | 11,884     |                | $          | 11,741               |       |                |       | $ | 24,908 |   | $ | 23,101 |   |   |   |
| Identity and access management                            |       | 9,407                  |       | 6,467               |       |                 |       | 16,387              |       | 13,045 |   |   |   |
| Other systems, security, and identity management products |       | 1,436                  |       | 1,583               |       |                 |       | 3,116               |       | 3,058 |   |   |   |
| Systems, security and identity management                 |       | 22,727                 |       | 19,791              |       | 15                   | %          | 44,411              |       | 39,204 |   | 13 | % |
| Open Enterprise Server                                    |       | 15,323                 |       | 3,547               |       |                 |       | 30,211              |       | 3,547 |   |   |   |
| Linux platform products                                   |       | 4,675                  |       | 4,133               |       |                 |       | 9,224               |       | 8,146 |   |   |   |
| Other open platform products                              |       | 435                    |       | 2,387               |       |                 |       | 1,143               |       | 6,541 |   |   |   |
| Open platform solutions                                   |       | 20,433                 |       | 10,067              |       | 103                  | %          | 40,578              |       | 18,234 |   | 123 | % |
| NetWare and other NetWare-related                         |       | 4,839                  |       | 21,749              |       |                 |       | 12,724              |       | 46,413 |   |   |   |
| Collaboration                                             |       | 7,317                  |       | 7,800               |       |                 |       | 15,768              |       | 15,870 |   |   |   |
| Other workspace products                                  |       | 1,316                  |       | 2,751               |       |                 |       | 2,875               |       | 5,017 |   |   |   |
| Workspace solutions                                       |       | 13,472                 |       | 32,300              |       | (58                  | )%         | 31,367              |       | 67,300 |   | (53 | )% |
| Global services and support                               |       | 29,948                 |       | 36,886              |       | (19                  | )%         | 59,060              |       | 69,857 |   | (15 | )% |
| Total net revenue                                         |       | $                      | 86,580     |                | $          | 99,044               |       | (13                 | )%         | $ | 175,416 |   | $ | 194,595 |   | (10 | )% |
|                                                           |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |

 

Revenue from EMEAdecreased in the second quarter and first six months of fiscal 2006 compared tothe same periods of fiscal 2005, primarily due to a decrease in NetWare revenueof $16.5 million and $32.9 million, respectively, a decrease in IT consultingrevenue of $6.9 million and $10.8 million, respectively, and a decrease in otheropen platform product revenue of $1.9 million and $5.4 million,respectively.  Consulting revenuedecreases were expected and primarily the result of our planned move to focuson Novell product-related consulting. The decreases in other open platform revenue were also expected and wereprimarily the result of plannedreductions of our consumer product, SUSE Linux (formerly SUSE Professional).  These decreases were offset somewhat by afull quarter and full six months of revenue during fiscal 2006 from OES and byincreased revenue from identity and access management products of $2.9 millionin the second quarter of fiscal 2006 and $3.3 million in the first six monthsof fiscal 2006.  Overall, foreigncurrency exchange rates decreased revenue in the EMEA segment by approximately$3.5 million and $7.3 million during the second quarter and first six months offiscal 2006, respectively.  Following aperiod of sluggish growth, the EMEA market is showing signs of recovery. Also,government spending appears to be increasing in EMEA.

 

**Netrevenue by solution category in the Asia Pacific segment was as follows:**

** **
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                                | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Resource management                                       |       | $                      | 2,314      |                | $          | 1,841                |       |                |       | $ | 4,105 |   | $ | 3,519 |   |   |   |
| Identity and access management                            |       | 2,515                  |       | 1,581               |       |                 |       | 5,171               |       | 3,486 |   |   |   |
| Other systems, security, and identity management products |       | 318                    |       | 101                 |       |                 |       | 750                 |       | 765 |   |   |   |
| Systems, security and identity management                 |       | 5,147                  |       | 3,523               |       | 46                   | %          | 10,026              |       | 7,770 |   | 29 | % |
| Open Enterprise Server                                    |       | 2,372                  |       | 209                 |       |                 |       | 4,742               |       | 209 |   |   |   |
| Linux platform products                                   |       | 1,003                  |       | 478                 |       |                 |       | 1,970               |       | 900 |   |   |   |
| Other open platform products                              |       | 104                    |       | (17                 | )          |                 |       | 498                 |       | 42 |   |   |   |
| Open platform solutions                                   |       | 3,479                  |       | 670                 |       | 419                  | %          | 7,210               |       | 1,151 |   | 526 | % |
| NetWare and other NetWare-related                         |       | 3,131                  |       | 5,748               |       |                 |       | 6,199               |       | 12,231 |   |   |   |
| Collaboration                                             |       | 1,032                  |       | 1,172               |       |                 |       | 2,029               |       | 2,327 |   |   |   |
| Other workspace products                                  |       | 3,129                  |       | 3,378               |       |                 |       | 4,158               |       | 4,332 |   |   |   |
| Workspace solutions                                       |       | 7,292                  |       | 10,298              |       | (29                  | )%         | 12,386              |       | 18,890 |   | (34 | )% |
| Global services and support                               |       | 6,884                  |       | 9,044               |       | (24                  | )%         | 12,861              |       | 17,269 |   | (26 | )% |
| Total net revenue                                         |       | $                      | 22,802     |                | $          | 23,535               |       | (3                  | )%         | $ | 42,483 |   | $ | 45,080 |   | (6 | )% |
|                                                           |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

The overall decrease inAsia Pacific segment revenue for the second quarter of fiscal 2006 compared tothe same quarter of fiscal 2005 is primarily due to a $2.6 million decrease inIT consulting revenue as a result of our move to focus on Novellproduct-related consulting and a $2.2 million decrease in NetWare revenue,offset somewhat by approximately $2.2 million of new revenue from OES, a $0.9million increase in identity and access management revenue and a $0.5 millionincrease in resource management revenue.

 

32

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The overall decrease inAsia Pacific segment revenue for the first six months of fiscal 2006 comparedto the same period of fiscal 2005 is primarily due to a $5.0 million decreasein IT consulting revenue and a $5.0 million decrease in NetWare revenue, offsetsomewhat by approximately $4.6 million of new revenue from OES, a $0.9 millionincrease in SUSE Linux revenue, a $1.7 million increase in identity and accessmanagement revenue and a $0.6 million increase in resource management revenue.

 

*Forward-lookingrevenue trends*

 

As discussed in our fiscal2005 Form 10-K, we expect our newer product offerings of our Open platformsolutions and Systems, security and identity management categories to growduring fiscal 2006. We expect revenue in the third fiscal quarter of 2006,without Celerant results, to be in the range of $239 to $247 million.

 

*Deferredrevenue*

 

Deferred revenue representsrevenue that is expected to be recognized in future periods. The majority ofdeferred revenue relates to maintenance contracts and subscriptions and isrecognized ratably over the related service periods, typically one to threeyears. The decrease in deferred revenue at April 30, 2006 compared to October31, 2005 of $60.0 million is primarily attributable to seasonably lower invoicingduring the first six months of fiscal 2006 offset by some increases in advancedinvoicing.  As more of our revenuecontracts shift to multiple product, multiple year subscription arrangements,we expect that a greater proportion of our revenue will initially be deferredand recognized over the contractual service term as maintenance andsubscription revenue.

 

*Grossprofit*

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|----------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**             | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Software licenses gross  profit        |       | $                      | 36,022     |                | $          | 40,905               |       | (12                 | )%         | $ | 73,828 |   | $ | 80,569 |   | (8 | )% |
| *percentage of related revenue*        | * *   | *90*                   | *%*        | *89*                | *%*        | * *             | * *   | *90*                | *%*        | *89* | *%* | * * | * * |
| Maintenance and services  gross profit |       | $                      | 137,845    |                | $          | 138,805              |       | (1                  | )%         | $ | 273,185 |   | $ | 277,218 |   | (1 | )% |
| *percentage of related revenue*        | * *   | *58*                   | *%*        | *55*                | *%*        | * *             | * *   | *58*                | *%*        | *56* | *%* | * * | * * |
| Total gross profit                     |       | $                      | 173,867    |                | $          | 179,710              |       | (3                  | )%         | $ | 347,013 |   | $ | 357,787 |   | (3 | )% |
| *percentage of revenue*                | * *   | *62*                   | *%*        | *60*                | *%*        | * *             | * *   | *63*                | *%*        | *61* | *%* | * * | * * |
|                                        |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |

 

The decrease in grossprofit from software licenses for the second quarter and first six months offiscal 2006 compared to the same periods of fiscal 2005 is primarily due todecreased sales of software licenses.

 

The increase in grossprofit from maintenance and services as a percentage of related revenue for thesecond quarter and first six months of fiscal 2006 was primarily a result ofthe consulting headcount reductions that took place in fiscal 2005 and a shiftin the mix of revenue to more product-related revenue compared to consultingrevenue, which carries higher costs of goods. These improvements were offset somewhat by additional expense from theadoption of SFAS No. 123(R), which added approximately $0.9 million of expensein the second quarter of fiscal 2006 and $2.0 million in the first six monthsof fiscal 2006.  The decrease inmaintenance and services gross profit dollars for the second quarter of fiscal2006 compared to the same period of fiscal 2005 was primarily due to decreasedmaintenance and services revenue, offset somewhat by the factors discussedpreviously.

 

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* *

*Operatingexpenses*

* *
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-----------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                    | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Sales and marketing                           |       | $                      | 96,003     |                | $          | 98,479               |       | (3                  | )%         | $ | 189,212 |   | $ | 192,488 |   | (2 | )% |
| *percentage of revenue*                       | * *   | *34*                   | *%*        | *33*                | *%*        | * *             | * *   | *34*                | *%*        | *33* | *%* | * * | * * |
| Product development                           |       | $                      | 48,328     |                | $          | 51,652               |       | (6                  | )%         | $ | 93,389 |   | $ | 100,645 |   | (7 | )% |
| *percentage of revenue*                       | * *   | *17*                   | *%*        | *17*                | *%*        | * *             | * *   | *17*                | *%*        | *17* | *%* | * * | * * |
| General and administrative                    |       | $                      | 33,377     |                | $          | 30,140               |       | 11                  | %          | $ | 68,831 |   | $ | 58,380 |   | 18 | % |
| *percentage of revenue*                       | * *   | *12*                   | *%*        | *10*                | *%*        | * *             | * *   | *12*                | *%*        | *10* | *%* | * * | * * |
| Restructuring expenses                        | * *   | *$*                    | *—*   |                | $          | 5,361                | * *   | *—*            | %          | $ | (1,064 | ) | $ | 11,780 |   | (109 | )% |
| *percentage of revenue*                       | * *   | *—*               | *%*        | *2*                 | *%*        | * *             | * *   | *—*            | *%*        | *2* | *%* | * * | * * |
| Purchased in-process research and development |       | $                      | 2,110      |                | $          | 480                  |       | 340                 | %          | $ | 2,110 |   | $ | 480 |   | 340 | % |
| *percentage of revenue*                       | * *   | *1*                    | *%*        | *—*            | *%*        | * *             | * *   | *—*            | *%*        | *—* | *%* | * * | * * |
| Gain on sale of property, plant and equipment |       | $                      | (2,190     | )                   | $          | —               | * *   | *—*            | %          | $ | (2,190 | ) | $ | (1,589 | ) | 38 | % |
| *percentage of revenue*                       | * *   | *(1*                   | *)%*       | *—*            | *%*        | * *             | * *   | *—*            | *%*        | *—* | *%* | * * | * * |
| Gain on legal settlement                      |       | $                      | (1,225     | )                   | $          | —               | * *   | *—*            | %          | $ | (1,225 | ) | $ | (447,560 | ) | (100 | )% |
| *percentage of revenue*                       | * *   | *—*               | *%*        | *—*            | *%*        | * *             | * *   | *—*            | *%*        | *(76* | *)%* | * * | * * |
| Total operating expenses                      |       | $                      | 176,403    |                | $          | 186,112              |       | (5                  | )%         | $ | 349,063 |   | $ | (85,376 | ) | (509 | )% |
| *percentage of revenue*                       | * *   | *63*                   | *%*        | *63*                | *%*        | * *             | * *   | *63*                | *%*        | *(15* | *)%* | * * | * * |
|                                               |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketingexpenses decreased in the second quarter and first six months of fiscal 2006compared to the same periods  of fiscal2005 due primarily to planned reductions as a result of the fiscal 2005 headcountreductions, offset somewhat by additional expense from the adoption of SFAS No.123(R), which added approximately $2.8 million and $6.2 million of additionalexpense in the second quarter and first six months of fiscal 2006,respectively.  Sales and marketing headcountwas approximately 98 employees, or 8%, lower at the end of  the second quarter of fiscal 2006 compared tothe same period of fiscal 2005.

 

 Product development expenses in thesecond quarter and first six months of fiscal 2006 decreased compared to thesame periods of fiscal 2005 due primarily to planned reductions as a result ofthe fiscal 2005 headcount reductions, offset somewhat by additional expensefrom the adoption of SFAS No. 123(R), which added approximately $1.4 millionand $3.7 million of additional expense in the second quarter and first sixmonths of fiscal 2006, respectively. Product development headcount was approximately 220 employees, or 14%,lower at the end of the second quarter of fiscal 2006 compared to the sameperiod of fiscal 2005.

 

General andadministrative expenses increased in the second quarter and first six months offiscal 2006 compared to the same quarter of fiscal 2005 due primarily toadditional expense of approximately $1.6 million and $8.1 million,respectively, resulting from the adoption of SFAS No. 123(R) and favorableone-time adjustments that reduced general and administrative expenses in fiscal 2005.  These increases were offset somewhat byheadcount reductions and lower facilities expenses.  General and administrative headcount waslower by approximately 52 employees, or 7%, at the end of the second quarter offiscal 2006 compared to the same period of fiscal 2005.

 

During the first sixmonths of fiscal 2006, we recorded adjustments to the restructuring reserves of$1.1 million related to changes in estimates, of which $0.4 million was relatedto Asia Pacific, $0.3 million was related to the Americas, $0.3 million wasrelated to EMEA, and $0.1 million was related to Celerant.

 

Purchased in-processresearch and development in the second quarter of fiscal 2006 related to theacquisition of e-Security.  Purchasedin-process research and development in the second quarter of fiscal 2005related to the acquisition of Immunix.

 

The gain on sale ofproperty, plant and equipment during the second quarter of fiscal 2006 relatesto the sale of one of our corporate aviation assets.  During the first six months of fiscal 2005, werecognized a gain of $1.6 million on the sale of our facility in Lindon, Utah.

 

The gain on legalsettlement in the second quarter of fiscal 2006 related to a settlement wereceived from one of our insurance companies for past legal expenses that werecovered under our insurance policies. The gain on legal settlement in fiscal 2005 relates to the settlementwith Microsoft concerning potential anti-trust litigation related to ourNetWare operating system.

 

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*Otherincome (expense)*

* *
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**      | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Investment income               |       | $                      | 15,816     |                | $          | 10,240               |       | 54                  | %          | $ | 30,805 |   | $ | 19,693 |   | 56 | % |
| *percentage of revenue*         | * *   | *6*                    | *%*        | *3*                 | *%*        | * *             | * *   | *6*                 | *%*        | *3* | *%* | * * | * * |
| Impairment of investments       |       | $                      | (226       | )                   | $          | (917                 | )          | (75                 | )%         | $ | (623 | ) | $ | (1,930 | ) | (68 | )% |
| *percentage of revenue*         | * *   | *—*               | *%*        | *—*            | *%*        | * *             | * *   | *—*            | *%*        | *—* | *%* | * * | * * |
| Interest expense and other, net |       | $                      | (2,213     | )                   | $          | (1,868               | )          | (18                 | )%         | $ | (4,103 | ) | $ | (5,273 | ) | (22 | )% |
| *percentage of revenue*         | * *   | *(1*                   | *)%*       | *(1*                | *)%*       | * *             | * *   | *(1*                | *)%*       | *1* | *%* | * * | * * |
| Total other income              |       | $                      | 13,377     |                | $          | 7,455                |       | 79                  | %          | $ | 26,079 |   | $ | 12,490 |   | 109 | % |
| *percentage of revenue*         | * *   | *5*                    | *%*        | *3*                 | *%*        | * *             | * *   | *5*                 | *%*        | *2* | *%* | * * | * * |
|                                 |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |  |

 

Novell’s long-terminvestments consist primarily of investments in venture capital partnerships.Investment income includes income from short-term and long-term investments.Investment income for the second quarter and first six months of fiscal 2006increased compared to the same periods in fiscal 2005 due to higher interestrates.

 

To assess impairment, weanalyze forecasted financial performance of the investees and our estimate ofthe potential for investment recovery based on the financial performancefactors.  When an impairment is deemed tobe “other than temporary” we record an impairment expense.

 

Interest expense andother, net for the second quarter of fiscal 2006 increased compared to the sameperiod of fiscal 2005 due primarily to decreased miscellaneous income.   Interest expense and other, net for thefirst six months of fiscal 2006 decreased compared to the same period of fiscal2005 primarily due to lower foreign currency transaction losses*.*

 

*Incometax expense*

* *
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**      | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Income tax expense              |       | $                      | 7,499      |                | $          | 16,680               |       | (55                 | )%         | $ | 18,822 |   | $ | 76,119 |   | (75 | )% |
| *percentage of related revenue* | * *   | *3*                    | *%*        | *6*                 | *%*        | * *             | * *   | *3*                 | *%*        | *13* | *%* | * * | * * |
| Effective tax rate              |       | 69                     | %          | 1584                | %          |                 |       | 78                  | %          | 17 | % |   |   |
|                                 |            |                        |            |                     |            |                      |            |                     |            |  |  |  |  |  |  |  |  |

 

We are subject to incometaxes in numerous jurisdictions and the use of estimates is required indetermining our provision for income taxes. For the second quarter and first six months of fiscal 2006, we providedincome taxes of $7.5 million and $18.8 million, respectively, based on theestimated annual effective tax rate for the year applied to “ordinary” income(pre-tax income excluding unusual or infrequently occurring discreteitems).  Due to the utilization of asignificant amount of our net operating loss carryforwards during fiscal 2005,substantially all of the future benefit received from our remaining netoperating loss carryforwards used to offset U.S. taxable income will becredited to additional paid-in capital or goodwill and not income taxexpense.  In addition, the windfall taxbenefits associated with stock-based compensation will be credited toadditional paid-in capital. In connection with our adoption of SFAS No. 123(R),we elected to follow the tax ordering laws to determine the sequence in whichdeductions and net operating loss carryforwards are utilized.  Accordingly, during the second quarter andfirst six months of fiscal 2006, a tax benefit relating to stock options of$1.2 million and $5.2 million, respectively, was credited to additional paid-incapital and a benefit of $3.0 million and $3.5 million, respectively, wascredited to goodwill.

 

The effective tax ratediffers from the federal statutory rate of 35% primarily due to the effects ofstock-based compensation plans, differences between book and tax items andforeign taxes.  The effective tax ratefor the second quarter of fiscal 2006 was 69% compared to the effective taxrate of 1,584% for the same period in 2005. The effective tax rate for the first six months of fiscal 2006 was 78%compared to the effective tax rate of 17% for the same period in 2005.  The effective tax rates for the secondquarter and the first six months of fiscal 2006 differ from the effective taxrates for the second quarter and the first six months of fiscal 2005 due to theuse of net operating losses in the first quarter of fiscal 2005, which offsetincome tax expense associated primarily with the income generated from asettlement we reached with Microsoft in the first quarter of fiscal 2005.  The effective tax rate for fiscal 2006 will be higher than the rate forfiscal 2005 primarily because the fiscal 2005 rate reflected a benefit recordedto income tax expense from the use of a significant amount of our net operatingloss carryforwards.

 

In accordance withdeterminations made pursuant to the applicable accounting standards, wecontinue to believe that it is more likely than not that our remaining U.S. netdeferred tax assets will not be realized based on the weight of all availableevidence. As a result, we have provided a full valuation allowance on our U.S.net deferred tax assets. As deferred tax assets or liabilities increase ordecrease in the future, or if a portion or all of the valuation allowance is nolonger deemed to be necessary, the adjustments to the 

 

35

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valuation allowance will increase or decrease futureincome tax provisions, goodwill or additional paid-in capital.  It is reasonably possible that an adjustmentto our valuation allowance will be required in the near term and the amountcould be material.

 

We paid cash for incometaxes of $6.0 million in the second quarter of fiscal 2006 and $9.5 millionduring the same period of fiscal 2005. We paid cash for income taxes of $10.5million in the first six months of fiscal 2006 and $12.9 million during thesame period of fiscal 2005. We continue to evaluate our tax reserves under SFASNo. 5, “Accounting for Contingencies,” which requires us to accrue for losseswe believe are probable and can be reasonably estimated.  The amount reflected in the consolidatedbalance sheet at April 30, 2006 is considered adequate based on our assessmentof many factors including, results of tax audits, past experience andinterpretations of tax law applied to the facts of each matter. It isreasonably possible that our tax reserves could be increased or decreased inthe near term based on these factors.

 

*Netincome (loss) available to common stockholders*

* *
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | **Six Months Ended** | ** ** | ** **          | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|
| **(dollars in thousands)**                                        | ** ** | **April 30,  2006**    | ** ** | **April 30,  2005** | ** ** | **Change**           | ** ** | **April 30,  2006** | ** ** | **April 30,  2005** | ** ** | **Change** | ** ** |
| Net income (loss)                                                 |       | $                      | 3,342      |                | $          | (15,627              | )          | 121                 | %          | $ | 5,207 |   | $ | 379,534 |   | (99 | )% |
| Net income (loss) available to common stockholders — basic   |       | $                      | 3,282      |                | $          | (15,752              | )          | 121                 | %          | $ | 5,093 |   | $ | 375,310 |   | (99 | )% |
| Net income (loss) available to common stockholders — diluted |       | $                      | 3,178      |                | $          | (15,752              | )          | 120                 | %          | $ | 5,021 |   | $ | 378,296 |   | (99 | )% |

 

Additional expense fromthe adoption of SFAS No. 123(R) in the first quarter of fiscal 2006 decreasednet income by approximately $6.8 million during the second quarter of fiscal2006 and $20.0 million during the first six months of fiscal 2006.  Net income was favorably impacted by foreignexchange rate fluctuations in the second quarter and first six months of fiscal2006 by approximately $0.5 million and $1.6 million, respectively.

 

Net income (loss)available to common stockholders — basic for the second quarter and first sixmonths of fiscal 2006 and fiscal 2005 differs from net income (loss) for thesame periods as a result of the deduction of Series B Preferred Stock dividendsand earnings allocated to the holders of Series B Preferred Stock, which arerequired to be deducted from net income to arrive at net income available tocommon stockholders — basic.

 

Net income (loss)available to common stockholders — diluted for the second quarter and first sixmonths of fiscal 2006 differs from net income available to common stockholders— basic for the same periods due to the deduction of additional Celerantminority interest that is required to be deducted from net income to arrive atnet income available to common stockholders — diluted.

 

 Net income available to common stockholders —diluted for the first six months of fiscal 2005 differs from net incomeavailable to common stockholders — basic for the same period of fiscal 2005 dueto the interest expense and amortization of issuance costs attributable to theDebentures that are added back to net income.

 

*Forward-looking net income trends*

 

Weexpect diluted net income per share for the third quarter of fiscal 2006 to beapproximately $0.00 per share.

 

36

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**Liquidityand Capital Resources**

 
| **(dollars in thousands)**                         | ** ** | **April 30, 2006** | ** ** | **October 31, 2005** | ** ** | **Change** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------------------|------------|------------|------------|
| Cash, cash equivalents and  short-term investments |       | $                  | 1,339,041  |                           | $          | 1,654,904  |       | (19 | )% |
| *Percent of total assets*                          | * *   | *55*               | *%*        | *60*                           | *%*        | * *   | * *   |
|                                                    |            |                    |            |                                |            |            |            |  |  |

 

An overview of thesignificant cash flow activities for the six months ended April 30, 2006 and2005 is as follows:

 
| ** **                                                              | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|
| **(in thousands)**                                                      | ** ** | **April 30, 2006** | ** ** | **April 30, 2005** | ** ** |
| Cash provided by operating activities, including litigation  settlement |       | $                       | 1,177      |   | $ | 426,663 |   |
| Issuance of common stock, net                                           |       | 18,082                  |       | 12,979 |   |
| Repurchases of common stock — retired                              |       | (267,479                | )          | — |   |
| Purchases of property, plant and equipment                              |       | (14,554                 | )          | (11,684 | ) |
| Proceeds from the sale of property, plant and equipment                 |       | 7,258                   |       | 10,421 |   |
| Proceeds from payoff of note receivable                                 |       | 9,092                   |       | — |   |
| Cash paid for acquisitions, net of cash acquired                        |       | (71,550                 | )          | (33,829 | ) |
| Purchase of intangible assets                                           |       | —                  |       | (15,500 | ) |
| Cash paid for equity investment in OIN                                  |       | (4,225                  | )          | — |   |
| Other long-term investing activities                                    |       | (3,014                  | )          | (3,018 | ) |
|                                                                         |            |                         |            |  |  |  |  |

 

Cash provided byoperating activities in the first six months of fiscal 2005 included thereceipt of $447.6 million in cash net of legal fees in connection with theMicrosoft settlement (included in cash provided by operating activities).

 

As of April 30, 2006, wehad cash, cash equivalents and other short-term investments of approximately$340.1 million held in accounts outside the United States. Our short-terminvestment portfolio is diversified among security types, industry groups, andindividual issuers, and consists primarily of investment grade securities. Toachieve potentially higher returns, a portion of our investment portfolio isinvested in equity securities and mutual funds, both of which are subject tomarket risk. Approximately $7.0 million of our short-term investments aredesignated for deferred compensation payments, which are paid out as requestedby the plan participants. Our short-term investment portfolio includes grossunrealized gains and losses of $0.8 million and $8.9 million, respectively, asof April 30, 2006. We monitor our investments and record losses when a declinein the investment’s market value is determined to be other than temporary.

 

Our $25.0 million bank lineof credit, which is used for letter of credit purposes, expires on April 1,2007.   At April 30, 2006, we had acorporate aviation asset with a net book value of approximately $13.8 millionclassified as held for sale. We anticipate selling this asset during fiscal2006 for at least net book value.

 

As of April 30, 2006, we hada carrying value of $55.4 million related to investments in various venturecapital funds and had commitments to contribute an additional $14.5 million tothese funds, of which we estimate approximately $9.5 million could becontributed during the remainder of fiscal 2006, approximately $4.4 million infiscal 2007, and approximately $0.6 million thereafter as requested by the fundmanagers. We intend to fund these investments with cash from operations andcash on hand.

 

Our $20.0 million, 20%ownership interest in OIN consisted of patents with a fair value of $15.8million, including $0.3 million of prepaid acquisition costs, and cash of $4.2million.  At the time of the contribution,the patents had a book value of $14.4 million, including $0.3 million ofprepaid acquisition costs.  According tothe terms of the LLC agreement, we could be required to make future cashcontributions which we would fund with cash from operations and cash on hand.

 

As of April 30, 2006, wehave various operating leases related to our facilities. These leases haveminimum annual lease commitments of $14.2 million for the remainder of fiscal2006, $25.3 million in fiscal 2007, $22.4 million in fiscal 2008, $14.8 millionin fiscal 2009, $9.2 million in fiscal 2010, and $36.2 million thereafter.Furthermore, we have $27.4 million of minimum rentals to be received in thefuture from subleases.

 

On July 2, 2004, weissued and sold $600.0 million aggregate principal amount of our Debentures due2024. The Debentures pay interest at 0.50% per annum, payable semi-annually onJanuary 15 and July 15 of each year until maturity, commencing January 15,2005. We paid $1.5 million in interest during the first six months of fiscal2006.

 

As of April 30, 2006, wealso have 187 shares of Series B Preferred Stock outstanding with a carryingvalue of $9.4 million. The Series B Preferred Stock is redeemable at our optionand by the holder under certain change in control circumstances.

 

On September 22, 2005, ourboard of directors approved a share repurchase program for up to $200.0 millionof our common stock through September 21, 2006. On April 4, 2006, our board ofdirectors approved an amendment to the share repurchase program increasing thelimit on repurchase from $200.0 million to $400.0 million and extending theprogram through April 3, 2007.  As of 

 

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April 30, 2006, 35.2 millionshares of common stock had been repurchased under this program at an averageprice of $7.59 per share.  The totalamount paid for the repurchase of our common stock was $267.5 million.  Subsequent to April 30, 2006, we completedthe share repurchase program by purchasing 16.3 million additional shares at atotal cost of $132.5 million.

 

There have been nosignificant changes to our contractual obligations as disclosed in our fiscal2005 Form 10-K.

 

Our principal sources ofliquidity continue to be from operations, cash on hand, and short-terminvestments. At April 30, 2006, our principal unused sources of liquidityconsisted of cash and cash equivalents of $542.1 million and short-terminvestments in the amount of $797.0 million. During the first six months offiscal 2006, we generated $1.2 million of cash flow from operations. Ourspecific liquidity needs for the next twelve months are principally forfinancing of fixed assets, commitments to our venture capital funds and productdevelopment.  Our general liquidity needsrelate to our need to maintain flexibility in a dynamic and competitiveoperating environment, including the ability to pursue potential acquisitionand investment opportunities. We expect our liquidity needs beyond the nexttwelve months would include those mentioned previously as well as to thepossible redemption of our Debentures, which the holders can first require usto repurchase on July 15, 2009.

 

We anticipate generatingpositive cash flows from operations in addition to investment income in fiscal2006 sufficient to fund operations. We anticipate being able to fund ourcurrent operations, future potential acquisitions, any further integration,restructuring or additional merger-related costs, and planned capitalexpenditures for the next twelve months with existing cash and short-terminvestments together with cash generated from operations and investment income.We believe that borrowings under our credit facilities or offerings of equityor debt securities are possible for expenditures beyond the next twelve months,if the need arises, although such offerings may not be available to us onacceptable terms and would be dependent on market conditions at such time.Investments will continue in product development and in new and existing areasof technology. Cash may also be used to acquire technology through purchasesand strategic acquisitions.

 

OnMay 24, 2006, we sold our shares in Celerant consulting to a group comprised ofCelerant management and Caledonia Investments plc for $77.0 million incash.  There will be no furthershareholding or operational relationship between us and Celerant goingforward.  The sale of Celerantconsulting does not have an impact on our IT consulting business.  We anticipate recording a gain ofapproximately $12.0 to $14.0 million on the sale of Celerant.  We will begin classifying Celerant’s resultsof operations and cash flows as discontinued operations in our consolidatedstatement of operations beginning in our third quarter of fiscal 2006.

 

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**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed tofinancial market risks, including changes in interest rates, foreign currencyexchange rates, and market prices of equity securities. To mitigate some of ourforeign currency exchange risks, we utilize currency forward contracts andcurrency options. We do not use derivative financial instruments forspeculative or trading purposes, and no significant derivative financialinstruments were outstanding at April 30, 2006.

 

*InterestRate Risk*

 

The primary objective ofour short-term investment activities is to preserve principal while maximizingyields without significantly increasing risk. Our strategy is to invest inwidely diversified short-term investments, consisting primarily of investmentgrade securities, substantially all of which either mature within the nexttwelve months or have characteristics of short-term investments. A hypothetical50 basis point increase in interest rates would result in an approximately $4.2million decrease (less than 0.5%) in the fair value of our available-for-salesecurities.

 

*MarketRisk*

 

We also holdavailable-for-sale equity securities in our short-term investment portfolio. Asof April 30, 2006, gross unrealized gains, before tax effect on the short-termpublic equity securities totaled $0.8 million. A reduction in prices of 10% ofthese short-term equity securities would result in an approximately $0.7million decrease (less than 0.5%) in the fair value of our short-terminvestments.

 

In addition, we invest inequity securities issued by privately-held companies that are included in ourlong-term portfolio of investments, primarily for the promotion of business andstrategic objectives. These investments are generally in thinly capitalizedcompanies in the high-technology industry sector or venture capital funds.Because of the nature of these investments, we are exposed to equity pricerisks. We typically do not attempt to reduce or eliminate our market exposureon these securities. A 10% adverse change in equity prices of long-term equitysecurities would result in an approximate $5.6 million decrease in the fairvalue of our long-term securities.

 

*ForeignCurrency Risk*

 

We use derivatives tohedge those net assets and liabilities that, when re-measured or settledaccording to accounting principles generally accepted in the United States,impact our consolidated statement of operations. Currency forward contracts areutilized in these hedging programs. All forward contracts entered into by usare components of hedging programs and are entered into for the sole purpose ofhedging an existing or anticipated currency exposure, not for speculation ortrading purposes. Gains and losses on these currency forward contracts wouldgenerally be offset by corresponding gains and losses on the net foreigncurrency assets and liabilities that they hedge, resulting in negligible netgain or loss overall on the hedged exposures. When hedging balance sheetexposures, all gains and losses on forward contracts are recognized in otherincome (expense) in the same period as when the gains and losses onre-measurement of the foreign currency denominated assets and liabilitiesoccur. All gains and losses related to foreign exchange contracts are includedin cash flows from operating activities in the consolidated statements of cashflows. Our hedging programs reduce, but do not always entirely eliminate, theimpact of foreign currency exchange rate movements. If we do not hedge againstforeign currency exchange rate movement, an increase or decrease of 10% inexchange rates would result in an increase or decrease in income before taxesof approximately $0.2 million. This number represents the exposure related tobalance sheet re-measurement only and assumes that all currencies move in thesame direction at the same time relative to the U.S. dollar.

 

All of the potentialchanges noted above are based on sensitivity analyses performed on ourfinancial position at April 30, 2006. Actual results may differ materially.

 

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**Item4. Controls and Procedures**

 

(a)                   Evaluation of Disclosure Controls andProcedures

 

Novell’s management, withthe participation of the Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of Novell’s disclosure controls and procedures asof the end of the period covered by this report. Based on that evaluation, theChief Executive Officer and Chief Financial Officer concluded that Novell’sdisclosure controls and procedures as of the end of the period covered by thisreport were designed and functioning effectively to provide reasonableassurance that the information required to be disclosed by Novell in reportsfiled under the Securities Exchange Act of 1934, as amended, is (i) recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (ii) accumulated andcommunicated to Novell’s management, including the Chief Executive Officer andChief Financial Officer, or persons performing similar functions, asappropriate to allow timely decisions regarding disclosure.

 

(b)                  Change in Internal Control over FinancialReporting

 

Other than theimplementation of a new financial information system, discussed below, nochange in Novell’s internal control over financial reporting occurred duringthe second quarter of fiscal 2006 that has materially affected, or isreasonably likely to materially affect, internal control over financialreporting.

 

In March 2006, weimplemented a significant upgrade to our financial information systems, whichaffected a majority of our financial transactions.  This initiative further strengthened theoverall design and operating effectiveness of our financial reporting controls.  This initiative was not in response to anyidentified deficiency or weakness in our internal control over financialreporting.

 

**PartII. Other Information**

 

Except as listed below,other items in Part II are omitted because the items are inapplicable orrequire no response.

 

**Item1. Legal Proceedings**

 

The information requiredby this item is incorporated herein by reference to Note N of our financialstatements contained in Part I, Item 1 of this Form 10-Q.

 

**Item1A.  Risk Factors**

 

There have been no material changes from the riskfactors disclosed in Part 1, Item 1A of our Form 10-K for the fiscal year endedOctober 31, 2005.

 

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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

**                Issuer Purchases of EquitySecurities**

 

                Thefollowing table presents information regarding purchases of shares of Novellcommon stock made by Novell pursuant to its share repurchase program during thethree months ended April 30, 2006.

 
| **Period**                                    | ** ** | **(a)  Total Number  of Shares  Purchased (1)** | ** ** | **(b)  Average  Price Paid  Per Share** | ** ** | **(c)  Total Number  of Shares  Purchased  as Part of  Publicly  Announced  Plans or  Programs (2)** | ** ** | **(d)  Maximum  Dollar Value of  Shares that  May Yet Be  Purchased  Under the  Plans or  Programs** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| **(in  thousands, except per share amounts)** | ** ** | ** **                                           | ** ** | ** **                                   | ** ** | ** **                                                                                                               | ** ** | ** **                                                                                                                         | ** ** |
| February 1, 2006 through February 28, 2006    |       | —                                               |       | $                                            | —     |                                                                                                                     | —     |                                                                                                                               | $          | 400,000 |   |
| March 1, 2006 through March 31, 2006          |       | 14,747                                               |       | $                                            | 7.52       |                                                                                                                     | 14,686     |                                                                                                                               | $          | 289,486 |   |
| April 1, 2006 through April 30, 2006          |       | 20,550                                               |       | $                                            | 7.64       |                                                                                                                     | 20,550     |                                                                                                                               | $          | 132,521 |   |
| Total                                         |       | 35,297                                               |       | $                                            | 7.59       |                                                                                                                     | 35,236     |                                                                                                                               | $          | 132,521 |   |

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(1) The total number of shares purchased includes:(i) shares purchased pursuant to the share repurchase program described infootnote (2) below; (ii) shares surrendered to the Company to satisfytax withholding obligations in connection with the vesting of restricted stockissued to employees, totaling 32,000 shares in the month of March, and (iii)shares repurchased from terminated employees in accordance with the terms of arestricted stock agreement, totaling 29,000 shares in the month of March.

 

(2) On September 22, 2005, Novell announced that itsboard of directors has approved a share repurchase program for up to $200million of Novell common stock over the next 12 months.  On April 4, 2006, Novell announced that itsboard of directors amended the share repurchase program to increase the amountof Novell common stock that may be repurchased under the program from $200million to $400 million and to extend the program through April 3, 2007.

 

**Item4.  Submission of Matters To a Vote ofSecurity Holders**

 

**2006Annual Meeting of Stockholders**

 

Novell’s 2006 AnnualMeeting of Stockholders was held at 404 Wyman Street, Waltham, Massachusetts,on April 6, 2006 at 10:00 a.m.  Out ofthe 389,062,596 shares of Common Stock and 187 shares of Series B ConvertiblePreferred Stock that were outstanding and entitled to vote at the meeting as ofFebruary 15, 2006 (the record date), a total of 354,017,481 shares ofCommon Stock and 187 shares of Series B Convertible Preferred Stock werepresent in person or represented by proxy at the meeting, representing 91.03%of the percent of the total voting power of Novell.

 

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

 

**I.   Election ofDirectors**

                                                
| ***Nominees:***         | *** *** | ***Votes For*** | *** *** | ***Votes Withheld*** | *** *** |
|-------------------------|--------------|-----------------|--------------|----------------------|--------------|
| Albert Aiello           |         | 346,337,124     |         | 9,176,357            |         |
| Fred Corrado            |         | 346,269,681     |         | 9,243,800            |         |
| Richard L. Crandall     |         | 346,347,878     |         | 9,165,603            |         |
| Claudine  B. Malone     |         | 344,875,783     |         | 10,637,698           |         |
| Jack L. Messman         |         | 338,117,432     |         | 17,396,049           |         |
| Richard L. Nolan        |         | 346,275,638     |         | 9,237,843            |         |
| Thomas G. Plaskett      |         | 346,333,784     |         | 9,179,697            |         |
| John  W. Poduska, Sr.   |         | 346,275,275     |         | 9,238,206            |         |
| James  D. Robinson, III |         | 337,793,694     |         | 17,719,787           |         |
| Kathy Brittain White    |         | 346,334,399     |         | 9,179,082            |         |

 

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**II.  Ratificationof Independent Public Accounting Firm**

 

Ratification of PricewaterhouseCoopers LLP as Novell’sindependent registered public accounting firm for the fiscal year endingOctober 31, 2006 passed.

 
| *** ***            | ** ** | ** **  | ** ** | **%****of Votes  Voting on the  Matter** | ** ** |
|-------------------------|------------|-------------|------------|------------------------------------------|------------|
| ***Votes For***         |       | 351,808,965 |       | 98.96                                    | %          |
| ***Votes  Against***    |       | 1,499,930   |       | 0.42                                     | %          |
| ***Votes  Abstaining*** |       | 2,204,586   |       | 0.62                                     | %          |

 

**III.                MajorityVoting for Directors**

 

A stockholder proposal that the Board of Directorsinitiate the appropriate process to amend Novell’s charter or bylaws to providethat director nominees shall be elected by a majority of votes cast passed.

 
| *** ***            | ** ** | ** **  | ** ** | **%****of Votes  Voting on the  Matter** | ** ** |
|-------------------------|------------|-------------|------------|------------------------------------------|------------|
| ***Votes  For***        |       | 165,366,148 |       | 61.14                                    | %          |
| ***Votes  Against***    |       | 101,498,559 |       | 37.53                                    | %          |
| ***Votes  Abstaining*** |       | 3,607,244   |       | 1.33                                     | %          |
| ***Broker  Non-Votes*** |       | 85,041,530  |       | n/a                                      |       |

 

**Item6. Exhibits**

 

(a)                   Exhibits

 
| **Exhibit  Number** | ** ** | **Description**                                    |
|---------------------|------------|----------------------------------------------------|
| 12.1                |       | Computation of Ratio of  Earnings to Fixed Charges |
|                |       |                                               |
| 31.1                |       | Rule 13a-14(a)  Certification                      |
|                |       |                                               |
| 31.2                |       | Rule 13a-14(a)  Certification                      |
|                |       |                                               |
| 32.1                |       | 18 U.S.C. Section 1350  Certification              |
|                |       |                                               |
| 32.2                |       | 18 U.S.C. Section 1350  Certification              |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                | Novell, Inc. (Registrant) |
|---------------------|---------------------------|
|                |                      |   |
|                |                      |   |
| Date:  June 8, 2006 | By:                       | /s/ JOSEPH S. TIBBETTS, JR. |
|                |                      | Joseph S. Tibbetts, Jr.  Sr. Vice President and Chief Financial Officer  (Principal Financial Officer and Principal Accounting Officer) |

 

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