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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K



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| |   |                                                     
| | - | ----------------------------------------------------
| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT of 1934


For the Fiscal Year Ended October 31,
2004

OR



| |   |                                                             
| | - | ------------------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE

SECURITIES EXCHANGE ACT OF 1934


For the transition period from

to
 .

Commission File Number 0-13351

NOVELL, INC.

(Exact name of registrant as specified in its
charter)


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

404 Wyman Street, Suite 500

Waltham, MA 02451


(Address of principal executive offices
including zip code)


(781) 464-8000

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $.10 per
share

(Title of Class)


Preferred Share Purchase Rights

(Title of Class)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.    o

The aggregate market value of the
registrants common stock as of April 30, 2004 held by
non-affiliates as of April 30, 2004 (based on the last
reported price of the Common Stock on the Nasdaq National Market
System on such date) was $3,648,866,087. For purposes of this
disclosure, shares of common stock held by persons who hold more
than 5% of the outstanding common stock and common stock held by
executive officers and directors of the registrant have been
excluded in that such persons may be deemed to be
affiliates as that term is defined under the rules
and regulations promulgated under the Securities Act of 1933.
This determination is not necessarily conclusive for other
purposes.

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

As of December 31, 2004 there were
378,704,093 shares of the registrants common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrants definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on
April 14, 2005, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.



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NOVELL, INC.

TABLE OF CONTENTS

|              |  |                                                                                                                       |  |      |    | 
|------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                                       |  | Page
|              |  |                                                                                                                       |  |     
|PART I       
|Item 1.       |  | Business                                                                                                              |  |      | 1  | 
|Item 2.       |  | Properties                                                                                                            |  |      | 13 | 
|Item 3.       |  | Legal Proceedings                                                                                                     |  |      | 14 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                               |  |      | 15 | 
|PART II      
|Item 5.       |  | Market for Registrants
    Common Equity, Related Stockholder Matters, and Issuer Purchases
    of Equity Securities |  |      | 16 | 
|Item 6.       |  | Selected Financial Data                                                                                               |  |      | 17 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                             |  |      | 18 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                        |  |      | 44 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                                       |  |      | 45 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                              |  |      | 92 | 
|Item 9A.      |  | Controls and Procedures                                                                                               |  |      | 92 | 
|Item 9B.      |  | Other Information                                                                                                     |  |      | 92 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                                |  |      | 93 | 
|Item 11.      |  | Executive Compensation                                                                                                |  |      | 93 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters                |  |      | 93 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                    |  |      | 93 | 
|Item 14.      |  | Principal Accountants
    Fees and Services                                                                          |  |      | 93 | 
|PART IV      
|Item 15.      |  | Exhibits and Financial
    Statement Schedules                                                                        |  |      | 94 | 
|EXHIBIT 10.13
|EXHIBIT 10.15
|EXHIBIT 10.22
|EXHIBIT 10.23
|EXHIBIT 21   
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



i



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NOVELL, INC.

FORM 10-K

In addition to historical information, this
Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. All statements, other than
statements of historical fact, regarding our strategy, future
operations, financial position, estimated revenue, projected
costs, projected savings, prospects, plans, opportunities and
objectives constitute forward looking statements.
The words may, will,
expects, plans, anticipates,
believe, estimates,
potential, or continue and similar types
of expressions identify such statements, although not all
forward-looking statements contain these identifying words.
These statements are based upon information that is currently
available to us and/or managements current expectations,
speak only as the date hereof, and are subject to certain risks
and uncertainties. We expressly disclaim any obligation or
undertaking to update or revise forward-looking statements
contained or incorporated by reference herein to reflect any
change or expectations with regard thereto or to reflect any
change in events, conditions, or circumstances on which any such
forward-looking statement is based, in whole or in part. Our
actual results may differ materially from the results discussed
in or implied by such forward-looking statements as a result of
a number of factors, which include, but are not limited to,
those set forth below in the section titled Risk Factors
Affecting Future Results of Operations. We assume no
obligation to update any of our forward-looking statements for
any reason, except as required by law. Readers should carefully
review the risk factors described in this document and in other
documents that Novell files from time to time with the
Securities and Exchange Commission.




PART I






|        |         
|------- | --------
|Item 1. | Business

The Company

Novell is a leading provider of information
solutions, a position we have been in since 1983. We provide
identity management and web services solutions and
cross-platform solutions on several operating systems, including
Linux, NetWare®, Windows, and Unix. All of our solutions
are supported by our worldwide services, including consulting,
training and technical services. Through these solutions, our
customers can deliver information or system resources from
diverse sources, regardless of how they are implemented and
regardless of how they connect, in a secure and personalized
way. We create value for our customers by reducing the cost,
complexity and vulnerability of todays information
environments, allowing them to optimize the performance of the
resources and assets that they employ. With approximately 6,000
employees globally, we serve customers all over the world.

We deliver this value to our customers by
developing, maintaining and delivering information solutions in
the following categories:

Identity management and web services
solutions.Our identity management and
web services products include applications that offer a full
suite of capabilities, including the following:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | secure authentication and authorization services;      
|
| |  | single sign-on;                                        
|
| |  | provisioning capabilities; and                         
|
| |  | portal and web services application
    infrastructure.

We believe that customers have recognized the
need to manage the access, utilization and optimization of
assets through information systems that can understand,
implement and administer business policies, not only



|                          |  
|------------------------- | -
|Novell annual report 2004 | 1












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within organizations, but also between
organizations and their customers and trading partners. Our web
services solutions enable organizations to balance growing user
demands for services and information with the
organizations demands for increased security. Through
identity management and web services, customers can integrate
business processes and systems, extending them within and across
enterprise boundaries to interact with customers, employees,
suppliers and partners. This affords organizations the
opportunity to make changes to their business operations without
incurring the cost of constantly changing their underlying
application software. These identity-based technologies not only
regulate access to information and applications, but are also
increasingly becoming core components of numerous other products
such as mobile phones and other digital devices. Our strategy
has been to develop identity management technologies as a set of
discrete services to accelerate time to value, as opposed to the
use of a single monolithic application that can take years to
implement and deploy.


Cross-platform
solutions.We offer two major
operating system platforms, NetWare and SUSE® LINUX, in
support of our cross-platform solutions. Our solutions offer an
enterprise-ready, scalable approach to networking and
collaboration services  including file, print,
messaging, scheduling and workspace. In addition, our
identity-driven, directory-based management modules allow
customers to manage their computing environment from a single,
central location. Our products are designed to operate within
existing heterogeneous computing environments as well as to
provide tools and strategies to allow easy migration between
platforms to fit better with our customers technology
plans.

A major focus of our cross-platform solutions is
to embrace and promote open source computing. Open source is 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 of whom are unaffiliated with
each other. Corporations also fund open source projects or
contribute code into open source to further assist the
development efforts. We believe that a major shift toward open
source software is underway as companies are more critically
evaluating the cost effectiveness of their information
technology (IT) investments, see value in having
access to the source code, and are looking for ways to avoid
vendor lock-in.

We believe that we are uniquely positioned to
drive the transition to greater use of open source software, as
well as to benefit from this trend. Widespread adoption of Linux
and open source software was initially hindered by weak
technical support and a lack of applications, shortcomings that
we are particularly well positioned to address. We leverage our
financial stability, experience, and global support capabilities
to help our customers integrate Linux and other open source
software into their existing IT environments. While the
flexibility and cost savings of Linux and open source have made
it attractive to enterprise customers, we believe these
businesses look to proprietary software vendors to provide
applications, management and security. With our SUSE LINUX open
source platform and our other cross-platform solutions, our
customers can deploy the best of closed and open source software
that many businesses find more attractive. As an example, our
GroupWise® product now allows customers to collaborate
seamlessly across their Windows and Linux environments. We also
provide solutions allowing IT managers to centrally control
Linux, NetWare and Windows systems in a consistent and
straightforward way.

Worldwide services.We provide worldwide IT consulting, training and support
services to address our customers needs. Our worldwide IT
consulting practice provides the business knowledge and
technical expertise to help our customers implement and achieve
maximum benefit from our products and solutions. We also offer
open source and identity driven services that are focused to aid
our clients in rapidly integrating applications or migrating
existing platforms to Linux.

Through our training services, we offer skills
assessments, advanced technical training courses, and customized
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 software engineer
certifica-



|  |                          
|- | -------------------------
|2 | Novell annual report 2004












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tions. Building on this program, we introduced
our Novell® Certified Linux Engineer and Novell Certified
Linux Professional programs to accelerate the adoption of Linux
and open source in the enterprise.


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

Celerant Consulting.Celerant, a majority-owned subsidiary of Novell, provides
value-based, operational strategy and implementation consulting
services to a wide variety of customers mainly in Europe and the
United States. Celerant specializes in improving the value
derived from existing business processes by accelerating time to
value and eliminating non-value creating activities.

Novell was incorporated in Delaware on
January 25, 1983. Our headquarters and principal executive
offices are located at 404 Wyman Street, Suite 500,
Waltham, MA 02451. Our telephone number at that address is
(781) 464-8000. We also have offices located in Provo,
Utah, telephone number (801) 861-7000. Our European
headquarters are located in Nuremberg, Germany, telephone number
(49) 911 740 53 0. We conduct primary
product development activities in Provo, Utah; Waltham,
Massachusetts; Cambridge, Massachusetts; Dublin, Ireland;
Nuremberg, Germany; and Bangalore, India. We also contract out
some product development activities to third-party developers.

Our Annual Report, Securities and Exchange
Commission (SEC) filings, earnings announcements,
and other financial information are available on our Investor
Relations website at http://www.novell.com/ir.

We make freely available on our website at
http://www.novell.com/company/shareholder/ our annual,
quarterly, and current reports, including any amendments to
those reports, as soon as reasonable practicable after they are
filed with the SEC.

Mailed copies of these reports can be obtained
free of charge through our automated telephone access system at
(800) 317-3195 or by emailing Novells investor
relations department at irmail@novell.com.

Components of Information Solutions

The following is a description of the core
products and services that make up each of our information
solution categories.

Identity management and web services
solutions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identity Manager, formerly DirXML®, is a
    powerful data-sharing and synchronization solution, often
    referred to as a meta-directory solution, which automatically
    distributes new and updated information across every designated
    application and directory on a network. This ensures that
    trusted e-business customers, partners, and suppliers are
    accessing consistent information, regardless of the applications
    and directories to which they have access.
|
| |  | eDirectoryTM is a full-service,
    platform-independent directory that significantly simplifies the
    complexities of managing users and resources in a mixed Linux,
    NetWare, UNIX, and Windows environment. It is a secure,
    scalable, cross-platform directory service that allows
    organizations to centrally store and manage information across
    all networks and operating systems and leverage existing IT
    investments.                                          
|
| |  | BorderManager® is a suite of network
    services used to connect a network securely to the Internet or
    any other network, allowing outside access to intranets and user
    access to the Internet.                                                                                                                                                                                                                                                                                    
|
| |  | iChain® is an identity-based security
    solution that controls access across technical and
    organizational boundaries to applications, the Web, and network
    resources. iChain separates security from individual
    applications and Web servers, enabling single-point,
    policy-based management of authentication and access privileges
    throughout the Internet.                                                                                                         



|                          |  
|------------------------- | -
|Novell annual report 2004 | 3












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| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | exteNdTM is a comprehensive suite for
    the rapid development and deployment of web services. Customers
    can powerfully combine identity, integration, and portal
    services to securely deliver relevant business information, at
    the appropriate time, to the right people.
|
| |  | SecureLogin is a directory-integrated
    authentication solution that delivers reliable, single sign-on
    access across multi-platform networks, simplifying password
    management by eliminating the need for users to remember more
    than one password.                       

Cross-platform solutions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NetWare is our proprietary operating system
    platform that offers secure continuous access to core network
    resources such as files, printers, directories, e-mail and
    databases seamlessly across all types of networks, storage
    platforms and client desktops.                                                                                                                                                
|
| |  | ZENworks® (Zero Effort Networking)
    management products protect the integrity of networks by
    centralizing, automating, and simplifying every aspect of
    network management, from distributing vital information across
    the enterprise to maintaining consistent policies on desktops,
    servers, and devices on Linux, NetWare, and Windows environments.                                                     
|
| |  | GroupWise collaboration products offer
    traditional and mobile users solutions for communication over
    intranets, extranets and the Internet.                                                                                                                                                                                                                                                                           
|
| |  | SUSE LINUX Enterprise Server is an
    enterprise-class, open source server operating system for
    professional deployment in heterogeneous IT environments of all
    sizes and sectors. This operating system integrates all server
    services relevant in Linux and constitutes a stable and secure
    platform for the cost-efficient operation of IT environments.                                                  
|
| |  | SUSE LINUX Professional is an open source product
    that combines a fast, secure operating system with over 1,000
    open source applications. It is ideal for new Linux users as
    well as technical enthusiasts, and it is principally sold
    through the retail channel.                                                                                                                                            
|
| |  | Novell Linux Desktop, released in November 2004,
    is a business desktop product that brings together the Linux
    operating environment with a complete set of office
    applications. Among the more significant business applications,
    it includes OpenOffice (a word processor, spreadsheet, and
    presentation suite), Mozillas Firefox browser, and Novell
    EvolutionTM, a collaboration client for Linux.

Worldwide Services.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consulting services: We provide technical
    expertise to deliver world-class solutions, based on an
    innovative approach focused on solving our customers
    business problems. We deliver services ranging from discovery
    workshops to strategy projects to solution implementations, all
    using a consistent, well-defined methodology. Our consulting
    approach is based on a strong commitment to open standards,
    interoperability, and the right blend of technology from Novell
    and other leading vendors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Technical Support: We provide phone-based,
    web-based, and onsite technical support for our proprietary and
    open source products through our Premium Support program.
    Premium Support provides customers with the flexibility to
    select the appropriate level of technical support services,
    which may include stated response times, around-the-clock
    support, service account management, and dedicated resources,
    such as Novells most experienced engineers. The Dedicated
    Support Engineer, Primary Support Engineer, and
    Account Management programs allow customers to build an
    ongoing support relationship with Novell at an appropriate level
    for their needs. We have committed a significant amount of
    technical support resources to the Linux open source platform.
    We also offer a full array of remote monitoring services and
    managed services. These services help customers increase system
    uptime, leveraging our experts to monitor and maintain the
    technologies our customers have employed.



|  |                          
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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Technical Support Alliance
    (TSANet):TSANet is an
    industry organization that enables world wide seamless
    collaborative support for multi-vendor support issues. TSANet
    was originally organized in 1993, with Novell being instrumental
    in the formation and charter of the organization. Membership
    today consists of more than one hundred software and hardware
    companies, including industry leaders such as EMC Corporation
    (EMC), Hewlett-Packard Company (HP),
    International Business Machines Corporation (IBM),
    Microsoft Corporation (Microsoft), Novell, Sun
    Microsystems, Inc. (Sun), Unisys Corporation, and
    Veritas Software Corporation (Veritas). We are an
    active member of TSANet worldwide, with representation on both
    the North American Board of Trustees and the European Board of
    Directors. We were also a major supporter in the creation of the
    TSANet Linux Community and are a sponsor member of that
    community when it was announced in August 2004.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Training Services: We accelerate the adoption of
    and enable the effective use of Novell products and solutions
    through the delivery of timely and relevant instructor-led and
    technology-based training course. Programs are delivered
    directly to customers and through our global channel of
    authorized Novell training partners. Our courses provide
    customers with a thorough understanding of the implementation,
    configuration, and administration of various Novell products and
    solutions. Additionally, we offer a consultative Technical
    Skills Assessment that provides clients with an evaluation
    of their proficiencies and their knowledge gaps. Through our
    training services, we also provide Advanced Technical Training
    at an engineering level to customers on a global basis.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certified Novell
    EngineerSM(CNE) Program:Through the
    long-standing CNE® program, we are strengthening the
    networking industrys self-support capability. CNE
    certificate holders are individuals who have received in-depth
    training and information and passed a comprehensive test
    validating their ability to proficiently administer both Novell
    and other networks.
|
| |  | Certified Linux Professional (CLP)
    Program:Announced in September of
    2004, the CLP program represents the cornerstone of our
    commitment to providing training and certification options for
    our clients and partners who require credentials and validation
    of competency on our SUSE LINUX Enterprise Server platform.                                                         
|
| |  | Certified Linux Engineer (CLE)
    Program:Announced in March 2003, the
    CLE program represents the cornerstone of Novells
    commitment to providing training and certification options for
    client and partners requiring credentials and validation of
    competency on both Linux and Novell Services for Linux
    technologies.                                                      

Strategy

Our mission is to reduce the cost, complexity and
vulnerability of our customers information environments,
allowing them to optimize the performance of their resources and
assets. We pursue this mission through five key strategies that
address the following:



| |   |                                        
| | - | ---------------------------------------
| |  | our products and services;             
|
| |  | our professional services;             
|
| |  | our partnerships;                      
|
| |  | multi-channel delivery; and            
|
| |  | continued development of our personnel.



|                          |  
|------------------------- | -
|Novell annual report 2004 | 5












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First, our product and services strategy focuses
on two specific areas that represent the greatest challenges
faced by IT executives today:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our strategy has been to develop identity-based
    technologies as a set of standards-based, discrete services, as
    opposed to a monolithic application dependent upon the use of
    proprietary underlying technologies. Our goal is to use identity
    services offerings as a foundation for establishing long-term
    strategic relationships with key customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Our innovative, open standards-based products are
    easy to deploy, simple to operate, reliable and scalable,
    enabling IT executives to create more robust computing
    environments with reduced IT budgets. A key tenet of our
    strategy is to embrace the open source movement, specifically
    through the distribution of SUSE LINUX and open source
    applications. We provide services on Linux from the desktop to
    the server to the mainframe. Our plan is to continue to use our
    significant engineering and support resources to encourage
    customers to adopt Linux, giving them the freedom of choice
    Linux provides without the anxiety over whether an open source
    solution can truly be relied upon for mission critical
    functions. In addition to distributing SUSE LINUX, our Open
    Enterprise Server product, due to be released in the second
    quarter of fiscal 2005, will give customers the opportunity to
    choose between a NetWare environment or a Linux environment,
    providing customers a cost effective, secure, reliable, and
    supported means to migrate to Linux and open source solutions,
    at the customers option, while maintaining all of the
    NetWare functionality to which they have become accustomed. Our
    goal is that by providing a migration strategy, we will retain
    traditional NetWare customers and gain new customers who are
    looking for the additional benefits that open source offers.

Second, our professional services are based on
understanding the complexities our customers face in the
information economy and the way our products best enable success
in our customers environments. Our strategy is to focus
our consulting and training expertise on identity-driven
solutions and open source software adoption, and to provide a
full range of support services for all proprietary and open
source products offered by us.

Third, we partner with the industrys
leading independent software vendors, systems integrators, and
original equipment manufacturers to enhance the value delivered
to customers. Some of our recent growth stems from a select set
of alliances. We expect to continue to pursue building these
alliances as well as develop other business channels. This
extends our market reach and enables us to provide full
solutions to our customers.

Fourth, we deliver solutions through a
multi-channel strategy, serving large organizations directly or
with systems integration partners and serving small and medium
organizations through our channel partners. We have reengaged
and renewed our business partner and channel relationships,
giving us a greater presence in the marketplace while lowering
our distribution costs. To maximize our reach while ensuring the
highest quality of service to our customers, we provide our
channel partners complete access to all of our tools, training
and methodologies.

Fifth, we will continue to take advantage of
innovation in our offerings, in our business practices and in
our go-to-market strategy. We strive to leverage all of our core
competencies and product sets: operating systems, resource
management, identity management, application development,
collaboration, cross-platform interoperability, and
heterogeneous environments. The continuous updating of our
employees skills remains a priority so that customers
receive the best possible value. Where appropriate, we also
intend to augment our offerings and delivery capabilities
through acquisitions.

Taken together, we believe the success of these
key strategies will provide lasting benefits to our customers
and stockholders alike.

Our strategy for our Celerant consulting business
is to remain focused on delivering measurable and sustainable
value to clients with a unique value-based pricing proposition.
We will continue to build on our



|  |                          
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|6 | Novell annual report 2004












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##### Table of Contents



extensive experience and strong relationships in
the chemicals, energy, manufacturing, telecommunications, and
process industries. We have expertise in the pharmaceuticals,
retail, and utilities industries, among others, on which we
intend to build.


Strategic Relationships

We partner with industry leaders in the software,
hardware, consulting, and system integration industries to bring
to market our solution sets. We believe that a well-managed and
supported alliance portfolio is critical to our success in
todays competitive solutions market. Alliance engagements
help increase our revenue and enhance our exposure to customers
around the world.

Our business partner strategy is based on having
a single partner program with a goal of providing consistent
interactions with Novell. This approach creates an environment
where a single business plan is created, including technology
enablement, certification, joint marketing, and sales
initiatives. To ensure partner efficiency, we are building a
partner ecosystem that combines our knowledge, services and
solutions with that of our partners to provide customers
the ability to adapt to, and profit from, the opportunities open
source brings to businesses.

Partnership engagements help expand our market
leverage increasing revenue and enhancing exposure to customers.
A partial list of our strategic partnerships includes: IBM, HP,
Dell, Inc. (Dell), Intel Corporation, Oracle
Corporation, SAP AG, Advanced Micro Devices, Inc., Veritas,
Computer Associates International, Inc. (Computer
Associates), EMC, and Adobe Systems, Inc. These partners
have all joined the Novell PartnerNet® Program and gain
value through participating in different partner tracks.
Solution providers gain access to various marketing campaigns
and programs that help drive sales volumes. Technology partners
receive solution developer deliverables and services that ensure
successful enablement of their technology with our technology.
We instruct our training partners so that they are able to in
turn train our customers.

Principal Markets, Segment and Geographic
Information

We sell our products, services, and solutions
directly through our sales force and indirectly through
resellers and distributors to corporations, government entities,
and educational institutions both domestically and
internationally.

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



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | North America  this geographic segment
    includes the United States and Canada.                                                                                                   
|
| |  | EMEA  this geographic segment includes
    Eastern and Western Europe, the Middle East and Africa.                                                                                  
|
| |  | Asia Pacific  this geographic segment
    includes China, Southeast Asia, Australia, New Zealand and India.                                                                         
|
| |  | Latin America  this geographic segment
    includes Mexico, Central America, South America and the
    Caribbean.                                                                   
|
| |  | Japan  this geographic segment is a
    majority-owned joint venture between Novell and several other
    companies.                                                                
|
| |  | Celerant consulting  this segment
    provides operational strategy and implementation consulting
    services to a variety of customers mainly in Europe and the
    United States.

All geographic segments sell our software and
services. Celerant consulting offers management consulting
services.



|                          |  
|------------------------- | -
|Novell annual report 2004 | 7












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Segment disclosures and geographical information
for fiscal years 2004, 2003, and 2002 are presented in
Part II, Item 8, Note W of the notes to the
consolidated financial statements of this report, which is
incorporated by reference into this Part I, Item 1. As
our strategy continues to evolve, the way in which management
views financial information to best evaluate performance and
operating results may also change.

Acquisitions

On July 19, 2004, we acquired Salmon Ltd.
(Salmon), a privately-held information technology
services and consulting firm headquartered in Watford, England.
The acquisition of Salmon enables us to expand our range of IT
consulting services offered in the United Kingdom.

On January 12, 2004, we acquired SUSE LINUX
AG (SUSE), a privately-held company and leading
distributor of commercial Linux for enterprise servers. The
acquisition of SUSE has expanded our ability to support and
distribute a complete package of Linux solutions and provides us
the ability to offer the most complete vertically-integrated set
of open source infrastructure applications available.

On August 4, 2003, we acquired Ximian, Inc.
(Ximian), a privately-held company and provider of
desktop and server solutions that enable enterprise Linux
adoption. The acquisition of Ximian expanded our ability to
support Linux solutions, providing us with Linux desktop,
groupware and management technologies. Through this acquisition,
along with the SUSE acquisition, we have brought leaders in the
open source community together with a strong core of Linux
developers at Novell.

Product Development

Product development activities are conducted
throughout the world to develop, translate and test products
that meet the needs of our customers. Our commitment to deliver
world-class products that simplify, secure, and accelerate
business solutions means continued investment in product
development. As a result of our focus on the Linux operating
system, our product development activities have expanded and now
include technology developed by the open source community.

Our product development engineers work as a part
of open source development teams across the world. This
involvement ensures our role in leading technical advances,
developing new features and having input over timing of
releases, as well as other information related to the
development of the Linux kernel and other open source projects.
Product development expenses for the fiscal years 2004, 2003,
and 2002 are discussed in Part II, Item 7 of this
report, Managements Discussion and Analysis of
Financial Condition and Results of Operations, which is
incorporated by reference into this Part I, Item 1.

Sales and Marketing

We sell our business solutions via our channel
market model, which we call our Clear Channelmodel, with
value added partners such as demand agents, vertical markets
resellers, systems integrator distributors, and OEMs who meet
our criteria, as well as selling directly to named enterprise
customers. In addition, we conduct sales and marketing
activities and provide technical support, training, and field
service to our customers from our 29 U.S. and 78 international
sales offices.

Distributors.We
have established a network of independent distributors who sell
our products to resellers, dealers, VARs (value added
resellers), and computer retail outlets. As of October 31,
2004, there were four U.S. distributors and approximately
123 international distributors.

VARs and Systems
Integrators.We also sell directly to
VARs and systems integrators who provide solutions across
multiple vertical market segments and whose volume of purchases
warrants buying directly from us.



|  |                          
|- | -------------------------
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OEMs/ Independent Hardware Vendors
(IHVs)/ Independent Software Vendors
(ISVs).We license subsets
of products to domestic and international OEMs/ IHVs/ ISVs for
integration with their products and/or solutions.

End-User Customers.We have assembled worldwide field resources to work directly
with enterprise end users and have engaged in license agreements
with over 5,000 customers to date. Additionally, product
upgrades and software maintenance are sold directly to
end-users. Customers can also purchase products and services
under license agreements through partners or resellers in or
near their geographic locations.

Marketing Strategy.The goals of our marketing strategy are to contribute to our
strategic decision-making through in-depth understanding of
market trends, customer needs, preferences, and buying patterns;
to build our market image; and to increase our revenue and
market share in chosen target markets. We feel that todays
focus on streamlining operations and cost reduction has resulted
in an increase in Chief Information Officer (CIO)
importance and control. Our primary marketing audience is the
CIO and other senior corporate executives, with additional
audiences being the IT applications development staff and
the IT operations staff.

Marketing
Initiatives.Our marketing activities
are varied and tightly focused. To more closely align our
offerings with customer needs, we have created a customer
council and have more closely integrated the operations of
marketing and product management. We have enhanced our Internet
site to improve communication of our value strategy. The events
that we sponsor are tightly focused and leverage our resources.
Twice annually, Novell conducts BrainShare® Conferences in
North America and Europe to inform and educate customers,
partners, developers, and the press and analyst community about
our product and solution strategy and offerings. In addition, we
have other ongoing activities such as distribution of sales
literature, press releases, periodic product announcements,
support of Novell user groups, publication of technical and
other articles in the trade press, and participation in industry
seminars, conferences, and trade shows. These activities are all
designed to educate the market about our products and services.

International
Revenue.In fiscal 2004, 2003, and
2002, approximately 56%, 54%, and 49%, respectively, of our
revenue was generated from customers outside the U.S.
Approximately 32% of our total revenue in fiscal 2004 was
invoiced by us in U.S. dollars outside of the U.S. Local
currency invoicing includes a significant portion of invoices
generated in our Irish shared service center, as well as other
international local office billings. No one foreign country
accounted for more than 10% of revenue in any period based on
revenue classified by location of the end-user customers. For
information regarding risk related to foreign operations, see
Part II, Item 7, Factors Affecting Future
Results of Operations, which information is incorporated
by reference into this Part I, Item 1.

Major Customers

None of our customers accounted for more than 10%
of our revenue in fiscal year 2004, 2003, or 2002.

Manufacturing Suppliers

Our physical products, which consist primarily of
compact discs and manuals, are duplicated by outside vendors.
Multiple high-volume manufacturers are available and we do not
rely on a single provider for our raw materials, nor have we
encountered problems with our existing manufacturing suppliers.

Backlog

Lead times for our products are relatively short.
Consequently, we do not believe that backlog is a reliable
indicator of future revenue or earnings. Our practice is to ship
products promptly upon the receipt of purchase orders from our
customers and, therefore, backlog is not significant.



|                          |  
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|Novell annual report 2004 | 9












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Competition

Geographic segments

The market for identity management and web
services solutions and cross-platform solutions is highly
competitive and subject to rapid technological change. We expect
competition to continue to increase both from existing
competitors and new market entrants. We believe that competitive
factors common to all of our geographic segments include the
following:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to preserve our legacy customer base;                                                                                                            
|
| |  | our ability to sell both products and services as
    part of an overall solution;                                                                           
|
| |  | the timing and market acceptance of new solutions
    developed by us and our competitors;                                                                   
|
| |  | brand and product awareness;                                                                                                                                 
|
| |  | the performance, reliability, and security of our
    products;                                                                                              
|
| |  | the completeness of our suite of product and
    solutions offerings;                                                                                        
|
| |  | our ability to establish and maintain key
    strategic relationships with distributors, resellers,
    independent software vendors, and other partners; and
|
| |  | the pricing of our products and services and the
    pricing strategies of our competitors.                                                                  

Competitors of our identity management and web
services solutions and cross-platform solutions include
Microsoft, IBM, Sun, HP, Altiris, Inc., Computer Associates and
Red Hat, Inc. Competitors of our worldwide services group
include IBM, Accenture Ltd. (Accenture), HP,
Computer Services Corporation (CSC) and Capgemini
Group (Capgemini).

One pervasive factor facing us and all companies
doing business in our industry is the presence  and
dominance  of Microsoft. In a decision upheld by a
federal appellate court, Microsoft was found to have violated
Section 2 of the Sherman Act by unlawfully acting to
maintain its monopoly over desktop operating systems. And in a
decision by the European Commission in 2004, now on appeal, the
EC found Microsoft in violation of Article 82 of the
EC Treaty for refusal to supply critical interoperability
information to its competitors, including Novell. We remain
concerned, however, that Microsoft may continue to engage in
business practices that unfairly inhibit the growth of its
competitors, including Novell, and that the settlement of the
litigation between the Department of Justice and Microsoft and
the decision in the EC will not significantly affect
Microsofts practices.

Celerant consulting segment

The key competitive factors faced by the Celerant
segment are attracting and retaining the highest quality
consultants; increasing the depth of our skills and expertise;
broadening our consulting capabilities; and having expertise in
key functional areas. The market for management consulting
services is highly competitive due to the existence of various
large consulting firms. Many of these companies have greater
financial, technical and marketing resources and greater name
recognition in the management consulting area, which could
inhibit our ability to grow our consulting business.
Additionally, the worldwide marketplace for management
consulting services is highly fragmented. In different regions
of the world, there may be multiple competitors, many with niche
consultancies. Examples of these various competitors include:
A.T. Kearney, Inc., McKinsey & Co.,
IBM Global Services, Capgemini, and The Management
Consulting Group PLC.

Copyright, Licenses, Patents, and
Trademarks

We rely on copyright, patent, trade secret, and
trademark law, as well as provisions in our license,
distribution, and other agreements to protect our intellectual
property rights. Our portfolio of patents,



|   |                          
|-- | -------------------------
|10 | Novell annual report 2004












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##### Table of Contents



copyrights, and trademarks as a whole is material
to our business; but no individual piece of intellectual
property is critical to our business. We have been issued what
we consider to be valuable patents and have numerous other
patents pending. No assurance can be given that the pending
patents will be issued or, if issued, will provide protection
for our competitive position. Notwithstanding our efforts to
protect our intellectual property through contractual measures,
unauthorized parties may still attempt to violate our
intellectual property rights.


Our business now includes a mix of proprietary
offerings and offerings based on open source technologies. With
respect to proprietary offerings, we perform the majority of our
development efforts internally, but we also acquire and license
technologies from third parties; no one license is critical to
our business. Our open source offerings are primarily comprised
of open source components developed by independent third parties
over whom we exercise no control; the collective licenses to
those open source technologies are critical to our business. If
we are unable to maintain licenses to third party materials, our
distribution of relevant offerings may be delayed until we are
able to develop, license, or acquire replacement technologies.
Such a delay could have a material adverse impact on our
business.

The software industry is characterized by
frequent litigation regarding patent, copyright and other
intellectual property rights and trends suggest that this may
increase. We have from time to time had infringement claims
asserted by third parties against us and our products. While
there are no known pending or threatened claims against us for
which we expect to have an unsatisfactory resolution that would
have a material adverse effect on our results of operations and
financial condition, there can be no assurance that such claims
will not be asserted, or, if asserted, will be resolved in a
satisfactory manner. In addition, there can be no assurance that
third-parties will not assert other claims against us with
respect to any third-party technology. In the event of
litigation to determine the validity of any third-party claims,
such litigation could result in significant expense to us and
divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor.

In the event of an adverse result in any such
litigation, we could be required to expend significant resources
to develop non-infringing technology or to obtain licenses to
the technology that was the subject of the litigation. There can
be no assurance that we would be successful in such development
or that any such licenses would be available.

In addition, the laws of certain countries in
which our products are or may be developed, manufactured, or
sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States.

Seasonality

All five geographic segments of our business
often experience a higher volume of revenue at the end of each
quarter and during the fourth quarter of our fiscal year due to
the spending cycles of our customers and the negotiation
patterns typical in the software industry. Celerant consulting
often experiences a lower volume of revenue during the fourth
fiscal quarter as a large portion of its revenue is derived in
Europe where many take summer holidays in August.

Employees

As of December 31, 2004, we had
6,186 permanent and temporary employees. The functional
distribution of our employees was: sales and
marketing  1,371; product development 
1,620; general and administrative  846; and service,
consulting, training, and operations  2,349. Of
these, 2,895 employees are in locations outside the U.S.
All of our U.S. personnel are based at our facilities in
Utah, Massachusetts, California, and various U.S. field
offices. None of our employees are represented by a labor union,
and we consider our employee relations to be good.



|                          |   
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|Novell annual report 2004 | 11












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Competition for personnel of the highest caliber
is intense in the software and consulting industries. To make a
long-term relationship with us rewarding, we endeavor to give
our employees challenging work, educational opportunities,
competitive wages, sales commission plans, bonuses, and
opportunities to participate financially in the ownership and
success of Novell through stock option and stock purchase plans.

Executive Officers

Set forth below are the names, ages, and titles
of the persons currently serving as our executive officers.

|                        |  |     |    |          |  |                                                                 
|----------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Jack L. Messman         |  |     | 64 |          |  | Chairman of the Board, President and Chief
    Executive Officer
|Joseph S. Tibbetts, Jr. |  |     | 52 |          |  | Senior Vice President, Chief Financial Officer                  
|Alan J. Friedman        |  |     | 57 |          |  | Senior Vice President, People                                   
|Joseph A. LaSala, Jr.   |  |     | 50 |          |  | Senior Vice President, General Counsel and
    Secretary        
|Ronald W. Hovsepian     |  |     | 43 |          |  | President, Novell North America                                 
|Richard Seibt           |  |     | 52 |          |  | President, Novell Europe, Middle East, Africa                   



| |                
| | ---------------
| | Jack L. Messman

Jack L. Messman became President and Chief
Executive Officer of Novell in July 2001 in connection with
Novells acquisition of Cambridge Technology Partners, Inc.
(Cambridge) and was appointed Chairman of the Board
of Directors in November 2001. He has been a director of Novell
since 1985. From August 1999 to July 2001, Mr. Messman was
President and Chief Executive Officer of Cambridge.
Mr. Messman was the Chief Executive Officer of Union
Pacific Resources Group Inc. (UPR), an oil and gas
company, from 1991 to August 1999 and its Chairman from 1996 to
August 1999. Mr. Messman is also a director of Safeguard
Scientifics, Inc., RadioShack Corporation, and Timminco, Ltd.



| |                        
| | -----------------------
| | Joseph S. Tibbetts, Jr.

Joseph S. Tibbetts, Jr. joined Novell in
February 2003 as Senior Vice President and Chief Financial
Officer. Mr. Tibbetts served as a member of Novells
Board of Directors from November 2002 until February 4,
2003, at which time he resigned from the Board to join our
management team. Mr. Tibbetts served as a General Partner
of Charles River Ventures, a venture capital firm, from March
2000 to June 2002. Prior to that, Mr. Tibbetts served as
the Senior Vice President, Finance and Administration, Chief
Financial Officer and Treasurer of Lightbridge, Inc., a firm
focusing on customer relationship management solutions for the
telecommunications industry, from May 1998 to February 2000.
Prior to that, Mr. Tibbetts served as Vice President,
Finance and Administration, Chief Financial Officer and
Treasurer of SeaChange International, Inc., a developer and
manufacturer of digital server systems for the television
industry, from June 1996 to March 1998. Before then,
Mr. Tibbetts spent 20 years at Price
Waterhouse LLP (now PricewaterhouseCoopers) where he was an
audit partner for ten years and led the firms national
software practice.



| |                 
| | ----------------
| | Alan J. Friedman

Alan J. Friedman became Senior Vice President,
People of Novell in July 2001 in connection with Novells
acquisition of Cambridge. Mr. Friedman served as
Cambridges Senior Vice President of Human Resources,
Enterprises Learning and Knowledge Management from January 2000
to July 2001, and had joined Cambridge in December 1999 as Vice
President of Learning and Knowledge Management. Prior to joining
Cambridge, Mr. Friedman was Senior Vice President of Human
Resources for Arthur D. Little, Inc., a consulting firm, from
June 1993 to December 1999.



|   |                          
|-- | -------------------------
|12 | Novell annual report 2004












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##### Table of Contents





| |                      
| | ---------------------
| | Joseph A. LaSala, Jr.

Joseph A. LaSala, Jr. became Senior Vice
President, General Counsel and Secretary of Novell in July 2001
in connection with Novells acquisition of Cambridge. From
March 2000 to July 2001, Mr. LaSala served as Senior Vice
President, General Counsel and Secretary of Cambridge. Prior to
joining Cambridge, Mr. LaSala served as Vice President,
General Counsel and Secretary of UPR. from January 1996 to March
2000. Mr. LaSala is a member of the board of directors of
Buckeye Pipe Line Company, the general partner of Buckeye
Partners, L.P.



| |                    
| | -------------------
| | Ronald W. Hovsepian

Ronald W. Hovsepian joined Novell in June 2003 as
President, Novell North America. From February 2002 to December
2002, Mr. Hovsepian was a Managing Director with Bear
Stearns Asset Management, a technology venture capital fund.
From March 2000 to February 2002, Mr. Hovsepian served as
Managing Director for Internet Capital Group, a venture capital
firm (ICG). Mr. Hovsepian had most recently
served as ICGs Managing Director, Operations, where he was
in charge of overseeing ICGs top 30 investments. Prior to
that, Mr. Hovsepian served in a number of positions with
IBM over a 17-year period, most recently serving as Vice
President, Business Development. Prior to that,
Mr. Hovsepian had also served as Worldwide General Manager
of Industry Solutions, Retail Sector and as Vice President,
Supply Chain Solutions. Mr. Hovsepian is a member of the
board of directors of Ann Taylor Corporation.



| |              
| | -------------
| | Richard Seibt

Richard Seibt joined Novell in January 2004 in
connection with our acquisition of SUSE LINUX AG
(SUSE), where he served as Chief Executive Officer
since he joined in January 2003. Mr. Seibt became
President, Novell EMEA in February 2004. Prior to joining SUSE,
Mr. Seibt served as Executive Board Member of United
Internet AG, an Internet service provider, from September
1998 to December 2002. Prior to that, Mr. Seibt served in a
number of positions with IBM, most recently serving as General
Manager of the OS/ 2 Business Unit, Vice President Software
Sales and Marketing North America and Managing Director IBM
Germany.






|        |           
|------- | ----------
|Item 2. | Properties

In the U.S., we own approximately
872,000 square feet and occupy approximately
834,000 square feet of office space on 46 acres in
Provo, Utah, which is used for administrative offices and
functions as our primary product development center. We lease
and occupy approximately 105,000 square-feet of office
space in Waltham, Massachusetts, which is the location of our
corporate headquarters and principal executive offices and is
also used for product development. We lease approximately
177,000 square-feet of office building in Cambridge,
Massachusetts, of which we occupy approximately
23,000 square feet, sublease approximately
133,000 square-feet and approximately 22,000 square
feet is vacant. We assumed the lease of a 100,000 square
foot facility in Billerica, Massachusetts, in conjunction with
the acquisition of SilverStream Software Inc.
(SilverStream). This facility is currently
unoccupied. We lease sales and support offices in California,
Colorado, Connecticut, Florida, Georgia, Illinois,
Massachusetts, Michigan, Minnesota, Missouri, New York, Oregon,
Pennsylvania, Tennessee, Texas, Utah, Virginia, and Washington.

Internationally, we own an
85,000 square-foot office building in Bracknell, United
Kingdom, a 42,000 square-foot building in the Netherlands,
and an 18,000 square-foot building in Johannesburg, South
Africa, all of which are used for sales and administrative
offices. We lease and occupy a 21,000 square-foot facility
in Dublin, Ireland, which is used as a shared services center
and for product localization, a 29,000 square-foot facility
in Richmond, United Kingdom, 11,000 square feet of which is
used as headquarters and administrative offices for our Celerant
subsidiary, and an 80,000 square-foot facility in
Bangalore, India,



|                          |   
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|Novell annual report 2004 | 13












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##### Table of Contents



which is used as a product development center. In
conjunction with the SUSE acquisition, we assumed the leases of
various facilities in Germany totaling 110,000 square feet.


We have subsidiaries in Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech
Republic, Denmark, Finland, France, Germany, India, Ireland,
Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, Netherlands,
New Zealand, Norway, Philippines, Portugal, Puerto Rico,
Singapore, Spain, Sweden, Switzerland, Thailand, Taiwan, United
Kingdom, and Venezuela, each of which leases a small facility
used as sales and support offices.

The terms of the above leases vary from
month-to-month to up to 20 years. We believe that our
existing facilities are adequate to meet our current
requirements and we anticipate that suitable additional or
substitute space will be available, as necessary, upon favorable
terms.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In November 2004, we filed suit against Microsoft
in the U.S. District Court, District of Utah. We seek to be
awarded treble damages in an amount to be determined at trial
based on claims that Microsoft eliminated competition in the
office productivity software market during the time that we
owned the WordPerfect word-processing application and the
Quattro Pro spreadsheet application. Among other claims, we
alleged that Microsoft withheld certain critical technical
information about Windows from us, thereby impairing our ability
to develop new versions of WordPerfect and other Novell office
productivity applications. The complaint also alleges that
Microsoft integrated certain technologies into Windows designed
to exclude WordPerfect and other Novell applications from
relevant markets. In addition, we alleged that Microsoft used
its monopoly power to prevent OEMs from offering
WordPerfect and other applications to customers. On
January 7, 2005, Microsoft filed a motion to dismiss the
complaint. We will vigorously oppose the motion to dismiss.
While there can be no assurance as to the ultimate disposition
of the litigation, we do not believe that its resolution will
have a material adverse effect on our financial position,
results of operations or cash flows.

In May 2004, we received $18.5 million from
The Canopy Group, Inc. (Canopy) in satisfaction of a
judgment against Canopy. The judgment arose out of a collection
action filed by us against Canopy, wherein we sought to recover
a royalty payment due under a licensing agreement and arising
out of a settlement payment from a third party to Canopy. In
connection with this payment, we recognized revenue of
$13.5 million and interest income of $5 million during
the quarter ended July 31, 2004.

In January 2004, the SCO Group, Inc.
(SCO) filed suit against us in the Third Judicial
District Court of Salt Lake County, State of Utah. We removed
the claim to the U.S. District Court, District of Utah.
SCOs original complaint alleged that our public statements
and filings regarding the ownership of the copyrights in UNIX
and UnixWare have harmed SCOs business reputation and
affected its efforts to protect its ownership interest in UNIX
and UnixWare. The District Court dismissed the original
complaint, but allowed SCO an opportunity to file an amended
complaint, which SCO did in July 2004. As with the original
complaint, SCO is again seeking to require us to assign all
copyrights that we have registered in UNIX and UnixWare to SCO,
to prevent us from representing that we have any ownership
interest in the UNIX and UnixWare copyrights and to require us
to withdraw all representations we have made regarding our
ownership of the UNIX and UnixWare copyrights and to pay actual,
special and punitive damages in an amount to be proven at trial.
We have again sought to dismiss SCOs amended complaint and
ultimately believe that we have meritorious defenses to these
claims even if our Motion to Dismiss is denied. Accordingly, we
intend to vigorously defend ourselves in this suit. Although
there can be no assurance as to the ultimate disposition of the
suit, we do not believe that the resolution of this litigation
will have a material adverse effect on our financial position,
results of operations or cash flows.

SilverStream which we acquired in July 2002, and
several of its former officers and directors, as well as the
underwriters who handled SilverStreams two public
offerings, were named as defendants in several class action
complaints that were filed on behalf of certain former
stockholders of SilverStream who purchased



|   |                          
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|14 | Novell annual report 2004












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##### Table of Contents



shares of SilverStream common stock between
August 16, 1999 and December 6, 2000. These complaints
are closely related to several hundred other complaints that the
same plaintiffs have brought against other issuers and
underwriters. These complaints all allege violations of the
Securities Act, as amended and the Securities Exchange Act of
1934, as amended. In particular, they allege, among other
things, that there was undisclosed compensation received by the
underwriters of the public offerings of all of these issuers,
including SilverStreams. The plaintiffs are seeking
monetary damages, statutory compensation and other relief that
may be deemed appropriate by the court. A Consolidated Amended
Complaint with respect to all of these companies was filed in
the U.S. District Court, Southern District of New York, on
April 19, 2002. While we believe that SilverStream and its
former officers and directors have meritorious defenses to the
claims, a Memorandum of Understanding has been reached between
many of the defendants and the plaintiffs, which contemplate a
settlement of the claims. The settlement, however, has not been
finalized. While there can be no assurance as to the ultimate
disposition of the litigation, we do not believe that its
resolution will have a material adverse effect on our financial
position, results of operations or cash flows.


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

We evaluate the adequacy of our legal reserves on
a quarterly basis. During fiscal 2004, we recorded a reduction
of $5 million in legal reserves relating to favorable
developments in then current litigation matters and a reduction
of $4 million due to a one-time adjustment to the legal
reserve. We are currently party to various legal proceedings and
claims including former employees, either asserted or
unasserted, which arise in the ordinary course of business.
While the outcome of these matters cannot be predicted with
certainty, we do not believe that the outcome of any of these
claims or any of the above mentioned legal matters will have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.






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

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year covered by
this report.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 15












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##### Table of Contents






PART II






|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters, and Issuer Purchases of Equity
    Securities

Novells common stock trades in the Nasdaq
National Market under the symbol NOVL. The following
chart sets forth the high and low sales prices of our common
stock during each quarter of the last two fiscal years:

|            |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |      | 
|----------- | ---- | ------- | - | ------- |  | ------- | - | ------- |  |  | - | ----- |  |  | - | ---- | 
|            |      | First   |   | Second  |  | Third   |   | Fourth 
|            |      | Quarter |   | Quarter |  | Quarter |   | Quarter
|            |      |         |   |         |  |         |   |        
|Fiscal 2004 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |     
|            | High |         | $ | 12.93   |  |         | $ | 14.24   |  |  | $ | 10.98 |  |  | $ | 7.45 | 
|            | Low  |         | $ | 5.64    |  |         | $ | 9.31    |  |  | $ | 6.32  |  |  | $ | 5.62 | 
|Fiscal 2003 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |     
|            | High |         | $ | 3.98    |  |         | $ | 3.29    |  |  | $ | 3.85  |  |  | $ | 6.35 | 
|            | Low  |         | $ | 2.63    |  |         | $ | 2.15    |  |  | $ | 2.72  |  |  | $ | 3.46 | 

No dividends have been declared on our common
stock. We have no current plans to pay dividends on our common
stock, and intend to retain our earnings for use in our
business. There were 8,566 stockholders of record at
December 31, 2004.

Repurchases of Common Stock

|                   |        |              |     |            |  |                          |      |                            |  |  |     |     |  |  |     |     | 
|------------------ | ------ | ------------ | --- | ---------- |  | ------------------------ | ---- | -------------------------- |  |  | --- | --- |  |  | --- | --- | 
|                   |        |              |     |            |  |                          |      | Maximum Dollar Value of   
|                   |        |              |     |            |  | Total Number of Shares   |      | Shares That May Yet Be    
|                   |        | Number of    |     | Average    |  | Purchased Under Publicly |      | Repurchased Under Publicly
|                   |        | Shares       |     | Price Paid |  | Announced Repurchase     |      | Announced Repurchase      
|Month Ended        |        | Purchased(1) |     | per Share  |  | Programs                 |      | Programs                  
|                   |        |              |     |            |  |                          |      |                           
|August 31, 2004    |        |              |    |            |  |                          |     |                            |  |  | N/A |     |  |  | N/A |    
|September 30, 2004 |        |              |    |            |  |                          |     |                            |  |  | N/A |     |  |  | N/A |    
|October 31, 2004   |        |              | 387 |            |  | $                        | 6.31 |                            |  |  | N/A |     |  |  | N/A |    
|                   |        |              |     |            |  |                          |      |                            |  |  |     |     |  |  |     |    
|                   | Totals |              |     | 387        |  |                          |      |                            |  |  |     | N/A |  |  |     | N/A | 
|                   |        |              |     |            |  |                          |      |                            |  |  |     |     |  |  |     |    

On June 28, 2004, we filed a Form 8-K
announcing our intention to use a portion of the proceeds from
the issuance of senior convertible debentures to repurchase, on
a one-time basis, $125 million of common stock
(15,188,300 shares at $8.23 per share). These shares were
repurchased on July 2, 2004, are held in treasury and are
classified as treasury stock on our consolidated balance sheet
at July 31, 2004.

(1) Repurchases of shares of common stock
that have not been publicly announced represent forfeited shares
by employees to satisfy tax withholdings relating to vesting of
restricted stock or payment of shares from the deferred
compensation plan.



|   |                          
|-- | -------------------------
|16 | Novell annual report 2004












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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                          |  |                                               |           |             |  |             |           |             |  |             |           |   |  |   |           |   |  |   |           |  
|--------------------------------------------------------- |  | --------------------------------------------- | --------- | ----------- |  | ----------- | --------- | ----------- |  | ----------- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                          |  |                                              
|                                                          |  | Fiscal Year Ended                            
|                                                          |  |                                              
|                                                          |  | October 31,                                   |           | October 31, |  | October 31, |           | October 31, |  | October 31,
|                                                          |  | 2004                                          |           | 2003        |  | 2002        |           | 2001        |  | 2000       
|                                                          |  |                                               |           |             |  |             |           |             |  |            
|                                                          |  |                                              
|                                                          |  | (Amounts in thousands, except per share data)
|Statement of operations                                   |  |                                               |           |             |  |             |           |             |  |             |           |   |  |   |           |   |  |   |           |  
|Revenue                                                   |  | $                                             | 1,165,917 |             |  | $           | 1,105,496 |             |  | $           | 1,134,320 |   |  | $ | 1,050,796 |   |  | $ | 1,161,735 |  
|Gross profit                                              |  |                                               | 750,238   |             |  |             | 666,778   |             |  |             | 684,902   |   |  |   | 712,162   |   |  |   | 834,337   |  
|Income (loss) from operations                             |  |                                               | 65,692    |             |  |             | (27,822   | )           |  |             | (68,125   | ) |  |   | (120,813  | ) |  |   | (31,582   | )
|Income (loss) before taxes                                |  |                                               | 74,974    |             |  |             | (55,010   | )           |  |             | (92,225   | ) |  |   | (276,766  | ) |  |   | 70,672    |  
|Income tax expense (benefit)                              |  |                                               | 17,786    |             |  |             | 106,894   |             |  |             | 10,896    |   |  |   | (14,944   | ) |  |   | 21,202    |  
|Net income (loss) before accounting change                |  |                                               | 57,188    |             |  |             | (161,904  | )           |  |             | (103,121  | ) |  |   | (261,822  | ) |  |   | 49,470    |  
|Cumulative effect of accounting change, net of
    tax(a) |  |                                               |          |             |  |             |          |             |  |             | (143,702  | ) |  |   | (11,048   | ) |  |   |          |  
|Net income (loss)                                         |  |                                               | 57,188    |             |  |             | (161,904  | )           |  |             | (246,823  | ) |  |   | (272,870  | ) |  |   | 49,470    |  
|Net income (loss) available to common stockholders        |  | $                                             | 31,092    |             |  | $           | (161,904  | )           |  | $           | (246,823  | ) |  | $ | (272,870  | ) |  | $ | 49,470    |  
|Net income (loss) per common share, basic and
    diluted |  | $                                             | 0.08      |             |  | $           | (0.44     | )           |  | $           | (0.68     | ) |  | $ | (0.82     | ) |  | $ | 0.15      |  
|Balance sheet                                             |  |                                               |           |             |  |             |           |             |  |             |           |   |  |   |           |   |  |   |           |  
|Cash, cash equivalents and short-term investments         |  | $                                             | 1,211,467 |             |  | $           | 751,852   |             |  | $           | 635,858   |   |  | $ | 705,243   |   |  | $ | 698,193   |  
|Working capital                                           |  |                                               | 842,120   |             |  |             | 404,095   |             |  |             | 328,031   |   |  |   | 416,463   |   |  |   | 552,281   |  
|Total assets                                              |  |                                               | 2,291,548 |             |  |             | 1,567,653 |             |  |             | 1,665,065 |   |  |   | 1,904,006 |   |  |   | 1,712,346 |  
|Senior convertible debentures                             |  |                                               | 600,000   |             |  |             |          |             |  |             |          |   |  |   |          |   |  |   |          |  
|Redeemable preferred stock                                |  |                                               | 25,000    |             |  |             |          |             |  |             |          |   |  |   |          |   |  |   |          |  
|Stockholders equity                                      |  | $                                             | 963,364   |             |  | $           | 934,470   |             |  | $           | 1,065,542 |   |  | $ | 1,270,667 |   |  | $ | 1,245,085 |  



---



|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In fiscal 2001 we changed our method of
    accounting for revenue related to product sales to distribution
    channel partners from recognizing the revenue upon shipment to
    the distribution partner to recognizing such revenue upon the
    sale by the distribution partner to the end user.
|   
|    | In fiscal 2002 we adopted Statement of Financial
    Accounting Standards No. 142, Goodwill and Other
    Intangible Assets, resulting in a transitional goodwill
    impairment loss.                                                                                                              

See the Managements Discussion and Analysis
of Financial Condition and Results of Operations section for a
discussion of data comparisons.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 17












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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

The strategic focus of our business is to deliver
to our customers identity management and web services solutions
and cross-platform solutions, supported by services solutions
that complement our products. Important factors in evaluating
our 2004 fiscal year results include the state of the global
economy and IT markets and our progress in implementing key
initiatives. These initiatives include:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | reducing the rate of revenue decline in our
    legacy NetWare business;           
|
| |  | increasing revenue from our Linux and identity
    management businesses; and      
|
| |  | increasing sales of other products and services,
    including consulting services.

Our initiatives and their implementation involve
risks and challenges. The following addresses our progress with
these initiatives and their implementation during fiscal 2004,
as well as the risks and challenges we believe we face over the
next year.

One of our most important strategies is to
embrace the open source movement, specifically the Linux
operating system, and to develop a competitive position in the
Linux market. This strategy includes supporting the Linux
operating system in addition to the NetWare operating system by
offering Novell products and services that run on both Linux and
NetWare platforms. Our acquisitions of Ximian and SUSE, as well
as restructurings in this and the prior fiscal year, are direct
results of this strategy. These acquisitions in particular
enable us to offer a full range of enterprise solutions on the
Linux platform, from the desktop to the server to the mainframe.
We have completed the integration of Ximian and have made
significant progress with the integration of SUSE personnel,
operations and technology into our business. We expect that the
benefits of the completed SUSE integration will not be fully
realized until mid-fiscal 2005. Our key open source and Linux
goals include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We need to successfully address the concerns of
    our NetWare installed base in order to eliminate historic
    revenue declines by providing a well articulated technology
    roadmap that is applicable for their businesses. The installed
    base is an important source of cash flow and an opportunity for
    us to sell more products. Excluding the impact of foreign
    currency effects, NetWare revenue for fiscal 2004 declined by
    10% from fiscal 2003. It is our goal that the release of our
    Open Enterprise Server (OES) product, which will
    include both the SUSE Linux Enterprise Server
    (SLES) 9 and NetWare operating systems, will
    keep customers with Novell. OES is designed as a platform to
    allow our installed base to easily transition from NetWare to
    Linux, should they choose to migrate. Our intention is that by
    providing customers with a clear migration path to our Linux
    products, we mitigate the risk that customers may defect.
|
| |  | We released SLES 9 during fiscal 2004, which we
    believe to be a major milestone in enabling enterprise Linux
    computing. We shipped approximately 40,000 SLES 9 units
    (including 12,000 to a single customer) during fiscal 2004 and
    3,800 units of SLES 8 from the date of our acquisition of SUSE
    to the release of SLES 9. We also signed Linux-related
    enterprise-wide agreements with three Fortune 100 customers
    during the fourth quarter of fiscal 2004. Our belief is that
    sales of our SUSE LINUX products will increase as the market
    becomes more familiar with them. In addition, we believe that
    our Linux initiatives will help grow the Linux market and
    provide sales opportunities for our other products. As a result,
    we expect our existing product revenue streams and financial
    trends to benefit as the overall Linux market grows in the
    future.                                                                                      
|
| |  | Another important goal is to remove the barriers
    to adoption of Linux at the enterprise level. We believe that
    our experience providing enterprise-level service, support, and
    products as well as other of our competitive advantages will
    allow us to become the leader in Linux operating system
    distributions in a relatively short period of time. We will
    continue to invest heavily in engineering, partnerships,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|   |                          
|-- | -------------------------
|18 | Novell annual report 2004












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| |  |                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | support and training. We are constantly
    evaluating our entire solution stack, and we will make, buy or
    license the appropriate technologies in order to provide a more
    complete, value-add offering.

Another goal is to expand our identity driven
computing strategy. We are in the process of componentizing
delivery of identity management solutions so customers can
implement a broader strategy in smaller modules, thereby
reducing the time it takes to realize considerable business
value and lowering their overall risk in adopting an
enterprise-wide identity strategy. We believe that a primary
driver of growth will be the demonstration of successful, small
implementations that we can use as case studies and proof points.

In fiscal 2004, we were able to turn our IT
consulting business around to profitability at the contribution
margin level. In fiscal 2005, we plan to continue to profitably
grow the IT consulting business and to more closely align the IT
consulting engagements with the products we sell. We still
intend to offer general IT consulting, but it will no longer be
our primary focus. We believe that we need to demonstrate to the
consulting and systems integrator (CSI) community
that we are not direct competitors and show them how to use our
products to develop identity solutions for their customers, with
our help, when needed.

As we have noted above, we are still a company in
transition, and there is much work that lies ahead. Although we
continued to successfully cut costs in fiscal 2004, reducing our
work force and consolidating facilities, in fiscal 2005 we will
need to maintain a transitional cost structure beyond that which
a steady state business would require in order to develop,
market and sell our products and solutions. Over the next 12 to
18 months, we expect to maintain current spending levels or
to increase spending in the following areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect our research and development expenses
    as a percent of revenue will continue running higher than where
    wed like over the next year as a result of efforts to
    rearchitect several products such as ZENworks, and eDirectory so
    that they will appeal to customers outside the NetWare installed
    base and as a result of our ongoing investments in Linux,
    partnerships and training. 
|
| |  | Last year, we commenced the transition of our
    North America sales force to a new business model as a result of
    our new products and repositioning. We made significant progress
    during 2004, and we estimate that this transition will be
    complete by the end of fiscal 2005.                                                                                                                         
|
| |  | Our EMEA business is in need of similar changes
    to those we have been making in North America. We expect to
    begin that process in the first fiscal quarter of 2005 and
    expect the reorganization to last 12-18 months. To
    capitalize on Linux interest, we have created a pan-regional
    Linux Sales and Business Development group in North America and
    EMEA to help coordinate our activities.
|
| |  | Critical to Novells performance over time
    is retaining and motivating our employees. Like many companies,
    we have significantly limited compensation changes over the past
    two years. In 2005, we plan to increase compensation, resulting
    in increased expense in both cost of sales and operating
    expenses.                                                                                    

Cash flow from operations is our principal source
of liquidity. Additionally, we have recently had net cash
infusions of $460 million from our private placement of
senior convertible debentures in July 2004 and $448 million
from our settlement of certain NetWare-related claims with
Microsoft in November 2004. Our strong liquidity will help
facilitate the implementation of this transition, as well to
quickly respond to market developments and business
opportunities that may arise.

Despite recent improvements in the economy, we
believe that we are still in a relatively soft IT spending
environment in North America. Although IT demand trends appear
to be slowly improving, we are seeing that CIOs are still
cautious on IT investments. We see a continued reluctance to
make large upfront commitments to infrastructure projects
because they typically take long to complete and touch every
part of the IT architecture. Longer sales cycles are resulting
in pilot rollouts that may or may not turn into orders.
Similarly, the European economy remains flat and IT budgets
continue to be constrained in that region. As a result, there
was general weakness across all lines of our business in the
EMEA region except for our SUSE LINUX



|                          |   
|------------------------- | --
|Novell annual report 2004 | 19












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products. We believe that our focus on Linux open
source and identity management solutions will permit us to
exploit the two primary concerns of CIOs  security
and total cost of ownership.


Critical Accounting Policies

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

Revenue Recognition.Our revenue is derived primarily from the sale of software
licenses and maintenance, technical support, training, and
consulting services. Revenue is recognized in accordance with
the requirements of Statement of Position
(SOP) 97-2, Software Revenue
Recognition. Under SOP 97-2, when an arrangement does
not require significant production, modification or
customization of the software, revenue is recognized when the
following four criteria are met:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Persuasive evidence of an arrangement
    exists  We require evidence of an agreement with a
    customer specifying the terms and conditions of the products or
    services to be delivered.             
|
| |  | Delivery has occurred  For software
    licenses, delivery takes place when the customer is given access
    to the software programs. For services, delivery takes place as
    the services are provided.
|
| |  | The fee is fixed or determinable  Fees
    are fixed or determinable if they are not subject to a refund or
    cancellation and do not have payment terms that exceed our
    standard payment terms.     
|
| |  | Collection is probable  We perform a
    credit review of all customers with significant transactions to
    determine whether a customer is credit worthy and collection is
    probable.                 

Revenue from software license fees is recognized
upon delivery of the software. If the fee due from the customer
is not fixed or determinable, revenue is recognized as payments
become due from the customer. If collection is not considered
probable, revenue is recognized when the fee is collected.
Allowances for estimated sales returns and allowances are
recorded in the same period as the related revenue. We recognize
revenue on the sale of shrink-wrapped box product through our
distributor channel on a sell-through basis.

Revenue from maintenance contracts,
subscriptions, support and other similar services is recognized
as services are performed over the term of the performance
period. Certain sales require continuing service, support and
performance by us, and accordingly, a portion of the revenue is
deferred until the future service, support, and performance are
provided.

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

Many of our software arrangements include
multiple elements, such as product upgrade protection, software
support services, consulting, and training, in addition to
software licenses and maintenance. These multiple element
arrangements are accounted for using the proportional method of
accounting in which we allocate revenue to each element of the
transaction based upon the relative fair values of the elements,
which may include software products, product upgrade protection,
software support services, consulting, and training. Fair value
is determined by Novell-specific objective evidence of the price
charged to other customers when



|   |                          
|-- | -------------------------
|20 | Novell annual report 2004












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each element is sold separately. We have
established sufficient Novell-specific objective evidence of the
fair value of all elements of a multiple element arrangement.


Services revenue includes reimbursable expenses
charged to our clients.

We record provisions against revenue for
estimated sales returns and allowances on product and
service-related sales in the same period as the related revenue
is recorded. We also record a provision to operating expenses
for bad debts resulting from customers inability to pay
for the products or services they have received, due to such
factors as bankruptcy. These estimates are based on historical
sales returns and bad debt expense, analyses of credit memo
data, and other known factors. If the historical data we use to
calculate these estimates do not properly reflect future returns
or bad debts, revenue or net income could be overstated or
understated.

Long-lived Assets.Our long-lived assets include net fixed assets, long-term
investments, goodwill, and other intangible assets. At
October 31, 2004, our long-lived assets included
$231.5 million of net fixed assets, $56.0 million of
long-term investments, $391.1 million of goodwill, and
$48.6 million of identifiable intangible assets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, Plant, and
    Equipment.We periodically review our
    property, plant, and equipment for impairment in accordance with
    Statement of Financial Accounting Standards (SFAS)
    No. 144, Accounting for the Impairment or Disposal of
    Long-Lived Assets. In determining whether an asset is
    impaired, we must make assumptions regarding recoverability of
    costs, estimated future cash flows from the asset, intended use
    of the asset and other related factors. If these estimates or
    their related assumptions change, we may be required to record
    impairment charges for these assets. For example, in the fourth
    quarter of fiscal 2002, we determined that our facilities in San
    Jose, California and a small building in Provo, Utah had become
    impaired due to changes in the intended use of the facilities,
    as well as changes in the local commercial real estate market.
    Accordingly, an independent real estate consulting firm was
    retained to appraise the facilities. This resulted in a pre-tax,
    non-cash impairment charge of $80 million. In the third
    quarter of fiscal 2003, we sold our San Jose facility to a San
    Jose-based company looking to remain in the area and seeking to
    satisfy specific space requirements. As a result, we were able
    to sell the facility for more than anticipated, and we recorded
    a $25 million gain on the sale.
|
| | Long-term
    Investments.The fair value of the
    long-term investments is dependent on the actual financial
    performance of the companies or venture funds in which we have
    invested, the investees market value, and the volatility
    inherent in the external markets for these investments. In
    assessing potential impairment for these private equity
    investments, we consider these factors as well as the forecasted
    financial performance of our investees, liquidation preference
    value of the stock we hold, and estimated potential for
    investment recovery based on all these factors. If any of these
    factors indicate that the investment has become
    other-than-temporarily impaired, we may have to record
    additional impairment charges not previously recognized. During
    fiscal 2004, we recognized $5.4 million of impairment
    losses related to our long-term investments. If general market
    conditions do not improve, or if any of the companies or venture
    funds included in long-term investments do not meet performance
    goals, our investments could become other-than-temporarily
    impaired as their values decline, causing us to record further
    investment impairment charges.                                                                                                                                                                                   
|
| | Goodwill and Intangible
    Assets.In assessing the
    recoverability of our goodwill and other intangible assets, we
    must make assumptions regarding estimated future cash flows and
    other factors to determine the fair value of the respective
    assets. This process is subjective and requires judgment at many
    points throughout the analysis. If these estimates or their
    related assumptions change in the future, or if actual cash
    flows are below our estimates, we may be required to record
    impairment charges for these assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | During the fourth quarters of fiscal 2004, 2003
    and 2002, we completed our annual goodwill impairment review
    based on August 1, 2004, 2003 and 2002 balances and
    determined that there was no goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



|                          |   
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|Novell annual report 2004 | 21












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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | impairment as of those dates. These assessments
    are made at the segment level, and therefore we could be subject
    to an impairment charge to goodwill or intangible assets if any
    one of the geographic segments or Celerant is not performing
    well in the future. In addition, changes in the assumptions used
    in the analysis could have changed the resulting outcome. For
    example, to estimate the fair value of our reporting units at
    August 1, 2004, we made estimates and judgments about
    future cash flows based on our fiscal 2005 forecast and current
    long-range plans used to manage the business. These long-range
    estimates could change in the future depending on internal
    changes in our company as well as external factors. Future
    changes in estimates could possibly result in a non-cash
    impairment charge that could have a material adverse impact on
    our results of operations.
|
| | Developed technology and customer relationships
    are amortized over three years as a cost of revenue. Our trade
    names have an indefinite life and therefore are not amortized
    but are reviewed for impairment at least annually. We review our
    intangible assets periodically for indicators of impairment in
    accordance with SFAS No. 144. During fiscal 2003, we
    recorded a $23.6 million impairment charge against certain
    intangible assets we acquired as a part of the SilverStream
    acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                           

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

In addition, during fiscal 2004, we incurred
U.S. pre-tax losses for tax reporting purposes. At
October 31, 2004, we have been in a cumulative pre-tax loss
position for each of the last three years. As a result, we have
provided a full valuation reserve on our deferred tax assets.

We recorded deferred tax liabilities during
fiscal 2004 for foreign jurisdictions. The deferred tax
liabilities recorded in foreign jurisdictions were attributable
to book to tax basis differences recorded as part of purchase
price accounting for the assets and liabilities of companies
acquired during the year.

Loss Contingency
Accruals.We are required to make
accruals for certain loss contingencies related to litigation,
restructurings and taxes. We accrue these items in accordance
with SFAS No. 5, Accounting for
Contingencies however the estimation of the amount to
accrue requires significant judgment. Litigation accruals
require we make assumptions about the future outcome of each
case based on current information. When our restructurings
include leased facilities, we are required to make assumptions
about future sublease income, which would offset our costs and
decrease our accrual. From time to time, we are subjected to tax
audits and must make assumptions about the outcome of the audit.
If any of the estimates or their related assumptions change in
the future, or if actual outcomes are different than our
estimates, we may be required to record additional charges or
reduce our accruals For example, during fiscal 2004, we recorded
a $4.9 million adjustment to a previous restructuring
accrual due to changes in estimates we originally made regarding
future sublease income, a $5 million reduction of our
litigation accrual due to changes in the estimated outcome of
certain ongoing legal cases and a $4 million reduction to
our litigation accrual and $6 million reduction to our
income tax accrual due to one-time adjustments to these reserves.



|   |                          
|-- | -------------------------
|22 | Novell annual report 2004












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##### Table of Contents



Results of Operations



| |             
| | ------------
| | Acquisitions



| |            
| | -----------
| | Salmon Ltd.

On July 19, 2004, we purchased all of the
outstanding stock of Salmon Ltd, a privately-held information
technology services and consulting firm headquartered in
Watford, England, for approximately $8.2 million in cash,
plus estimated merger and transaction costs of
$0.6 million. In addition, we recorded a deferred income
tax liability of $1.2 million resulting from the future tax
consequences of the non-deductibility of identified intangible
assets recorded in connection with this acquisition.

The purchase agreement provides for contingent
payments of up to an additional $10.6 million based upon
the future revenues and profitability of both Salmon and Novell
in the United Kingdom over a period of two years. Any future
earnout payments will be capitalized as goodwill when and if
paid.

Revenues of $6.5 million and expenses of
$6.1 million were included in our statement of operations
related to Salmon for the period from acquisition (July 19,
2004) to October 31, 2004.



| |              
| | -------------
| | SUSE LINUX AG

On January 12, 2004, we purchased
substantially all of the outstanding stock of SUSE LINUX AG, a
privately-held company and a leading provider of Linux-based
products, for approximately $210.0 million in cash, plus
estimated merger and transaction costs of $9.0 million. In
addition, we recorded a deferred income tax liability of
$3.0 million resulting from the future tax consequences of
the non-deductibility of identified intangible assets recorded
in connection with this acquisition.

Revenues of approximately $36.2 million and
expenses of approximately $42.2 million were included in
our statement of operations related to SUSE for the period from
acquisition (January 12, 2004) to October 31, 2004.



| |             
| | ------------
| | Ximian, Inc.

On August 4, 2003, we acquired Ximian, Inc.,
a privately-held company and provider of desktop and server
solutions that enable enterprise Linux adoption, approximately
$40.0 million in cash and estimated transaction costs of
$0.5 million. Ximians results of operations have been
incorporated into our statement of operations beginning on the
acquisition date of August 4, 2003.



| |                            
| | ---------------------------
| | SilverStream Software, Inc.

On July 17, 2002, we acquired substantially
all of the outstanding shares of SilverStream at a price of
$9.00 per share. At the closing date of the merger,
approximately 23.5 million shares of SilverStream common
stock were outstanding, resulting in a total cash acquisition
price of $210.8 million. Direct transaction costs were
approximately $1.1 million and the fair value of
SilverStream stock options assumed, both vested and unvested,
totaled $28.6 million. Silverstreams results of
operations have been incorporated into our statement of
operations beginning on the acquisition date of July 17,
2002.

Revenue

We sell our products, services, and solutions
primarily to corporations, government entities, educational
institutions, resellers and distributors both domestically and
internationally. In the statement of operations, we categorize
revenue as software licenses or maintenance and services.
Software license revenue includes new



|                          |   
|------------------------- | --
|Novell annual report 2004 | 23












---



##### Table of Contents



license revenue only. Maintenance and services
includes all other revenue including Linux subscriptions and
upgrade protection contracts.


|                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |    |   
|------------------------ | ----------------- | ------------- | --- | ------------------- |  | ---- | --- | ------- |  | ------- | --- | ----- |  |  | --- | -- | - |  | --- | -- | --
|                         |                   |               |     |                     |  |      |     | 2004 vs |  | 2003 vs
|                         |                   | 2004          |     | 2003                |  | 2002 |     | 2003    |  | 2002   
|                         |                   |               |     |                     |  |      |     |         |  |        
|                         |                   |               |     |                    
|                         |                   | (In millions) |     | (Percentage change)
|New software licenses    |                   | $             | 238 |                     |  | $    | 265 |         |  | $       | 319 |       |  |  | (10 | )% |   |  | (17 | )%
|Maintenance and services |                   |               | 928 |                     |  |      | 840 |         |  |         | 815 |       |  |  | 10  | %  |   |  | 3   | % 
|                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |   
|                         | Total net revenue |               | $   | 1,166               |  |      | $   | 1,105   |  |         | $   | 1,134 |  |  |     | 6  | % |  |     | (3 | )%
|                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |   

New software license revenue decreased in fiscal
2004 compared to fiscal 2003 and in fiscal 2003 compared to
fiscal 2002 primarily as a result of lower NetWare,
collaboration and ZENworks new license sales. Revenue from
NetWare licenses decreased by $21 million or 20% from
fiscal 2003 to fiscal 2004 and $39 million or 27% from
fiscal 2002 to fiscal 2003. Revenue from Collaboration licenses
decreased $3.3 million or 9% from fiscal 2003 to fiscal
2004 and $6.2 million or 14% from fiscal 2002 to fiscal
2003. Revenue from ZENworks licenses decreased by
$1.4 million or 3% from fiscal 2003 to fiscal 2004 and
$4.3 million or 9% from fiscal 2002 to fiscal 2003. These
decreases were offset somewhat by favorable foreign exchange
rates, particularly in Europe and the addition of approximately
$4.4 million of revenue from SUSE.

Maintenance and services revenue increased in
fiscal 2004 compared to fiscal 2003 primarily due to increased
worldwide services revenue, which increased $8.5 million or
3%, the recognition of $13.5 million of royalty revenue
related to the legal judgment against The Canopy Group, Inc.
(Canopy), the addition of $31.8 million in SUSE
services revenue, and the benefit of favorable foreign exchange
rates, primarily in Europe. These increases were offset somewhat
by lower NetWare maintenance revenue, which decreased by
$9.0 million or 5%. In total, NetWare revenue decreased by
10% from fiscal 2003 to 2004. The increase from fiscal 2002 to
fiscal 2003 relates primarily to increased collaboration,
ZENworks, and identity management maintenance revenue, offset
somewhat by lower consulting revenue.

Further explanation of revenue trends by product
follows in the discussion of revenue by segment.

Revenues by reporting segment were as follows:

|                                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |    |   
|---------------------------------------- | ----------------- | ------------- | --- | ------------------- |  | ---- | --- | ------- |  | ------- | --- | ----- |  |  | --- | -- | - |  | --- | -- | --
|                                         |                   |               |     |                     |  |      |     | 2004 vs |  | 2003 vs
|                                         |                   | 2004          |     | 2003                |  | 2002 |     | 2003    |  | 2002   
|                                         |                   |               |     |                     |  |      |     |         |  |        
|                                         |                   |               |     |                    
|                                         |                   | (In millions) |     | (Percentage change)
|North America                            |                   | $             | 515 |                     |  | $    | 508 |         |  | $       | 577 |       |  |  | 1   | %  |   |  | (12 | )%
|Europe, Middle East, and Africa (EMEA) |                   |               | 378 |                     |  |      | 348 |         |  |         | 323 |       |  |  | 9   | %  |   |  | 8   | % 
|Asia Pacific                             |                   |               | 62  |                     |  |      | 60  |         |  |         | 55  |       |  |  | 3   | %  |   |  | 9   | % 
|Latin America                            |                   |               | 21  |                     |  |      | 24  |         |  |         | 27  |       |  |  | (13 | )% |   |  | (11 | )%
|Japan                                    |                   |               | 28  |                     |  |      | 26  |         |  |         | 27  |       |  |  | 8   | %  |   |  | (4  | )%
|Celerant                                 |                   |               | 162 |                     |  |      | 139 |         |  |         | 125 |       |  |  | 17  | %  |   |  | 11  | % 
|                                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |   
|                                         | Total net revenue |               | $   | 1,166               |  |      | $   | 1,105   |  |         | $   | 1,134 |  |  |     | 6  | % |  |     | (3 | )%
|                                         |                   |               |     |                     |  |      |     |         |  |         |     |       |  |  |     |    |   |  |     |   



|   |                          
|-- | -------------------------
|24 | Novell annual report 2004












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##### Table of Contents



We further analyze revenue by solution categories
within each geographic segment. Revenues by solution category in
North America were as follows:

|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |    |   |  |     |     |   
|---------------------------------------------- | ----------------- | ------------- | --- | ------------------- |  | ---- | --- | ------- |  | ------- | --- | --- |  |  | -- | -- | - |  | --- | --- | --
|                                               |                   |               |     |                     |  |      |     | 2004 vs |  | 2003 vs
|                                               |                   | 2004          |     | 2003                |  | 2002 |     | 2003    |  | 2002   
|                                               |                   |               |     |                     |  |      |     |         |  |        
|                                               |                   |               |     |                    
|                                               |                   | (In millions) |     | (Percentage change)
|Identity management and web services solutions |                   | $             | 49  |                     |  | $    | 49  |         |  | $       | 45  |     |  |  |   | %  |   |  | 9   | %  
|Cross-platform solutions                       |                   |               | 319 |                     |  |      | 309 |         |  |         | 353 |     |  |  | 3  | %  |   |  | (13 | )% 
|Services                                       |                   |               | 147 |                     |  |      | 150 |         |  |         | 179 |     |  |  | (2 | )% |   |  | (16 | )% 
|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |    |   |  |     |    
|                                               | Total net revenue |               | $   | 515                 |  |      | $   | 508     |  |         | $   | 577 |  |  |    | 1  | % |  |     | (12 | )%
|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |    |   |  |     |    

The 1% overall increase in the North America
segment revenues for fiscal 2004 compared to fiscal 2003 is
primarily due to increased revenue in our cross-platform
services solution category. This increase is due primarily to
the recognition of $13.5 million of royalty revenue related
to the legal judgment against Canopy. Excluding the Canopy
revenue, North America revenue for fiscal 2004 decreased by
$7 million or 1% compared to the fiscal 2003. These
declines are primarily due to a $18.2 million or 11%
decline in fiscal 2004 in NetWare revenues and a
$3.5 million or 2% decrease in worldwide services revenue.
These declines are offset somewhat by increases in ZENworks
revenues of $8 million or 13% for fiscal 2004 compared to
fiscal 2003, principally related to our successful release of
ZENworks 6.5 during the third quarter of fiscal 2004 and the
addition of $11 million in revenue from SUSE in fiscal
2004. The SUSE revenue included subscriptions related to
approximately 25,000 units of SLES 9. Revenues in identity
management and web solutions and services remained relatively
flat.

Revenue in the North America segment decreased in
fiscal 2003 compared to 2002 by 12%. The decrease is mainly a
result of a $34.5 million or 17% decrease in NetWare
revenue as a result of declining license maintenance sales, and
a $28.3 million reduction in IT consulting revenues, which
was due to the difficult economy, which caused corporate IT
spending in general to decrease. These decreases were offset
somewhat by increased identity management and web services
revenue, primarily in the exteNd product line.

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

|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |   |   |  |    |   |  
|---------------------------------------------- | ----------------- | ------------- | --- | ------------------- |  | ---- | --- | ------- |  | ------- | --- | --- |  |  | -- | - | - |  | -- | - | -
|                                               |                   |               |     |                     |  |      |     | 2004 vs |  | 2003 vs
|                                               |                   | 2004          |     | 2003                |  | 2002 |     | 2003    |  | 2002   
|                                               |                   |               |     |                     |  |      |     |         |  |        
|                                               |                   |               |     |                    
|                                               |                   | (In millions) |     | (Percentage change)
|Identity management and web services solutions |                   | $             | 41  |                     |  | $    | 37  |         |  | $       | 30  |     |  |  | 11 | % |   |  | 23 | %
|Cross-platform solutions                       |                   |               | 213 |                     |  |      | 199 |         |  |         | 196 |     |  |  | 7  | % |   |  | 2  | %
|Services                                       |                   |               | 124 |                     |  |      | 112 |         |  |         | 97  |     |  |  | 11 | % |   |  | 15 | %
|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |   |   |  |    |  
|                                               | Total net revenue |               | $   | 378                 |  |      | $   | 348     |  |         | $   | 323 |  |  |    | 9 | % |  |    | 8 | %
|                                               |                   |               |     |                     |  |      |     |         |  |         |     |     |  |  |    |   |   |  |    |  

The 9% overall increase in the EMEA segment
revenues for fiscal 2004 compared to fiscal 2003 was due
primarily to favorable foreign currency exchange rates, which
increased revenues by approximately $18 million for fiscal
2004. This increase is also due to the inclusion of SUSE
revenues in the cross-platform services solution category of
$21 million for fiscal 2004 compared to no SUSE revenue in
fiscal 2003. Also, revenues for fiscal 2004 increased by
approximately $7 million due to the inclusion of Salmon
revenues. During fiscal 2004, SUSE revenue in EMEA included
subscriptions related to approximately 13,000 units of
SLES 9 and 3,800 units of SLES 8 during fiscal
2004.

Excluding the impact of foreign currency exchange
rates, SUSE revenues and Salmon revenues, revenues for EMEA for
fiscal 2004 decreased by approximately $16 million or 4%
due primarily to declining NetWare revenue and lower than
expected maintenance renewals in Germany and the United Kingdom.

Revenue in the EMEA segment increased by 8% in
2003 compared to 2002. The increase was mainly due to favorable
exchange rates coupled with slight increases in product revenue
and IT consulting sales.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 25












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##### Table of Contents



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

|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |    |    |   |  |    |   |  
|---------------------------------------------- | ----------------- | ------------- | -- | ------------------- |  | ---- | -- | ------- |  | ------- | -- | -- |  |  | -- | -- | - |  | -- | - | -
|                                               |                   |               |    |                     |  |      |    | 2004 vs |  | 2003 vs
|                                               |                   | 2004          |    | 2003                |  | 2002 |    | 2003    |  | 2002   
|                                               |                   |               |    |                     |  |      |    |         |  |        
|                                               |                   |               |    |                    
|                                               |                   | (In millions) |    | (Percentage change)
|Identity management and web services solutions |                   | $             | 8  |                     |  | $    | 7  |         |  | $       | 5  |    |  |  | 14 | %  |   |  | 40 | %
|Cross-platform solutions                       |                   |               | 34 |                     |  |      | 36 |         |  |         | 34 |    |  |  | (6 | )% |   |  | 6  | %
|Services                                       |                   |               | 20 |                     |  |      | 17 |         |  |         | 16 |    |  |  | 18 | %  |   |  | 6  | %
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |    |    |   |  |    |  
|                                               | Total net revenue |               | $  | 62                  |  |      | $  | 60      |  |         | $  | 55 |  |  |    | 3  | % |  |    | 9 | %
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |    |    |   |  |    |  

The 3% overall increase in Asia Pacific segment
revenues for fiscal 2004 compared to fiscal 2003 is primarily
due to favorable foreign currency exchange rates, improved
revenues for our services, ZENworks and identity management
products, offset somewhat by decreases in NetWare revenue of
approximately $4 million or 17%.

Revenue in the Asia Pacific segment increased by
9% in 2003 compared to 2002. The increase in 2003 is mainly a
result of favorable exchange rates coupled with flat product and
services sales.

Revenues by solution category in the Latin
America segment were as follows:

|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |     |    |  |     |     |   
|---------------------------------------------- | ----------------- | ------------- | -- | ------------------- |  | ---- | -- | ------- |  | ------- | -- | -- |  |  | --- | --- | -- |  | --- | --- | --
|                                               |                   |               |    |                     |  |      |    | 2004 vs |  | 2003 vs
|                                               |                   | 2004          |    | 2003                |  | 2002 |    | 2003    |  | 2002   
|                                               |                   |               |    |                     |  |      |    |         |  |        
|                                               |                   |               |    |                    
|                                               |                   | (In millions) |    | (Percentage change)
|Identity management and web services solutions |                   | $             | 2  |                     |  | $    | 3  |         |  | $       | 1  |    |  |  | (33 | )%  |    |  | 200 | %  
|Cross-platform solutions                       |                   |               | 10 |                     |  |      | 11 |         |  |         | 12 |    |  |  | (9  | )%  |    |  | (8  | )% 
|Services                                       |                   |               | 9  |                     |  |      | 10 |         |  |         | 14 |    |  |  | (10 | )%  |    |  | (29 | )% 
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |     |    |  |     |    
|                                               | Total net revenue |               | $  | 21                  |  |      | $  | 24      |  |         | $  | 27 |  |  |     | (13 | )% |  |     | (11 | )%
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |     |    |  |     |    

The 13% overall decline in Latin America segment
revenues for fiscal 2004 is primarily due to a 19% decrease in
NetWare revenue, a 14% decrease in collaboration products, a 26%
decrease in identity management and web services revenue, and a
10% decrease in services revenue. These decreases were somewhat
offset by a 15% increase in ZENworks revenue due primarily to
our successful release of ZENworks 6.5 during the third quarter.
Revenue in the Latin America segment decreased by 11% in 2003
compared to 2002. The decrease in 2003 is mainly a result of a
20% decrease in NetWare revenue, a 21% decrease in ZENworks
revenue, and a 30% decrease in services revenue, offset somewhat
by increased collaboration revenue. Overall, the decrease in
revenues reflect the poor economic conditions in Latin America
resulting in lower IT spending.

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

|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |    |   |  |     |    |   
|---------------------------------------------- | ----------------- | ------------- | -- | ------------------- |  | ---- | -- | ------- |  | ------- | -- | -- |  |  | --- | -- | - |  | --- | -- | --
|                                               |                   |               |    |                     |  |      |    | 2004 vs |  | 2003 vs
|                                               |                   | 2004          |    | 2003                |  | 2002 |    | 2003    |  | 2002   
|                                               |                   |               |    |                     |  |      |    |         |  |        
|                                               |                   |               |    |                    
|                                               |                   | (In millions) |    | (Percentage change)
|Identity management and web services solutions |                   | $             | 1  |                     |  | $    | 1  |         |  | $       | 1  |    |  |  |    | %  |   |  |    | % 
|Cross-platform solutions                       |                   |               | 19 |                     |  |      | 15 |         |  |         | 14 |    |  |  | 27  | %  |   |  | 7   | % 
|Services                                       |                   |               | 8  |                     |  |      | 10 |         |  |         | 12 |    |  |  | (20 | )% |   |  | (17 | )%
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |    |   |  |     |   
|                                               | Total net revenue |               | $  | 28                  |  |      | $  | 26      |  |         | $  | 27 |  |  |     | 8  | % |  |     | (4 | )%
|                                               |                   |               |    |                     |  |      |    |         |  |         |    |    |  |  |     |    |   |  |     |   

The 8% overall increase in Japan segment revenues
for fiscal 2004 is primarily due to increased royalty revenue,
offset somewhat by declining services revenue. Revenue in the
Japan segment decreased by 4% in 2003 compared to 2002 primarily
due to decreased services revenue.



|   |                          
|-- | -------------------------
|26 | Novell annual report 2004












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##### Table of Contents



Revenues in the Celerant consulting segment were
as follows:

|                    |  |               |     |                     |  |      |     |         |  |         |     |  |  |  |    |   |  |  |    |  
|------------------- |  | ------------- | --- | ------------------- |  | ---- | --- | ------- |  | ------- | --- |  |  |  | -- | - |  |  | -- | -
|                    |  |               |     |                     |  |      |     | 2004 vs |  | 2003 vs
|                    |  | 2004          |     | 2003                |  | 2002 |     | 2003    |  | 2002   
|                    |  |               |     |                     |  |      |     |         |  |        
|                    |  |               |     |                    
|                    |  | (In millions) |     | (Percentage change)
|Celerant consulting |  | $             | 162 |                     |  | $    | 139 |         |  | $       | 125 |  |  |  | 17 | % |  |  | 11 | %
|                    |  |               |     |                     |  |      |     |         |  |         |     |  |  |  |    |   |  |  |    |  

Celerant revenues for fiscal 2004 increased 17%
compared to the prior year due to a combination of underlying
growth in the business and favorable currency exchange rates.
Excluding the impact of the foreign currency exchange rates,
revenue increased by 8% for fiscal 2004 compared to fiscal 2003
due to improved revenue growth in our European businesses.

Revenue in the Celerant consulting segment
increased by 11% in 2003 compared to 2002 due to favorable
exchange rates and increased demand for services.



| |                 
| | ----------------
| | Deferred revenue

Deferred revenue represents revenue that has been
billed or collected, but that will be recognized when the
earnings process is completed in future periods. The majority of
deferred revenue relates to maintenance contracts and
subscriptions and is recognized ratably over the related
periods, typically one year. At October 31, 2004, deferred
revenue increased by $52 million or 16% to
$374 million compared to the balance at October 31,
2003. This increase is largely attributable to a
$12 million increase due to favorable foreign currency
exchange rates, a $17 million increase due to the inclusion
of SUSE deferred revenue, and the remaining increase is
primarily due to advanced invoicing of maintenance contract
renewals and to changes in our business mix moving towards more
maintenance and subscription contracts.



| |                               
| | ------------------------------
| | Forward-looking revenue trends

We expect NetWare to continue to decline in
fiscal 2005 and we will attempt to offset this decline with
growth in our new products. Based on our review of industry
trend reports from industry analysts, we expect the Linux and
identity management markets to grow between 30-35% and 14-16%,
respectively, in fiscal 2005. We anticipate our revenues in
these areas will increase as well. In addition based on our
review of IDC reports, we anticipate an overall improvement in
IT spending of around 7%, which should help us increase our
ZENworks, consulting and support revenue in fiscal 2005.



| |             
| | ------------
| | Gross profit

|                         |                                                      |                 |     |                     |   |      |     |         |   |         |     |    |   |  |    |    |  |  |     |    | 
|------------------------ | ---------------------------------------------------- | --------------- | --- | ------------------- | - | ---- | --- | ------- | - | ------- | --- | -- | - |  | -- | -- |  |  | --- | -- | 
|                         |                                                      |                 |     |                     |   |      |     | 2004 vs |   | 2003 vs
|                         |                                                      | 2004            |     | 2003                |   | 2002 |     | 2003    |   | 2002   
|                         |                                                      |                 |     |                     |   |      |     |         |   |        
|                         |                                                      |                 |     |                    
|                         |                                                      | ($ in millions) |     | (Percentage change)
|New software licenses    |                                                      | $               | 215 |                     |   | $    | 233 |         |   | $       | 288 |    |   |  | (8 | )% |  |  | (19 | )%
|                         | as a percent of new software license
    revenue     |                 |     | 90                  | % |      |     | 88      | % |         |     | 90 | % |  |    |    |  |  |     |    | 
|Maintenance and services |                                                      | $               | 535 |                     |   | $    | 433 |         |   | $       | 397 |    |   |  | 23 | %  |  |  | 9   | % 
|                         | as a percent of maintenance and services
    revenue |                 |     | 58                  | % |      |     | 52      | % |         |     | 49 | % |  |    |    |  |  |     |    | 
|Total gross profit       |                                                      | $               | 750 |                     |   | $    | 667 |         |   | $       | 685 |    |   |  | 12 | %  |  |  | (3  | )%
|                         | as a percent of net revenue                          |                 |     | 64                  | % |      |     | 60      | % |         |     | 60 | % |  |    |    |  |  |     |    | 

The increase in gross profit from new software
licenses as a percentage of related revenue from fiscal 2003 to
fiscal 2004 and the decrease in gross profit from software
licenses as a percentage of related revenue from fiscal 2002 to
fiscal 2003 are due to an intangible asset impairment charge
taken in fiscal 2003 against software licenses of
$9.6 million. This charge related to intangible assets from
the acquisition of SilverStream.

The increase in gross profit from maintenance and
services as a percentage of related revenue from fiscal 2003 to
fiscal 2004 is primarily due to the recognition of
$13.5 million of revenue in connection with the



|                          |   
|------------------------- | --
|Novell annual report 2004 | 27












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##### Table of Contents



Canopy legal judgment during fiscal 2004, which
had relatively little corresponding cost of sales. In addition,
our margins were positively impacted by increased consulting
billing rates, which increased from $135 per hour in fiscal
2003 to $144 per hour in fiscal 2004 and from cost savings
related to workforce reductions we implemented during fiscal
2003 and 2004, mainly in the North America and EMEA segments.


Gross profit as a percentage of revenue on
maintenance and services increased in fiscal 2003 relative to
fiscal 2002 due to efforts to improve resource utilization in
our IT consulting services such as elimination of excess
capacity, which was partially offset by the intangible asset
impairment charge of $14.0 million taken against
maintenance and services in fiscal 2003.



| |                                    
| | -----------------------------------
| | Forward-looking gross margin trends

We expect gross margin percentages will decrease
in fiscal 2005 as our revenue mix continues to shift from
software licenses to services as our Linux and worldwide
services businesses improve. Additionally, during fiscal 2005 we
anticipate that gross margin percentages will be lower as we
increase our investment in restructuring the North America and
EMEA businesses and in increasing compensation to retain and
motivate our employees, who have had limited compensation
increases over the last two years.



| |                   
| | ------------------
| | Operating expenses

|                                              |                             |                 |     |                     |   |      |     |         |    |         |     |    |   |  |     |    |  |  |      |    | 
|--------------------------------------------- | --------------------------- | --------------- | --- | ------------------- | - | ---- | --- | ------- | -- | ------- | --- | -- | - |  | --- | -- |  |  | ---- | -- | 
|                                              |                             |                 |     |                     |   |      |     | 2004 vs |    | 2003 vs
|                                              |                             | 2004            |     | 2003                |   | 2002 |     | 2003    |    | 2002   
|                                              |                             |                 |     |                     |   |      |     |         |    |        
|                                              |                             |                 |     |                    
|                                              |                             | ($ in millions) |     | (Percentage change)
|Sales and marketing                           |                             | $               | 363 |                     |   | $    | 381 |         |    | $       | 359 |    |   |  | (5  | )% |  |  | 6    | % 
|                                              | as a percent of net revenue |                 |     | 31                  | % |      |     | 34      | %  |         |     | 32 | % |  |     |    |  |  |      |    | 
|Product development                           |                             | $               | 199 |                     |   | $    | 184 |         |    | $       | 169 |    |   |  | 8   | %  |  |  | 9    | % 
|                                              | as a percent of net revenue |                 |     | 17                  | % |      |     | 17      | %  |         |     | 15 | % |  |     |    |  |  |      |    | 
|General and administrative                    |                             | $               | 102 |                     |   | $    | 111 |         |    | $       | 123 |    |   |  | (8  | )% |  |  | (10  | )%
|                                              | as a percent of net revenue |                 |     | 9                   | % |      |     | 10      | %  |         |     | 11 | % |  |     |    |  |  |      |    | 
|Restructuring expenses                        |                             | $               | 23  |                     |   | $    | 43  |         |    | $       | 19  |    |   |  | (47 | )% |  |  | 126  | % 
|                                              | as a percent of net revenue |                 |     | 2                   | % |      |     | 4       | %  |         |     | 2  | % |  |     |    |  |  |      |    | 
|Purchased in-process research and development |                             | $               |    |                     |   | $    | 1   |         |    | $       | 3   |    |   |  |    |    |  |  | (67  | )%
|                                              | as a percent of net revenue |                 |     |                    | % |      |     |        | %  |         |     |   | % |  |     |    |  |  |      |    | 
|(Gains)/impairments on real property          |                             | $               | (2  | )                   |   | $    | (25 | )       |    | $       | 80  |    |   |  | 92  | %  |  |  | (131 | )%
|                                              | as a percent of net revenue |                 |     |                    | % |      |     | (2      | )% |         |     | 7  | % |  |     |    |  |  |      |    | 
|Total operating expenses                      |                             | $               | 685 |                     |   | $    | 695 |         |    | $       | 753 |    |   |  | (1  | )% |  |  | (8   | )%
|                                              | as a percent of net revenue |                 |     | 59                  | % |      |     | 63      | %  |         |     | 66 | % |  |     |    |  |  |      |    | 

Sales and marketing expenses in total and as a
percentage of revenue, decreased in fiscal 2004 compared to
fiscal 2003 due primarily to lower marketing spending, mainly in
corporate advertising and the effect of fiscal 2003 and 2004
restructurings, offset somewhat by additional expenses related
to the SUSE and Salmon acquisitions in fiscal 2004. This decline
is offset somewhat by changes in foreign currency exchange
rates. Sales and marketing expense, in total and as a percentage
of revenue, increased in fiscal 2003 compared to fiscal 2002
primarily as a result of higher advertising costs and the
addition of SilverStream sales and marketing costs, including
SilverStream employees, for the full twelve months of fiscal
2003.

Product development costs in fiscal 2004
increased compared to fiscal 2003 due to increased research and
development activity from the acquisitions of Ximian and SUSE.
Product development headcount increased by 140 engineers
compared to the prior year due primarily to the acquisitions of
Ximian and SUSE, offset by workforce reductions in other areas
of product development. Product development expenses, in total
and as a percentage of revenue, increased in fiscal 2003
compared to fiscal 2002 primarily due to the addition of



|   |                          
|-- | -------------------------
|28 | Novell annual report 2004












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##### Table of Contents



SilverStream product development costs, including
SilverStream employees who became Novell product development
employees in July 2002.


General and administrative expenses in fiscal
2004 decreased compared to fiscal 2003 primarily due to
favorable legal developments that allowed us to reduce our legal
reserves by $5 million during our second quarter of fiscal
2004, one-time adjustments to our medical liabilities, accounts
payable accruals, and legal reserves of $7.9 million during
our fourth quarter of fiscal 2004, and a one-time adjustment to
decrease bad debt expense by $1.8 million compared to
fiscal 2003, offset somewhat by increased expenses related to
the addition of SUSE and Salmon general and administrative
costs. General and administrative expenses decreased, in total
and as a percentage of revenue, in fiscal 2003 from fiscal 2002
primarily due to a full years impact of restructuring
activities undertaken in 2002. This decrease was partially
offset by the addition of SilverStream general and
administrative costs in July 2002.

Purchased in-process research and development is
technology purchased in the acquisitions of Ximian and
SilverStream that was not technologically feasible at the date
of the acquisition, meaning it had not reached the working model
stage, did not contain all of the major functions planned for
the product, and was not ready for initial customer testing.
In-process research and development was valued based on
discounting forecasted cash flows that will be generated
directly from the related products. The in-process research and
development does not have any alternative future use and did not
otherwise qualify for capitalization. As a result, the entire
amount was expensed.



| |                                             
| | --------------------------------------------
| | Forward-looking operating expense
    trends

In order to fully transition our business from
our legacy products, such as NetWare, to those that will drive
our future growth, such as Linux, we will need to maintain a
transitional cost structure in order to develop, market and sell
these products and solutions. Specifically, we anticipate our
investment in product development in fiscal 2005 will be higher
than recent years as we develop new products and re-architect
older products. We expect to continue to incur costs in North
America as we complete the process of restructuring this
organization and expect to incur costs to similarly restructure
our EMEA business. We plan to increase compensation to retain
and motivate our employees in fiscal 2005, who have had limited
compensation increases over the last two years. This will
increase both cost of sales and operating expenses.



| |                                   
| | ----------------------------------
| | (Gain)/impairment on real property

During fiscal 2004, we recognized a gain of
$2.0 million on the sale of one of our facilities. During
the fourth quarter of fiscal 2002, we determined that there were
indicators of impairment related to our facility in
San Jose, California and a small building in Provo, Utah
due to the move of most employees from San Jose to other
facilities, as well as changes in the local real estate market.
We then performed an analysis of each of the propertys
future undiscounted cash flows and determined that their
estimated future cost recovery was lower than the recorded net
book value of the assets. Based on the results of this analysis,
we obtained an independent appraisal to determine the fair value
of these locations. Based on the fair value of these facilities
as determined by the independent appraisals, we recorded a
pre-tax non-cash impairment charge of $80 million. In the
third quarter of fiscal 2003, we sold our facility in
San Jose, California, for $125 million, which resulted
in a realized gain of $25 million.



| |                       
| | ----------------------
| | Restructuring Expenses



| |                                                     
| | ----------------------------------------------------
| | Second, third and fourth quarters of fiscal
    2004

During the second, third and fourth quarters of
fiscal 2004, we recorded net restructuring expenses of
$5.3 million, $9.7 million, and $4.0 million,
respectively. These restructuring expenses were in response to
the evolution of our business strategy to develop a competitive
position in the Linux market. This strategy includes plans to
support the Linux operating system in addition to the NetWare
operating system, by offering our



|                          |   
|------------------------- | --
|Novell annual report 2004 | 29












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##### Table of Contents



products and services that run on Linux, NetWare
and other platforms. The acquisitions of Ximian and SUSE are
direct results of the evolution in our business strategy. These
changes were made to address market penetration for Linux and
NetWare and to address NetWare revenue declines. Specific
actions taken include reducing our workforce by 54 employees
during the second quarter, 65 employees during the third
quarter, and 17 employees during the fourth quarter of fiscal
2004, mainly in consulting, sales and product development in
EMEA and North America. In addition, we consolidated facilities,
resulting in the closure of two sales facilities and the
disposal of excess equipment and tenant improvements in the
United States. Total restructuring expenses for fiscal 2004 by
reporting segment were as follows: North America
$5.5 million, EMEA $9.4 million, Asia Pacific
$0.4 million, Latin America $0.2 million, and
non-allocated corporate costs $3.5 million.


The following table summarizes the activity
during fiscal 2004 related to this restructuring:

|                                             |  |               |    |          |  |             |     |             |  |   |   |  |  |   |   | 
|-------------------------------------------- |  | ------------- | -- | -------- |  | ----------- | --- | ----------- |  | - | - |  |  | - | - | 
|                                             |  |               |    |          |  |             |     | Balance at 
|                                             |  | Original      |    | Cash     |  | Non-Cash    |     | October 31,
|                                             |  | Reserve       |    | Payments |  | Adjustments |     | 2004       
|                                             |  |               |    |          |  |             |     |            
|                                             |  |              
|                                             |  | (In millions)
|Severance and benefits                       |  | $             | 13 |          |  | $           | (8  | )           |  | $ |  |  |  | $ | 5 | 
|Excess facilities and property and equipment |  |               | 6  |          |  |             | (4  | )           |  |   |  |  |  |   | 2 | 
|                                             |  |               |    |          |  |             |     |             |  |   |   |  |  |   |   | 
|                                             |  | $             | 19 |          |  | $           | (12 | )           |  | $ |  |  |  | $ | 7 | 
|                                             |  |               |    |          |  |             |     |             |  |   |   |  |  |   |   | 

As of October 31, 2004, the remaining
balance of the fiscal 2004 restructuring expenses included
accrued liabilities related to severance and benefits, which
will be paid out over the remaining severance obligation period,
not to exceed two years, lease costs for redundant facilities,
which will be paid over the respective remaining contract terms,
and various severed employee related costs, which will be paid
over the respective remaining contract terms.

During fiscal 2004, we also recorded a
$5.9 million restructuring expense to increase prior
restructuring liabilities by $1.0 million and prior
merger-related liabilities by $4.9 million, and we released
approximately $2.1 million of excess restructuring reserves
related to prior restructuring events. The increases were the
result of changes in estimates used when the original expenses
were recorded primarily due to changes in the real estate market
in the United Kingdom. The net impact of the fiscal 2004
restructurings and the release of the prior restructuring excess
reserves was an expense of $22.9 million in fiscal 2004.



| |                             
| | ----------------------------
| | Third quarter of fiscal 2003

During the third quarter of fiscal 2003, we
recorded a pre-tax restructuring expense of approximately
$27.8 million resulting from the restructuring of our
operations in response to changes in general market conditions,
changing customer demands, and the evolution of our business
strategy relative to the identity management and web services
areas of our business and our revised strategy. This strategy
includes plans to support Linux in addition to NetWare by
offering our products and services that run on both NetWare and
Linux platforms. These changes in strategy and company structure
were made to address the then current revenue declines. Specific
actions taken included reducing our workforce worldwide by
approximately 600 employees (approximately 10%) across all
functions and geographies, with a majority coming from product
development, sales, and general and administrative functions,
primarily in the United States. In addition, we consolidated
facilities and disposed of excess equipment. Total restructuring
expenses by reporting segment were as follows: North America
$18.9 million, EMEA $6.0 million, Asia Pacific
$2.4 million, and Latin America $0.5 million of the
total restructuring expense.

As of October 31, 2004, the remaining
balance of the third quarter of fiscal 2003 restructuring
expense included accrued liabilities related to redundant
facilities and other fixed contracts, which will be paid over
the respective remaining contract terms, and various severed
employee related costs, which will be paid over the respective
remaining contract terms.



|   |                          
|-- | -------------------------
|30 | Novell annual report 2004












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##### Table of Contents



The following table summarizes the activity
related to this restructuring.

|                                  |  |               |    |          |  |             |     |             |  |          |    |             |  |             |    |  |  |   |     |   |  |   |   |  |  |   |   | 
|--------------------------------- |  | ------------- | -- | -------- |  | ----------- | --- | ----------- |  | -------- | -- | ----------- |  | ----------- | -- |  |  | - | --- | - |  | - | - |  |  | - | - | 
|                                  |  |               |    |          |  |             |     | Balance at  |  |          |    |             |  | Balance at 
|                                  |  | Original      |    | Cash     |  | Non-Cash    |     | October 31, |  | Cash     |    | Non-Cash    |  | October 31,
|                                  |  | Expense       |    | Payments |  | Adjustments |     | 2003        |  | Payments |    | Adjustments |  | 2004       
|                                  |  |               |    |          |  |             |     |             |  |          |    |             |  |            
|                                  |  |              
|                                  |  | (In millions)
|Severance and benefits            |  | $             | 20 |          |  | $           | (18 | )           |  | $        | 4  |             |  | $           | 6  |  |  | $ | (7  | ) |  | $ | 1 |  |  | $ |  | 
|Excess facilities and property    |  |               |    |          |  |             |     |             |  |          |    |             |  |             |    |  |  |   |     |   |  |   |   |  |  |   |   | 
|and equipment                     |  |               | 6  |          |  |             | (3  | )           |  |          | 6  |             |  |             | 9  |  |  |   | (6  | ) |  |   |  |  |  |   | 3 | 
|Other restructuring-related costs |  |               | 2  |          |  |             |    |             |  |          |   |             |  |             | 2  |  |  |   |    |   |  |   |  |  |  |   | 2 | 
|                                  |  |               |    |          |  |             |     |             |  |          |    |             |  |             |    |  |  |   |     |   |  |   |   |  |  |   |   | 
|                                  |  | $             | 28 |          |  | $           | (21 | )           |  | $        | 10 |             |  | $           | 17 |  |  | $ | (13 | ) |  | $ | 1 |  |  | $ | 5 | 
|                                  |  |               |    |          |  |             |     |             |  |          |    |             |  |             |    |  |  |   |     |   |  |   |   |  |  |   |   | 

During the fourth quarter of fiscal 2003, we
accrued an additional $10 million related to the completion
of restructuring activities that were part of the previous
quarters plan of restructuring. The additional accrual
relates mainly to the severance of approximately 100 employees
and the closing of excess facilities. Such activities occurred
mostly in the North America reporting segment.

During the third quarter of fiscal 2003, we also
released approximately $2 million related to excess
restructuring reserves related to the second quarter fiscal 2002
restructuring event. The net impact of the third quarter fiscal
2003 restructuring and the release of the excess fiscal 2002
restructuring reserves was an expense of $26 million.



| |                              
| | -----------------------------
| | Second quarter of fiscal 2003

During the second quarter of fiscal 2003, we
determined that the amount we had originally accrued for
facility-related costs in previous restructurings was too low
and accrued an additional $8 million. The original
liability was based on estimated sublease rates and timing,
which have been affected by the decline in the real estate
market.



| |                              
| | -----------------------------
| | Second quarter of fiscal 2002

During the second quarter of fiscal 2002, we
recorded a pre-tax restructuring expense of approximately
$20 million. The expense was a result of our continued move
toward becoming a business solutions provider, addressing
changes in the market due to technology changes, and becoming
more customer-focused. Specific actions taken included: reducing
our workforce worldwide by approximately 50 employees (less than
1%) across all functional areas, consolidating facilities,
closing offices in unprofitable locations, and disposing of
excess property and equipment. The following table summarizes
the activity related to the second quarter fiscal 2002
restructuring.

|                                             |  |               |    |          |  |             |     |             |  |          |    |             |  |             |   |          |  |             |    |             |  |   |   |  |  |   |   |  |  |   |    |   |  |   |   |  |  |   |   | 
|-------------------------------------------- |  | ------------- | -- | -------- |  | ----------- | --- | ----------- |  | -------- | -- | ----------- |  | ----------- | - | -------- |  | ----------- | -- | ----------- |  | - | - |  |  | - | - |  |  | - | -- | - |  | - | - |  |  | - | - | 
|                                             |  |               |    |          |  | Non-Cash    |     | Balance at  |  |          |    | Non-Cash    |  | Balance at  |   |          |  | Non-Cash    |    | Balance at 
|                                             |  | Original      |    | Cash     |  | Expenses/   |     | October 31, |  | Cash     |    | Expenses/   |  | October 31, |   | Cash     |  | Expenses/   |    | October 31,
|                                             |  | Expense       |    | Payments |  | Adjustments |     | 2002        |  | Payments |    | Adjustments |  | 2003        |   | Payments |  | Adjustments |    | 2004       
|                                             |  |               |    |          |  |             |     |             |  |          |    |             |  |             |   |          |  |             |    |            
|                                             |  |               |    |         
|                                             |  | (In millions) |    |         
|Severance and benefits                       |  | $             | 15 |          |  | $           | (9  | )           |  | $        | (2 | )           |  | $           | 4 |          |  | $           | (3 | )           |  | $ |  |  |  | $ | 1 |  |  | $ | (1 | ) |  | $ |  |  |  | $ |  | 
|Excess facilities and property and equipment |  |               | 5  |          |  |             | (1  | )           |  |          |   |             |  |             | 4 |          |  |             | (4 | )           |  |   | 4 |  |  |   | 4 |  |  |   | (2 | ) |  |   | 2 |  |  |   | 4 | 
|Other restructuring- related costs           |  |               | 1  |          |  |             |    |             |  |          |   |             |  |             | 1 |          |  |             | (1 | )           |  |   |  |  |  |   |  |  |  |   |   |   |  |   | 1 |  |  |   | 1 | 
|                                             |  |               |    |          |  |             |     |             |  |          |    |             |  |             |   |          |  |             |    |             |  |   |   |  |  |   |   |  |  |   |    |   |  |   |   |  |  |   |   | 
|                                             |  | $             | 21 |          |  | $           | (10 | )           |  | $        | (2 | )           |  | $           | 9 |          |  | $           | (8 | )           |  | $ | 4 |  |  | $ | 5 |  |  | $ | (3 | ) |  | $ | 3 |  |  | $ | 5 | 
|                                             |  |               |    |          |  |             |     |             |  |          |    |             |  |             |   |          |  |             |    |             |  |   |   |  |  |   |   |  |  |   |    |   |  |   |   |  |  |   |   | 

As of October 31, 2004, the remaining
balance of the second quarter 2002 restructuring expense
included redundant facilities and other fixed contracts, which
will be paid over the respective remaining contract terms.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 31












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##### Table of Contents



During the second quarter of fiscal 2002, we also
released approximately $1.3 million of excess accruals
related to the fiscal 2000 restructuring, which reduced the
restructuring costs reflected on the statement of operations for
fiscal 2002. These excess accruals relate to facilities and
legal costs that were not required.



| |                            
| | ---------------------------
| | Other income (expense), net

|                                  |                             |                 |    |                     |    |      |     |         |    |         |     |    |    |  |     |    |  |  |      |    | 
|--------------------------------- | --------------------------- | --------------- | -- | ------------------- | -- | ---- | --- | ------- | -- | ------- | --- | -- | -- |  | --- | -- |  |  | ---- | -- | 
|                                  |                             |                 |    |                     |    |      |     | 2004 vs |    | 2003 vs
|                                  |                             | 2004            |    | 2003                |    | 2002 |     | 2003    |    | 2002   
|                                  |                             |                 |    |                     |    |      |     |         |    |        
|                                  |                             |                 |    |                    
|                                  |                             | ($ in millions) |    | (Percentage change)
|Investment impairments            |                             | $               | (5 | )                   |    | $    | (35 | )       |    | $       | (58 | )  |    |  | 86  | %  |  |  | 40   | % 
|                                  | as a percent of net revenue |                 |    |                    | %  |      |     | (3      | )% |         |     | (5 | )% |  |     |    |  |  |      |    | 
|Investment income                 |                             | $               | 23 |                     |    | $    | 13  |         |    | $       | 25  |    |    |  | 77  | %  |  |  | (48  | )%
|                                  | as a percent of net revenue |                 |    | 2                   | %  |      |     | 1       | %  |         |     | 2  | %  |  |     |    |  |  |      |    | 
|Other expenses, net               |                             | $               | (9 | )                   |    | $    | (5  | )       |    | $       | 9   |    |    |  | (80 | )% |  |  | (155 | )%
|                                  | as a percent of net revenue |                 |    | (1                  | )% |      |     |        | %  |         |     | 1  | %  |  |     |    |  |  |      |    | 
|Total other income (expense), net |                             | $               | 9  |                     |    | $    | (27 | )       |    | $       | (24 | )  |    |  | 133 | %  |  |  | (13  | )%
|                                  | as a percent of net revenue |                 |    | 1                   | %  |      |     | (2      | )% |         |     | (2 | )% |  |     |    |  |  |      |    | 

Our long-term investments consist primarily of
investments in venture capital fund partnerships and other
direct investments in equity securities of privately-held
securities. The decline in investment impairments during fiscal
2004 and fiscal 2003 from the prior years is primarily the
result of more stable fund valuations as compared to the same
periods in fiscal 2003 and fiscal 2002.

Investment income for fiscal 2004 increased
compared to fiscal 2003 due to the collection of $5 million
of interest income earned in connection with the favorable legal
judgment against Canopy during the third quarter of fiscal 2004.
Investment income decreased in fiscal 2003 from fiscal 2002
primarily due to lower yields on short-term investments.

Other expenses, net, for fiscal 2004 increased
compared to fiscal 2003 primarily due to higher foreign currency
transaction losses and a slight increase in interest expense of
$2.0 million related to the issuance of senior convertible
debentures on July 2, 2004. Other expenses, net, for fiscal
2003 decreased compared to fiscal 2002 primarily due to higher
foreign currency transaction losses.

Income tax expense

|                   |                         |                 |    |                     |   |      |     |         |   |         |    |   |   |  |     |    |  |  |     |   | 
|------------------ | ----------------------- | --------------- | -- | ------------------- | - | ---- | --- | ------- | - | ------- | -- | - | - |  | --- | -- |  |  | --- | - | 
|                   |                         |                 |    |                     |   |      |     | 2004 vs |   | 2003 vs
|                   |                         | 2004            |    | 2003                |   | 2002 |     | 2003    |   | 2002   
|                   |                         |                 |    |                     |   |      |     |         |   |        
|                   |                         |                 |    |                    
|                   |                         | ($ in millions) |    | (Percentage change)
|Income tax expense |                         | $               | 18 |                     |   | $    | 107 |         |   | $       | 11 |   |   |  | (83 | )% |  |  | 873 | %
|                   | as a percent of revenue |                 |    | 2                   | % |      |     | 10      | % |         |    | 1 | % |  |     |    |  |  |     |   | 
|Effective tax rate |                         |                 | 24 | %                   |   |      | 194 | %       |   |         | 12 | % |   |  |     |    |  |  |     |  

The effective tax rate for fiscal 2004
significantly decreased from fiscal 2003 primarily as a result
of a full valuation allowance that was established for our total
deferred tax assets during the fourth quarter of 2003. For
fiscal 2004, we did not record income tax expense for
U.S. activity. On a U.S. tax return basis, we expect a
taxable loss for 2004. Thus, we concluded that we could not
forecast future U.S. taxable income under the more likely
than not standard. Accordingly, current year deferred tax
provisions were also recorded as adjustments to the valuation
allowance.

The effective tax rate for fiscal 2003
significantly changed from the effective tax rate for fiscal
2002 primarily as a result of the need for additional valuation
allowances in fiscal 2003. In the fourth quarter of 2003, we
provided a full valuation allowance against net deferred tax
assets carried on our balance sheet. SFAS No. 109
requires an assessment of a companys current and previous
performance and other relevant



|   |                          
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|32 | Novell annual report 2004












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##### Table of Contents



factors when determining the need for such a
valuation allowance. Under this pronouncement, factors such as
current and previous operating losses are given greater weight
than the outlook for future profitability in determining
deferred tax asset carrying value. This adjustment will have no
impact on our cash flow or future prospects, nor does it alter
our ability to utilize the underlying tax net operating loss and
credit carryforwards in the future. As deferred tax assets or
liabilities increase or decrease in the future, or if a portion
or all of the valuation allowance is no longer deemed to be
necessary, the adjustment to the valuation allowance will
increase or decrease future income tax provisions.


In connection with our review of our tax reserves
for the fourth quarter of 2004, we determined that the amount of
reserves required for tax exposures was less than the amount
recorded in the financial statements. As a result, we reduced
the tax reserve and provision by $6 million.

On November 8, 2004, we announced an
agreement with Microsoft to settle potential antitrust
litigation. A gain of $448 million, the settlement less
estimated transaction costs, will be included in operating
income in our first fiscal quarter ended January 31, 2005.
We anticipate using net operating loss carryforwards against
this income, and expect an estimated $10 million current
liability as a result of the related alternative minimum tax.

Preferred stock dividends

|                                                                                         |  |                 |     |      |  |      |   |  |  |   |   | 
|---------------------------------------------------------------------------------------- |  | --------------- | --- | ---- |  | ---- | - |  |  | - | - | 
|                                                                                         |  | 2004            |     | 2003 |  | 2002
|                                                                                         |  |                 |     |      |  |     
|                                                                                         |  |                
|                                                                                         |  | ($ in millions)
|Non-cash deemed dividend related to beneficial
    conversion feature of preferred stock |  | $               | (26 | )    |  | $    |  |  |  | $ |  | 
|Preferred stock cash dividends                                                           |  | $               | (  | )    |  | $    |  |  |  | $ |  | 

On March 23, 2004, we entered into a
definitive agreement with IBM providing for an investment of
$50 million by IBM in Novell. The primary terms of the
investment, which were negotiated in November 2003, entailed the
purchase by IBM of 1,000 shares of our Series B
redeemable preferred stock that are convertible into
8 million shares of our common stock at a price of
$6.25 per common share. The shares are entitled to a
dividend of 2% per annum, payable quarterly in cash.
Dividends on preferred stock were $0.4 million during
fiscal 2004.

Because the fair value of our common stock of
$9.46 per share on March 23, 2004 was greater than the
conversion price of $6.25 per share, we recorded a
one-time, non-cash deemed dividend of $25.7 million
attributable to the value of the Series B preferred
stocks conversion feature. This beneficial conversion
feature had no impact on net income, but did reduce earnings
attributable to common stockholders and thus reduced basic and
diluted earnings per share by approximately $0.07 in fiscal 2004.

On June 17, 2004, 500 shares of
Series B Preferred Stock, with a carrying value of
$25 million, were converted into 4 million shares of
our common stock.

Change in Accounting Principle

Effective November 1, 2001, we adopted
SFAS No. 142, which requires the discontinuance of
amortization related to goodwill and indefinite lived intangible
assets. These assets are subject to an impairment test at least
annually. In addition, SFAS No. 142 includes
provisions requiring the identification of reporting units upon
adoption for the purpose of assessing potential future
impairments and the performance of an initial impairment
analysis within the first six months after adoption. We
completed our goodwill impairment analysis during the second
quarter of fiscal 2002 and recognized a transitional goodwill
impairment loss of $144 million related to our consulting
segment as of November 1, 2001, which was recorded as the
cumulative effect of a change in accounting principle in our
consolidated statements of operations.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 33












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##### Table of Contents



Liquidity and Capital Resources

|                                |  |                 |       |             |  |            |     |   |  |  |    |  
|------------------------------- |  | --------------- | ----- | ----------- |  | ---------- | --- | - |  |  | -- | -
|                                |  | October 31,     |       | October 31, |  | Percentage
|                                |  | 2004            |       | 2003        |  | Change    
|                                |  |                 |       |             |  |           
|                                |  |                 |       |            
|                                |  | ($ in millions) |       |            
|Cash and short-term investments |  | $               | 1,211 |             |  | $          | 752 |   |  |  | 61 | %
|Percentage of total assets      |  |                 | 53    | %           |  |            | 48  | % |  |  |    |  

An overview of the significant cash flow
activities for fiscal 2004 and 2003 are as follows:

|                                                                     |  |                              |      |             |  |             |     |   |  |   |      |  
|-------------------------------------------------------------------- |  | ---------------------------- | ---- | ----------- |  | ----------- | --- | - |  | - | ---- | -
|                                                                     |  | Fiscal 2004                  |      | Fiscal 2003 |  | Fiscal 2002
|                                                                     |  |                              |      |             |  |            
|                                                                     |  |                             
|                                                                     |  | (Dollar amounts in millions)
|Cash provided by operating activities                                |  | $                            | 119  |             |  | $           | 55  |   |  | $ | 51   |  
|Issuance of senior convertible debentures, net of
    issuance costs |  |                              | 585  |             |  |             |    |   |  |   |     |  
|Issuance of convertible preferred stock                              |  |                              | 50   |             |  |             |    |   |  |   |     |  
|Issuance of common stock, net                                        |  |                              | 58   |             |  |             | 20  |   |  |   | 13   |  
|Repurchase of common stock  held in
    treasury                    |  |                              | (125 | )           |  |             |    |   |  |   |     |  
|Expenditures for property, plant and equipment                       |  |                              | (27  | )           |  |             | (39 | ) |  |   | (28  | )
|Proceeds from sales of property, plant and
    equipment             |  |                              | 5    |             |  |             | 125 |   |  |   | 16   |  
|Net cash paid for acquisitions                                       |  |                              | (206 | )           |  |             | (41 | ) |  |   | (106 | )

Cash, cash equivalents, and short-term
investments increased $459.6 million or 61% from
October 31, 2003 to October 31, 2004. This increase is
primarily due to the following:



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improved cash flows from operating activities of
    $119.1 million primarily due to cost reductions over the
    past several quarters;                                                                   
|
| |  | the issuance of senior convertible debentures
    (Debentures) on July 2, 2004 in the amount of
    $600 million, less issuance costs of $14.9 million;                                                  
|
| |  | the issuance of $50 million of Series B
    preferred stock on March 23, 2004;                                                                                                                             
|
| |  | the net issuance of $58.2 million of common
    stock during the year, primarily associated with employee
    exercises of stock options and purchases through the employee
    stock purchase program; and
|
| |  | the sale of property, plant and equipment,
    including buildings and land in Orem, Utah, which netted
    $5.0 million in cash.                                                                          

These increases are offset by decreases in cash,
cash equivalents, and short-term investments due to the
following:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | a $125 million repurchase of common stock
    during the third quarter of fiscal 2004 in connection with our
    Debentures offering;
|
| |  | the purchase of property, plant and equipment for
    $27 million;                                                                   
|
| |  | the purchase of SUSE on January 10, 2004 for
    $210 million less $10 million of cash
    acquired; and                             
|
| |  | the purchase of Salmon on July 19, 2004 for
    $8.4 million less cash acquired of $3.1 million.                                     

As of October 31, 2004, we had cash, cash
equivalents and other short-term investments of approximately
$272 million held in accounts outside the United States.
Our short-term investment portfolio is diversified among
security types, industry groups, and individual issuers. To
achieve potentially higher returns, a portion of our investment
portfolio is invested in equity securities and mutual funds,
which are subject to market risk. Approximately
$4.5 million of our short-term investments is restricted
for deferred compensation payments, which are paid out as
requested by the plan participants. Our short-term investment
portfolio includes gross unrealized gains and losses of
$1.1 million and $1.0 million, respectively, as of
October 31, 2004. We monitor



|   |                          
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|34 | Novell annual report 2004












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##### Table of Contents



our investments and record losses when a decline
in the investments market value is determined to be other
than temporary.


We also invest excess cash in long-term
investments through the Novell Venture account, Cambridge
Technology Capital Fund I L.P. (CTC I), and
directly in equity securities in privately-held companies.
Investments made through the Novell Venture account and CTC I
are generally in private companies, including small
capitalization stocks in the high-technology industry sector,
and in funds managed by venture capitalists for the promotion of
our business and strategic objectives. As of October 31,
2004, we had a carrying value of $54.0 million related to
investments in various venture capital funds and had commitments
to contribute an additional $32.9 million to these funds,
of which we estimate approximately $19.9 million could be
contributed in fiscal 2005, approximately $9.3 million in
fiscal 2006, and approximately $3.7 million thereafter as
requested by the fund managers. Through our acquisition of
Cambridge, we also own both limited and general partnership
interests in CTC I of approximately 24%. As of October 31,
2004, we had an investment balance of $0.2 million in CTC I
and had commitments to contribute an additional
$0.3 million through 2007. We intend to fund these
investments with cash from operations and cash on hand.

As of October 31, 2004, we have various
operating leases related to our facilities with remaining terms
of more than one year. These leases have minimum annual lease
commitments of $27.9 million in fiscal 2005,
$22.1 million in fiscal 2006, $19.1 million in fiscal
2007, $13.4 million in fiscal 2008, $7.2 million in
fiscal 2009, and $9.0 million thereafter. Furthermore, we
have $24.0 million of minimum rentals to be received in the
future from subleases.

On July 2, 2004, we issued and sold
$600 million aggregate principal amount of our senior
convertible debentures due 2024. The Debentures pay interest at
0.50% per annum, payable semi-annually on January 15 and
July 15 of each year, commencing January 15, 2005. Each
$1,000 principal amount of Debentures is convertible, at the
option of the holders, into 86.7905 shares of our common
stock prior to July 15, 2024 if (1) the price of our
common stock trades above 130% of the conversion price for a
specified duration, (2) the trading price of the Debentures
is below a certain threshold, subject to specified exceptions,
(3) the Debentures have been called for redemption, or
(4) specified corporate transactions have occurred. None of
the conversion triggers were met as of October 31, 2004.
The conversion rate is subject to certain adjustments. The
conversion rate initially represents a conversion price of
$11.52 per share. Holders of the Debentures may require us
to repurchase all or a portion of their Debentures on
July 15, 2009, July 15, 2014 and July 15, 2019,
or upon the occurrence of certain events, including a change in
control. The Debentures can be redeemed by us for cash beginning
on or after July 20, 2009.

In connection with the issuance of the
Debentures, we incurred $14.9 million of issuance costs,
which primarily consisted of investment banker fees and legal
and other professional fees. These costs are included in other
assets and are being amortized as interest expense using the
effective interest method over the term from issuance through
the first date that the holders can require repurchase of the
Debentures (July 15, 2009). Amortization expense related to
the issuance costs was $1.0 million for the fiscal year
ended October 31, 2004. In addition, interest expense was
$1.0 million for the fiscal year ended October 31,
2004. We intend to use the proceeds from these Debentures for
general corporate purposes, including potential acquisitions.

As of October 31, 2004, we also have
$25 million of Series B preferred stock outstanding.
The preferred stock is redeemable at our option, and by the
holder only under certain change in control circumstances.



|                          |   
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|Novell annual report 2004 | 35












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Contractual Obligations

|                                             |                              |                        |       |           |  |             |      |             |  |               |      |      |  |   |      |      |  |   |       |       | 
|-------------------------------------------- | ---------------------------- | ---------------------- | ----- | --------- |  | ----------- | ---- | ----------- |  | ------------- | ---- | ---- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                                             |                              |                       
|                                             |                              | Payments Due by Period
|                                             |                              |                       
|                                             |                              |                        |       | Less than |  |             |      | More than  
|                                             |                              |                        |       | 1 Year    |  | 1-3 Years   |      | 3-5 Years   |  | 5 Years      
|                                             |                              | Total                  |       | (2005)    |  | (2006-2007) |      | (2008-2009) |  | (Beyond 2009)
|                                             |                              |                        |       |           |  |             |      |             |  |              
|                                             |                              |                       
|                                             |                              | (In millions)         
|Commitments to venture capital funds         |                              | $                      | 33.2  |           |  | $           | 19.9 |             |  | $             | 12.6 |      |  | $ | 0.7  |      |  | $ |      |      
|Senior convertible debentures                |                              |                        | 600.0 |           |  |             |     |             |  |               |     |      |  |   |     |      |  |   | 600.0 |      
|Interest on senior convertible debentures(a) |                              |                        | 59.0  |           |  |             | 3.0  |             |  |               | 6.0  |      |  |   | 6.0  |      |  |   | 44.0  |      
|Purchase commitments(b)                      |                              |                        | 9.0   |           |  |             | 6.6  |             |  |               | 1.9  |      |  |   | 0.4  |      |  |   | 0.1   |      
|Operating lease obligations                  |                              |                        | 98.7  |           |  |             | 27.9 |             |  |               | 41.2 |      |  |   | 20.6 |      |  |   | 9.0   |      
|                                             |                              |                        |       |           |  |             |      |             |  |               |      |      |  |   |      |      |  |   |       |      
|                                             | Total                        |                        | $     | 799.9     |  |             | $    | 57.4        |  |               | $    | 61.7 |  |   | $    | 27.7 |  |   | $     | 653.1 | 
|                                             |                              |                        |       |           |  |             |      |             |  |               |      |      |  |   |      |      |  |   |       |      
|Other contractual obligations:               |                              |                        |       |           |  |             |      |             |  |               |      |      |  |   |      |      |  |   |       |      
|                                             | Dividends on preferred stock |                        |       | (c)       |  |             |      | 0.5         |  |               |      | 1.0  |  |   |      | 1.0  |  |   |       | (c)   | 



---



|    |  |                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Interest on senior convertible debentures assumes
    no conversions.                                                                                                                                                        
|   
|(b) |  | Purchase obligations represent future contracted
    payments under normal take or pay arrangements entered into as a
    part of the normal course of business that are not recorded as
    liabilities at October 31, 2004.
|   
|(c) |  | Dividend payments are indefinite and are
    $500,000 per year.                                                                                                                                                              

On November 8, 2004, Novell announced an
agreement with Microsoft to settle potential antitrust
litigation related to our NetWare operating system in exchange
for $536 million in cash, which we received on
November 18, 2004. The financial terms of the NetWare
settlement agreement, net of related legal fees, are expected to
result in a pre-tax gain of approximately $448 million in
the first quarter of fiscal 2005.

Our principal source of liquidity continues to be
from operations, cash on hand, and short-term investments. At
October 31, 2004, our principal unused sources of liquidity
consisted of cash and cash equivalents of $434.4 million
and short-term investments in the amount of $777.1 million.
During fiscal 2004, we generated $119 million of cash flow
from operations, including $18.5 million from the
settlement of litigation with Canopy. Our liquidity needs for
the next twelve months are principally for financing of fixed
assets, commitments to our venture capital funds and product
development and to maintain flexibility in a dynamic and
competitive operating environment, including the ability to
pursue potential acquisition and investment opportunities. Our
liquidity needs beyond the next twelve months include those
mentioned previously in addition to redemption of our Debentures.

We anticipate generating positive cash flows from
operations in addition to investment income in fiscal 2005
sufficient to fund operations. We anticipate being able to fund
our current operations, future potential acquisitions, any
further integration, restructuring or additional merger-related
costs, and planned capital expenditures for the next twelve
months with existing cash and short-term investments together
with cash generated from operations and investment income. We
believe that borrowings under our credit facilities or offerings
of equity or debt securities are possible for expenditures
beyond the next twelve months, if the need arises, although such
offerings may not be available to us on acceptable terms and are
dependent on market conditions at such time. Investments will
continue in product development and in new and existing areas of
technology. Cash may also be used to acquire technology through
purchases and strategic acquisitions. We also anticipate having
adequate cash in fiscal 2005 for necessary capital expenditures.

Recent Pronouncements

In March 2004, the Emerging Issues Task Force
(EITF) reached a final consensus on Issue 03-6,
Participating Securities and the Two 
Class Method under Financial Accounting Standards Board



|   |                          
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|36 | Novell annual report 2004












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##### Table of Contents



(FASB) Statement 128,
Issue 03-6 requires the two-class method of calculating
earnings per share for companies that have issued securities
other than common stock that contractually entitle the holder to
participate in dividends of the company. Because the
Series B preferred stock participates in dividends, we are
required to use the two-class method of calculating earnings per
share, effective in fiscal 2004 and retroactively for all prior
periods. This change in computational methods had no impact on
earnings per share for any period in fiscal 2004 or any prior
period.


In November 2004, the EITF reached a final
conclusion on Issue 04-8, Accounting Issues Related
to Certain Features of Contingently Convertible Debt and the
Effect on Diluted Earnings per Share. EITF Issue 04-8
addresses when the dilutive effect of contingently convertible
debt with a market price trigger should be included in diluted
earnings per share calculations. The EITFs conclusion is
that the market price trigger should be ignored and that these
securities should be treated as convertible securities and
included in diluted earnings per share regardless of whether the
conversion contingencies have been met. Because our senior
convertible debentures are contingently convertible debt with a
market price trigger, we will be required to comply with EITF
Issue 04-8 beginning in the first quarter of fiscal 2005.
Had the conclusions of EITF Issue 04-8 been effective for
fiscal 2004, reported earnings per share would not have changed
due to the timing of our issuance of the senior convertible
debentures. However, future earnings per share could be impacted
by the adoption of this standard. For example, had the senior
convertible debentures been outstanding for the fiscal year
ended October 31, 2004, on a pro forma basis our diluted
earnings per share attributable to common stock would have been
$0.07 instead of our reported $0.08 per diluted share and
our weighted average number of shares would have increased by
approximately 52 million shares.

In December 2004, the FASB issued its final
standard on accounting for employee stock options,
SFAS No. 123(R), Share-Based Payment,
which replaces SFAS Nos. 123 and supercedes Accounting
Principles Board Opinion 25, Accounting for Stock Issued
to Employees. SFAS No. 123(R) requires all
companies to measure compensation costs for all share-based
payments, including stock options, at fair value and expense
such payments to the statement of operations over the service
period. SFAS No. 123(R) is effective beginning for
interim or annual periods beginning after June  15,
2005, which would be our fourth fiscal quarter of fiscal 2005.
We are in the process of determining the impact
SFAS No. 123(R) will have on our consolidated
financial statements.

Risk Factors

Our NetWare revenue stream continues to
deteriorate.

We have been selling and upgrading NetWare for
many years, sales of which have been declining. Overall, NetWare
license and maintenance revenue of our business declined by
$36 million in fiscal 2004, excluding the impact of
favorable foreign exchange rates. Our next generations of
NetWare enterprise-ready operating system and services, Open
Enterprise Server, will give customers the opportunity to choose
between a NetWare operating system and a Linux operating system,
providing NetWare customers a means to migrate to Linux and open
source solutions while maintaining enterprise-class
functionality to which they have become accustomed. Our goal is
that by providing a migration strategy, we will retain existing
NetWare customers and gain new customers who are looking for the
additional benefits that open source has to offer. If this
strategy is unsuccessful, our NetWare revenue stream will
deteriorate faster than the growth of revenue streams from our
other products.

We had net losses in fiscal years 2002 and
2003 and may not maintain profitability.

We had net losses of $161.9 million in 2003
and $246.8 million in 2002. Although we generated net
income of $57.2 million in 2004, we cannot be certain that
we will generate sufficient revenues to maintain profitability.
If our revenues grow more slowly than we anticipate, or if our
operating expenses increase more



|                          |   
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|Novell annual report 2004 | 37












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##### Table of Contents



than we expect or cannot be reduced in the event
of lower revenues, our business will be materially and adversely
affected.


If our identity management and cross-platform
services solutions do not grow at the rate we anticipate, our
growth will be negatively impacted.

Our product strategy focuses on two specific
areas: identity management and web services solutions, and
cross-platform services solutions with a specific emphasis on
open source platforms. We have focused on these offerings
because we believe that identity driven solutions and open
source platforms are two of the fastest growing segments in our
industry, and we believe that they represent the best
opportunity for us to profitably grow our revenues. Our ability
to achieve success with this strategy is dependent on a number
of factors including, but not limited to, the following:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | the growth of these markets;                                                                                                           
|
| |  | development of key product solutions and upgrades;                                                                                     
|
| |  | the acceptance of these solutions by clients,
    particularly enterprise companies;                                                   
|
| |  | enticing customers to upgrade from older versions
    of our products to newer versions;                                               
|
| |  | successfully selling technical support and other
    Novell solutions to our maintenance customers of our open source
    products; and
|
| |  | the acceptance of those products by large
    industry partners and major accounts.                                                    

We may not be able to successfully compete in
a challenging market for computer software and consulting
services.

The industries we compete in are highly
competitive. We expect competition to continue to increase both
from existing competitors and new market entrants. Competitors
of our identity management and web services solutions and
cross-platform solutions include Microsoft, IBM, Sun, HP,
Altiris, and Computer Associates. Our primary competitor in the
North America Linux market is Red Hat. Competitors of our
worldwide services group include IBM, Accenture, HP, CSC and
Capgemini. Competitors of our Celerant consulting segment
include A.T. Kearney, McKinsey & Co., IBM Global
Services, Capgemini, and The Management Consulting Group. Many
of our competitors have greater financial, technical and
marketing resources than we have. We believe that competitive
factors common to all of our segments include:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | the pricing of our products and services and the
    pricing strategies of our competitors;                                   
|
| |  | the timing and market acceptance of new solutions
    developed by us and our competitors;                                    
|
| |  | brand and product awareness;                                                                                                  
|
| |  | the performance, reliability and security of our
    products;                                                                
|
| |  | the ability to preserve our legacy customer base;                                                                             
|
| |  | our ability to establish and maintain key
    strategic relationships with distributors, resellers and other
    partners; and
|
| |  | our ability to attract and retain highly
    qualified development, consulting and managerial personnel.                      

If third parties claim that we infringed upon
their intellectual property, our ability to use some
technologies and products could be limited and we may incur
significant costs to resolve these claims.

Litigation regarding intellectual property rights
is common in the software industry. We have from time to time
received letters or been the subject of claims suggesting that
we are infringing upon the intellectual



|   |                          
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|38 | Novell annual report 2004












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##### Table of Contents



rights of others. In addition, we have faced and
expect to continue to face from time to time disputes over
rights and obligations concerning intellectual property. The
cost and time of defending ourselves can be significant. If an
infringement claim is successful, we and our customers may be
required to obtain one or more licenses from third parties, and
we may be obligated to pay or reimburse our customers for
monetary damages. In such instances, we or our customers may not
be able to obtain necessary licenses from third parties at a
reasonable cost or at all, and may face delays in product
shipment while developing or arranging for alternative
technologies, which could adversely affect our operating results.


In the event claims for indemnification are
brought for intellectual property infringement, we could incur
significant expenses, thereby adversely affecting our results of
operations.

We indemnify customers against certain claims
that our products infringe upon the intellectual property rights
of others. Additionally, under our Novell Linux Indemnification
Program, we offer indemnification for copyright infringement
claims made by third parties against registered Novell customers
who obtain SUSE LINUX Enterprise Server 8, SUSE LINUX
Enterprise Server 9, SUSE LINUX Retail Solution, and Novell
Linux Desktop, and who, after January 12, 2004, obtain
upgrade protection and a qualifying technical support contract
from us or a participating channel partner. Although
indemnification programs for proprietary software are common in
our industry, indemnification programs that cover open source
software are not. For example, SCO has brought claims against
two end users of Linux and has threatened to bring claims
against other end users of Linux arising out of the facts
alleged in SCOs lawsuit against IBM and in SCOs
public statements. In the event that claims for indemnification
are brought for intellectual property infringement, we could
incur significant expense reimbursing customers for their legal
costs and, in the event those claims are successful, for damages.

Legal actions being taken by SCO could
adversely affect our revenues and business plan if these legal
actions cause a reduction in demand for our SUSE LINUX and
Ximian products.

SCO filed a legal action in March 2003 against
IBM alleging, among other things, that Linux is an unauthorized
derivative of UNIX and that portions of UNIX intellectual
property that SCO alleges it owns have been included in the
Linux operating system without authorization. In addition, SCO
has warned that legal liability for the use of Linux may extend
to commercial users, has threatened users with litigation and
sought licensing fees from them, and more recently has filed
Linux related suits against other parties. As discussed below,
SCO has sued Novell for slander of title relating to disputes
about whether Novell or SCO owns the copyrights to UNIX, on
which some of SCOs Linux-related claims depend. It is
possible that SCOs actions may reduce general demand for
Linux and Linux related products and services. In this event,
demand for our Linux (or open-source) products and services
could decrease, thereby reducing revenue, and would otherwise
adversely affect our business since we have made a strategic
decision to become active in the Linux market.

A lawsuit filed against us by SCO could result
in a substantial judgment against us and adversely affect our
revenues and business plan if they are successful.

In January 2004, 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 of Utah. SCOs original complaint alleged that our
public statements and filings regarding the ownership of the
copyrights in UNIX and UnixWare have harmed SCOs business
reputation and affected its efforts to protect its ownership
interest in UNIX and UnixWare. The District Court dismissed the
original complaint, but allowed SCO an opportunity to file an
amended complaint, which SCO did in July 2004. As with the
original complaint, SCO is again seeking to require us to assign
all copyrights that we have registered in UNIX and UnixWare to
SCO, to prevent us from representing that we have any ownership
interest in the UNIX and UnixWare copyrights and to require us
to withdraw all representations we have made regarding our
ownership of the UNIX and UnixWare copyrights



|                          |   
|------------------------- | --
|Novell annual report 2004 | 39












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##### Table of Contents



and to pay actual, special and punitive damages
in an amount to be proven at trial. We have again sought to
dismiss SCOs amended complaint. Our revenues and business
plan could be adversely affected if SCO is ultimately successful.


We have experienced delays in the introduction
of new products due to various factors, resulting in lost
revenue.

We have in the past experienced delays in the
introduction of new products due to a number of factors,
including the complexity of software products, the need for
extensive testing of software to ensure compatibility of new
releases with a wide variety of application software and
hardware devices, the need to debug products prior
to extensive distribution, and with regard to our open-source
products, our increasing reliance on the work of third parties
not employed by Novell. Additionally, our open source offerings
depend to a large extent on the efforts of developers not
employed by us for the creation and update of open source
technologies. For example, Linus Torvalds, the original
developer of the Linux kernel, and a small group of engineers,
many of whom are not employed by us, are primarily responsible
for the development and evolution of the Linux kernel that is a
key component of our Open Enterprise Server offering. The timing
and nature of new releases of the Linux kernel are controlled by
these third parties. Delays in developing, completing, or
shipping new or enhanced products could result in delayed or
reduced revenues for those products and could adversely impact
customer acceptance of those offerings.

We benefit from the open source contributions
of third-party programmers and corporations, and if they cease
to make these contributions, our product strategy could be
adversely affected.

Our open source offerings depend to a large
extent on the efforts of developers not employed by us for the
creation and update of open source technologies. Also, we and
many other corporations contribute software into the open source
movement. If key members, or a significant percentage, of this
group of developers or corporations decides to cease development
of the Linux kernel or other open source applications, we would
have to either rely on another party (or parties) to develop
these technologies, develop them ourselves or adapt our product
strategy accordingly. This could increase our development
expenses, delay our product releases and upgrades or adversely
impact customer acceptance of open source offerings.

We may not be able to attract and retain
qualified personnel because of the intense competition for
qualified personnel in the computer and consulting
industries.

Our ability to maintain our competitive
technological position depends, in large part, on our ability to
attract and retain highly qualified development, consulting, and
managerial personnel. Competition for personnel of the highest
caliber is intense in the software and consulting industries.
The loss of certain key individuals, or a significant group of
key personnel, would adversely affect our performance. The
failure to successfully hire suitable replacements in a timely
manner could have a material adverse effect on our business.

If our relationships with other IT services
organizations become impaired we could lose business.

We maintain relationships with IT services
organizations that recommend, design and implement solutions for
their customers businesses that include our products. Any
of these organizations could decide at any time to not continue
to do business with us or to not recommend our products. A
change in the willingness of these IT service organizations to
do business with us or recommend our products could result in
lower revenues.



|   |                          
|-- | -------------------------
|40 | Novell annual report 2004












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The success of our acquisitions is dependent
on our ability to integrate personnel, operations and
technology, and if we are not successful, our revenue will not
grow at the rate we anticipate.

Achieving the benefits of acquisitions will
depend in part on the successful integration of personnel,
operations and technology. The integration of acquisitions will
be subject to risks and will require significant expenditure of
time and resources. The challenges involved in integrating
acquisitions include the following:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtaining synergies from the companies
    organizations;                                                                                                      
|
| |  | obtaining synergies from the companies
    service and product offerings effectively and quickly;                                                              
|
| |  | bringing together marketing efforts so that the
    market receives useful information about the combined companies
    and their products;                     
|
| |  | coordinating sales efforts so that customers can
    do business easily with the combined companies;                                                            
|
| |  | integrating product offerings, technology, back
    office, human resources, accounting and financial systems;                                                  
|
| |  | assimilating employees who come from diverse
    corporate cultural backgrounds into a common business culture
    revolving around our solutions offerings; and
|
| |  | retaining key officers and employees who possess
    the necessary skills and experience to quickly and effectively
    transition and integrate the businesses.

Failure to effectively and timely complete the
integration of acquisitions could materially harm the business
and operating results of the combined companies. In addition,
goodwill related to any acquisitions could become impaired.
Furthermore, we may assume significant liabilities in connection
with acquisitions we make or become responsible for liabilities
of the acquired businesses.

Our financial and operating results may vary
and may fall below analysts estimates, which may cause the
price of our common stock to decline.

We do not currently provide estimates of our
revenues or results of operations for future periods. Our
operating results may fluctuate from quarter to quarter due to a
variety of factors including, but not limited to:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | timing of orders from customers and shipments to
    customers;                                       
|
| |  | impact of foreign currency exchange rates on the
    price of our products in international locations;
|
| |  | inability to respond to the decline in revenue
    through the distribution channel;                  
|
| |  | inability to deliver solutions as expected by our
    customers and systems integration partners.     

In addition, we often experience a higher volume
of revenue at the end of each quarter and during the fourth
quarter of our fiscal year. Because of this, fixed costs that
are out of line with revenue levels may not be detected until
late in any given quarter and results of operations could be
adversely affected.

Due to these factors or other unanticipated
events, quarter-to-quarter comparisons of our operating results
may not be reliable indicators of our future performance. In
addition, from time to time our quarterly financial results may
fall below the expectations of the securities and industry
analysts who publish reports on our company, or of investors
generally. This could cause the market price of our securities
to decline, perhaps significantly.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 41












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##### Table of Contents



We face increased risks in conducting a global
business.

We are a global corporation with offices and
subsidiaries around the world and, as such, we face risks in
doing business abroad that we do not face domestically. Certain
aspects inherent in transacting business internationally could
negatively impact our operating results, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | costs and difficulties in staffing and managing
    international operations;                                                         
|
| |  | unexpected changes in regulatory requirements;                                                                                        
|
| |  | tariffs and other trade barriers;                                                                                                     
|
| |  | difficulties in enforcing contractual and
    intellectual property rights;                                                           
|
| |  | longer payment cycles;                                                                                                                
|
| |  | local political and economic conditions;                                                                                              
|
| |  | potentially adverse tax consequences, including
    restrictions on repatriating earnings and the threat of
    double taxation; and
|
| |  | fluctuations in currency exchange rates, which
    can affect demand and increase our costs.                                          

We may not be able to protect our confidential
information, and this could adversely affect our
business.

We generally enter into contractual relationships
with our employees that protect our confidential information.
The misappropriation of our trade secrets or other proprietary
information could seriously harm our business. In addition, we
may not be able to timely detect unauthorized use of our
intellectual property and take appropriate steps to enforce our
rights. In the event we are unable to enforce these contractual
obligations and our intellectual property rights, our business
could be adversely affected.

Some of our short-term, long-term, and venture
capital fund investments have become impaired and additional
investments could become impaired.

Our investment portfolio includes investments in
public equity securities, small capitalization stocks in the
high-technology industry sector, private companies, and funds
managed by venture capitalists. Many of these investments might
become other-than-temporarily impaired. During our fiscal years
ended October 31, 2004 and 2003, we recorded impairment
charges of $5 million and $35 million, respectively,
related to some of the investments in our portfolio whose market
value had experienced an other-than-temporary decline. As of
October 31, 2004, we had net unrealized gains, net of
taxes, on investments totaling approximately $0.1 million.
If the funds in which we have invested suffer poor financial
performance, or if the private companies in which we have
invested are not successfully acquired or undertake initial
public offerings, the value of our investments may decrease
further.

Our consulting services contracts contain
pricing risks and, if our estimates prove inaccurate, we could
lose money.

Our IT and Celerant consulting businesses derive
a portion of their revenue from fixed-price, fixed-time
contracts. Because of the complex nature of the services
provided, it is sometimes difficult to accurately estimate the
cost, scope and duration of particular client engagements. If we
do not accurately estimate the resources required for a project,
do not accurately assess the scope of work associated with a
project, do not manage the project properly, or do not satisfy
our obligations in a manner consistent with the contract, then
our costs to complete the project could increase substantially.
We have occasionally had to commit unanticipated additional
resources to complete projects, and may have to take similar
action in the future. We may not be compensated for these
additional costs or the commitment of these additional resources.



|   |                          
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|42 | Novell annual report 2004












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Additionally, our Celerant consulting business
derives revenue from projects priced on a contingency basis. If
results are not met, or if a dispute arises, we may not be able
to realize a potentially large amount of revenue.


Our IT and Celerant consulting clients can
cancel or reduce the scope of their engagements with us on short
notice.

If our clients cancel or reduce the scope of an
engagement with our IT or Celerant consulting business, we may
be unable to reassign our professionals to new engagements
without delay. Personnel and related costs constitute a
substantial portion of our operating expenses. Because these
expenses are relatively fixed, and because we establish the
levels of these expenses well in advance of any particular
quarter, cancellations or reductions in the scope of client
engagements could result in the under-utilization of our
professional services employees, causing significant reductions
in operating results for a particular quarter.

Recent changes in the accounting treatment of
the Debentures may cause us to report significant dilution of
our earnings per share.

In November 2004, the EITF reached a final
conclusion on Issue 04-8 that changed the accounting
treatment for contingent convertible debt, including the
Debentures. As a result, the shares of common stock issuable
upon conversion of the Debentures must be included in any
calculation of earnings per share on a fully diluted basis. This
change has retroactive effect and will cause us to report, in
our Form 10-Q for our first quarter of fiscal 2005,
significant dilution of our earnings per share reflecting the
shares of our common stock underlying the outstanding
Debentures. Our stock price may suffer due to the report of
lower earnings per share.

Conversion of the Debentures into shares of
our common stock will dilute the ownership interests of existing
stockholders.

The conversion of some or all of the Debentures
into shares of common stock will dilute the ownership interest
of existing common stockholders. Any large volume sales in the
public market of the common stock issued upon such conversion
could adversely affect prevailing market prices of our common
stock. In addition, the existence of the Debentures may
encourage short selling by market participants because the
conversion of the Debentures could depress the price of our
common stock.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 43












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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We are exposed to financial market risks,
including changes in interest rates, foreign currency exchange
rates, and market prices of equity securities. To mitigate some
of these risks, we utilize currency forward contracts and
currency options. We do not use derivative financial instruments
for speculative or trading purposes, and no significant
derivative financial instruments were outstanding at
October 31, 2004.

Interest Rate Risk

The primary objective of our short-term
investment activities is to preserve principal while maximizing
yields without significantly increasing risk. Our strategy is to
invest in widely diversified short-term investments, consisting
primarily of investment grade securities, substantially all of
which either mature within the next twelve months or have
characteristics of short-term investments. A hypothetical
50 basis point increase in interest rates would result in
an approximately $2.1 million decrease (less than 0.5%) in
the fair value of our available-for-sale securities.

Market Risk

We also hold available-for-sale equity securities
in our short-term investment portfolio. As of October 31,
2004, gross unrealized gains, before tax effect on the
short-term public equity securities totaled $0.6 million. A
reduction in prices of 10% of these short-term equity securities
would result in approximately a $0.5 million decrease (less
than 0.5%) in the fair value of our short-term investments.

In addition, we invest in equity securities
issued by privately-held companies that are included in our
long-term portfolio of investments, primarily for the promotion
of business and strategic objectives. These investments are
generally in thinly capitalized companies in the high-technology
industry sector or venture capital funds. Because of the nature
of these investments, we are exposed to equity price risks. We
typically do not attempt to reduce or eliminate our market
exposure on these securities. A 10% adverse change in equity
prices of long-term equity securities would result in an
approximate $5.5 million decrease in the fair value of our
long-term securities.

Foreign Currency Risk

We use derivatives to hedge those net assets and
liabilities that, when re-measured or settled according to
accounting principles generally accepted in the U.S., impact our
consolidated statement of operations. Currency forward contracts
are utilized in these hedging programs. All forward contracts
entered into by us are components of hedging programs and are
entered into for the sole purpose of hedging an existing or
anticipated currency exposure, not for speculation or trading
purposes. Gains and losses on these currency forward contracts
would generally be offset by corresponding gains and losses on
the net foreign currency assets and liabilities that they hedge,
resulting in negligible net gain or loss overall on the hedged
exposures. When hedging balance sheet exposures, all gains and
losses on forward contracts are recognized in other income
(expense) in the same period as when the gains and losses
on re-measurement of the foreign currency denominated assets and
liabilities occur. All gains and losses related to foreign
exchange contracts are included in cash flows from operating
activities in the consolidated statements of cash flows. Our
hedging programs reduce, but do not always entirely eliminate,
the impact of foreign currency exchange rate movements. If we
did not hedge against foreign currency exchange rate movement,
an increase or decrease of 10% in exchange rates would result in
an increase or decrease in income before taxes of approximately
$3.6 million. This number represents the exposure related
to balance sheet re-measurement only and assumes that all
currencies move in the same direction at the same time relative
to the U.S. dollar.

All of the potential changes noted above are
based on sensitivity analyses performed on our financial
position at October 31, 2004. Actual results may differ
materially.



|   |                          
|-- | -------------------------
|44 | Novell annual report 2004












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Item 8.Financial
Statements and Supplementary Data

Novell, Inc.

|                                                                               |  |      |    | 
|------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                               |  | Page
|                                                                               |  |     
|Consolidated Statements of Operations                                          |  |      | 46 | 
|Consolidated Balance Sheets                                                    |  |      | 47 | 
|Consolidated Statements of Stockholders
    Equity                            |  |      | 48 | 
|Consolidated Statements of Cash Flows                                          |  |      | 49 | 
|Notes to Consolidated Financial Statements                                     |  |      | 50 | 
|Report of Ernst & Young LLP, Independent
    Registered Public Accounting Firm |  |      | 90 | 
|Selected Consolidated Quarterly Financial
    Data  Unaudited                 |  |      | 91 | 



|                          |   
|------------------------- | --
|Novell annual report 2004 | 45












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##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(Amounts in thousands, except per share
data)


|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |         |         |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------------- | --------- | ----------- | ------- | ----------- | --------- | ------- | ------- | - | --------- | ------- | ------- | -
|                                                                                |                                                                |                                                          
|                                                                                |                                                                | Fiscal Year Ended                                        
|                                                                                |                                                                |                                                          
|                                                                                |                                                                | October 31,                                               |           | October 31, |         | October 31,
|                                                                                |                                                                | 2004                                                      |           | 2003        |         | 2002       
|                                                                                |                                                                |                                                           |           |             |         |            
|Net revenue:                                                                    |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                | New software licenses                                          |                                                           | $         | 238,419     |         |             | $         | 265,256 |         |   | $         | 319,281 |        
|                                                                                | Maintenance and services                                       |                                                           |           | 927,498     |         |             |           | 840,240 |         |   |           | 815,039 |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Total net revenue                                                               |                                                                |                                                           | 1,165,917 |             |         |             | 1,105,496 |         |         |   | 1,134,320 |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Cost of revenue:                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                | New software licenses                                          |                                                           |           | 23,478      |         |             |           | 31,773  |         |   |           | 31,175  |        
|                                                                                | Maintenance and services                                       |                                                           |           | 392,201     |         |             |           | 406,945 |         |   |           | 418,243 |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Total cost of revenue                                                           |                                                                |                                                           | 415,679   |             |         |             | 438,718   |         |         |   | 449,418   |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Gross profit                                                                    |                                                                |                                                           | 750,238   |             |         |             | 666,778   |         |         |   | 684,902   |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Operating expenses:                                                             |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                | Sales and marketing                                            |                                                           |           | 362,569     |         |             |           | 380,826 |         |   |           | 358,742 |        
|                                                                                | Product development                                            |                                                           |           | 198,614     |         |             |           | 183,758 |         |   |           | 169,247 |        
|                                                                                | General and administrative                                     |                                                           |           | 102,437     |         |             |           | 110,963 |         |   |           | 122,588 |        
|                                                                                | Restructuring expenses                                         |                                                           |           | 22,903      |         |             |           | 43,067  |         |   |           | 19,100  |        
|                                                                                | Purchased in-process research and development                  |                                                           |           |            |         |             |           | 920     |         |   |           | 3,000   |        
|                                                                                | (Gain on sale) impairment of property, plant and
    equipment |                                                           |           | (1,977      | )       |             |           | (24,934 | )       |   |           | 80,350  |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                |                                                                | Total operating expenses                                  |           |             | 684,546 |             |           |         | 694,600 |   |           |         | 753,027 |  
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Income (loss) from operations                                                   |                                                                |                                                           | 65,692    |             |         |             | (27,822   | )       |         |   | (68,125   | )      
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Other income (expense):                                                         |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                | Investment income                                              |                                                           |           | 23,401      |         |             |           | 13,033  |         |   |           | 24,654  |        
|                                                                                | Impairment of investments                                      |                                                           |           | (5,415      | )       |             |           | (34,735 | )       |   |           | (57,572 | )      
|                                                                                | Other, net                                                     |                                                           |           | (8,704      | )       |             |           | (5,486  | )       |   |           | 8,818   |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                |                                                                | Other income (expense), net                               |           |             | 9,282   |             |           |         | (27,188 | ) |           |         | (24,100 | )
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Income (loss) before taxes                                                      |                                                                |                                                           | 74,974    |             |         |             | (55,010   | )       |         |   | (92,225   | )      
|Income tax expense                                                              |                                                                |                                                           | 17,786    |             |         |             | 106,894   |         |         |   | 10,896    |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Income (loss) before accounting change                                          |                                                                |                                                           | 57,188    |             |         |             | (161,904  | )       |         |   | (103,121  | )      
|Cumulative effect of accounting change, net of
    taxes                        |                                                                |                                                           |          |             |         |             |          |         |         |   | (143,702  | )      
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Net income (loss)                                                               |                                                                |                                                           | 57,188    |             |         |             | (161,904  | )       |         |   | (246,823  | )      
|Deemed dividend related to beneficial conversion
    feature of preferred stock |                                                                |                                                           | (25,680   | )           |         |             |          |         |         |   |          |        
|Preferred stock dividends                                                       |                                                                |                                                           | (416      | )           |         |             |          |         |         |   |          |        
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Net income (loss) available to common stockholders                              |                                                                | $                                                         | 31,092    |             |         | $           | (161,904  | )       |         | $ | (246,823  | )      
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|Weighted-average shares outstanding:                                            |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                | Basic                                                          |                                                           |           | 381,100     |         |             |           | 370,545 |         |   |           | 363,569 |        
|                                                                                | Diluted                                                        |                                                           |           | 390,879     |         |             |           | 370,545 |         |   |           | 363,569 |        
|Net income (loss) per common share, basic and
    diluted:                      |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                |                                                                | Before cumulative effect of accounting change             |           | $           | 0.08    |             |           | $       | (0.44   | ) |           | $       | (0.28   | )
|                                                                                |                                                                | Cumulative effect of accounting change, net of
    taxes  |           |             |        |             |           |         |        |   |           |         | (0.40   | )
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        
|                                                                                |                                                                | Net income (loss) per common share, basic and
    diluted |           | $           | 0.08    |             |           | $       | (0.44   | ) |           | $       | (0.68   | )
|                                                                                |                                                                |                                                           |           |             |         |             |           |         |         |   |           |        

See notes to consolidated financial statements.



|   |                          
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|46 | Novell annual report 2004












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NOVELL, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per
share data)


|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |         |        |           | 
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------- | ------ | --------- | ------- | ------- | ------ | --------- | 
|                                                                |                                                                                                          | October 31,                                                                                                                                                                                         |                                                                       | October 31,
|                                                                |                                                                                                          | 2004                                                                                                                                                                                                |                                                                       | 2003       
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |            
|ASSETS                                                         
|Current assets:                                                 |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                | Cash and cash equivalents                                                                                |                                                                                                                                                                                                     | $                                                                     | 434,404     |        |           | $       | 366,932 |       
|                                                                | Short-term investments                                                                                   |                                                                                                                                                                                                     |                                                                       | 777,063     |        |           |         | 384,920 |       
|                                                                | Receivables (net of allowances of $24,396 and
    $26,852 at October 31, 2004 and 2003, respectively)    |                                                                                                                                                                                                     |                                                                       | 269,431     |        |           |         | 232,492 |       
|                                                                | Prepaid expenses                                                                                         |                                                                                                                                                                                                     |                                                                       | 25,190      |        |           |         | 23,005  |       
|                                                                | Other current assets                                                                                     |                                                                                                                                                                                                     |                                                                       | 28,846      |        |           |         | 23,204  |       
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total current assets                                                  |             |        | 1,534,934 |         |         |        | 1,030,553 | 
|Property, plant and equipment, net                              |                                                                                                          |                                                                                                                                                                                                     | 231,468                                                               |             |        |           | 255,526 |        
|Long-term investments                                           |                                                                                                          |                                                                                                                                                                                                     | 55,986                                                                |             |        |           | 50,948  |        
|Goodwill                                                        |                                                                                                          |                                                                                                                                                                                                     | 391,088                                                               |             |        |           | 213,300 |        
|Intangible assets, net                                          |                                                                                                          |                                                                                                                                                                                                     | 48,616                                                                |             |        |           | 10,800  |        
|Other assets                                                    |                                                                                                          |                                                                                                                                                                                                     | 29,456                                                                |             |        |           | 6,526   |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total assets                                                          |             | $      | 2,291,548 |         |         | $      | 1,567,653 | 
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|LIABILITIES, REDEEMABLE SECURITIES AND
    STOCKHOLDERS EQUITY
|Current liabilities:                                            |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                | Accounts payable                                                                                         |                                                                                                                                                                                                     | $                                                                     | 55,956      |        |           | $       | 50,258  |       
|                                                                | Accrued compensation                                                                                     |                                                                                                                                                                                                     |                                                                       | 126,612     |        |           |         | 101,164 |       
|                                                                | Other accrued liabilities                                                                                |                                                                                                                                                                                                     |                                                                       | 98,983      |        |           |         | 117,073 |       
|                                                                | Income taxes payable                                                                                     |                                                                                                                                                                                                     |                                                                       | 37,077      |        |           |         | 35,493  |       
|                                                                | Deferred revenue                                                                                         |                                                                                                                                                                                                     |                                                                       | 374,186     |        |           |         | 322,470 |       
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total current liabilities                                             |             |        | 692,814   |         |         |        | 626,458   | 
|Deferred income taxes                                           |                                                                                                          |                                                                                                                                                                                                     | 3,855                                                                 |             |        |           |        |        
|Senior convertible debentures                                   |                                                                                                          |                                                                                                                                                                                                     | 600,000                                                               |             |        |           |        |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total liabilities                                                     |             |        | 1,296,669 |         |         |        | 626,458   | 
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|Minority interests                                              |                                                                                                          |                                                                                                                                                                                                     | 6,515                                                                 |             |        |           | 6,725   |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|Redeemable securities:                                          |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                | Series B preferred stock, $.10 par
    value, Authorized  1,000 shares;                                 |                                                                                                                                                                                                     |                                                                       |             |        |           |         |         |       
|                                                                | Outstanding  500 and no shares at
    October 31, 2004 and 2003, respectively (at redemption
    value) |                                                                                                                                                                                                     |                                                                       | 25,000      |        |           |         |        |       
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|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  393,061,385 and
    376,460,107 shares at October 31, 2004 and 2003,
    respectively, Outstanding  377,874,351 and
    376,460,107 shares at October 31, 2004 and 2003,
    respectively |                                                                       |             | 39,306 |           |         |         | 37,646 |          
|                                                                | Additional paid-in capital                                                                               |                                                                                                                                                                                                     |                                                                       | 431,102     |        |           |         | 319,016 |       
|                                                                | Treasury stock, at cost  15,187,034
    and no shares at October 31, 2004 and 2003, respectively        |                                                                                                                                                                                                     |                                                                       | (124,989    | )      |           |         |        |       
|                                                                | Retained earnings                                                                                        |                                                                                                                                                                                                     |                                                                       | 607,851     |        |           |         | 576,759 |       
|                                                                | Accumulated other comprehensive income                                                                   |                                                                                                                                                                                                     |                                                                       | 16,180      |        |           |         | 7,068   |       
|                                                                | Other                                                                                                    |                                                                                                                                                                                                     |                                                                       | (6,086      | )      |           |         | (6,019  | )     
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total stockholders equity                                            |             |        | 963,364   |         |         |        | 934,470   | 
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        
|                                                                |                                                                                                          |                                                                                                                                                                                                     | Total liabilities, redeemable securities and
    stockholders equity |             | $      | 2,291,548 |         |         | $      | 1,567,653 | 
|                                                                |                                                                                                          |                                                                                                                                                                                                     |                                                                       |             |        |           |         |        

See notes to consolidated financial statements.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 47












---



##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(Amounts in thousands)


|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|-------------------------------------------------------- |  | ------ | ------- | ------ |  | -------- | ------ | -------- |  | ---------- | ------- | -------- |  | ------------- | -------- | ----- |  | ----- | ------- | - |  | - | -------- | - |  | - | ------ | - |  | - | ------ | - |  | - | --------- | -
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  | Accumulated   |          |       |  |      
|                                                         |  | Common |         | Common |  | Treasury |        | Treasury |  | Additional |         |          |  | Other         |          |       |  |      
|                                                         |  | Stock  |         | Stock  |  | Stock    |        | Stock    |  | Paid-In    |         | Retained |  | Comprehensive |          |       |  |      
|                                                         |  | Shares |         | Amount |  | Shares   |        | Amount   |  | Capital    |         | Earnings |  | Income        |          | Other |  | Total
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |      
|Balance at October 31, 2001                              |  |        | 362,341 |        |  | $        | 36,234 |          |  |            |        |          |  | $             |         |       |  | $     | 256,332 |   |  | $ | 985,486  |   |  | $ | 2,455  |   |  | $ | (9,840 | ) |  | $ | 1,270,667 |  
|Stock issued from stock plans                            |  |        | 5,737   |        |  |          | 574    |          |  |            |        |          |  |               |         |       |  |       | 13,780  |   |  |   |         |   |  |   |       |   |  |   | (1,254 | ) |  |   | 13,100    |  
|Stock options issued for acquisition                     |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       | 28,583  |   |  |   |         |   |  |   |       |   |  |   | (4,826 | ) |  |   | 23,757    |  
|Shares cancelled                                         |  |        | (540    | )      |  |          | (55    | )        |  |            |        |          |  |               |         |       |  |       | (1,556  | ) |  |   |         |   |  |   |       |   |  |   | 1,697  |   |  |   | 86        |  
|Amortization of unearned stock compensation              |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   | 7,153  |   |  |   | 7,153     |  
|Change in unrealized gain on investments, net of
    tax |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | (2,828 | ) |  |   |       |   |  |   | (2,828    | )
|Cumulative translation adjustment, net of tax            |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | 430    |   |  |   |       |   |  |   | 430       |  
|Net loss                                                 |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   | (246,823 | ) |  |   |       |   |  |   |       |   |  |   | (246,823  | )
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Comprehensive loss                                       |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (249,221  | )
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Balance at October 31, 2002                              |  |        | 367,538 |        |  |          | 36,753 |          |  |            |        |          |  |               |         |       |  |       | 297,139 |   |  |   | 738,663  |   |  |   | 57     |   |  |   | (7,070 | ) |  |   | 1,065,542 |  
|Stock issued from stock plans                            |  |        | 9,008   |        |  |          | 902    |          |  |            |        |          |  |               |         |       |  |       | 22,499  |   |  |   |         |   |  |   |       |   |  |   | (2,872 | ) |  |   | 20,529    |  
|Shares cancelled                                         |  |        | (86     | )      |  |          | (9     | )        |  |            |        |          |  |               |         |       |  |       | (622    | ) |  |   |         |   |  |   |       |   |  |   | 232    |   |  |   | (399      | )
|Amortization of unearned stock compensation              |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   | 3,691  |   |  |   | 3,691     |  
|Change in unrealized gain on investments, net of
    tax |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | (705   | ) |  |   |       |   |  |   | (705      | )
|Cumulative translation adjustment, net of tax            |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | 7,716  |   |  |   |       |   |  |   | 7,716     |  
|Net loss                                                 |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   | (161,904 | ) |  |   |       |   |  |   |       |   |  |   | (161,904  | )
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Comprehensive loss                                       |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (154,893  | )
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Balance at October 31, 2003                              |  |        | 376,460 |        |  |          | 37,646 |          |  |            |        |          |  |               |         |       |  |       | 319,016 |   |  |   | 576,759  |   |  |   | 7,068  |   |  |   | (6,019 | ) |  |   | 934,470   |  
|Stock issued from stock plans                            |  |        | 12,757  |        |  |          | 1,276  |          |  |            | 1       |          |  |               | 11       |       |  |       | 63,101  |   |  |   |         |   |  |   |       |   |  |   | (5,452 | ) |  |   | 58,936    |  
|Stock issued for conversion of preferred stock           |  |        | 4,000   |        |  |          | 400    |          |  |            |        |          |  |               |         |       |  |       | 24,600  |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | 25,000    |  
|Shares repurchased                                       |  |        |        |        |  |          |       |          |  |            | (15,188 | )        |  |               | (125,000 | )     |  |       |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | (125,000  | )
|Shares cancelled                                         |  |        | (156    | )      |  |          | (16    | )        |  |            |        |          |  |               |         |       |  |       | (1,295  | ) |  |   |         |   |  |   |       |   |  |   | 537    |   |  |   | (774      | )
|Amortization of unearned stock compensation              |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   | 4,848  |   |  |   | 4,848     |  
|Beneficial conversion feature                            |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       | 25,680  |   |  |   | (25,680  | ) |  |   |       |   |  |   |       |   |  |   |          |  
|Dividends on preferred stock                             |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   | (416     | ) |  |   |       |   |  |   |       |   |  |   | (416      | )
|Change in unrealized gain on investments, net of
    tax |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | (1,352 | ) |  |   |       |   |  |   | (1,352    | )
|Cumulative translation adjustment, net of tax            |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | 11,720 |   |  |   |       |   |  |   | 11,720    |  
|Change in minimum pension liability                      |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   | (1,256 | ) |  |   |       |   |  |   | (1,256    | )
|Net income                                               |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   | 57,188   |   |  |   |       |   |  |   |       |   |  |   | 57,188    |  
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Comprehensive income                                     |  |        |        |        |  |          |       |          |  |            |        |          |  |               |         |       |  |       |        |   |  |   |         |   |  |   |       |   |  |   |       |   |  |   | 66,301    |  
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  
|Balance at October 31, 2004                              |  |        | 393,061 |        |  | $        | 39,306 |          |  |            | (15,187 | )        |  | $             | (124,989 | )     |  | $     | 431,102 |   |  | $ | 607,851  |   |  | $ | 16,180 |   |  | $ | (6,086 | ) |  | $ | 963,364   |  
|                                                         |  |        |         |        |  |          |        |          |  |            |         |          |  |               |          |       |  |       |         |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |           |  

See notes to consolidated financial statements.



|   |                          
|-- | -------------------------
|48 | Novell annual report 2004












---



##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Amounts in thousands)


|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |          |         |        | 
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------- | ------------------------------------------------------- | ----------- | ------- | ----------- | -------- | -------- | ------- | -------- | -------- | -------- | ------- | ------ | 
|                                                                                             |                                                                                      |                      
|                                                                                             |                                                                                      | Fiscal Year Ended    
|                                                                                             |                                                                                      |                      
|                                                                                             |                                                                                      | October 31,           |                                                         | October 31, |         | October 31,
|                                                                                             |                                                                                      | 2004                  |                                                         | 2003        |         | 2002       
|                                                                                             |                                                                                      |                       |                                                         |             |         |            
|Cash flows from operating activities                                                         |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Net income (loss)                                                                            |                                                                                      | $                     | 57,188                                                  |             |         | $           | (161,904 | )        |         | $        | (246,823 | )       
|Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             | Depreciation and amortization                                                        |                       |                                                         | 53,482      |         |             |          | 61,058   |         |          |          | 68,785   |        
|                                                                                             | Gain on sale of property, plant and equipment                                        |                       |                                                         | (1,639      | )       |             |          | (25,299  | )       |          |          | (8,762   | )      
|                                                                                             | Gain on sale of long-term investments                                                |                       |                                                         | (1,567      | )       |             |          |         |         |          |          |         |        
|                                                                                             | Impairment of goodwill and intangible assets, net
    of tax                         |                       |                                                         |            |         |             |          | 13,935   |         |          |          | 143,702  |        
|                                                                                             | Impairment of investments and property, plant and
    equipment                      |                       |                                                         | 5,415       |         |             |          | 34,735   |         |          |          | 137,922  |        
|                                                                                             | Purchased in-process research and development                                        |                       |                                                         |            |         |             |          | 920      |         |          |          | 3,000    |        
|                                                                                             | Changes in current assets and liabilities,
    excluding the effect of acquisitions: |                       |                                                         |             |         |             |          |          |         |          |          |          |        
|                                                                                             |                                                                                      | Receivables, net      |                                                         |             | (25,250 | )           |          |          | (17,215 | )        |          |          | 18,599  |       
|                                                                                             |                                                                                      | Prepaid expenses      |                                                         |             | (1,467  | )           |          |          | 1,135   |          |          |          | 7,580   |       
|                                                                                             |                                                                                      | Deferred income taxes |                                                         |             | 870     |             |          |          | 105,277 |          |          |          | (14,035 | )     
|                                                                                             |                                                                                      | Other current assets  |                                                         |             | (3,069  | )           |          |          | 368     |          |          |          | 7,741   |       
|                                                                                             |                                                                                      | Deferred revenue      |                                                         |             | 43,261  |             |          |          | 47,195  |          |          |          | 32,083  |       
|                                                                                             |                                                                                      | Accounts payable      |                                                         |             | 2,492   |             |          |          | (7,213  | )        |          |          | (23,386 | )     
|                                                                                             |                                                                                      | Accrued liabilities   |                                                         |             | (10,619 | )           |          |          | 2,014   |          |          |          | (74,932 | )     
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             |                                                                                      |                       | Net cash provided by operating activities               |             |         | 119,097     |          |          |         | 55,006   |          |          |         | 51,474 | 
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Cash flows from financing activities                                                         |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             | Issuance of common stock, net                                                        |                       |                                                         | 58,162      |         |             |          | 20,130   |         |          |          | 13,186   |        
|                                                                                             | Issuance of convertible preferred stock                                              |                       |                                                         | 50,000      |         |             |          |         |         |          |          |         |        
|                                                                                             | Issuance of senior convertible debentures                                            |                       |                                                         | 600,000     |         |             |          |         |         |          |          |         |        
|                                                                                             | Payment of issuance costs on senior convertible
    debentures                       |                       |                                                         | (14,850     | )       |             |          |         |         |          |          |         |        
|                                                                                             | Payment of cash dividends on preferred stock                                         |                       |                                                         | (292        | )       |             |          |         |         |          |          |         |        
|                                                                                             | Repurchases of common stock, held in treasury                                        |                       |                                                         | (125,000    | )       |             |          |         |         |          |          |         |        
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             |                                                                                      |                       | Net cash provided by financing activities               |             |         | 568,020     |          |          |         | 20,130   |          |          |         | 13,186 | 
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Cash flows from investing activities                                                         |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             | Purchases of property, plant and equipment                                           |                       |                                                         | (26,997     | )       |             |          | (39,468  | )       |          |          | (27,610  | )      
|                                                                                             | Proceeds from the sale of property, plant and
    equipment                          |                       |                                                         | 4,951       |         |             |          | 125,000  |         |          |          | 16,050   |        
|                                                                                             | Purchases of short-term investments                                                  |                       |                                                         | (999,078    | )       |             |          | (727,817 | )       |          |          | (549,008 | )      
|                                                                                             | Maturities of short-term investments                                                 |                       |                                                         | 160,611     |         |             |          | 117,485  |         |          |          | 262,974  |        
|                                                                                             | Sales of short-term investments                                                      |                       |                                                         | 444,972     |         |             |          | 396,462  |         |          |          | 477,313  |        
|                                                                                             | Proceeds from sale of long-term investments                                          |                       |                                                         | 1,567       |         |             |          |          |         |          |          |          |        
|                                                                                             | Cash paid for acquisition of Salmon, net of cash
    acquired                        |                       |                                                         | (5,322      | )       |             |          |         |         |          |          |         |        
|                                                                                             | Cash paid for acquisition of SUSE, net of cash
    acquired                          |                       |                                                         | (200,298    | )       |             |          |         |         |          |          |         |        
|                                                                                             | Cash paid for acquisition of Ximian, net of cash
    acquired                        |                       |                                                         |            |         |             |          | (40,046  | )       |          |          |         |        
|                                                                                             | Cash paid for acquisition of SilverStream, net of
    cash acquired                  |                       |                                                         |            |         |             |          |         |         |          |          | (102,975 | )      
|                                                                                             | Cash paid for acquisition of Volera minority
    interest                            |                       |                                                         |            |         |             |          | (1,050   | )       |          |          | (3,500   | )      
|                                                                                             | Purchases of long-term investments                                                   |                       |                                                         | (12,702     | )       |             |          | (14,322  | )       |          |          | (26,143  | )      
|                                                                                             | Other                                                                                |                       |                                                         | 12,651      |         |             |          | 11,565   |         |          |          | 14,299   |        
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|                                                                                             |                                                                                      |                       | Net cash (used in) provided by investing
    activities |             |         | (619,645    | )        |          |         | (172,191 | )        |          |         | 61,400 | 
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Total increase (decrease) in cash and cash
    equivalents                                   |                                                                                      |                       | 67,472                                                  |             |         |             | (97,055  | )        |         |          | 126,060  |         
|Cash and cash equivalents  beginning
    of period                                          |                                                                                      |                       | 366,932                                                 |             |         |             | 463,987  |          |         |          | 337,927  |         
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Cash and cash equivalents  end of
    period                                                |                                                                                      | $                     | 434,404                                                 |             |         | $           | 366,932  |          |         | $        | 463,987  |         
|                                                                                             |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Supplemental disclosures of cash and non-cash
    financing and investing activities:        |                                                                                      |                       |                                                         |             |         |             |          |          |         |          |          |         
|Deemed dividend related to beneficial conversion
    feature of Series B preferred stock     |                                                                                      | $                     | 25,680                                                  |             |         | $           |         |          |         | $        |         |         
|Conversion of Series B preferred stock                                                       |                                                                                      |                       | 25,000                                                  |             |         |             |         |          |         |          |         |         
|Issuance of notes receivable for sale of
    property, plant and equipment                   |                                                                                      |                       | 9,935                                                   |             |         |             |         |          |         |          |         |         
|Cash paid for interest                                                                       |                                                                                      |                       |                                                        |             |         |             |         |          |         |          |         |         
|Cash paid for income taxes                                                                   |                                                                                      | $                     | 11,212                                                  |             |         | $           | 17,806   |          |         | $        | 20,514   |         

See notes to consolidated financial statements.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 49












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##### Table of Contents



NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

October 31, 2004


A. Summary of Business Operations

Novell is a leading provider of information
solutions, a position we have been in since 1983. We provide
identity management and web services solutions and
cross-platform solutions on several operating systems, including
Linux, NetWare, Windows, and Unix. All of our solutions are
supported by our worldwide services, including consulting,
training and technical services. Through these solutions, our
customers can deliver information or system resources from
diverse sources, regardless of how they are implemented and
regardless of how they connect, in a secure and personalized
way. We create value for our customers by reducing the cost,
complexity and vulnerability of todays information
environments, allowing them to optimize the performance of the
resources and assets that they employ. With approximately 6,000
employees globally, we serve customers all over the world.

We deliver this value to our customers by
developing, maintaining and delivering the following four
solution categories:

Identity management and web services
solutions.Our identity management and
web services products include applications that offer a full
suite of capabilities, including the following:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | secure authentication and authorization services;      
|
| |  | single sign-on;                                        
|
| |  | provisioning capabilities; and                         
|
| |  | portal and web services application
    infrastructure.

We believe that customers have recognized the
need to manage the access, utilization and optimization of
assets through information systems that can understand,
implement and administer business policies, not only within
organizations, but also between organizations and their
customers and trading partners. Our web services solutions
enable organizations to balance growing user demands for
services and information with the organizations demands
for increased security. Through identity management and web
services, customers can integrate business processes and
systems, extending them within and across enterprise boundaries
to interact with customers, employees, suppliers and partners.
This affords organizations the opportunity to make changes to
their business operations without incurring the cost of
constantly changing their underlying application software. These
identity-based technologies not only regulate access to
information and applications, but are also increasingly becoming
core components of numerous other products such as mobile phones
and other digital devices. Our strategy has been to develop
identity management technologies as a set of discrete services
to accelerate time to value, as opposed to the use of a single
monolithic application that can take years to implement and
deploy.

Cross-platform
solutions.We offer two major
operating system platforms, NetWare and SUSE LINUX, in support
of our cross-platform solutions. Our solutions offer an
enterprise-ready, scalable approach to networking and
collaboration services  including file, print,
messaging, scheduling and workspace. In addition, our
identity-driven, directory-based management modules allow
customers to manage their computing environment from a single,
central location. Our products are designed to operate within
existing heterogeneous computing environments as well as to
provide tools and strategies to allow easy migration between
platforms to fit better with our customers technology
plans.



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A major focus of our cross-platform solutions is
to embrace and promote open source computing. Open source is 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 of whom are unaffiliated with
each other. Corporations also fund open source projects or
contribute code into open source to further assist the
development efforts. We believe that a major shift toward open
source software is underway as companies are more critically
evaluating the cost effectiveness of their information
technology (IT) investments, are intrigued about
having access to the source code, and are looking for ways to
avoid vendor lock-in.

We believe that we are uniquely positioned to
drive the transition to greater use of open source software, as
well as to benefit from this trend. Widespread adoption of Linux
and open source software was initially hindered by weak
technical support and a lack of applications, shortcomings that
we are particularly well positioned to address. We leverage our
financial stability, experience, and global support capabilities
to help our customers integrate Linux and other open source
software into their existing IT environments. While the
flexibility and cost savings of Linux and open source have made
it attractive to enterprise customers, we believe these
businesses look to proprietary software vendors to provide
applications, management and security. With our SUSE LINUX open
source platform and our other cross-platform solutions, our
customers can deploy the best of closed and open source software
that many businesses find more attractive. As an example, our
GroupWise product now allows customers to collaborate seamlessly
across their Windows and Linux environments. We also provide
solutions allowing IT managers to centrally control Linux,
NetWare and Windows systems in a consistent and straightforward
way.

Worldwide services.We provide worldwide IT consulting, training and support
services to address our customers needs. Our worldwide IT
consulting practice provides the business knowledge and
technical expertise to help our customers implement and achieve
maximum benefit from our products and solutions. We also offer
open source and identity driven services that are focused to aid
our clients in rapidly integrating applications or migrating
existing platforms to Linux.

Through our training services, we offer skills
assessments, advanced technical training courses, and customized
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 software engineer
certifications. Building on this program, we introduced our
Novell Certified Linux Engineer and Novell Certified Linux
Professional programs to accelerate the adoption of Linux and
open source in the enterprise.

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

Celerant Consulting.Celerant, a majority-owned subsidiary of Novell, provides
value-based, operational strategy and implementation consulting
services to a wide variety of customers mainly in Europe and the
United States. Celerant specializes in improving the value
derived from existing business processes by accelerating time to
value and eliminating non-value creating activities.

We are subject to a number of risks similar to
those of other companies of similar size in our industry,
including a recent history of pre-tax losses, rapid
technological changes, competition, limited number of suppliers,
customer concentration, integration of acquisitions, government
regulations, management of international activities and
dependence on key individuals.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 51












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

B. Summary of Significant Accounting
Policies

The accompanying consolidated financial
statements reflect the application of significant accounting
policies as described in this note and elsewhere in the
accompanying consolidated financial statements.

Principles
of Consolidation



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying consolidated financial
    statements include the accounts of Novell, Inc., its
    subsidiaries and majority-owned joint ventures. All material
    inter-company accounts and transactions have been eliminated in
    consolidation.

Managements
Estimates and Uncertainties



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of financial statements in
    conformity with accounting principles generally accepted in the
    United States requires management to make estimates and
    assumptions that affect the amounts reported in the financial
    statements and accompanying notes. Actual results could differ
    materially from those estimates.

Reclassifications



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain amounts reported in prior years have been
    reclassified from what was previously reported to conform to the
    current years presentation.

Foreign
Currency Translation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to increased activity in non-U.S. dollar
    currencies, beginning November 1, 2002, we determined the
    functional currency of all of our international subsidiaries,
    except for our Irish subsidiaries and a German holding company,
    to be the local currency. In our Irish subsidiary and German
    holding company, the functional currency is the
    U.S. dollar. These subsidiaries generate and expend cash
    primarily in their respective local currencies. Assets and
    liabilities of these subsidiaries are translated at current
    month-end exchange rates. Revenue and expenses are translated
    monthly at the average monthly exchange rate. Translation
    adjustments are recorded in accumulated other comprehensive
    income. Previously, the functional currency of our international
    subsidiaries, except Novell Japan, Novell India, and the
    international subsidiaries of Cambridge Technology Partners
    (Cambridge) and SilverStream Software, Inc.
    (SilverStream), was the U.S. dollar. All
    transaction gains and losses are reported in other income
    (expense). Foreign exchange resulted in a loss of
    $5.0 million and $3.0 million, respectively, during
    fiscal 2004 and 2003, and a gain of $0.3 million in fiscal
    2002.

Cash,
Cash Equivalents and Short-Term Investments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We consider all investments purchased with an
    initial term to maturity of three months or less to be cash
    equivalents. All auction market securities are classified as
    short-term investments. Short-term investments are diversified,
    primarily consisting of investment grade securities that either
    mature within the next 12 months or have other
    characteristics of short-term investments. All of our auction
    market securities have auction dates within at least
    6 months of the prior auction date. Our fixed income
    securities have maturities, puts, announced calls, auctions, or
    resets ranging from zero to seven years. These securities are
    available to be used for current operations and thus are
    classified as short-term investments, even though some
    maturities may extend beyond one year.



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All marketable debt and equity securities that
    are included in cash and short-term investments are considered
    available-for-sale and are carried at fair value. The unrealized
    gains and losses related to these securities are included in
    accumulated other comprehensive income, net of tax, after any
    applicable tax valuation allowances (see Note U). Fair
    values are based on quoted market prices where available. If
    quoted market prices are not available, as in the case of
    municipal debt securities, we use third-party pricing services
    to assist in determining fair value. In many instances, these
    services examine the pricing of similar instruments to estimate
    fair value. When securities are sold, their cost is determined
    based on the specific identification method.

Concentrations
of Credit Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Financial instruments that subject us to credit
    risk primarily consist of cash and cash equivalents, short-term
    investments, accounts receivable, notes receivable, and amounts
    due under subleases. Our credit risk is managed by investing
    cash and cash equivalents in high-quality money market
    instruments and securities of the U.S. government and its
    agencies. Accounts receivable include amounts owed by
    geographically dispersed end users, distributors, resellers, and
    original equipment manufacturer (OEM) customers. No
    collateral is required. We provide a standard right of return of
    30 days. Provisions are made for sales returns and bad
    debts and are based on historical experience and on specific
    customer situations. Accounts receivable are not sold or
    factored. There were no customers with outstanding receivable
    balances greater than 10% of total accounts receivable at
    October 31, 2004 or 2003. We generally have not experienced
    any material losses related to receivables from individual
    customers or groups of customers. Due to these factors, no
    significant additional credit risk, beyond amounts provided for,
    is believed by management to be inherent in our accounts
    receivable. Our long-term notes receivable in the amount of
    $9.8 million is secured by collateral. Our subleases are
    with many different parties and thus no concentration of credit
    risk exists at October 31, 2004.
|
| | During the years ended October 31, 2004,
    2003 and 2002 there were no customers who accounted for more
    than 10% of total net revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Property,
Plant and Equipment



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, plant and equipment are carried at cost
    less accumulated depreciation and amortization. Depreciation and
    amortization is computed on the straight-line method over the
    estimated useful lives of the assets, or lease term, if shorter.
    Such lives are as follows:

|                                 |  |              |               | 
|-------------------------------- |  | ------------ | ------------- | 
|Asset classification             |  | Useful Lives
|                                 |  |             
|Buildings                        |  |              | 30 years      | 
|Furniture and equipment          |  |              | 2  7  years  | 
|Leasehold improvements and other |  |              | 3  10  years | 

Goodwill
and Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In accordance with SFAS No. 142,
    Goodwill and Other Intangible Assets, we do not
    amortize goodwill or intangibles with indefinite lives resulting
    from acquisitions. We review these assets periodically for
    potential impairment issues. Separable intangible assets that
    are not deemed to have an indefinite life are amortized over
    their estimated useful lives.



|                          |   
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|Novell annual report 2004 | 53












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Disclosure
of Fair Value of Financial Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial instruments mainly consist of cash
    and cash equivalents, short-term investments, accounts
    receivable, notes receivable, long-term investments, accounts
    payable, and senior convertible debentures. The carrying amounts
    of our cash equivalents and short-term investments, accounts
    receivable and accounts payable approximate fair value due to
    the short-term nature of these instruments. Long-term
    investments are accounted for initially at cost. The Company
    periodically reviews the realizability of each long-term
    investment when impairment indicators exist with respect to the
    investment. If an other-than-temporary impairment of the value
    of the investments is deemed to exist, the carrying value of the
    investment is written down to its estimated fair value. We
    consider an impairment to be other than temporary when market
    evidence or issuer-specific knowledge does not reflect long-term
    growth to support current carrying values. As of
    October 31, 2004 and 2003, we did not hold any
    publicly-traded long-term equity securities. Our long-term notes
    receivable and senior convertible debentures have interest rates
    that approximate current market rates; therefore the carrying
    value of the both approximate fair value.

Revenue



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenue is derived primarily from the sale of
    software licenses and maintenance, technical support, training,
    and consulting services. Revenue is recognized in accordance
    with the requirements of Statement of Position (SOP)
    97-2, Software Revenue Recognition. Under
    SOP 97-2, when an arrangement does not require significant
    production, modification or customization of the software,
    revenue is recognized when the following four criteria are met:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Persuasive evidence of an arrangement
    exists  We require evidence of an agreement with a
    customer specifying the terms and conditions of the products or
    services to be delivered.             
|
| |  | Delivery has occurred  For software
    licenses, delivery takes place when the customer is given access
    to the software programs. For services, delivery takes place as
    the services are provided.
|
| |  | The fee is fixed or determinable  Fees
    are fixed or determinable if they are not subject to a refund or
    cancellation and do not have payment terms that exceed our
    standard terms.             
|
| |  | Collectibility is probable  We perform
    a credit review of all customers with significant transactions
    to determine whether a customer is credit-worthy and
    collectibility is probable.         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue from software license fees is generally
    recognized upon delivery of the software. If the fee due from
    the customer is not fixed or determinable, revenue is recognized
    as payments become due from the customer. If collection is not
    considered probable, revenue is recognized when the fee is
    collected. Allowances for estimated sales returns and allowances
    are recorded in the same period as the related revenue. We
    recognize revenue on the sale of shrink-wrapped box products
    through our distributor channel on a sell-through basis.
|
| | Revenue from maintenance contracts, subscription
    agreements, support, and other similar services, is recognized
    as services are performed over the term of the performance
    period. Certain sales require continuing service, support, and
    performance by us, and accordingly, a portion of the revenue is
    deferred until the future service, support, and performance are
    provided.                                                                                                                                                                               
|
| | Consulting project contracts are either
    time-and-materials or fixed-price contracts. Revenue from
    consulting projects is recognized only if a signed contract
    exists, the fee is fixed or determinable, and collection of the
    resulting receivable is probable. Revenue from
    time-and-materials contracts is recog-                                                                                                                                                                                                                                                   



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|54 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | nized as the services are performed. Revenue from
    fixed-price contracts is recognized using the proportional
    performance method, using the estimated time-to-completion to
    measure the percent complete. The cumulative impact of any
    revision in estimates of the percent complete or recognition of
    losses on contracts is reflected in the period in which the
    changes or losses become known.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Many of our software arrangements include
    multiple elements, such as product upgrade protection, software
    support services, consulting, and training, in addition to
    software licenses and maintenance. These multiple element
    arrangements are accounted for using a proportional method of
    accounting in which we allocate revenue to each element of the
    transaction based upon the relative fair values of the elements,
    which may include software products, product upgrade protection,
    software support services, consulting, and training. Fair value
    is determined by Novell-specific objective evidence of the price
    charged to other customers when each element is sold separately.
    We have established sufficient Novell-specific objective
    evidence of the fair value of all elements of a multiple element
    arrangement.
|
| | Services revenue includes reimbursable expenses
    charged to our clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | We record provisions against revenue for
    estimated sales returns and allowances on product and
    service-related sales in the same period as the related revenue
    is recorded. We also record a provision to operating expenses
    for bad debts resulting from customers inability to pay
    for the products or services they have received, due to such
    factors as bankruptcy. These estimates are based on historical
    sales returns and bad debt expense, analyses of credit memo
    data, and other known factors.                                                                                                                                                                                                                                                                                                                                              

Cost
of Revenue



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization charges for product and services
    related intangible assets are recorded as a cost of revenue in
    the statements of operations.

Expenses



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product development costs are expensed as
    incurred. Due to the use of the working model approach,
    capitalized development costs have not been material.                    
|
| | Advertising costs are expensed as incurred.
    Advertising expenses totaled $10.6 million,
    $37.5 million, and $19.5 million, in fiscal 2004,
    2003, and 2002, respectively.

Stock-Based
Compensation



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



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At October 31, 2004, we had authorized
    several stock-based compensation plans which are more fully
    described in Note R. Under these plans, options to purchase
    shares of our common stock could be granted to employees,
    consultants, and outside directors. Under the intrinsic value
    method, compensation expense is calculated based on the
    difference between the fair value of our common stock and the
    option exercise price at the date of grant. We generally grant
    employee stock options with an exercise price equal to the fair
    value of our common stock. If compensation expense for our
    stock-based compensation had been determined based on the fair
    value of the stock grants, our net income (loss) and net income
    (loss) per share would have been the pro forma amounts indicated
    below:

|                                                        |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |          |  
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ----------- | - | ----------- | - | -------- | - |  | - | -------- | -
|                                                        |                                                                                                                                          |                          
|                                                        |                                                                                                                                          | Fiscal Year Ended        
|                                                        |                                                                                                                                          |                          
|                                                        |                                                                                                                                          | October 31,               |   | October 31, |   | October 31,
|                                                        |                                                                                                                                          | 2004                      |   | 2003        |   | 2002       
|                                                        |                                                                                                                                          |                           |   |             |   |            
|                                                        |                                                                                                                                          |                          
|                                                        |                                                                                                                                          | (Amounts in thousands,   
|                                                        |                                                                                                                                          | except per share amounts)
|Net income (loss) available to common
    stockholders: |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                                                        | As reported                                                                                                                              |                           | $ | 31,092      |   |             | $ | (161,904 | ) |  | $ | (246,823 | )
|                                                        | Less: total stock-based compensation expense
    determined under fair value-based method for all awards, net of
    related tax effects |                           |   | (51,436     | ) |             |   | (28,753  | ) |  |   | (63,086  | )
|                                                        | Add: total stock-based compensation expense
    recorded in the statement of operations                                                  |                           |   | 4,940       |   |             |   | 3,445    |   |  |   | 7,534    |  
|                                                        |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                                                        | Pro forma                                                                                                                                |                           | $ | (15,404     | ) |             | $ | (187,212 | ) |  | $ | (302,375 | )
|                                                        |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|Net income (loss) per common share:                     |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                                                        | As reported basic and diluted                                                                                                            |                           | $ | 0.08        |   |             | $ | (0.44    | ) |  | $ | (0.68    | )
|                                                        | Pro forma basic and diluted                                                                                                              |                           | $ | (0.04       | ) |             | $ | (0.51    | ) |  | $ | (0.83    | )



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the purpose of the above table, the fair
    value of each option grant is estimated as of the date of grant
    using the Black-Scholes option-pricing model with the following
    weighted-average assumptions used for grants in fiscal 2004,
    2003, and 2002: a risk-free interest rate of approximately 2.8%
    for fiscal 2004, 2.8% for fiscal 2003, and 3.6% for fiscal 2002;
    a dividend yield of 0.0% for all years; a weighted-average
    expected life of 3.75 years for fiscal 2004 and five years
    for fiscal 2003 and 2002; and a volatility factor of the
    expected market price of our common stock of 0.77 for fiscal
    2004, 0.85 for fiscal 2003, and 0.87 for fiscal 2002. The
    weighted-average fair value of options granted in fiscal 2004,
    2003, and 2002 was $5.63, $2.38, and $1.70, respectively.                                                                                                                     
|
| | We do not recognize compensation expense related
    to employee purchase rights under the Novell, Inc. 1989 Employee
    Stock Purchase Plan. Pro forma compensation expense is estimated
    for the fair value of the employees purchase rights using
    the Black-Scholes model with the following assumptions for the
    rights granted in fiscal 2004, 2003, and 2002: a dividend yield
    of 0.0% for all years; an expected life of six months for all
    years; an expected volatility factor of 0.77 for fiscal 2004,
    0.85 for fiscal 2003, and 0.87 for fiscal 2002; and a risk-free
    interest rate of approximately 1.2% for fiscal 2004, 1.1% for
    fiscal 2003, and 1.5% for fiscal 2002. The weighted-average fair
    value of the purchase rights granted on April 19, 2004,
    October 20, 2003, May 7, 2003, October 21, 2002,
    April 22, 2002, and October 22, 2001, was $4.19,
    $2.19, $1.07, $0.93, $1.50, and $1.52, respectively.



|   |                          
|-- | -------------------------
|56 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net
Income (Loss) Per Share



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic and diluted net income (loss) per share
    available to common stockholders is presented in conformity with
    SFAS No. 128, Earnings per Share. Basic
    net income (loss) per share attributable to common stockholders
    is computed by dividing net income (loss) by the
    weighted-average number of common shares outstanding during the
    period and excludes the dilutive effects of common stock
    equivalents. Common stock equivalents include stock options and,
    in certain circumstances, convertible securities such as our
    senior convertible debentures and convertible Series B
    preferred stock. Diluted earnings per share includes the
    dilutive effect of common stock equivalents.                                   
|
| | In March 2004, the EITF reached a final consensus
    on Issue 03-6, Participating Securities and the
    Two  Class Method under FASB Statement 128.
    Issue 03-6 requires the two-class method of
    calculating earnings per share for companies that have issued
    securities other than common stock that contractually entitle
    the holder to participate in dividends of the company. Because
    the Series B preferred stock participates in dividends, we
    are required to use the two-class method of calculating earnings
    per share, effective in fiscal 2004 and retroactively for all
    prior periods. This change in computational methods had no
    impact on earnings per share for any period in fiscal 2004 or
    any prior period.

Derivative
Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A large portion of our revenue, expense, and
    capital purchasing activities are transacted in
    U.S. dollars. However, we do enter into transactions in
    other currencies, primarily the Euro, Japanese Yen, and certain
    other European, Latin American and Asian currencies. To protect
    against reductions in value caused by changes in foreign
    exchange rates, we have established balance sheet and
    inter-company hedging programs. We hedge currency risks of some
    assets and liabilities denominated in foreign currencies through
    the use of one-month foreign currency forward contracts. We do
    not currently hedge currency risks related to revenue or
    expenses denominated in foreign currencies.
|
| | We enter into these one-month hedging contracts
    two business days before the end of each month and settle them
    at the end of the following month. Due to the short period of
    time between entering into the forward contracts and the
    year-end, the fair value of the derivatives as of
    October 31, 2004 is insignificant. Gains and losses
    recognized during the year on these foreign currency contracts
    are recorded as other income or expense and would generally be
    offset by corresponding losses or gains on the related hedged
    items, resulting in negligible net exposure to our financial
    statements.                                                                                            

Recent
Pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2004, the EITF reached a final
    conclusion on Issue 04-8, Accounting Issues Related
    to Certain Features of Contingently Convertible Debt and the
    Effect on Diluted Earnings per Share. This issue addresses
    when the dilutive effect of contingently convertible debt with a
    market price trigger should be included in diluted earnings per
    share calculations. The EITFs conclusion is that the
    market price trigger should be ignored and that these securities
    should be treated as convertible securities and included in
    diluted earnings per share regardless of whether the conversion
    contingencies have been met. The effect of Issue 04-8 is
    discussed in Note T.
|
| | In December 2004, the FASB issued its final
    standard on accounting for employee stock options,
    SFAS No. 123(R), Share-Based Payment,
    which replaces SFAS Nos. 123 and supercedes Accounting
    Principles Board Opinion 25, Accounting for Stock Issued
    to Employees. SFAS No. 123(R) requires all
    companies to measure compensation costs for all share-based
    payments, including stock                                                                                                                                                                                                                                                                                                                 



|                          |   
|------------------------- | --
|Novell annual report 2004 | 57












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | options, at fair value and expense such payments
    to the statement of operations over the service period.
    SFAS No. 123(R) is effective beginning for interim or
    annual periods beginning after June 15, 2005, which would
    be our fourth fiscal quarter of fiscal 2005. We are in the
    process of determining the impact SFAS No. 123(R) will
    have on our consolidated financial statements.

C. Acquisitions

Salmon
Ltd.

On July 19, 2004, we purchased all of the
outstanding stock of Salmon Ltd. (Salmon), a
privately-held information technology services and consulting
firm headquartered in Watford, England, for approximately
$8.2 million in cash, plus estimated merger and transaction
costs of $0.6 million. In addition, we recorded a deferred
income tax liability of $1.2 million resulting from the
future tax consequences of the non-deductibility of identified
intangible assets recorded in connection with this acquisition.

The acquisition of Salmon enables us to expand
our range of IT consulting services in the United Kingdom.
Salmons results of operations have been included in the
consolidated financial statements beginning on the acquisition
date.

The purchase price was preliminarily allocated as
follows:

|                                           |                        |                  |       |            |  |            |        
|------------------------------------------ | ---------------------- | ---------------- | ----- | ---------- |  | ---------- | -------
|                                           |                        | Estimated        |       |           
|                                           |                        | Acquisition Cost |       | Asset Life
|                                           |                        |                  |       |           
|                                           |                        | (In thousands)   |       |           
|Fair value of net tangible assets acquired |                        | $                | 3,007 |            |  | N/A       
|Identifiable intangible assets:            |                        |                  |       |            |  |           
|                                           | Customer relationships |                  |       | 3,417      |  |            | 3 years
|                                           | Non-compete agreement  |                  |       | 422        |  |            | 3 years
|Goodwill                                   |                        |                  | 3,109 |            |  | Indefinite
|                                           |                        |                  |       |            |  |           
|Total acquisition cost                     |                        | $                | 9,955 |            |  |           
|                                           |                        |                  |       |            |  |           

The purchase price has been allocated to the
tangible and identifiable intangible assets and the excess of
the total purchase price over the amounts assigned has been
recorded as goodwill. We estimated the fair values of the
intangible assets. Customer relationships and the non-compete
agreement are being amortized over their estimated useful lives.
Goodwill is not amortized but is periodically evaluated for
impairment.

The purchase price allocation will be adjusted as
integration plans, including restructuring, are finalized, as
allowed by SFAS No. 141, Business
Combinations.

The purchase agreement provides for contingent
payments of up to an additional $10.6 million based upon
the future revenues and profitability of both Salmon and Novell
in the United Kingdom over a period of two years. Any future
earnout payments will be capitalized as goodwill when and if
paid.

Net tangible assets of Salmon consisted mainly of
cash and cash equivalents, accounts receivable, fixed assets,
accounts payable, and other liabilities.

Goodwill from the acquisition resulted from our
belief that the consulting methodologies and expertise Salmon
had developed are valuable to our services business. We also
believed it was more beneficial to acquire such knowledge rather
than to develop it in-house. The goodwill from the Salmon
acquisition was allocated to our EMEA segment.



|   |                          
|-- | -------------------------
|58 | Novell annual report 2004












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The valuation of customer relationships in the
amount of $3.4 million was determined by comparing
estimated future cash flow with and without the relationships in
place.

The non-compete agreement in the amount of
$0.4 million relates to an agreement Salmon has with a key
individual. The valuation of the agreement was determined by
estimating the present value of future cash flows with and
without the non-compete agreement in place.

If the Salmon acquisition had occurred on
November 1, 2002, the unaudited pro forma results of
operations for the fiscal years ended October 31, 2004 and
2003 would have been:

|                                                                              |  |                           |           |          |  |   |           |  
|----------------------------------------------------------------------------- |  | ------------------------- | --------- | -------- |  | - | --------- | -
|                                                                              |  |                          
|                                                                              |  | Fiscal Year Ended        
|                                                                              |  |                          
|                                                                              |  | Oct. 31,                  |           | Oct. 31,
|                                                                              |  | 2004                      |           | 2003    
|                                                                              |  |                           |           |         
|                                                                              |  |                          
|                                                                              |  | (Amounts in thousands,   
|                                                                              |  | except per-share amounts)
|Net revenue                                                                   |  | $                         | 1,181,514 |          |  | $ | 1,123,969 |  
|Net income (loss) attributable to common
    stockholders                     |  |                           | 29,184    |          |  |   | (160,061  | )
|Net income (loss) per share attributable to
    common stockholders  basic   |  | $                         | 0.08      |          |  | $ | (0.43     | )
|Net income (loss) per share attributable to
    common stockholders  diluted |  | $                         | 0.07      |          |  | $ | (0.43     | )



| |              
| | -------------
| | SUSE LINUX AG

On January 12, 2004, we purchased
substantially all of the outstanding stock of SUSE LINUX AG
(SUSE), a privately-held company and a leading
provider of Linux-based products, for approximately
$210.0 million in cash, plus estimated merger and
transaction costs of $9.0 million. In addition, we recorded
a deferred income tax liability of $3.0 million resulting
from the future tax consequences of the non-deductibility of
identified intangible assets recorded in connection with this
acquisition. The deferred income tax liability was originally
valued at $17.3 million; however, during the fourth quarter
of fiscal 2004 we completed a reorganization of certain
subsidiaries of SUSE Linux AG in accordance with German merger
law that resulted in a reduction of the deferred tax liability
and goodwill of approximately $14.3 million.

The acquisition of SUSE enables us to offer a
full range of enterprise solutions on the Linux platform, from
the desktop to the server to the mainframe. SUSEs results
of operations have been incorporated into ours beginning on the
acquisition date.

The purchase price was preliminarily allocated as
follows:

|                                           |                        |                  |         |            |  |            |           
|------------------------------------------ | ---------------------- | ---------------- | ------- | ---------- |  | ---------- | ----------
|                                           |                        | Estimated        |         |           
|                                           |                        | Acquisition Cost |         | Asset Life
|                                           |                        |                  |         |           
|                                           |                        | (In thousands)   |         |           
|Fair value of net tangible assets acquired |                        | $                | 1,599   |            |  | N/A       
|Identifiable intangible assets:            |                        |                  |         |            |  |           
|                                           | Customer relationships |                  |         | 13,385     |  |            | 3 years   
|                                           | Internal use software  |                  |         | 5,864      |  |            | 3 years   
|                                           | Trademarks/trade names |                  |         | 24,221     |  |            | Indefinite
|Goodwill                                   |                        |                  | 176,963 |            |  | Indefinite
|                                           |                        |                  |         |            |  |           
|Total acquisition costs                    |                        | $                | 222,032 |            |  |           
|                                           |                        |                  |         |            |  |           



|                          |   
|------------------------- | --
|Novell annual report 2004 | 59












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price has been allocated to the
tangible and identifiable intangible assets and the excess of
the total purchase price over the amounts assigned has been
recorded as goodwill. We estimated the fair values of the
intangible assets. Customer relationships and internal use
software are being amortized over their estimated useful lives.
Trademarks, trade names and goodwill are not amortized but are
periodically evaluated for impairment.

The purchase price allocation will be adjusted as
integration plans, including restructuring, are finalized, as
allowed by SFAS No. 141.

Net tangible assets of SUSE consisted mainly of
cash and cash equivalents, accounts receivable, fixed assets,
accounts payable, and other liabilities.

Goodwill from the acquisition resulted from our
belief that the technology SUSE had developed is valuable to our
solutions offerings. We also believed it was more beneficial to
acquire such knowledge rather than to develop it in-house. The
goodwill from the SUSE acquisition has been allocated to our
geographic segments based on anticipated future revenue to be
derived from this transaction.

Customer relationships in the amount of
$13.4 million, net of tax, relate to the following types of
contracts:



| |   |                              
| | - | -----------------------------
| |  | product maintenance services;
|
| |  | business support services;   
|
| |  | partner memberships;         
|
| |  | alliances; and               
|
| |  | customer backlog.            

The valuation of product maintenance services,
business support services, and partner memberships were
determined by comparing the estimated future cash flows
generated from annual renewals of each contract, versus such
cash flows without the renewals of such contracts. The valuation
of alliances was determined using the replacement cost approach.
The valuation of customer backlog was determined based on
forecasted cash flows from firm orders that had been placed that
SUSE is expected to service.

Internal use software in the amount of
$5.9 million relates to proprietary know-how that is
technologically feasible at the acquisition date. These included
three operational software applications that SUSE used to
package, test, and configure the open source software for
distribution to customers. The valuation of the internal use
software was determined using the replacement cost approach,
whereby estimates of the value are based upon the estimated cost
to recreate the software.

The value of trademarks and trade names was
determined based on assigning a royalty rate to the revenue
streams that were expected from the products using the SUSE
trade names. The royalty rate was determined based on trade name
recognition, marketing support, and contribution of the trade
names value relative to the revenue drivers. The pre-tax
royalty rate of two percent was applied to the product revenue
and discounted to a present value, resulting in a valuation of
approximately $24.2 million.



|   |                          
|-- | -------------------------
|60 | Novell annual report 2004












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

If the SUSE acquisition had occurred on
November 1, 2002, the unaudited pro forma results of
operations for the fiscal years ended October 31, 2004 and
2003 would have been:

|                                                                                        |  |                           |           |          |  |   |           |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | --------- | -------- |  | - | --------- | -
|                                                                                        |  |                          
|                                                                                        |  | Fiscal Year Ended        
|                                                                                        |  |                          
|                                                                                        |  | Oct. 31,                  |           | Oct. 31,
|                                                                                        |  | 2004                      |           | 2003    
|                                                                                        |  |                           |           |         
|                                                                                        |  |                          
|                                                                                        |  | (Amounts in thousands,   
|                                                                                        |  | except per share amounts)
|Net revenue                                                                             |  | $                         | 1,173,890 |          |  | $ | 1,140,201 |  
|Net income (loss) attributable to common
    stockholders                               |  |                           | 30,135    |          |  |   | (177,170  | )
|Net income (loss) per share attributable to
    common stockholders  basic and diluted |  | $                         | 0.08      |          |  | $ | (0.48     | )



| |             
| | ------------
| | Ximian, Inc.

On August 4, 2003, we acquired Ximian, Inc.
(Ximian), a privately-held company and provider of
desktop and server solutions that enable enterprise Linux
adoption, for approximately $40.0 million in cash and
estimated transaction costs of $0.5 million. This
transaction was accounted for as a purchase. Ximians
results of operations have been incorporated into Novells
beginning on the acquisition date of August 4, 2003.

The value of the acquisition was allocated as
follows:

|                                           |                                               |                  |        |            |  |            |                        
|------------------------------------------ | --------------------------------------------- | ---------------- | ------ | ---------- |  | ---------- | -----------------------
|                                           |                                               | Estimated        |        |           
|                                           |                                               | Acquisition Cost |        | Asset Life
|                                           |                                               |                  |        |           
|                                           |                                               | (In thousands)   |        |           
|Fair value of net tangible assets acquired |                                               | $                | 161    |            |  | N/A       
|Intangible assets:                         |                                               |                  |        |            |  |           
|                                           | Purchased in-process research and development |                  |        | 920        |  |            | Expensed in fiscal 2003
|                                           | Developed technology                          |                  |        | 3,532      |  |            | 3 years                
|                                           | Customer relationships                        |                  |        | 307        |  |            | 3 years                
|                                           | Trademarks/trade names                        |                  |        | 755        |  |            | Indefinite             
|Goodwill                                   |                                               |                  | 34,854 |            |  | Indefinite
|                                           |                                               |                  |        |            |  |           
|                                           |                                               | $                | 40,529 |            |  |           
|                                           |                                               |                  |        |            |  |           

Goodwill, shown in the table above, includes a
$2.9 million charge to record deferred income tax liability
for the future amortization of developed technology and customer
relationships. As a result, developed technology and customer
relationships are shown above net of this income tax effect.

Results of operations of Ximian are included in
our results of operations beginning August 4, 2003.
Goodwill from the acquisition resulted from our belief that the
technology Ximian had developed is valuable to our product
offerings. We also believed it was more beneficial to acquire
such technology rather than to develop it in-house. The goodwill
from the Ximian acquisition has been allocated to our geographic
segments based on anticipated future revenue to be derived from
this transaction.

Net tangible assets of Ximian consisted mainly of
cash and cash equivalents, accounts receivable, fixed assets,
accounts payable, and other liabilities.

The $0.9 million of in-process research and
development pertains to technology that was not technologically
feasible at the date of the acquisition, meaning it had not
reached the working model stage, did not contain all of the
major functions planned for the product, and was not ready for
initial customer testing.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 61












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Shortly before the acquisition, Ximian released
its latest version of each of its products, thus there was
minimal in-process research and development at the acquisition
date. In-process research and development was valued based on
discounting forecasted cash flows that will be generated
directly from the related products. Completion of development of
the future upgrades of these products is dependent upon our
delivery of our Linux applications products and our successful
integration of Ximian. The in-process research and development
does not have any alternative future use and did not otherwise
qualify for capitalization. As a result, the entire amount was
expensed.

Developed technology relates to Ximians
products that are commercially available and can be combined
with Novell products and services. To determine the value of
developed technology, the expected future cash flow attributable
to the products was discounted taking into account risk
associated with these assets relative to the in-process research
and development. The analysis resulted in a valuation of
approximately $3.5 million for developed technology, which
had reached technological feasibility.

The valuation of customer relationships in the
amount of $0.3 million, net of tax, was determined by
comparing estimated future cash flows with and without the
relationship in place.

The value of trademarks and trade names was
determined based on assigning a royalty rate to the revenue
streams that were expected from the products using the
Ximian® trade names. The royalty rate was determined based
on trade name recognition, marketing support, and contribution
of the trade names value relative to the revenue drivers.
The pre-tax royalty rate of one percent was applied to the
product revenue and discounted to a present value, resulting in
a valuation of approximately $0.8 million.



| |                            
| | ---------------------------
| | SilverStream Software, Inc.

In July 2002, we acquired substantially all of
the outstanding shares of SilverStream at a price of
$9.00 per share. At the closing date of the merger,
approximately 23.5 million shares of SilverStream common
stock were outstanding, resulting in a total cash acquisition
price of $210.8 million. Direct transaction costs were
approximately $1.1 million and the fair value of
SilverStream stock options assumed, both vested and unvested,
totaled $28.6 million.

With respect to stock options assumed as a part
of the merger, all SilverStream options, vested and unvested,
were exchanged for Novell options with the same terms and
vesting characteristics. The fair value of these options was
included in the acquisition purchase price. The portion of the
intrinsic value related to unvested options that will be earned
over the remaining vesting period of those options was deducted
from the fair value of the unvested options and recorded as
deferred compensation. This deferred compensation was amortized
over the remaining vesting period of approximately two years, in
accordance with Financial Accounting Standards Board
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation. In total,
options to purchase approximately 5 million shares of
SilverStream common stock were converted into options to
purchase approximately 15 million shares of Novell, Inc.
common stock using a conversion ratio of 3.0518.

The fair value of the options was determined
using the Black-Scholes model using the following assumptions:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fair market value of the underlying shares was
    based on the average closing price of Novells common stock
    on June 10, 2002, and the three days prior to and
    subsequent to that date.
|
| |  | expected option life of 2-5 years.                                                                                                                                                               
|
| |  | expected volatility of 80%.                                                                                                                                                                      



|   |                          
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|62 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                               
| | - | ------------------------------
| |  | risk free interest rate of 5%.
|
| |  | expected dividend rate of 0%. 

The value of the acquisition was allocated as
follows:

|                             |                                               |                  |         |                       |  |            |                        
|---------------------------- | --------------------------------------------- | ---------------- | ------- | --------------------- |  | ---------- | -----------------------
|                             |                                               | Acquisition Cost |         | Asset Life (in years)
|                             |                                               |                  |         |                      
|                             |                                               | (In thousands)   |         |                      
|Net tangible assets acquired |                                               | $                | 86,083  |                       |  | N/A       
|Deferred compensation        |                                               |                  | 4,826   |                       |  | 2 years   
|Intangible assets            |                                               |                  |         |                       |  |           
|                             | Purchased in-process research and development |                  |         | 3,000                 |  |            | Expensed in fiscal 2002
|                             | Developed technology                          |                  |         | 19,800                |  |            | 3 years                
|                             | Trademarks/trade names                        |                  |         | 2,200                 |  |            | Indefinite             
|Goodwill                     |                                               |                  | 124,622 |                       |  | Indefinite
|                             |                                               |                  |         |                       |  |           
|                             |                                               | $                | 240,531 |                       |  |           
|                             |                                               |                  |         |                       |  |           

Goodwill from the acquisition resulted from our
belief that the technology SilverStream had developed is
valuable to our web services product offerings. We also believe
it was more beneficial to acquire such technology rather than
develop it in-house. The goodwill from the SilverStream
acquisition was allocated to our geographic segments based on
forecasted sales of SilverStream products by geography.

Net tangible assets of SilverStream consisted
mainly of cash and cash equivalents, accounts receivable, fixed
assets, accounts payable, and other liabilities.

The $3 million of in-process research and
development pertains to replacement and enhancement technology
that was included in the next versions of the exteNd product
suite, and was not technologically feasible at the date of the
acquisition, meaning it had not reached the working model stage,
did not contain all of the major functions planned for the
product, and was not ready for initial customer testing. Shortly
before the acquisition, SilverStream released its latest version
of each of the products in the exteNd suite, thus there was
minimal in-process research and development at the acquisition
date. In-process research and development was valued based on
discounting forecasted cash flows directly from the related
products. Completion of development of the future upgrades of
these products is dependant upon the delivery of our web
services products and successfully integrating SilverStream. The
in-process research and development did not have any alternative
future use and did not otherwise qualify for capitalization.

Developed technology related to
SilverStreams exteNd products that were shipping at the
date of the acquisition and could be combined with our products
and services. To determine the value of developed technology,
the expected future cash flow attributable to the exteNd
products was discounted taking into account risk associated with
these assets relative to the in-process research and
development. The analysis resulted in a valuation of
approximately $20 million for developed technology, which
had reached technological feasibility.

The value of trademarks and trade names was
determined based on assigning a royalty rate to the revenue
streams expected from the products using the exteNd trade names.
The royalty rate was determined based on trade name recognition,
marketing support and contribution of the trade names
value relative to the revenue drivers. A pre-tax royalty rates
of 0.5 percent was applied to the anticipated product
revenue and discounted to a present value, resulting in a
valuation of approximately $2 million.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 63












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Our statement of operations includes SilverStream
results subsequent to July 20, 2002. The unaudited pro
forma consolidated statement of operations data for fiscal 2002
set forth below gives effect to the acquisition of SilverStream
as if it had occurred on November 1, 2001. The unaudited
pro forma results for these periods include an adjustment to
reflect amortization of intangibles recorded in conjunction with
the acquisition and the adoption of SFAS No. 142 at
the beginning of the periods.

|                                       |  |                   |           |  
|-------------------------------------- |  | ----------------- | --------- | -
|                                       |  | Fiscal Year Ended
|                                       |  | October 31, 2002 
|                                       |  |                  
|                                       |  | (Amounts in      
|                                       |  | thousands, except
|                                       |  | per share data)  
|Net revenue                            |  | $                 | 1,162,176 |  
|Net loss before accounting change      |  |                   | (189,909  | )
|Net loss                               |  |                   | (333,645  | )
|Net loss per share  basic and diluted |  | $                 | (0.92     | )



|   |                       
|-- | ----------------------
|D. | Short-Term Investments

Following is a summary of our short-term
investments at fiscal year ended October 31, 2004 and 2003:

|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |         |         | 
|----------------------- | ------------------------------------- | ---------------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                        |                                       |                              |   |            |         |            |   | Fair       
|                        |                                       |                              |   |            |         |            |   | Market     
|                        |                                       | Cost at                      |   | Gross      |         | Gross      |   | Value at   
|                        |                                       | October 31,                  |   | Unrealized |         | Unrealized |   | October 31,
|                        |                                       | 2004                         |   | Gains      |         | Losses     |   | 2004       
|                        |                                       |                              |   |            |         |            |   |            
|                        |                                       |                             
|                        |                                       | (Amounts in thousands)      
|Short-term investments: |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                        | Auction market securities             |                              | $ | 358,200    |         |            | $ | 5           |       |  | $ |     |      |   | $ | 358,205 |        
|                        | U.S. government and agency securities |                              |   | 200,415    |         |            |   | 216         |       |  |   | (416 | )    |   |   | 200,215 |        
|                        | Corporate notes and bonds             |                              |   | 171,461    |         |            |   | 284         |       |  |   | (407 | )    |   |   | 171,338 |        
|                        | Asset and mortgage-backed securities  |                              |   | 42,552     |         |            |   | 7           |       |  |   | (157 | )    |   |   | 42,402  |        
|                        | Equity securities                     |                              |   | 4,288      |         |            |   | 615         |       |  |   |     |      |   |   | 4,903   |        
|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                        |                                       | Total short-term investments |   | $          | 776,916 |            |   | $           | 1,127 |  |   | $    | (980 | ) |   | $       | 777,063 | 
|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        

|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |         |         | 
|----------------------- | ------------------------------------- | ---------------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                        |                                       |                              |   |            |         |            |   | Fair       
|                        |                                       |                              |   |            |         |            |   | Market     
|                        |                                       | Cost at                      |   | Gross      |         | Gross      |   | Value at   
|                        |                                       | October 31,                  |   | Unrealized |         | Unrealized |   | October 31,
|                        |                                       | 2003                         |   | Gains      |         | Losses     |   | 2003       
|                        |                                       |                              |   |            |         |            |   |            
|                        |                                       |                             
|                        |                                       | (Amounts in thousands)      
|Short-term investments: |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                        | Auction market securities             |                              | $ | 76,600     |         |            | $ | 14          |       |  | $ | (7   | )    |   | $ | 76,607  |        
|                        | U.S. government and agency securities |                              |   | 115,538    |         |            |   | 388         |       |  |   | (127 | )    |   |   | 115,799 |        
|                        | Corporate notes and bonds             |                              |   | 176,462    |         |            |   | 1,307       |       |  |   | (195 | )    |   |   | 177,574 |        
|                        | Asset and mortgage-backed securities  |                              |   | 9,780      |         |            |   | 19          |       |  |   | (14  | )    |   |   | 9,785   |        
|                        | Equity securities                     |                              |   | 4,742      |         |            |   | 413         |       |  |   |     |      |   |   | 5,155   |        
|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                        |                                       | Total short-term investments |   | $          | 383,122 |            |   | $           | 2,141 |  |   | $    | (343 | ) |   | $       | 384,920 | 
|                        |                                       |                              |   |            |         |            |   |             |       |  |   |      |      |   |   |        



|   |                          
|-- | -------------------------
|64 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At October 31, 2004, approximately
$4.5 million of our equity securities are restricted for
deferred compensation payments, which are paid out as requested
by the participants of the plan. We had net unrealized gains
related to short-term investments, net of deferred taxes, of
$0.1 million and $1.2 million at October 31, 2004
and 2003, respectively. We realized gains on the sales of
securities of $5.3 million, $1.8 million, and
$8.1 million, in fiscal 2004, 2003, and 2002, respectively,
while realizing losses on sales of securities of
$0.6 million, $0.5 million, and $1.3 million,
during those same periods, respectively. In addition, during
fiscal 2002 we recognized a $2.9 million loss on short-term
investments due to a change in market value that was considered
to be other-than-temporary.



|   |                 
|-- | ----------------
|E. | Notes Receivable

In October 2004, we completed the sale of three
buildings we owned in Orem, Utah for $12.8 million,
including a $10 million note receivable. The note is
secured by the buildings and land as well as a personal
guarantee and letters of credit. The note bears interest at
5.50375% for the first year and LIBOR plus 3% thereafter through
the maturity date. Principal payments on the note are to be made
periodically with a final lump sum payment on the maturity date
in October 2009. As of October 31, 2004, there was
$0.1 million recorded in other current assets and
$9.8 million recorded in other assets.



|   |                      
|-- | ---------------------
|F. | Long-Term Investments

The primary components of long-term investments
as of October 31, 2004 and 2003 were investments made
through the Novell Venture account, Cambridge Technology Capital
Fund I L.P. (CTC I), or directly by us for
strategic direct investments in private long-term equity
securities. Long-term investments are accounted for initially at
cost and written down to fair market value when indicators of
impairment are deemed to be other than temporary. At
October 31, 2004 and 2003, we had long term investment of
$56.0 million and $50.9 million, respectively.

Investments made through the Novell Venture
account generally are in private companies, primarily small
capitalization stocks in the high-technology industry sector.
Within the Novell Venture account there are also investments in
venture capital funds that are managed largely by external
venture capitalists. Investments made through CTC I generally
are in expansion-stage, private companies providing products and
services within the technology industry. The values of the
investments made through the Novell Venture account and
CTC I are dependent on the financial performance,
successful acquisition, and/or initial public offering of the
investees.

We routinely review our investments in private
securities and venture funds for impairment. During fiscal 2004,
2003, and 2002 we recognized impairment losses on long-term
investments totaling $5.4 million, $34.7 million, and
$54.4 million, respectively. During fiscal 2004, we
recognized a $1.6 million gain on the sale of long-term
investments.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 65












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|G. | Property, Plant and Equipment

Property, plant and equipment consists of the
following:

|                                       |  |                        |          |             |  |   |          |  
|-------------------------------------- |  | ---------------------- | -------- | ----------- |  | - | -------- | -
|                                       |  | October 31,            |          | October 31,
|                                       |  | 2004                   |          | 2003       
|                                       |  |                        |          |            
|                                       |  |                       
|                                       |  | (Amounts in thousands)
|Buildings and land                     |  | $                      | 210,453  |             |  | $ | 226,971  |  
|Furniture and equipment                |  |                        | 214,429  |             |  |   | 220,914  |  
|Leasehold improvements and other       |  |                        | 86,580   |             |  |   | 91,454   |  
|                                       |  |                        |          |             |  |   |          |  
|Property, plant and equipment, at cost |  |                        | 511,462  |             |  |   | 539,339  |  
|Accumulated depreciation               |  |                        | (279,994 | )           |  |   | (283,813 | )
|                                       |  |                        |          |             |  |   |          |  
|Property, plant and equipment, net     |  | $                      | 231,468  |             |  | $ | 255,526  |  
|                                       |  |                        |          |             |  |   |          |  

Depreciation and amortization expense related to
property, plant and equipment totaled $40.0 million,
$47.3 million, and $58.2 million, in fiscal 2004,
2003, and 2002, respectively.

In October 2004, we completed the sale of three
buildings we owned in Orem, Utah for $12.8 million,
including $10 million we financed though a secured note
receivable. This transaction resulted in a loss of approximately
$0.3 million. During fiscal 2004, we also sold an
additional facility for $2 million. This facility had a net
book value of zero at the time of sale. In May 2003, we
completed the sale of our 512,000 square foot office
complex, and approximately 48 acres of land in
San Jose, California in two transactions for
$125 million cash, resulting in a total net gain of
approximately $24.9 million.

We review our property, plant and equipment
annually for indicators of impairment in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. As of October 31,
2004, we have not identified or recorded any impairments of our
property, plant and equipment.



|   |                               
|-- | ------------------------------
|H. | Goodwill and Intangible Assets



| |         
| | --------
| | Goodwill

Goodwill includes approximately
$177.0 million from the January 2004 acquisition of SUSE,
approximately $124.6 million from the July 2002 acquisition
of SilverStream, approximately $43.0 million from the July
2001 acquisition of Cambridge, approximately $34.9 million
from the August 2003 acquisition of Ximian, approximately
$3.1 million from the acquisition of Salmon, and
approximately $9.0 million related to the acquisition of
several small technology-related companies. Goodwill has been
allocated to our operating segments described in Note W.



|   |                          
|-- | -------------------------
|66 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of goodwill, which has
been allocated to our operating segments, which we consider to
be reporting units for allocating and evaluating goodwill:

|                            |  |                |         |      |  |         |         |         |  |       |        |          |  |       |       |   |  |   |       |   |  |   |        |  |  |   |         |  
|--------------------------- |  | -------------- | ------- | ---- |  | ------- | ------- | ------- |  | ----- | ------ | -------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ |  |  | - | ------- | -
|                            |  | North          |         |      |  | Asia    |         | Latin   |  |       |        |          |  |      
|                            |  | America        |         | EMEA |  | Pacific |         | America |  | Japan |        | Celerant |  | Total
|                            |  |                |         |      |  |         |         |         |  |       |        |          |  |      
|                            |  |               
|                            |  | (In thousands)
|Balance at October 31, 2003 |  | $              | 85,067  |      |  | $       | 74,100  |         |  | $     | 8,887  |          |  | $     | 1,750 |   |  | $ | 996   |   |  | $ | 42,500 |  |  | $ | 213,300 |  
|Acquisition of SUSE         |  |                | 91,792  |      |  |         | 65,022  |         |  |       | 11,733 |          |  |       | 3,539 |   |  |   | 4,877 |   |  |   |       |  |  |   | 176,963 |  
|Acquisition of Salmon       |  |                |        |      |  |         | 3,109   |         |  |       |       |          |  |       |      |   |  |   |      |   |  |   |       |  |  |   | 3,109   |  
|Adjustments*                |  |                | (1,311  | )    |  |         | (851    | )       |  |       | (96    | )        |  |       | (21   | ) |  |   | (5    | ) |  |   |       |  |  |   | (2,284  | )
|                            |  |                |         |      |  |         |         |         |  |       |        |          |  |       |       |   |  |   |       |   |  |   |        |  |  |   |         |  
|Balance at October 31, 2004 |  | $              | 175,548 |      |  | $       | 141,380 |         |  | $     | 20,524 |          |  | $     | 5,268 |   |  | $ | 5,868 |   |  | $ | 42,500 |  |  | $ | 391,088 |  
|                            |  |                |         |      |  |         |         |         |  |       |        |          |  |       |       |   |  |   |       |   |  |   |        |  |  |   |         |  



---



|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|* | Adjustments relate to the release of excess
    merger-related liabilities related to the acquisitions of Ximian
    and SilverStream.

SFAS No. 142 requires that companies
perform an impairment test within six months of adopting the
statement and at least annually thereafter. Steps required in
the impairment test include: Step 1  identifying
reporting units, assigning assets and liabilities to the
reporting units, assigning goodwill to reporting units, and
determining if the fair value of each reporting unit is less
than its carrying amount. If the fair value of any reporting
unit is below carrying value, Step 2  determining the
impairment amount  is performed.

In the fourth quarters of fiscal 2004 and 2003,
we performed our annual goodwill impairment test under
SFAS No. 142. This test was performed as of
August 1, 2004 and 2003, respectively. To estimate the fair
value of our reporting units, management made estimates and
judgments about future cash flows based on assumptions that are
consistent with both short-term and long-range plans used to
manage the business. We also considered factors such as our
market capitalization in assessing the fair value of the
business. Based on the results of our analyses, we determined
that no goodwill impairment existed in any of our reporting
units for either year.

Changes to the estimates used in the analyses,
including estimated future cash flows, could cause one or more
of the reporting units to be valued differently in future
periods. Future analysis could possibly result in a non-cash
goodwill impairment charge of up to $391.1 million, the
full amount of our goodwill, depending on the estimated value of
the reporting units and the value of the net assets attributable
to those reporting units at that time.



| |                  
| | -----------------
| | Intangible Assets

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

|                           |  |                        |        |             |  |             |        |  |  |  |            | 
|-------------------------- |  | ---------------------- | ------ | ----------- |  | ----------- | ------ |  |  |  | ---------- | 
|                           |  | October 31,            |        | October 31, |  |            
|                           |  | 2004                   |        | 2003        |  | Asset Lives
|                           |  |                        |        |             |  |            
|                           |  |                       
|                           |  | (Amounts in thousands)
|Trademarks and trade names |  | $                      | 26,121 |             |  | $           | 2,390  |  |  |  | Indefinite | 
|Developed technology       |  |                        | 4,203  |             |  |             | 8,410  |  |  |  | 3 years    | 
|Customer relationships     |  |                        | 13,570 |             |  |             |       |  |  |  | 3 years    | 
|Internal use software      |  |                        | 4,340  |             |  |             |       |  |  |  | 3 years    | 
|Non-compete agreement      |  |                        | 382    |             |  |             |       |  |  |  | 3 years    | 
|                           |  |                        |        |             |  |             |        |  |  |  |            | 
|Total intangible assets    |  | $                      | 48,616 |             |  | $           | 10,800 |  |  |  |            | 
|                           |  |                        |        |             |  |             |        |  |  |  |            | 



|                          |   
|------------------------- | --
|Novell annual report 2004 | 67












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Trademarks and trade names at October 31,
2004 related primarily to the SUSE, Ximian® and
SilverStream individual product names, which we continue to use.
Developed technology at October 31, 2004 related primarily
to the Linux product line as a result of our January 2004
acquisition of SUSE, cross-platform services product line as a
result of our acquisition of Ximian and the exteNd product line
that we acquired as a part of our acquisition of SilverStream.
During the third quarter of fiscal 2003, we determined that
impairment indicators existed related to the developed
technology and trade names we acquired from SilverStream as a
result of unexpected revenue declines and the evident failure to
achieve revenue growth targets for the exteNd products. Based on
a valuation of these assets, we recorded a $23.6 million
charge to cost of revenue to write down these assets to
estimated fair value, which was determined by the net present
value of future estimated revenue streams attributed to these
assets. Customer relationships at October 31, 2004 related
primarily to the customers we acquired as a part of our
acquisitions of SUSE and Salmon. Internal use software at
October 31, 2004 related to certain build tools we acquired
through our acquisition of SUSE. Non-compete agreement related
to certain agreements that were assumed through our acquisition
of Salmon.

We analyze our intangible assets periodically for
indicators of impairment. No indicators of impairments to our
intangible assets were noted during fiscal 2004.

Intangible assets are shown net of accumulated
amortization of $9.5 million and $11.0 million at
October 31, 2004 and 2003, respectively. Amortization
expense was $9.5 million in fiscal 2004, $11.0 million
in fiscal 2003, and $6.3 million in fiscal 2002.
Amortization of intangibles is estimated to be approximately
$10.9 million in fiscal 2005, $9.3 million in fiscal
2006, and $2.2 million in fiscal 2007.



|   |             
|-- | ------------
|I. | Income Taxes

We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires that we record deferred tax
assets and liabilities based upon the future tax consequence of
differences between the book and tax basis of assets and
liabilities, and other tax attributes. SFAS No. 109
also requires that we assess the ability to realize deferred tax
assets based upon a more likely than not standard
and provide a valuation allowance for any tax assets not deemed
realizable under this standard. The components of income tax
expense consist of the following:

|                   |           |                        |                                             |             |        |             |   |   |        |         |  |   |         |         |  
|------------------ | --------- | ---------------------- | ------------------------------------------- | ----------- | ------ | ----------- | - | - | ------ | ------- |  | - | ------- | ------- | -
|                   |           |                       
|                   |           | Fiscal Year Ended     
|                   |           |                       
|                   |           | October 31,            |                                             | October 31, |        | October 31,
|                   |           | 2004                   |                                             | 2003        |        | 2002       
|                   |           |                        |                                             |             |        |            
|                   |           |                       
|                   |           | (Amounts in thousands)
|Income tax expense |           |                        |                                             |             |        |             |   |   |        |         |  |  
|                   | Current:  |                        |                                             |             |        |             |   |   |        |         |  |   |        
|                   |           | Federal                |                                             | $           | (5,819 | )           |   | $ |       |         |  | $ |        |        
|                   |           | State                  |                                             |             | 500    |             |   |   | 800    |         |  |   | 1,488   |        
|                   |           | Foreign                |                                             |             | 23,826 |             |   |   | 23,512 |         |  |   | 19,625  |        
|                   |           |                        |                                             |             |        |             |   |   |        |         |  |  
|                   |           |                        | Total current income tax expense            |             |        | 18,507      |   |   |        | 24,312  |  |   |         | 21,113  |  
|                   |           |                        |                                             |             |        |             |   |   |        |         |  |  
|                   | Deferred: |                        |                                             |             |        |             |   |   |        |         |  |   |        
|                   |           | Federal                |                                             |             |       |             |   |   | 88,747 |         |  |   | (14,696 | )      
|                   |           | State                  |                                             |             |       |             |   |   | (4,222 | )       |  |   | (5,093  | )      
|                   |           | Foreign                |                                             |             | (721   | )           |   |   | (1,943 | )       |  |   | 9,572   |        
|                   |           |                        |                                             |             |        |             |   |   |        |         |  |  
|                   |           |                        | Total deferred income tax expense (benefit) |             |        | (721        | ) |   |        | 82,582  |  |   |         | (10,217 | )
|                   |           |                        |                                             |             |        |             |   |   |        |         |  |  
|                   |           |                        | Total income tax expense                    |             | $      | 17,786      |   |   | $      | 106,894 |  |   | $       | 10,896  |  
|                   |           |                        |                                             |             |        |             |   |   |        |         |  |  



|   |                          
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|68 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Differences between the U.S. statutory and
effective tax rates are as follows:

|                                                                     |  |                   |      |             |  |             |       |    |  |  |       |   
|-------------------------------------------------------------------- |  | ----------------- | ---- | ----------- |  | ----------- | ----- | -- |  |  | ----- | --
|                                                                     |  |                  
|                                                                     |  | Fiscal Year Ended
|                                                                     |  |                  
|                                                                     |  | October 31,       |      | October 31, |  | October 31,
|                                                                     |  | 2004              |      | 2003        |  | 2002       
|                                                                     |  |                   |      |             |  |            
|U.S. statutory rate                                                  |  |                   | 35.0 | %           |  |             | (35.0 | )% |  |  | (35.0 | )%
|State income taxes, net of federal tax effect                        |  |                   |     |             |  |             | (4.0  | )  |  |  | (2.5  | ) 
|Research and development tax credits                                 |  |                   | (3.7 | )           |  |             | (6.7  | )  |  |  | (4.2  | ) 
|Tax exempt income                                                    |  |                   |     |             |  |             |      |    |  |  | (0.9  | ) 
|Foreign income taxed at different rates than
    U.S. statutory rate |  |                   |     |             |  |             | (9.8  | )  |  |  | (8.0  | ) 
|Valuation allowances                                                 |  |                   | (3.0 | )           |  |             | 209.2 |    |  |  | 59.0  |   
|Reversal of permanently invested earnings                            |  |                   |     |             |  |             | 32.9  |    |  |  |      |   
|Non-recurring tax benefit                                            |  |                   | (7.8 | )           |  |             |      |    |  |  |      |   
|Other, net                                                           |  |                   | 3.2  |             |  |             | 7.7   |    |  |  | 3.4   |   
|                                                                     |  |                   |      |             |  |             |       |    |  |  |       |   
|Effective tax (benefit) rate                                         |  |                   | 23.7 | %           |  |             | 194.3 | %  |  |  | 11.8  | % 
|                                                                     |  |                   |      |             |  |             |       |    |  |  |       |   

Domestic and foreign components of income (loss)
before taxes are as follows:

|                                 |  |                        |        |             |  |             |          |   |  |   |          |  
|-------------------------------- |  | ---------------------- | ------ | ----------- |  | ----------- | -------- | - |  | - | -------- | -
|                                 |  |                       
|                                 |  | Fiscal Year Ended     
|                                 |  |                       
|                                 |  | October 31,            |        | October 31, |  | October 31,
|                                 |  | 2004                   |        | 2003        |  | 2002       
|                                 |  |                        |        |             |  |            
|                                 |  |                       
|                                 |  | (Amounts in thousands)
|Domestic                         |  | $                      | 36,651 |             |  | $           | (129,395 | ) |  | $ | (168,341 | )
|Foreign                          |  |                        | 38,323 |             |  |             | 74,385   |   |  |   | 76,116   |  
|                                 |  |                        |        |             |  |             |          |   |  |   |          |  
|Total income (loss) before taxes |  | $                      | 74,974 |             |  | $           | (55,010  | ) |  | $ | (92,225  | )
|                                 |  |                        |        |             |  |             |          |   |  |   |          |  
|Cash paid for income taxes       |  | $                      | 11,212 |             |  | $           | 17,806   |   |  | $ | 20,514   |  
|                                 |  |                        |        |             |  |             |          |   |  |   |          |  

The components of deferred tax assets at
October 31, 2004 and 2003 are as follows:

|                                      |                           |                                  |                           |                                |         |          |         |   |         |          |         |  
|------------------------------------- | ------------------------- | -------------------------------- | ------------------------- | ------------------------------ | ------- | -------- | ------- | - | ------- | -------- | ------- | -
|                                      |                           | October 31,                      |                           | October 31,                   
|                                      |                           | 2004                             |                           | 2003                          
|                                      |                           |                                  |                           |                               
|                                      |                           |                                 
|                                      |                           | (Amounts in thousands)          
|Deferred income taxes:                |                           |                                  |                           |                                |         |          |         |  
|                                      | Deferred tax assets:      |                                  |                           |                                |         |          |         |   |        
|                                      |                           | Accruals                         |                           | $                              | 19,105  |          |         | $ | 25,332  |         
|                                      |                           | Capital loss carryforward        |                           |                                | 48,288  |          |         |   | 40,053  |         
|                                      |                           | Credit carryforwards             |                           |                                | 131,037 |          |         |   | 125,596 |         
|                                      |                           | Net operating loss carryforwards |                           |                                | 263,494 |          |         |   | 237,421 |         
|                                      |                           | Intangibles from acquisitions    |                           |                                |        |          |         |   | 3,856   |         
|                                      |                           | Investment impairments           |                           |                                | 47,303  |          |         |   | 56,081  |         
|                                      |                           | Receivable valuation accounts    |                           |                                | 4,774   |          |         |   | 5,848   |         
|                                      |                           | Other items                      |                           |                                | 738     |          |         |   | (963    | )       
|                                      |                           |                                  |                           |                                |         |          |         |  
|                                      |                           |                                  | Gross deferred tax assets |                                |         | 514,739  |         |   |         | 493,224  |        
|                                      |                           |                                  | Valuation allowance       |                                |         | (456,516 | )       |   |         | (423,436 | )      
|                                      |                           |                                  |                           |                                |         |          |         |  
|                                      |                           |                                  |                           | Total deferred tax assets      |         |          | 58,223  |   |         |          | 69,788  |  
|                                      |                           |                                  |                           |                                |         |          |         |  
|                                      | Deferred tax liabilities: |                                  |                           |                                |         |          |         |   |        
|                                      |                           | Depreciation                     |                           |                                | (11,827 | )        |         |   | (7,660  | )       
|                                      |                           | Foreign earnings                 |                           |                                | (46,396 | )        |         |   | (62,128 | )       
|                                      |                           | Intangibles from acquisitions    |                           |                                | (3,855  | )        |         |   |        |         
|                                      |                           |                                  |                           |                                |         |          |         |  
|                                      |                           |                                  |                           | Total deferred tax liabilities |         |          | (62,078 | ) |         |          | (69,788 | )
|                                      |                           |                                  |                           |                                |         |          |         |  
|Net deferred tax assets (liabilities) |                           | $                                | (3,855                    | )                              |         | $        |        |  
|                                      |                           |                                  |                           |                                |         |          |         |  



|                          |   
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|Novell annual report 2004 | 69












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We perform quarterly and annual assessments of
the realization of our deferred tax assets considering all
available evidence, both positive and negative. As a result of
these assessments, prior to fiscal 2003 we established valuation
allowances on select deferred tax assets that were considered to
be at risk due to their unique characteristics and limitations,
such as capital loss carryovers and acquired tax attributes.
Through the third quarter of fiscal 2003, we concluded that it
was more likely than not that the remaining recognized deferred
tax assets would be realized. The valuation allowance
established in the fourth quarter of fiscal 2003 was recorded as
a result of our analysis of the facts and circumstances at that
time, which led us to conclude that we could no longer forecast
future U.S. taxable income under the more likely than not
standard required by SFAS No. 109. Our cumulative
pre-tax book loss for three consecutive years ended
October 31, 2003, imposed a high standard for compelling,
positive evidence of the likelihood of, and ability to forecast,
future taxable income in the near term. As a result, in the
fourth fiscal quarter 2003, we provided a full valuation
allowance against net deferred tax assets carried on our balance
sheet. In conjunction with our decision to provide a full
valuation allowance on our net deferred tax assets in 2003, we
also recorded a deferred tax liability for our foreign earnings
that were previously considered permanently invested. This
resulted in an additional deferred tax liability of
$18.1 million.

At the end of fiscal 2004 we again assessed the
ability to realize our deferred tax assets. We concluded that we
could not forecast future taxable income under the more likely
than not standard. Accordingly, current year deferred tax
provisions were offset by adjustments to the valuation
allowance. The valuation allowances reduce our deferred tax
assets to zero. The valuation allowance on deferred tax assets
increased by $33 million, $77 million, and
$98 million in fiscal 2004, 2003 and 2002 respectively. The
October 31, 2003 deferred tax assets have been adjusted to
recognize a correction of previously reported items of
approximately $53 million. These amounts are fully reserved
and accordingly have no impact on the financial statements.

We recorded deferred tax liabilities during
fiscal 2004 for foreign jurisdictions, which were attributable
to book and tax basis differences recorded as part of purchase
price accounting for the assets and liabilities of companies
acquired during the year.

As of October 31, 2004, we had U.S. net
operating loss carryforwards for federal tax purposes of
approximately $445 million. If not utilized, these
carryforwards will expire in fiscal years 2020 through 2024.
These amounts do not include an additional $261 million in
net operating loss carryforwards from acquired companies that
will expire in years 2010 through 2022. These loss carryforwards
from acquired companies can be utilized to offset future taxable
income, but are subject to certain annual limitations. In
addition, we have approximately $100 million of foreign
loss carryforwards, of which $7 million, $4 million,
$2 million, and $3 million are subject to expiration
in years 2006 though 2009, respectively. The remaining losses do
not expire. We have $125 million in capital loss
carryforwards, which, if not utilized, will expire in fiscal
years 2006 through 2009. We have foreign tax credit
carryforwards of $35 million that expire between 2009 and
2014, and general business credit carryforwards of
$91 million that expire between 2018 and 2024.

As of October 31, 2004, deferred tax assets
of approximately $55 million pertain to certain tax credits
and net operating loss carryforwards resulting from the exercise
of employee stock options. If recognized, the tax benefit of
these credits and losses will be accounted for as a credit to
stockholders equity. Deferred tax assets of
$126 million relate to acquired entities. These acquired
deferred tax assets are subject to limitation under the change
of ownership rules of the Internal Revenue Code and have been
fully valued. Any future benefit relating to these deferred tax
assets will first reduce goodwill relating to the acquisition,
second reduce other non-current intangible assets relating to
the acquisition, and third reduce income tax expense.



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|70 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with our review of the tax reserves
for the fourth quarter of 2004, we determined that the amount of
reserves related to tax exposures was less than the amount
recorded in the financial statements. As a result, we reduced
the tax reserves by $6 million.

On November 8, 2004, Novell announced an
agreement with Microsoft to settle potential antitrust
litigation. A gain of $448 million, the settlement less
estimated transaction costs, will be included in operating
income in the first fiscal quarter ended January 31, 2005.
The company anticipates using net operating loss carryforwards
against this income, and expects an estimated $10 million
current liability as a result of the Alternative Minimum Tax.

J. Other Accrued Liabilities

Other accrued liabilities consist of the
following:

|                                 |                                 |                        |        |             |  |   |        |         | 
|-------------------------------- | ------------------------------- | ---------------------- | ------ | ----------- |  | - | ------ | ------- | 
|                                 |                                 | October 31,            |        | October 31,
|                                 |                                 | 2004                   |        | 2003       
|                                 |                                 |                        |        |            
|                                 |                                 |                       
|                                 |                                 | (Amounts in thousands)
|Other accrued expenses           |                                 | $                      | 48,104 |             |  | $ | 58,837 |        
|Restructuring reserves           |                                 |                        | 19,178 |             |  |   | 28,277 |        
|Accrued property and other taxes |                                 |                        | 17,451 |             |  |   | 17,309 |        
|Accrued marketing expenses       |                                 |                        | 8,032  |             |  |   | 6,940  |        
|Accrued royalties                |                                 |                        | 5,101  |             |  |   | 5,710  |        
|Accrued interest and dividends   |                                 |                        | 1,117  |             |  |   |       |        
|                                 |                                 |                        |        |             |  |   |        |        
|                                 | Total other accrued liabilities |                        | $      | 98,983      |  |   | $      | 117,073 | 
|                                 |                                 |                        |        |             |  |   |        |        

K. Restructuring Expenses

Second,
third and fourth quarters of fiscal 2004

During the second, third and fourth quarters of
fiscal 2004, we recorded net restructuring expenses of
$5.3 million, $9.7 million, and $4.0 million,
respectively. These restructuring expenses were in response to
the evolution of our business strategy to develop a competitive
position in the Linux market. This strategy includes plans to
support the Linux operating system in addition to the NetWare
operating system, by offering our products and services that run
on Linux, NetWare and other platforms. The acquisitions of
Ximian and SUSE are direct results of the evolution in our
business strategy. These changes were made to address market
penetration for Linux and NetWare and to address NetWare revenue
declines. Specific actions taken include reducing our workforce
by 54 employees during the second quarter,
65 employees during the third quarter, and
17 employees during the fourth quarter of fiscal 2004,
mainly in consulting, sales and product development in EMEA and
North America. In addition, we consolidated facilities,
resulting in the closure of two sales facilities and the
disposal of excess equipment and tenant improvements in the
United States. Total restructuring expenses for fiscal 2004 by
reporting segment were as follows: North America
$5.5 million, EMEA $9.4 million, Asia Pacific
$0.4 million, Latin America $0.2 million, and
non-allocated corporate costs $3.5 million.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 71












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
during fiscal 2004 related to this restructuring:

|                                          |  |                |        |          |  |             |         |             |  |   |   |  |  |   |       | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | - | - |  |  | - | ----- | 
|                                          |  |                |        |          |  |             |         | Balance at 
|                                          |  | Original       |        | Cash     |  | Non-Cash    |         | October 31,
|                                          |  | Reserve        |        | Payments |  | Adjustments |         | 2004       
|                                          |  |                |        |          |  |             |         |            
|                                          |  |               
|                                          |  | (In thousands)
|Severance and benefits                    |  | $              | 12,910 |          |  | $           | (8,252  | )           |  | $ |  |  |  | $ | 4,658 | 
|Excess facilities, property and equipment |  |                | 6,152  |          |  |             | (3,645  | )           |  |   |  |  |  |   | 2,507 | 
|                                          |  |                |        |          |  |             |         |             |  |   |   |  |  |   |       | 
|                                          |  | $              | 19,062 |          |  | $           | (11,897 | )           |  | $ |  |  |  | $ | 7,165 | 
|                                          |  |                |        |          |  |             |         |             |  |   |   |  |  |   |       | 

As of October 31, 2004, the remaining
balance of the fiscal 2004 restructuring expenses included
accrued liabilities related to severance and benefits, which
will be paid out over the remaining severance obligation period,
not to exceed two years, lease costs for redundant facilities,
which will be paid over the respective remaining contract terms,
and various severed employee related costs, which will be paid
over the respective remaining contract terms.

During fiscal 2004, we also recorded a
$5.9 million restructuring expense to increase prior
restructuring liabilities by $1.0 million and prior
merger-related liabilities by $4.9 million, and we released
approximately $2.1 million of excess restructuring reserves
related to prior restructuring events. The increases were the
result of changes in estimates used when the original expenses
were recorded primarily due to changes in the real estate market
in the United Kingdom. The net impact of the fiscal 2004
restructurings and the release of the prior restructuring excess
reserves was an expense of $22.9 million in fiscal 2004.
These adjustments, which pertain to separate restructuring
events, are included in the applicable tables that follow.

Third
quarter of fiscal 2003

During the third quarter of fiscal 2003, we
recorded a pre-tax restructuring expense of approximately
$27.8 million resulting from the restructuring of our
operations in response to changes in general market conditions,
changing customer demands, and the evolution of our business
strategy relative to the identity management and web services
areas of our business and our revised strategy. This strategy
includes plans to support Linux in addition to NetWare, by
offering our products and services that run on both NetWare and
Linux platforms. These changes in strategy and company structure
were made to address the current revenue declines. Specific
actions taken included reducing our workforce worldwide by
approximately 600 employees (approximately 10%) across all
functions and geographies, with a majority coming from product
development, sales, and general and administrative functions,
primarily in the United States. In addition, we consolidated
facilities, and disposed of excess equipment. Total
restructuring expenses by reporting segment were as follows:
North America $18.9 million, EMEA $6.0 million, Asia
Pacific $2.4 million, and Latin America $0.5 million

As of October 31, 2004, the remaining
balance of the third quarter of fiscal 2003 restructuring
expense included accrued liabilities related to redundant
facilities and other fixed contracts, which will be paid over
the respective remaining contract terms, and various severed
employee related costs, which will be paid over the respective
remaining contract terms.



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|72 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
related to this restructuring.

|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |        |  |  |   |         |   |  |   |     |  |  |   |       | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | -------- | ------ | ----------- |  | ----------- | ------ |  |  | - | ------- | - |  | - | --- |  |  | - | ----- | 
|                                          |  |                |        |          |  |             |         | Balance at  |  |          |        |             |  | Balance at 
|                                          |  | Original       |        | Cash     |  | Non-Cash    |         | October 31, |  | Cash     |        | Non-Cash    |  | October 31,
|                                          |  | Expense        |        | Payments |  | Adjustments |         | 2003        |  | Payments |        | Adjustments |  | 2004       
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |            
|                                          |  |               
|                                          |  | (In thousands)
|Severance and benefits                    |  | $              | 20,287 |          |  | $           | (17,163 | )           |  | $        | 3,755  |             |  | $           | 6,879  |  |  | $ | (7,462  | ) |  | $ | 876 |  |  | $ | 293   | 
|Excess facilities, property and equipment |  |                | 5,778  |          |  |             | (3,079  | )           |  |          | 5,735  |             |  |             | 8,434  |  |  |   | (5,911  | ) |  |   |    |  |  |   | 2,523 | 
|Other restructuring-related costs         |  |                | 1,729  |          |  |             | (423    | )           |  |          | 536    |             |  |             | 1,842  |  |  |   |        |   |  |   |    |  |  |   | 1,842 | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |        |  |  |   |         |   |  |   |     |  |  |   |       | 
|                                          |  | $              | 27,794 |          |  | $           | (20,665 | )           |  | $        | 10,026 |             |  | $           | 17,155 |  |  | $ | (13,373 | ) |  | $ | 876 |  |  | $ | 4,658 | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |        |  |  |   |         |   |  |   |     |  |  |   |       | 

During the fourth quarter of fiscal 2003, we
accrued an additional $10 million related to the completion
of restructuring activities that were part of the previous
quarters plan of restructuring. The additional accrual
relates mainly to the severance of approximately 100 employees
and the closing of excess facilities. Such activities occurred
mostly in the North America reporting segment.

During the third quarter of fiscal 2003, we also
released approximately $2 million related to excess
restructuring reserves related to the second quarter fiscal 2002
restructuring event. The net impact of the third quarter fiscal
2003 restructuring and the release of the excess fiscal 2002
restructuring reserves was an expense of $26 million.

Second
quarter of fiscal 2003

During the second quarter of fiscal 2003, we
determined that the amount we had originally accrued for
facility-related costs in previous restructurings was too low
and accrued an additional $8 million. The original
liability was based on estimated sublease rates and timing,
which were affected by the decline in the real estate market.
This additional amount, which pertains to three separate
restructuring events, is included in the applicable tables that
follow.

Second
quarter of fiscal 2002

During the second quarter of fiscal 2002, we
recorded a pre-tax restructuring expense of approximately
$20 million. The expense was a result of our continued move
toward becoming a business solutions provider, addressing
changes in the market due to technology changes, and becoming
more customer-focused. Specific actions taken included: reducing
our workforce worldwide by approximately 50 employees (less than
1%) across all functional areas, consolidating facilities,
closing offices in unprofitable locations, and disposing of
excess property and equipment. The following table summarizes
the activity related to the second quarter fiscal 2002
restructuring.

|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |       |   |  |   |       |  |  |   |        |   |  |   |       |  |  |   |       | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | -------- | ------ | ----------- |  | ----------- | ----- | -------- |  | ----------- | ------ | ----------- |  | - | ----- | - |  | - | ----- |  |  | - | ------ | - |  | - | ----- |  |  | - | ----- | 
|                                          |  |                |        |          |  | Non-Cash    |         | Balance at  |  |          |        | Non-Cash    |  | Balance at  |       |          |  | Non-Cash    |        | Balance at 
|                                          |  | Original       |        | Cash     |  | Expenses/   |         | October 31, |  | Cash     |        | Expenses/   |  | October 31, |       | Cash     |  | Expenses/   |        | October 31,
|                                          |  | Expense        |        | Payments |  | Adjustments |         | 2002        |  | Payments |        | Adjustments |  | 2003        |       | Payments |  | Adjustments |        | 2004       
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |            
|                                          |  |               
|                                          |  | (In thousands)
|Severance and benefits                    |  | $              | 14,748 |          |  | $           | (9,172  | )           |  | $        | (1,318 | )           |  | $           | 4,258 |          |  | $           | (3,152 | )           |  | $ | (100  | ) |  | $ | 1,006 |  |  | $ | (1,006 | ) |  | $ |      |  |  | $ |      | 
|Excess facilities, property and equipment |  |                | 5,146  |          |  |             | (925    | )           |  |          |       |             |  |             | 4,221 |          |  |             | (4,460 | )           |  |   | 4,381 |   |  |   | 4,142 |  |  |   | (2,216 | ) |  |   | 1,597 |  |  |   | 3,523 | 
|Other restructuring-related costs         |  |                | 492    |          |  |             | (42     | )           |  |          | (150   | )           |  |             | 300   |          |  |             |       |             |  |   |      |   |  |   | 300   |  |  |   | (41    | ) |  |   | 817   |  |  |   | 1,076 | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |       |   |  |   |       |  |  |   |        |   |  |   |       |  |  |   |       | 
|                                          |  | $              | 20,386 |          |  | $           | (10,139 | )           |  | $        | (1,468 | )           |  | $           | 8,779 |          |  | $           | (7,612 | )           |  | $ | 4,281 |   |  | $ | 5,448 |  |  | $ | (3,263 | ) |  | $ | 2,414 |  |  | $ | 4,599 | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |       |   |  |   |       |  |  |   |        |   |  |   |       |  |  |   |       | 



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|Novell annual report 2004 | 73












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of October 31, 2004, the remaining
balance of the second quarter 2002 restructuring expense
included redundant facilities and other fixed contracts, which
will be paid over the respective remaining contract terms.

During the second quarter of fiscal 2002, we also
released approximately $1.3 million of excess accruals
related to the fiscal 2000 restructuring, which reduced the
restructuring costs reflected on the statement of operations for
fiscal 2002. These excess accruals relate to facilities and
legal costs that were not required.

Fourth
quarter of fiscal 2001

During the fourth quarter of fiscal 2001, we
recorded $51 million of pre-tax, restructuring expenses
resulting from changes in general market conditions, changing
customer demands, and the evolution of our business strategy,
all of which required us to restructure our operations. This
business strategy focused on business solutions designed to
secure and power the networked world across leading operating
systems. The execution of this strategy included refining our
consulting initiatives, refocusing research and development
efforts, defining sales and marketing efforts to be more
customer and solutions oriented, and adjusting the overall cost
structure given then current revenue levels and our strategic
direction.

Specific actions included reducing our workforce
worldwide by approximately 1,100 employees (approximately 16%),
consolidating excess facilities and disposing of excess property
and equipment, terminating a management consulting contract that
no longer fits with our strategic focus, and abandoning and
writing off technologies that no longer fit within our new
strategy. We also realigned our remaining resources to better
manage and control our business. The following table summarizes
the costs and activities related to the fourth quarter 2001
restructuring.

|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |     |  |  |   |       |  |  |   |      |   |  |   |      |   |  |   |       | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | -------- | ------ | ----------- |  | ----------- | ----- | -------- |  | ----------- | ------ | ----------- |  | - | --- |  |  | - | ----- |  |  | - | ---- | - |  | - | ---- | - |  | - | ----- | 
|                                          |  | Balance at     |        |          |  | Non-Cash    |         | Balance at  |  |          |        | Non-Cash    |  | Balance at  |       |          |  | Non-Cash    |        | Balance at 
|                                          |  | October 31,    |        | Cash     |  | Expenses/   |         | October 31, |  | Cash     |        | Expenses/   |  | October 31, |       | Cash     |  | Expenses/   |        | October 31,
|                                          |  | 2001           |        | Payments |  | Adjustments |         | 2002        |  | Payments |        | Adjustments |  | 2003        |       | Payments |  | Adjustments |        | 2004       
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |            
|                                          |  |               
|                                          |  | (In thousands)
|Severance and benefits                    |  | $              | 32,793 |          |  | $           | (27,676 | )           |  | $        | (4,000 | )           |  | $           | 1,117 |          |  | $           | (1,013 | )           |  | $ |    |  |  | $ | 104   |  |  | $ | (104 | ) |  | $ |     |   |  | $ |      | 
|Excess facilities, property and equipment |  |                | 10,896 |          |  |             | (8,215  | )           |  |          | 1,970  |             |  |             | 4,651 |          |  |             | (2,181 | )           |  |   | 262 |  |  |   | 2,732 |  |  |   | (862 | ) |  |   | (333 | ) |  |   | 1,537 | 
|Other restructuring- related costs        |  |                | 911    |          |  |             | (287    | )           |  |          |       |             |  |             | 624   |          |  |             | (439   | )           |  |   |    |  |  |   | 185   |  |  |   |     |   |  |   | 95   |   |  |   | 280   | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |     |  |  |   |       |  |  |   |      |   |  |   |      |   |  |   |       | 
|                                          |  | $              | 44,600 |          |  | $           | (36,178 | )           |  | $        | (2,030 | )           |  | $           | 6,392 |          |  | $           | (3,633 | )           |  | $ | 262 |  |  | $ | 3,021 |  |  | $ | (966 | ) |  | $ | (238 | ) |  | $ | 1,817 | 
|                                          |  |                |        |          |  |             |         |             |  |          |        |             |  |             |       |          |  |             |        |             |  |   |     |  |  |   |       |  |  |   |      |   |  |   |      |   |  |   |       | 

As of October 31, 2004, the remaining
balance of the fourth quarter 2001 restructuring charge included
accrued liabilities largely related to redundant facilities
costs, which will be paid over the respective remaining lease
terms.

Third
quarter of fiscal 2001

During the third quarter of fiscal 2001, we
recorded a restructuring expense of approximately
$30 million, pre-tax, as a result of our acquisition of
Cambridge and changes in our business to move towards a business
solutions strategy.

Specific actions included reducing our workforce
worldwide by approximately 280 employees (approximately 5%
before the addition of Cambridge) across all functional areas,
consolidating facilities and disposing of excess property and
equipment, abandoning and writing off technologies that no
longer fit within our new



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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

integrated strategy, and discontinuing
unprofitable product lines. The following table summarizes the
activity related to the third quarter 2001 restructuring costs.

|                                          |  |                |        |          |  |             |         |          |  |             |       |             |  |          |        |             |  |             |     |  |  |   |       |  |  |   |      |   |  |   |        |   |  |   |     | 
|----------------------------------------- |  | -------------- | ------ | -------- |  | ----------- | ------- | -------- |  | ----------- | ----- | ----------- |  | -------- | ------ | ----------- |  | ----------- | --- |  |  | - | ----- |  |  | - | ---- | - |  | - | ------ | - |  | - | --- | 
|                                          |  | Balance at     |        |          |  | Balance at  |         |          |  | Non-Cash    |       | Balance at  |  |          |        | Non-Cash    |  | Balance at 
|                                          |  | October 31,    |        | Cash     |  | October 31, |         | Cash     |  | Expenses/   |       | October 31, |  | Cash     |        | Expenses/   |  | October 31,
|                                          |  | 2001           |        | Payments |  | 2002        |         | Payments |  | Adjustments |       | 2003        |  | Payments |        | Adjustments |  | 2004       
|                                          |  |                |        |          |  |             |         |          |  |             |       |             |  |          |        |             |  |            
|                                          |  |               
|                                          |  | (In thousands)
|Severance and benefits                    |  | $              | 3,377  |          |  | $           | (3,377  | )        |  | $           |      |             |  | $        |       |             |  | $           |    |  |  | $ |      |  |  | $ |     |   |  | $ |       |   |  | $ |    | 
|Excess facilities, property and equipment |  |                | 9,736  |          |  |             | (5,847  | )        |  |             | 3,889 |             |  |          | (1,914 | )           |  |             | 678 |  |  |   | 2,653 |  |  |   | (422 | ) |  |   | (2,011 | ) |  |   | 220 | 
|Other restructuring-related costs         |  |                | 1,224  |          |  |             | (1,087  | )        |  |             | 137   |             |  |          | (137   | )           |  |             |    |  |  |   |      |  |  |   |     |   |  |   |       |   |  |   |    | 
|                                          |  |                |        |          |  |             |         |          |  |             |       |             |  |          |        |             |  |             |     |  |  |   |       |  |  |   |      |   |  |   |        |   |  |   |     | 
|                                          |  | $              | 14,337 |          |  | $           | (10,311 | )        |  | $           | 4,026 |             |  | $        | (2,051 | )           |  | $           | 678 |  |  | $ | 2,653 |  |  | $ | (422 | ) |  | $ | (2,011 | ) |  | $ | 220 | 
|                                          |  |                |        |          |  |             |         |          |  |             |       |             |  |          |        |             |  |             |     |  |  |   |       |  |  |   |      |   |  |   |        |   |  |   |     | 

L. Line of Credit

We have a $25 million bank line of credit
available for letter of credit purposes. At October 31,
2004, there were standby letters of credit of $18.3 million
outstanding under this line, all of which are secured by cash.
The bank line expires on April 1, 2005. The bank line is
subject to the terms of a credit agreement containing financial
covenants and restrictions, none of which are expected to affect
our operations. We are in compliance with all financial
covenants relating to this line of credit as of October 31,
2004. In addition, at October 31, 2004, we had outstanding
letters of credit of an insignificant amount at other banks.

M. Senior Convertible
Debentures

On July 2, 2004, we issued and sold
$600 million aggregate principal amount of our senior
convertible debentures (Debentures) due 2024. The
Debentures pay interest at 0.50% per annum, payable
semi-annually on January 15 and July 15 of each year, commencing
January 15, 2005. Each $1,000 principal amount of
Debentures is convertible, at the option of the holders, into
86.7905 shares of our common stock prior to July 15,
2024 if (1) the price of our common stock trades above 130%
of the conversion price for a specified duration, (2) the
trading price of the Debentures is below a certain threshold,
subject to specified exceptions, (3) the Debentures have
been called for redemption, or (4) specified corporate
transactions have occurred. None of the conversion triggers have
been met as of October 31, 2004. The conversion rate is
subject to certain adjustments. The conversion rate initially
represents a conversion price of $11.52 per share. Holders
of the Debentures may require us to repurchase all or a portion
of their Debentures on July 15, 2009, July 15, 2014
and July 15, 2019, or upon the occurrence of certain events
including a change in control. The Debentures can be redeemed by
us for cash beginning on or after July 20, 2009.

The Debentures were sold to an accredited
investor within the meaning of Rule 501 under the
Securities Act of 1933, as amended, in reliance upon the private
placement exemption afforded by Section 4(2) of the
Securities Act. The initial investor offered and resold the
Debentures to qualified institutional buyers under
Rule 144A of the Securities Act.

In connection with the issuance of the
Debentures, we incurred $14.9 million of issuance costs,
which primarily consisted of investment banker fees and legal
and other professional fees. These costs are classified within
Other Assets and are being amortized as interest expense using
the effective interest method over the term from issuance
through the first date that the holders can require repurchase
of the Debentures (July 15, 2009). Amortization expense
related to the issuance costs was $1.0 million and interest
expense on the Debentures was $1.0 million for the fiscal
year ended October 31, 2004.



|                          |   
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|Novell annual report 2004 | 75












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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

N. Guarantees

During the first quarter of fiscal 2002, we sold
our subsidiary in the Czech Republic. As a part of this
transaction, we provided a guarantee to the landlord of the
building we leased in the Czech Republic whereby we agreed to
pay any and all monies due under the lease, including legal fees
if the new lessee defaults on the lease. During the fiscal year
2003, we paid approximately $0.1 million against this
guarantee and at October 31, 2004, we had accrued an
additional $0.2 million, which represents our liability
exposure if the new lessee continues in default, excluding legal
fees. In addition, we have provided a guarantee in the amount of
$2 million related to a foreign tax audit. As of
October 31, 2004 we had accrued $2 million for this
guarantee. No amounts have been paid against this guarantee. It
is expected that the term of the guarantee will continue until
the conclusion of the audit. We have also provided other
guarantees of insignificant amounts for various purposes.

As an element of our standard contract terms, we
include an indemnification clause in our agreements with our
customers that indemnify the licensee against certain liability
and damages arising from intellectual property infringement
claims resulting from their use or distribution of our software.
Additionally, during the first quarter of fiscal 2004, we
implemented our Novell Linux Indemnification Program. Under this
program, indemnification is offered for copyright infringement
claims made by third parties against registered Novell customers
who obtain certain Novell Linux products and who meet other
requirements relating to technical support. We do not record a
liability for potential litigation claims related to
indemnification agreements with our customers, unless and until
we conclude the likelihood of a material obligation is probable
and estimable.



|   |                              
|-- | -----------------------------
|O. | Commitments and Contingencies

The Board of Directors established a venture
investment program within our investment portfolio for the
purpose of promoting our business and strategic objectives by
making investments in private companies, mainly small
capitalization stocks in the high-technology industry sector,
and in funds managed by venture capitalists for the promotion of
our business and strategic objectives. As of October 31,
2004, we had a carrying value of $54.0 million related to
investments in various venture capital funds and had commitments
to contribute an additional $32.9 million to these funds,
of which approximately $19.9 million could be contributed
in fiscal 2005, approximately $9.3 million in fiscal 2006,
and approximately $3.7 million thereafter as requested by
the fund managers. Through our acquisition of Cambridge, we also
own both limited and general partnership interests in CTC I of
approximately 24%. As of October 31, 2004, we had an
investment balance of $0.2 million in CTC I and had
commitments to contribute an additional $0.3 million
through 2007.

As of October 31, 2004, we have various
operating leases related to our facilities with remaining terms
of more than one year. These leases have minimum annual lease
commitments of $27.9 million in fiscal 2005,
$22.1 million in fiscal 2006, $19.1 million in fiscal
2007, $13.4 million in fiscal 2008, $7.2 million in
fiscal 2009, and $9.0 million thereafter. Furthermore, we
have $24.0 million of minimum rentals to be received in the
future from subleases.

Rent expense, net of sublease rental income, for
operating and month-to-month leases was $21.5 million,
$24 million, and $29 million, in fiscal 2004, 2003,
and 2002, respectively.



|   |                  
|-- | -----------------
|P. | Legal Proceedings

In November 2004, we filed suit against Microsoft
in the U.S. District Court, District of Utah. We seek to be
awarded treble damages in an amount to be determined at trial
based on claims that Microsoft eliminated competition in the
office productivity software market during the time that we
owned the WordPerfect word-processing application and the
Quattro Pro spreadsheet application. Among other claims,



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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

we alleged that Microsoft withheld certain
critical technical information about Windows from us, thereby
impairing our ability to develop new versions of WordPerfect and
other Novell office productivity applications. The complaint
also alleges that Microsoft integrated certain technologies into
Windows designed to exclude WordPerfect and other Novell
applications from relevant markets. In addition, we alleged that
Microsoft used its monopoly power to prevent OEMs from
offering WordPerfect and other applications to customers. On
January 7, 2005, Microsoft filed a motion to dismiss the
complaint. We will vigorously oppose the motion to dismiss.
While there can be no assurance as to the ultimate disposition
of the litigation, we do not believe that its resolution will
have a material adverse effect on our financial position,
results of operations or cash flows.

In May 2004, we received $18.5 million from
The Canopy Group, Inc. (Canopy) in satisfaction of a
judgment against Canopy. The judgment arose out of a collection
action filed by us against Canopy, wherein we sought to recover
a royalty payment due under a licensing agreement and arising
out of a settlement payment from a third party to Canopy. In
connection with this payment, we recognized revenue of
$13.5 million and interest income of $5 million during
the quarter ended July 31, 2004.

In January 2004, the SCO Group, Inc.
(SCO) filed suit against us in the Third Judicial
District Court of Salt Lake County, State of Utah. We removed
the claim to the U.S. District Court, District of Utah.
SCOs original complaint alleged that our public statements
and filings regarding the ownership of the copyrights in UNIX
and UnixWare have harmed SCOs business reputation and
affected its efforts to protect its ownership interest in UNIX
and UnixWare. The District Court dismissed the original
complaint, but allowed SCO an opportunity to file an amended
complaint, which SCO did in July 2004. As with the original
complaint, SCO is again seeking to require us to assign all
copyrights that we have registered in UNIX and UnixWare to SCO,
to prevent us from representing that we have any ownership
interest in the UNIX and UnixWare copyrights and to require us
to withdraw all representations we have made regarding our
ownership of the UNIX and UnixWare copyrights and to pay actual,
special and punitive damages in an amount to be proven at trial.
We have again sought to dismiss SCOs amended complaint and
ultimately believe that we have meritorious defenses to these
claims even if our Motion to Dismiss is denied. Accordingly, we
intend to vigorously defend ourselves in this suit. Although
there can be no assurance as to the ultimate disposition of the
suit, we do not believe that the resolution of this litigation
will have a material adverse effect on our financial position,
results of operations or cash flows.

SilverStream, which we acquired in July 2002, and
several of its former officers and directors, as well as the
underwriters who handled SilverStreams two public
offerings, were named as defendants in several class action
complaints that were filed on behalf of certain former
stockholders of SilverStream who purchased shares of
SilverStream common stock between August  16, 1999 and
December 6, 2000. These complaints are closely related to
several hundred other complaints that the same plaintiffs have
brought against other issuers and underwriters. These complaints
all allege violations of the Securities Act, as amended
The Securities Act, and the Securities Exchange Act
of 1934, as amended The Exchange Act. In particular,
they allege, among other things, that there was undisclosed
compensation received by the underwriters of the public
offerings of all of these issuers, including
SilverStreams. The plaintiffs are seeking monetary
damages, statutory compensation and other relief that may be
deemed appropriate by the court. A Consolidated Amended
Complaint with respect to all of these companies was filed in
the U.S. District Court, Southern District of New York, on
April 19, 2002. While we believe that SilverStream and its
former officers and directors have meritorious defenses to the
claims, a Memorandum of Understanding has been reached between
many of the defendants and the plaintiffs, which contemplate a
settlement of the claims. The settlement, however, has not been
finalized. While there can be no assurance as to the ultimate
disposition of the litigation, we do not believe that its
resolution will have a material adverse effect on our financial
position, results of operations or cash flows.



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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

We evaluate the adequacy of our legal reserves on
a quarterly basis. During fiscal 2004, we recorded a reduction
of $5 million in legal reserves relating to favorable
developments in current litigation matters and a reduction of
$4 million due to a one-time adjustment to the legal
reserves. We are currently party to various legal proceedings
and claims including former employees, either asserted or
unasserted, which arise in the ordinary course of business.
While the outcome of these matters cannot be predicted with
certainty, we do not believe that the outcome of any of these
claims or any of the above mentioned legal matters will have a
material adverse effect on our consolidated financial position,
results of operations or cash flows.



|   |                           
|-- | --------------------------
|Q. | Redeemable Preferred Stock

On March 23, 2004, we entered into a
definitive agreement with International Business Machines
Corporation (IBM) in connection with IBMs
previously announced $50 million investment in Novell. The
primary terms of the investment were negotiated in November 2003
and entailed the purchase by IBM of 1,000 shares of our
Series B redeemable preferred stock (Series B
Preferred Stock) that are convertible into 8 million
shares of our common stock at a conversion price of
$6.25 per common share. The Series B Preferred Stock
is entitled to a dividend of 2% per annum, payable
quarterly in cash. Dividends on the Series B Preferred
Stock during fiscal 2004 amounted to $0.4 million, of which
$0.3 million was paid out during the year.

Because the fair value of our common stock of
$9.46 per share on March 23, 2004 was greater than the
conversion price of $6.25 per share of Series B
Preferred Stock, we recorded a one-time, non-cash deemed
dividend of $25.7 million pursuant to EITF Issue
No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios.

The Series B Preferred Stock is convertible
at any time at the option of the holder and has a liquidation
value equal to $50,000 per share. Each share of Preferred
Stock issued and outstanding is entitled to the number of votes
equal to the number of shares of common stock into which it is
convertible. The Series B Preferred Stock is senior to the
common stock with respect to dividends and liquidation
preferences. The Series B Preferred Stock is redeemable at
our option, and by the holder only under certain change in
control circumstances. Because the redemption is not certain to
occur, the Series B Preferred Stock is not required to be
classified as a liability, but rather is classified in the
mezzanine section of the balance sheet and is stated at
redemption value.

On June 17, 2004, 500 shares of
Series B Preferred Stock, with a carrying value of
$25 million, were converted into 4 million shares of
our common stock.



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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                     
|-- | --------------------
|R. | Stockholders Equity



| |                                 
| | --------------------------------
| | Preferred Share Rights Agreement

In December 1988, the Board of Directors adopted
a Preferred Share Rights Agreement. This plan was most recently
amended in September 1999 and expires on November 21, 2006.
The plan provides for a dividend of rights, which cannot be
exercised until certain events occur, to purchase shares of our
Series A Preferred Stock. Each common stockholder of record
has one right for each share of common stock owned. This plan
was adopted to ensure that all of our stockholders receive fair
value for their common stock in the event a third party proposes
to acquire us and to guard against coercive tactics to gain
control of us without offering fair value to our stockholders.
We have 499,000 authorized shares of Series A Preferred
Stock with a par value of $0.10 per share, none of which
were issued or outstanding at October 31, 2004 or
October 31, 2003.

Stock
Repurchase

On July 2, 2004, we used approximately
$125 million of the proceeds from the issuance of the
Debentures to repurchase 15,188,300 shares of common
stock at $8.23 per share. These shares are held in treasury
and are classified as treasury stock on our consolidated balance
sheet.

Stock
Option Plans

Pursuant to an exchange offer dated May 14,
2003, approved by our stockholders at our 2003 Annual Meeting
held on May 1, 2003, through the approval of amendments to
our stock option plans, we offered a stock option exchange
program to our non-executive employees, giving them the right to
exchange outstanding stock options with an exercise price of
$5.03 per share or higher for new options that were granted
on December 16, 2003. The options tendered under the
program were replaced with options to purchase a fewer number of
shares than the original options would have provided, based upon
an exchange ratio dependent upon the exercise price of the
tendered option.

Under the program, options to
purchase 17.0 million shares of our common stock were
tendered, representing approximately 64% of the options that
were eligible for the exchange. These tendered options were
cancelled and are no longer outstanding. We issued new options
with an exercise price of $9.14, the fair market value of our
common stock on December 16, 2003, to purchase an aggregate
of 8.9 million shares of our common stock. We apply the
intrinsic value method and related interpretations in accounting
for stock options granted under our stock option plans.
Accordingly, no compensation expense has been recognized in
connection with the grant of replacement options. We have
amended the Novell/SilverStream 1997 Stock Option Plan to reduce
the aggregate number of shares of common stock issuable there
under by 8.1 million shares, the excess of the number of
options tendered over the number of options reissued.

We currently have five broad-based stock option
plans with options available for grant to employees and
consultants, and one stock option plan with options available
for grant to members of the Board of Directors. We typically
grant nonstatutory options at fair market value. In addition, we
occasionally grant restricted stock purchase rights and
restricted units to certain employees. Prior to 2002, we granted
options to virtually all employees at their time of hire. Our
current practice is to grant options to mid- and
upper-management at time of hire. We also maintain an on-going
annual grant program under which certain employees are eligible
for consideration for performance and retention grants. These
plans are discussed in more detail below.



|                          |   
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|Novell annual report 2004 | 79












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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                
| | -----------------------------------------------
| | The 2000 Stock Plan and the 1991 Stock
    Plan

The 2000 Stock Plan (the 2000 Plan),
with an aggregate of 16 million shares of common stock
reserved for issuance, provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock purchase
rights and common stock equivalents (CSEs) and
was approved by stockholders in April 2000. Shares of common
stock may also be issued under the 2000 Plan to satisfy our
obligations under our Stock Based Deferred Compensation Plan. As
of October 31, 2004, a total of 5,632,390 shares of
common stock remained available for issuance pursuant to the
2000 Plan. The 1991 Stock Plan (the 1991 Plan), with
an aggregate of 80,277,765 shares of common stock reserved
for issuance, provides for the grant of nonqualified stock
options, restricted stock purchase rights, restricted units,
stock appreciation rights and long-term performance awards and
was most recently approved by the stockholders in March 1994. As
of October 31, 2004, a total of 19,583,461 shares of
common stock remained available for issuance pursuant to the
1991 Plan. Under both plans, options are granted at the fair
market value of our common stock at the date of grant, generally
vest over 48 months (although options have been granted
that vest over 24 or 36 months), are exercisable upon
vesting and expire either four, eight or ten years from the date
of grant. Under both plans, restricted stock purchase rights
have been granted providing for the sale of our common stock to
certain employees at a purchase price of $0.10 per share.
Shares of restricted common stock are subject to repurchase by
us until they have vested. Grants of restricted stock generally
vest over a three-year period. There were 1,182,500 shares
of outstanding restricted common stock that remained unvested
and subject to repurchase at the end of fiscal 2004. Under the
1991 Plan, restricted units may be granted to international
employees. These units vest three years from their date of
grant, have an exercise price of $0.10 and are payable in common
stock. Under the 2000 Plan, CSEs may be issued to
non-employee members of our Board of Directors, who elect to
have all or a portion of their board retainers deferred through
the purchase of CSEs. The purchase price for CSEs is
equal to the fair market value of our common stock on the date
of purchase. Participating board members who defer compensation
into the award of CSEs specify the future date such common
stock equivalents will be converted into shares of our common
stock.



| |                                            
| | -------------------------------------------
| | The 2000 Nonqualified Stock Option
    Plan

The 2000 Nonqualified Stock Option Plan (the
2000 NQ Plan), with an aggregate of 26 million
shares of common stock reserved for issuance, provides for the
grant of nonstatutory stock options. As of October 31,
2004, a total of 12,904,116 shares of common stock remained
available for issuance pursuant to the 2000 NQ Plan. Under the
2000 NQ Plan, nonstatutory options are granted at the fair
market value of our common stock at the date of grant, generally
vest over 48 months (although options have been granted
that vest over 24 months), are exercisable upon vesting and
expire either four, eight or ten years from the date of grant.



| |                                                   
| | --------------------------------------------------
| | The Novell/SilverStream 1997 Stock Option
    Plan

The Novell/SilverStream 1997 Stock Option Plan
(the SilverStream 1997 Plan), with an aggregate of
12,530,883 shares of common stock reserved for issuance,
after taking into account the retirement of
8,090,788 shares in January 2004 in connection with
Novells stock option exchange program, provides for the
grant of incentive stock options and nonstatutory stock options,
was most recently approved by stockholders of SilverStream in
May of 2002, and was assumed by us in July 2002 in connection
with our acquisition of SilverStream. As of October 31,
2004, a total of 6,512,393 shares of common stock remained
available for issuance pursuant to the SilverStream 1997 Plan.
Under the SilverStream 1997 Plan, options are granted at the
fair market value of our common stock at the date of grant.
Options that had been granted prior to our acquisition of
SilverStream were granted at the fair market value of
SilverStreams common stock at the date of grant and were
converted to options to acquire our common stock based on the
terms of the acquisition.



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|80 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Options generally vest over 48 months
(although options had been granted before our acquisition of
SilverStream that vest over 42 or 60 months), are
exercisable upon vesting, and expire eight or ten years from
date of grant.



| |                                                   
| | --------------------------------------------------
| | The Novell/SilverStream 2001 Stock Option
    Plan

The Novell/SilverStream 2001 Stock Option Plan
(the SilverStream 2001 Plan), with an aggregate of
2,426,494 shares of common stock reserved for issuance,
provides for the grant of nonstatutory stock options. We assumed
the SilverStream 2001 Plan in July 2002 in connection with the
acquisition of SilverStream. As of October 31, 2004, a
total of 701,481 shares of common stock remain available
for issuance pursuant to the SilverStream 2001 Plan. Under the
SilverStream 2001 Plan, options are granted at the fair market
value of our common stock at the date of grant. Options that had
been granted prior to our acquisition of SilverStream were
granted at the fair market value of SilverStreams common
stock at the date of grant and were converted to options to
acquire our common stock based on the terms of the acquisition.
Options generally vest over 48 months (although options had
been granted before our acquisition of SilverStream that vest
over 42 months), are exercisable upon vesting and expire
eight or ten years from date of grant.



| |                                                     
| | ----------------------------------------------------
| | The Stock Option Plan for Non-Employee
    Directors

The Stock Option Plan for Non-Employee Directors
(the Director Plan), with an aggregate of
1,500,000 shares of common stock reserved for issuance,
provides for two types of non-discretionary stock option grants
to non-employee members of our Board of Directors: an initial
grant of 30,000 options at the time a director is first elected
or appointed to the Board, with options vesting over four years
and exercisable upon vesting; and an annual grant of 15,000
options upon reelection to the Board, with options vesting over
two years and exercisable upon vesting. Under the Director Plan,
options are granted at the fair market value of our common stock
at the date of grant. The Director Plan was approved by the
stockholders in April 1996. As of October 31, 2004, a total
of 574,500 shares of common stock remained available for
issuance pursuant to the Director Plan. Options expire ten years
from the date of grant.



| |                              
| | -----------------------------
| | Additional Stock Option Plans

Miscellaneous plans assumed due to acquisitions
(including two additional SilverStream plans not mentioned above
that were also assumed in connection with the SilverStream
acquisition) have terminated, and no further options may be
granted under these plans. Options previously granted under
these plans that have not yet expired or otherwise become
unexercisable continue to be administered under such plans, and
any portions that expire or become unexercisable for any reason
shall be cancelled and be unavailable for future issuance.

A summary of the status of our stock option plans
as of October 31, 2004, 2003 and 2002 is presented below.
As noted previously, options to purchase 17.0 million
shares of the companys stock were forfeited in fiscal year
2003 in connection with our stock option exchange program. These
forfeited options are included in the fiscal 2003 activity
below. On December 16, 2003, we issued replacement options
to purchase 8.9 million shares of our common stock
with an exercise price of $9.14 per share.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 81












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |       | 
|-------------------------------- | -------------------------------- | -------------------------------- | ------- | -------------- | - | ----------- | ---- | -------------- |  | --------- | ------ | -------------- | - | - | ---- | ----- |  |  | ------ | ------- | - | - | ---- | ----- | 
|                                 |                                  |                                  |         |                |   |            
|                                 |                                  | Fiscal 2004                      |         | Fiscal 2003    |   | Fiscal 2002
|                                 |                                  |                                  |         |                |   |            
|                                 |                                  |                                  |         | Weighted-      |   |             |      | Weighted-      |  |           |        | Weighted-     
|                                 |                                  | Number of                        |         | Average        |   | Number of   |      | Average        |  | Number of |        | Average       
|                                 |                                  | Options                          |         | Exercise Price |   | Options     |      | Exercise Price |  | Options   |        | Exercise Price
|                                 |                                  |                                  |         |                |   |             |      |                |  |           |        |               
|                                 |                                  |                                 
|                                 |                                  | (Number of options in thousands)
|Outstanding at beginning of year |                                  |                                  | 41,875  |                |   | $           | 5.21 |                |  |           | 75,814 |                |   | $ | 7.75 |       |  |  | 74,510 |         |   | $ | 8.79 |      
|Granted:                         |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      
|                                 | Price at fair value              |                                  |         | 17,893         |   |             |      | 9.58           |  |           |        | 6,387          |   |   |      | 3.27  |  |  |        | 5,053   |   |   |      | 3.96  | 
|                                 | Price at greater than fair value |                                  |         |               |   |             |      |               |  |           |        |               |   |   |      |      |  |  |        |        |   |   |      |      | 
|                                 | Price at less than fair value    |                                  |         | 486            |   |             |      | 0.10           |  |           |        | 820            |   |   |      | 0.10  |  |  |        | 400     |   |   |      | 0.10  | 
|Assumed:                         |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      
|                                 | Price at greater than fair value |                                  |         |               |   |             |      |               |  |           |        |               |   |   |      |      |  |  |        | 6,857   |   |   |      | 11.10 | 
|                                 | Price at less than fair value    |                                  |         |                |   |             |      |                |  |           |        |               |   |   |      |      |  |  |        | 8,163   |   |   |      | 1.11  | 
|Exercised                        |                                  |                                  | (10,530 | )              |   |             | 4.41 |                |  |           | (4,725 | )              |   |   | 2.38 |       |  |  | (1,369 | )       |   |   | 2.00 |      
|Cancelled:                       |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      
|                                 | Forfeited                        |                                  |         | (3,593         | ) |             |      | 8.59           |  |           |        | (35,051        | ) |   |      | 10.49 |  |  |        | (17,694 | ) |   |      | 9.70  | 
|                                 | Expired                          |                                  |         | (5             | ) |             |      | 5.62           |  |           |        | (1,370         | ) |   |      | 8.40  |  |  |        | (106    | ) |   |      | 23.92 | 
|                                 |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      
|Outstanding at end of year       |                                  |                                  | 46,126  |                |   | $           | 6.76 |                |  |           | 41,875 |                |   | $ | 5.21 |       |  |  | 75,814 |         |   | $ | 7.75 |      
|                                 |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      
|Exercisable at end of year       |                                  |                                  | 23,247  |                |   | $           | 5.73 |                |  |           | 26,887 |                |   | $ | 6.04 |       |  |  | 48,349 |         |   | $ | 8.92 |      
|                                 |                                  |                                  |         |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |      |      

The following table summarizes information about
stock options outstanding at October 31, 2004:

|               |  |                                  |        |                     |  |                     |      |             |  |                |       |  |  |  |        |  |  |   |       | 
|-------------- |  | -------------------------------- | ------ | ------------------- |  | ------------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|               |  |                                  |        |                     |  |                     |      |            
|               |  |                                  |        | Options Outstanding |  |                    
|               |  |                                  |        |                     |  | Options Exercisable
|               |  |                                  |        | Weighted-           |  |                     |      |            
|Range of       |  | Number of                        |        | Average             |  | Weighted-           |      | Number of   |  | Weighted-     
|Exercise       |  | Options                          |        | Remaining           |  | Average             |      | Options     |  | Average       
|Prices         |  | Outstanding                      |        | Contractual Life    |  | Exercise Price      |      | Exercisable |  | Exercise Price
|               |  |                                  |        |                     |  |                     |      |             |  |               
|               |  |                                 
|               |  | (Number of options in thousands)
|$0.00  $ 3.06 |  |                                  | 6,035  |                     |  |                     | 6.14 |             |  | $              | 2.30  |  |  |  | 3,119  |  |  | $ | 2.32  | 
|$3.12  $ 3.92 |  |                                  | 4,656  |                     |  |                     | 6.71 |             |  |                | 3.72  |  |  |  | 2,490  |  |  |   | 3.75  | 
|$3.93  $ 4.68 |  |                                  | 6,573  |                     |  |                     | 6.65 |             |  |                | 4.53  |  |  |  | 6,065  |  |  |   | 4.57  | 
|$4.70  $ 6.91 |  |                                  | 7,380  |                     |  |                     | 5.95 |             |  |                | 5.40  |  |  |  | 6,375  |  |  |   | 5.37  | 
|$6.93  $ 9.14 |  |                                  | 9,975  |                     |  |                     | 3.53 |             |  |                | 8.95  |  |  |  | 1,087  |  |  |   | 8.34  | 
|$9.19  $38.88 |  |                                  | 11,507 |                     |  |                     | 6.44 |             |  |                | 10.58 |  |  |  | 4,111  |  |  |   | 11.08 | 
|               |  |                                  |        |                     |  |                     |      |             |  |                |       |  |  |  |        |  |  |   |       | 
|$0.00  $38.88 |  |                                  | 46,126 |                     |  |                     | 5.75 |             |  | $              | 6.76  |  |  |  | 23,247 |  |  | $ | 5.73  | 
|               |  |                                  |        |                     |  |                     |      |             |  |                |       |  |  |  |        |  |  |   |       | 

Other information:

|                                                                                |  |                       |         |             |  |  |         | 
|------------------------------------------------------------------------------- |  | --------------------- | ------- | ----------- |  |  | ------- | 
|                                                                                |  | Fiscal 2004           |         | Fiscal 2003
|                                                                                |  |                       |         |            
|                                                                                |  |                      
|                                                                                |  | (Number of shares and
|                                                                                |  | options in thousands)
|Options available for future grants                                             |  |                       | 45,908  |             |  |  | 68,727  | 
|Shares of common stock outstanding at year end                                  |  |                       | 377,874 |             |  |  | 376,460 | 
|Options granted during the year as a percentage
    of outstanding common stock |  |                       | 5%      |             |  |  | 2%      | 
|Option holders as a percentage of total employees                               |  |                       | 74%     |             |  |  | 82%     | 



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In May 2003, the stockholders approved a
10 million share increase to the Companys 1989
Employee Stock Purchase Plan (the Purchase Plan). As
amended, we are now authorized to issue up to 34 million



|   |                          
|-- | -------------------------
|82 | Novell annual report 2004












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares of our common stock to our employees who
work at least 20 hours a week and more than five months a
year. In May 2003, the Purchase Plan was further amended to
limit the number of shares that can be purchased by employees
during any fiscal year to 3 million shares. Under the terms
of the Purchase Plan, there are two six-month offer periods per
year, and employees can choose to have up to 10% of their salary
withheld to purchase our common stock. The purchase price of the
common stock is 85% of the lower of the subscription date fair
market value or the purchase date fair market value.
Approximately 35% of the eligible employees participated in the
Purchase Plan in fiscal 2004, 33% in fiscal 2003, and 34% in
fiscal 2002. Under the Purchase Plan, we issued 2.2 million
shares to employees in fiscal 2004 and 4 million shares to
employees in each of fiscal 2003 and 2002. This plan has
approximately 6.3 million shares available for future
issuance.



| |                                    
| | -----------------------------------
| | Shares Reserved for Future Issuance

As of October 31, 2004, there were
92,034,795 shares of common stock reserved for stock option
exercises, 6,279,752 shares of common stock reserved for
issuances under the stock purchase program,
4,000,000 shares reserved for the conversion of
Series B preferred stock, and 52,074,300 shares
reserved for the conversion of our Debentures.



|   |                                          
|-- | -----------------------------------------
|S. | Employee Savings and Retirement
    Plans

We adopted a 401(k) savings and retirement plan
in December 1986. The plan covers all Novell U.S. employees
who are 21 years of age or older who are scheduled to
complete 1,000 hours of service during any consecutive
12-month period. Our 401(k) retirement and savings plan allows
us to contribute an amount equal to 100% of the employees
contribution up to the higher of 4% of each employees
compensation or the maximum contribution allowed by tax laws.

SilverStream had a 401(k) savings plan, to which
eligible employees could contribute up to 15% of their annual
compensation, subject to limitations established by the Internal
Revenue Code of 1986, as amended. SilverStream could elect to
contribute a discretionary matching contribution to each such
participants deferred compensation account equal to a
discretionary percentage determined by SilverStream. On
January 1, 2003, the SilverStream 401(k) savings plan was
rolled into the Novell 401(k) retirement and savings plan.

Ximian had a 401(k) savings plan, to which
eligible employees could contribute up to 20% of their annual
compensation, subject to limitations established by the Internal
Revenue Code of 1986, as amended. On January 1, 2004,
Ximian employees were eligible to participate in the Novell,
Inc. 401(k) retirement and savings plan, as amended. The Ximian
plan assets have been rolled into the Novell, Inc. 401(k)
retirement and savings plan.

SUSE had a 401(k) savings plan, to which eligible
employees could contribute up to 100% of their annual
compensation, subject to limitations established by the Internal
Revenue Code of 1986, as amended. SUSE could elect to contribute
a discretionary matching contribution to each such
participants deferred compensation account equal to a
discretionary percentage determined by SUSE. On October 1,
2004, the SUSE 401(k) savings plan was rolled into the Novell
401(k) retirement and savings plan.

Our Celerant subsidiary sponsors a defined
benefit pension plan covering approximately 28 former Celerant
employees. The plan was closed to new members as of
April 5, 1997. Actuarial gains or losses are being
amortized over a 15 year period, and the amortization
charges are included within the overall net periodic pension
costs, which is charged to the income statement. As of
October 31, 2004, the benefit



|                          |   
|------------------------- | --
|Novell annual report 2004 | 83












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

obligation of the plan was approximately
$2.7 million and funded status of the plan was a deficit of
approximately $0.9 million, which was recorded as a
liability.

We also have other retirement plans in certain
foreign countries in which we employ personnel. Each plan is
consistent with local laws and business practices.

Company matching contributions on our 401(k)
savings and retirement plan and other retirement plans were
$20.6 million, $22.7 million, and $18.6 million,
in fiscal 2004, 2003, and 2002, respectively.



|   |                                                                    
|-- | -------------------------------------------------------------------
|T. | Net Income (Loss) Per Share Attributable to
    Common Stockholders

The following table reconciles the numerators and
denominators of the earnings per share calculation for the
fiscal years ended October 31, 2004, 2003, and 2002:

|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |          |         | 
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------- | - | ----------- | ------- | ----------- | - | -------- | ------- |  | - | -------- | ------- | 
|                                                     |                                                                                    |                                              
|                                                     |                                                                                    | Fiscal Year Ended                            
|                                                     |                                                                                    |                                              
|                                                     |                                                                                    | October 31,                                   |   | October 31, |         | October 31,
|                                                     |                                                                                    | 2004                                          |   | 2003        |         | 2002       
|                                                     |                                                                                    |                                               |   |             |         |            
|                                                     |                                                                                    |                                              
|                                                     |                                                                                    | (Amounts in thousands, except per share      
|                                                     |                                                                                    | data)                                        
|Basic net income (loss) per share
    computation:   |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Net income (loss)                                                                  |                                               | $ | 57,188      |         |             | $ | (161,904 | )       |  | $ | (246,823 | )      
|                                                     | Deemed dividend related to beneficial conversion
    feature of preferred stock    |                                               |   | (25,680     | )       |             |   |         |         |  |   |         |        
|                                                     | Dividends on Series B preferred stock                                              |                                               |   | (416        | )       |             |   |         |         |  |   |         |        
|                                                     | Allocation of earnings to preferred stockholders                                   |                                               |   | (274        | )       |             |   |         |         |  |   |         |        
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Net income (loss) attributable to common
    stockholders                          |                                               | $ | 30,818      |         |             | $ | (161,904 | )       |  | $ | (246,823 | )      
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Weighted-average common shares outstanding                                         |                                               |   | 381,100     |         |             |   | 370,545  |         |  |   | 363,569  |        
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Basic net income (loss) per share attributable to
    common stockholders          |                                               | $ | 0.08        |         |             | $ | (0.44    | )       |  | $ | (0.68    | )      
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|Diluted net income (loss) per share
    computation: |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Net income (loss)                                                                  |                                               | $ | 57,188      |         |             | $ | (161,904 | )       |  | $ | (246,823 | )      
|                                                     | Deemed dividend related to beneficial conversion
    feature of preferred stock    |                                               |   | (25,680     | )       |             |   |         |         |  |   |         |        
|                                                     | Dividends on Series B preferred stock                                              |                                               |   | (416        | )       |             |   |         |         |  |   |         |        
|                                                     | Allocation of earnings to preferred stockholders                                   |                                               |   | (274        | )       |             |   |         |         |  |   |         |        
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Net income (loss) attributable to common
    stockholders                          |                                               | $ | 30,818      |         |             | $ | (161,904 | )       |  | $ | (246,823 | )      
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Weighted-average common shares outstanding                                         |                                               |   | 381,100     |         |             |   | 370,545  |         |  |   | 363,569  |        
|                                                     | Incremental shares attributable to the assumed
    exercise of outstanding options |                                               |   | 9,779       |         |             |   |         |         |  |   |         |        
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     |                                                                                    | Total adjusted weighted average common shares |   |             | 390,879 |             |   |          | 370,545 |  |   |          | 363,569 | 
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         
|                                                     | Diluted net income (loss) per share attributable
    to common stockholders        |                                               | $ | 0.08        |         |             | $ | (0.44    | )       |  | $ | (0.68    | )      
|                                                     |                                                                                    |                                               |   |             |         |             |   |          |         |  |   |         

Incremental shares attributable to the assumed
exercise of outstanding options of 2,277,414, and 639,938 have
been excluded from the calculation of diluted net loss per share
for fiscal 2003 and 2002, respectively, as their effect would
have been anti-dilutive due to the net loss incurred in those
periods. Incremental shares



|   |                          
|-- | -------------------------
|84 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

attributable to the assumed conversion of
convertible preferred stock of 3,388,406 have been excluded from
the calculation of diluted earnings per share in fiscal 2004 as
their effect would have been anti-dilutive. Incremental shares
attributable to options with exercise prices that were at or
greater than the average market price (out of the
money) at October 31, 2004, 2003, and 2002 were also
excluded from the calculation of diluted earnings per share as
their effect would have been antidilutive. At October 31,
2004, 2003, and 2002, there were 18,539,606, 50,497,016, and
70,309,436 out of the money options, respectively, that had been
excluded.

As of October 31, 2004, our Debentures are
contingently convertible into 52,074,300 shares of common
stock. Under current accounting literature, the dilutive effect
of these contingently issuable shares of common stock is
included in the calculation of diluted earnings per share only
when the conversion contingencies have been satisfied. Because
none of the conversion contingencies were satisfied during
fiscal year ended October 31, 2004, these contingently
issuable shares were excluded in the determination of diluted
earnings per share.

In November 2004, the EITF reached a final
conclusion on Issue 04-8, Accounting Issues Related
to Certain Features of Contingently Convertible Debt and the
Effect on Diluted Earnings per Share. This issue addresses
when the dilutive effect of contingently convertible debt with a
market price trigger should be included in diluted earnings per
share calculations. The EITFs conclusion is that the
market price trigger should be ignored and that these securities
should be treated as convertible securities and included in
diluted earnings per share regardless of whether the conversion
contingencies have been met. Because our senior convertible
debentures are contingently convertible debt with a market price
trigger, we will be required to comply with EITF Issue 04-8
beginning in the first quarter of fiscal 2005. Had the
conclusions of EITF Issue 04-8 been effective for fiscal
2004, reported earnings per share would not have changed due to
the timing of our issuance of the senior convertible debentures.
However, future earnings per share could be impacted by the
adoption of this standard. For example, had the senior
convertible debentures been outstanding for the fiscal year
ended October 31, 2004, on a pro forma basis our diluted
earnings per share attributable to common stock would have been
$0.07 instead of the reported $0.08 per diluted share and
our weighted average number of shares would have increased by
approximately 52 million shares.



|   |                     
|-- | --------------------
|U. | Comprehensive Income

Our accumulated other comprehensive income (loss)
is comprised of the following:

|                                   |  |                        |        |             |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ----------- |  | - | ----- | 
|                                   |  |                       
|                                   |  | Fiscal Year Ended     
|                                   |  |                       
|                                   |  | October 31,            |        | October 31,
|                                   |  | 2004                   |        | 2003       
|                                   |  |                        |        |            
|                                   |  |                       
|                                   |  | (Amounts in thousands)
|Net unrealized gain on investments |  | $                      | 147    |             |  | $ | 1,499 | 
|Minimum pension liability          |  |                        | (1,256 | )           |  |   |      | 
|Cumulative translation adjustment  |  |                        | 17,289 |             |  |   | 5,569 | 
|                                   |  |                        |        |             |  |   |       | 
|Total other comprehensive income   |  | $                      | 16,180 |             |  | $ | 7,068 | 
|                                   |  |                        |        |             |  |   |       | 



|                          |   
|------------------------- | --
|Novell annual report 2004 | 85












---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Changes to accumulated other comprehensive income
are as follows:

|                                                                                                                                                     |  |                        |        |             |  |             |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------- | -
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | Fiscal Year Ended     
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | October 31,            |        | October 31, |  | October 31,
|                                                                                                                                                     |  | 2004                   |        | 2003        |  | 2002       
|                                                                                                                                                     |  |                        |        |             |  |            
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | (Amounts in thousands)
|Total gross unrealized loss on investments during
    the year, net of tax benefit of $2,670, $941, and $6,408
    respectively                      |  | $                      | (4,251 | )           |  | $           | (1,503 | ) |  | $ | (10,203 | )
|Adjustment for unrealized loss on investment
    impairments                                                                                         |  |                        |       |             |  |             |       |   |  |   | 3,130   |  
|Adjustment for net realized gains on investments
    included in net income (loss), net of tax expense of $1,821,
    $500, and $2,666, respectively |  |                        | 2,899  |             |  |             | 798    |   |  |   | 4,245   |  
|                                                                                                                                                     |  |                        |        |             |  |             |        |   |  |   |         |  
|Net unrealized loss on investments                                                                                                                   |  |                        | (1,352 | )           |  |             | (705   | ) |  |   | (2,828  | )
|Minimum pension liability, net of tax expense of
    $788, $0, and $0, respectively                                                                  |  |                        | (1,256 | )           |  |             |       |   |  |   |        |  
|Cumulative translation adjustments, net of tax
    expense of $7,362, $4,828, and $270, respectively                                                 |  |                        | 11,720 |             |  |             | 7,716  |   |  |   | 430     |  
|                                                                                                                                                     |  |                        |        |             |  |             |        |   |  |   |         |  
|Other comprehensive income (loss)                                                                                                                    |  | $                      | 9,112  |             |  | $           | 7,011  |   |  | $ | (2,398  | )
|                                                                                                                                                     |  |                        |        |             |  |             |        |   |  |   |         |  



|   |                           
|-- | --------------------------
|V. | Related Party Transactions

During 2004 and 2003, we received consulting
services from J.D. Robinson Incorporated. Mr. Robinson, a
director of Novell, is Chairman and Chief Executive Officer and
the sole shareholder of J.D. Robinson Incorporated. The
agreement provides for payments of $0.2 million per year
for these services. In each of fiscal 2004 and 2003, services in
the amount of $0.2 million were provided by J.D. Robinson.



|   |                    
|-- | -------------------
|W. | Segment Information

Beginning November 1, 2002, we reorganized
our operations and began reporting our financial results in four
segments; three are based on geographic areas and the fourth is
Celerant consulting. The geographic segments were Americas,
EMEA, and Asia Pacific. Beginning in fiscal 2004, we separated
our Americas segment into North America and Latin America and
separated Japan from our Asia Pacific segment. We have applied
this presentation to all periods presented for comparability.
Performance is evaluated by our Chief Executive Officer and our
chief decision makers, and is based on reviewing revenue and
segment operating income (loss) information for each of the
geographic segments and for the Celerant consulting segment.

The geographic segments include:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | North America  includes the United
    States and Canada                                                           
|
| |  | EMEA  includes Eastern and Western
    Europe, Middle East, and Africa                                             
|
| |  | Asia Pacific  includes China,
    Southeast Asia, Australia, New Zealand, and India                                
|
| |  | Latin America  includes Mexico,
    Central America, South America and the Caribbean                               
|
| |  | Japan  this geographic segment is a
    majority-owned joint venture between Novell and several other
    companies



|   |                          
|-- | -------------------------
|86 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

All geographic segments sell our software and
services. These offerings are sold in the United States via
direct, OEM, reseller, and distributor channels, and
internationally are sold directly and through distributors who
sell to dealers and end users. Operating results by segment are
as follows:

|                                                                |                                    |                        |           |               |  |             |         |               |   |             |           |               |  |   |         |          |   |   |           |         |  |   |          |          |  
|--------------------------------------------------------------- | ---------------------------------- | ---------------------- | --------- | ------------- |  | ----------- | ------- | ------------- | - | ----------- | --------- | ------------- |  | - | ------- | -------- | - | - | --------- | ------- |  | - | -------- | -------- | -
|                                                                |                                    |                        |           |               |  |            
|                                                                |                                    | Fiscal 2004            |           | Fiscal 2003   |  | Fiscal 2002
|                                                                |                                    |                        |           |               |  |            
|                                                                |                                    |                        |           | Operating     |  |             |         | Operating     |   |             |           | Operating    
|                                                                |                                    | Net Revenue            |           | Income (Loss) |  | Net Revenue |         | Income (Loss) |   | Net Revenue |           | Income (Loss)
|                                                                |                                    |                        |           |               |  |             |         |               |   |             |           |              
|                                                                |                                    |                       
|                                                                |                                    | (Amounts in thousands)
|                                                                | North America                      |                        | $         | 514,477       |  |             | $       | 269,137       |   |             | $         | 507,526       |  |   | $       | 225,471  |   |   | $         | 577,574 |  |   | $        | 272,856  |  
|                                                                | EMEA                               |                        |           | 378,273       |  |             |         | 122,159       |   |             |           | 348,105       |  |   |         | 122,897  |   |   |           | 322,705 |  |   |          | 122,010  |  
|                                                                | Asia Pacific                       |                        |           | 61,774        |  |             |         | 20,116        |   |             |           | 60,141        |  |   |         | 13,229   |   |   |           | 55,027  |  |   |          | 12,287   |  
|                                                                | Latin America                      |                        |           | 21,026        |  |             |         | 1,685         |   |             |           | 24,036        |  |   |         | 4,750    |   |   |           | 26,972  |  |   |          | 6,307    |  
|                                                                | Japan                              |                        |           | 28,304        |  |             |         | 7,089         |   |             |           | 26,359        |  |   |         | 4,055    |   |   |           | 26,810  |  |   |          | 1,531    |  
|                                                                | Common unallocated operating costs |                        |           |              |  |             |         | (350,827      | ) |             |           |              |  |   |         | (381,414 | ) |   |           |        |  |   |          | (382,360 | )
|                                                                |                                    |                        |           |               |  |             |         |               |   |             |           |               |  |   |         |          |   |   |           |         |  |   |          |         
|Total geographic segments                                       |                                    |                        | 1,003,854 |               |  |             | 69,359  |               |   |             | 966,167   |               |  |   | (11,012 | )        |   |   | 1,009,088 |         |  |   | 32,631   |         
|Celerant consulting                                             |                                    |                        | 162,063   |               |  |             | 17,631  |               |   |             | 139,329   |               |  |   | 5,115   |          |   |   | 125,232   |         |  |   | 5,167    |         
|Unallocated integration, impairment and
    restructuring costs |                                    |                        |          |               |  |             | (21,298 | )             |   |             |          |               |  |   | (21,925 | )        |   |   |          |         |  |   | (105,923 | )       
|                                                                |                                    |                        |           |               |  |             |         |               |   |             |           |               |  |   |         |          |   |   |           |         |  |   |          |         
|Total                                                           |                                    | $                      | 1,165,917 |               |  | $           | 65,692  |               |   | $           | 1,105,496 |               |  | $ | (27,822 | )        |   | $ | 1,134,320 |         |  | $ | (68,125  | )       
|                                                                |                                    |                        |           |               |  |             |         |               |   |             |           |               |  |   |         |          |   |   |           |         |  |   |          |         

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

In addition to reviewing geographic and Celerant
consulting segment results, our chief decision makers review net
revenue by solution category. These solution categories are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identity management and web services
    solutions  solutions that help customers with their
    identity management and security issues. Products include
    Identity Manager, eDirectory, Border Manager, iChain, exteNd,
    and Secure Login.                                                                                                                                                   
|
| |  | Cross-platform solutions  solutions
    that offer an effective and open approach to networking and
    collaboration services, including file, print, messaging,
    scheduling, workspace, etc. while using a cross-platform
    approach. Products include NetWare, ZENworks, GroupWise, SUSE
    LINUX Enterprise Server, SUSE LINUX Professional, Novell LINUX
    Desktop, and Novell iFolder®.
|
| |  | Worldwide services  comprehensive
    worldwide IT consulting, training, and support services that
    apply business solutions to our customers business
    situations, providing the business knowledge and technical
    expertise to help our customers implement our identity
    management, web services, and cross-platform services.                                                      
|
| |  | Celerant consulting  operational
    strategy and implementation consulting services offered to a
    wide range of customers across various sectors, worldwide.                                                                                                                                                                                                                                     



|                          |   
|------------------------- | --
|Novell annual report 2004 | 87












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue by Solution Category

|                                        |                                                |                        |           |             |  |             |           |         |  |   |           |         | 
|--------------------------------------- | ---------------------------------------------- | ---------------------- | --------- | ----------- |  | ----------- | --------- | ------- |  | - | --------- | ------- | 
|                                        |                                                |                       
|                                        |                                                | Fiscal Years Ended    
|                                        |                                                |                       
|                                        |                                                | October 31,            |           | October 31, |  | October 31,
|                                        |                                                | 2004                   |           | 2003        |  | 2002       
|                                        |                                                |                        |           |             |  |            
|                                        |                                                |                       
|                                        |                                                | (Amounts in thousands)
|                                        | Identity management and web services solutions |                        | $         | 101,531     |  |             | $         | 96,977  |  |   | $         | 82,610  | 
|                                        | Cross-platform solutions                       |                        |           | 597,475     |  |             |           | 569,859 |  |   |           | 608,750 | 
|                                        |                                                |                        |           |             |  |             |           |         |  |   |           |        
|Total software licenses and maintenance |                                                |                        | 699,006   |             |  |             | 666,836   |         |  |   | 691,360   |        
|Services                                |                                                |                        | 304,848   |             |  |             | 299,331   |         |  |   | 317,728   |        
|                                        |                                                |                        |           |             |  |             |           |         |  |   |           |        
|Total IT software and solutions         |                                                |                        | 1,003,854 |             |  |             | 966,167   |         |  |   | 1,009,088 |        
|Celerant consulting                     |                                                |                        | 162,063   |             |  |             | 139,329   |         |  |   | 125,232   |        
|                                        |                                                |                        |           |             |  |             |           |         |  |   |           |        
|Total net revenue                       |                                                | $                      | 1,165,917 |             |  | $           | 1,105,496 |         |  | $ | 1,134,320 |        
|                                        |                                                |                        |           |             |  |             |           |         |  |   |           |        

Geographic Information

Revenue outside the United States are comprised
of revenue to customers in Europe, Africa, the Middle East,
Canada, South America, Australia, and Asia Pacific. Other than
revenue from Ireland, international revenue was not material
individually in any other international location. Inter-company
revenue between geographic areas is accounted for at prices
representative of unaffiliated party transactions.
U.S. operations include shipments to customers
in the U.S., licensing to OEMs, and exports of finished goods
directly to international customers, primarily in Canada, South
America, and Asia. Irish operations include
shipments from Ireland of product to customers throughout
Europe, the Middle East, and Africa, and licensing to OEMs. The
Irish operation acts as the sales principal and thus records the
revenue on shipments it makes. The Irish operation uses our
other European, Middle Eastern, and African subsidiaries as
commissionaires and commission agents to assist in the sales of
software and in turn pays them a commission. This inter-company
commission is included in the eliminations. Other
international operations primarily includes revenue from
consulting and service contracts.

|                               |                                |                                     |   |             |           |             |   |          |           |  |   |           |           | 
|------------------------------ | ------------------------------ | ----------------------------------- | - | ----------- | --------- | ----------- | - | -------- | --------- |  | - | --------- | --------- | 
|                               |                                |                                    
|                               |                                | Fiscal Year Ended                  
|                               |                                |                                    
|                               |                                | October 31,                         |   | October 31, |           | October 31,
|                               |                                | 2004                                |   | 2003        |           | 2002       
|                               |                                |                                     |   |             |           |            
|                               |                                |                                    
|                               |                                | (Amounts in thousands)             
|Revenue:                       |                                |                                     |   |             |           |             |   |          |           |  |   |          
|                               | U.S. operations                |                                     | $ | 587,710     |           |             | $ | 682,909  |           |  | $ | 711,320   |          
|                               | Irish operations               |                                     |   | 320,624     |           |             |   | 305,697  |           |  |   | 270,126   |          
|                               | Other international operations |                                     |   | 311,799     |           |             |   | 216,364  |           |  |   | 211,001   |          
|                               | Eliminations                   |                                     |   | (54,216     | )         |             |   | (99,474  | )         |  |   | (58,127   | )        
|                               |                                |                                     |   |             |           |             |   |          |           |  |   |          
|                               |                                | Total revenue                       |   | $           | 1,165,917 |             |   | $        | 1,105,496 |  |   | $         | 1,134,320 | 
|                               |                                |                                     |   |             |           |             |   |          |           |  |   |          
|Long-lived assets at year end: |                                |                                     |   |             |           |             |   |          |           |  |   |          
|                               | U.S. operations                |                                     | $ | 715,005     |           |             | $ | 753,712  |           |  | $ | 1,007,391 |          
|                               | Irish operations               |                                     |   | 291,168     |           |             |   | 108,709  |           |  |   | 109,250   |          
|                               | Other international operations |                                     |   | 326,033     |           |             |   | 94,528   |           |  |   | 75,476    |          
|                               | Eliminations                   |                                     |   | (605,048    | )         |             |   | (426,438 | )         |  |   | (520,913  | )        
|                               |                                |                                     |   |             |           |             |   |          |           |  |   |          
|                               |                                | Total long-lived assets at year end |   | $           | 727,158   |             |   | $        | 530,511   |  |   | $         | 671,204   | 
|                               |                                |                                     |   |             |           |             |   |          |           |  |   |          



|   |                          
|-- | -------------------------
|88 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reconciliation of long-lived assets to total
assets is as follows:

|                       |              |                        |           |             |  |             |           |           |  |   |         |           | 
|---------------------- | ------------ | ---------------------- | --------- | ----------- |  | ----------- | --------- | --------- |  | - | ------- | --------- | 
|                       |              | October 31,            |           | October 31, |  | October 31,
|                       |              | 2004                   |           | 2003        |  | 2002       
|                       |              |                        |           |             |  |            
|                       |              |                       
|                       |              | (Amounts in thousands)
|Long-lived assets      |              | $                      | 727,158   |             |  | $           | 530,574   |           |  | $ | 671,204 |          
|Other long-term assets |              |                        | 29,456    |             |  |             | 6,526     |           |  |   | 74,323  |          
|Current assets         |              |                        | 1,534,934 |             |  |             | 1,030,553 |           |  |   | 919,538 |          
|                       |              |                        |           |             |  |             |           |           |  |   |         |          
|                       | Total assets |                        | $         | 2,291,548   |  |             | $         | 1,567,653 |  |   | $       | 1,665,065 | 
|                       |              |                        |           |             |  |             |           |           |  |   |         |          

In fiscal 2004, 2003, and 2002, sales to
international customers were approximately $648.5 million,
$593.1 million, and $551.7 million, respectively. In
fiscal 2004, 2003, and 2002, international sales to the EMEA
segment were 77% 75%, and 73%, of international sales,
respectively. No one foreign country accounted for more than 10%
of total revenue in any period and there were no customers who
accounted for more than 10% of revenue in any period.



|   |                       
|-- | ----------------------
|X. | Derivative Instruments

A large portion of our revenue, expense, and
capital purchasing activities is transacted in
U.S. dollars. We do not currently hedge currency risks
related to revenue or expenses denominated in foreign
currencies. However, we hedge currency risks of some assets and
liabilities denominated in foreign currencies to protect against
reductions in value caused by changes in foreign exchange rates.
We have established balance sheet and intercompany hedging
programs that use one-month foreign currency forward contracts,
primarily on the Euro, Japanese Yen, and certain other European,
Latin American and Asian currencies.

We enter into these one-month hedging contracts
two business days before the end of each month and settle them
at the end of the following month. Due to the short period of
time between entering into the forward contracts and the
quarter-end, the fair value of the derivatives as of
October 31, 2004 is insignificant. Gains and losses
recognized during a quarter on these foreign currency contracts
are recorded as other income or expense and generally offset
corresponding gains and losses on the underlying hedged assets
and liabilities, resulting in negligible effect to our financial
statements.



|   |                  
|-- | -----------------
|Y. | Subsequent Events

On November 8, 2004, Novell announced an
agreement with Microsoft Corporation to settle potential
antitrust litigation related to our NetWare operating system in
exchange for $536 million in cash, which we received on
November 18, 2004. The financial terms of the NetWare
settlement agreement, net of related legal fees, are expected to
result in a pre-tax gain of approximately $448 million in
the first quarter of fiscal 2005. We will account for this
transaction, and any related tax effects, in the first quarter
of fiscal 2005.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 89












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##### Table of Contents



REPORT OF ERNST & YOUNG
LLP,

INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


The Board of Directors and
Stockholders  Novell, Inc.

We have audited the accompanying consolidated
balance sheets of Novell, Inc. and subsidiaries (the Company) as
of October 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
October 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Novell, Inc. and subsidiaries
at October 31, 2004 and 2003, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended October 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Boston, Massachusetts

November 16, 2004




|   |                          
|-- | -------------------------
|90 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.

SELECTED CONSOLIDATED QUARTERLY FINANCIAL
DATA

Unaudited


|                                                                                   |  |                                               |         |         |  |         |          |         |  |             |         |   |  |   |          |   |  |   |           |  
|---------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ------- |  | ------- | -------- | ------- |  | ----------- | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                                                                   |  | First                                         |         | Second  |  | Third   |          | Fourth  |  |            
|                                                                                   |  | Quarter                                       |         | Quarter |  | Quarter |          | Quarter |  | Fiscal Year
|                                                                                   |  |                                               |         |         |  |         |          |         |  |            
|                                                                                   |  |                                              
|                                                                                   |  | (Amounts in thousands, except per share data)
|Fiscal Year Ended October 31,
    2004                                             |  |                                               |         |         |  |         |          |         |  |             |         |   |  |   |          |   |  |   |           |  
|Revenue                                                                            |  | $                                             | 267,107 |         |  | $       | 293,556  |         |  | $           | 304,597 |   |  | $ | 300,657  |   |  | $ | 1,165,917 |  
|Gross profit                                                                       |  |                                               | 172,231 |         |  |         | 187,114  |         |  |             | 200,641 |   |  |   | 190,252  |   |  |   | 750,238   |  
|Income before taxes                                                                |  |                                               | 16,483  |         |  |         | 14,837   |         |  |             | 28,794  |   |  |   | 14,860   |   |  |   | 74,974    |  
|Net income                                                                         |  |                                               | 10,135  |         |  |         | 10,383   |         |  |             | 23,405  |   |  |   | 13,265   |   |  |   | 57,188    |  
|Net income (loss) available to common stockholders                                 |  | $                                             | 10,135  |         |  | $       | (15,399  | )       |  | $           | 23,216  |   |  | $ | 13,140   |   |  | $ | 31,092    |  
|Net income (loss) per common share, basic and
    diluted                          |  | $                                             | 0.03    |         |  | $       | (0.04    | )       |  | $           | 0.06    |   |  | $ | 0.03     |   |  | $ | 0.08      |  
|Fiscal Year Ended October 31,
    2003                                             |  |                                               |         |         |  |         |          |         |  |             |         |   |  |   |          |   |  |   |           |  
|Revenue                                                                            |  | $                                             | 259,971 |         |  | $       | 275,967  |         |  | $           | 282,809 |   |  | $ | 286,749  |   |  | $ | 1,105,496 |  
|Gross profit                                                                       |  |                                               | 162,407 |         |  |         | 167,196  |         |  |             | 151,763 | * |  |   | 185,412  |   |  |   | 666,778   |  
|Income (loss) before taxes                                                         |  |                                               | (12,354 | )       |  |         | (34,984  | )       |  |             | (23,762 | ) |  |   | 16,090   |   |  |   | (55,010   | )
|Net loss                                                                           |  |                                               | (11,888 | )       |  |         | (28,612  | )       |  |             | (12,400 | ) |  |   | (109,004 | ) |  |   | (161,904  | )
|Net loss available to common stockholders                                          |  | $                                             | (11,888 | )       |  | $       | (28,612  | )       |  | $           | (12,400 | ) |  | $ | (109,004 | ) |  | $ | (161,904  | )
|Net income (loss) per common share, basic and
    diluted                          |  | $                                             | (0.03   | )       |  | $       | (0.08    | )       |  | $           | (0.03   | ) |  | $ | (0.29    | ) |  | $ | (0.44     | )
|Fiscal Year Ended October 31,
    2002                                             |  |                                               |         |         |  |         |          |         |  |             |         |   |  |   |          |   |  |   |           |  
|Revenue                                                                            |  | $                                             | 277,859 |         |  | $       | 273,853  |         |  | $           | 282,273 |   |  | $ | 300,335  |   |  | $ | 1,134,320 |  
|Gross profit                                                                       |  |                                               | 160,290 |         |  |         | 161,025  |         |  |             | 172,451 |   |  |   | 191,136  |   |  |   | 684,902   |  
|Income (loss) before taxes                                                         |  |                                               | 11,930  |         |  |         | (32,042  | )       |  |             | 15,498  |   |  |   | (87,611  | ) |  |   | (92,225   | )
|Net income (loss) before accounting change                                         |  |                                               | 8,351   |         |  |         | (29,749  | )       |  |             | 9,949   |   |  |   | (91,672  | ) |  |   | (103,121  | )
|Net income (loss)                                                                  |  |                                               | 8,351   |         |  |         | (173,451 | )       |  |             | 9,949   |   |  |   | (91,672  | ) |  |   | (246,823  | )
|Net income (loss) available to common stockholders                                 |  | $                                             | 8,351   |         |  | $       | (173,451 | )       |  | $           | 9,949   |   |  | $ | (91,672  | ) |  | $ | (246,823  | )
|Net income (loss) per common share before
    accounting change, basic and diluted |  | $                                             | 0.02    |         |  | $       | (0.08    | )       |  | $           | 0.03    |   |  | $ | (0.25    | ) |  | $ | (0.28     | )
|Net income (loss) per common share, basic and
    diluted                          |  | $                                             | 0.02    |         |  | $       | (0.48    | )       |  | $           | 0.03    |   |  | $ | (0.25    | ) |  | $ | (0.68     | )



---



|  |                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Reflects the reclassification of an intangible
    asset impairment loss of $23.6 million to cost of revenue
    from other income (expense) as previously recorded in our
    Form 10-Q for the third quarter of fiscal 2003.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 91












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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

On September 27, 2004, we retained
PricewaterhouseCoopers LLP (PwC) as our independent
registered public accounting firm effective for the fiscal year
2005 beginning November 1, 2004. PwC replaces
Ernst & Young LLP, which we retained to complete the
fiscal year 2004 audit. On September 27, 2004, we filed a
current report on Form 8-K to report this change (as
amended on October 7, 2004).






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

(b) No change in our internal control over
financial reporting occurred during our fourth fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.






|         |                  
|-------- | -----------------
|Item 9B. | Other Information

On January 7, 2005, we entered into a change
in control agreement (the Agreement) with Jack L.
Messman, our President and Chief Executive Officer. Pursuant to
the Agreement, in the event that Mr. Messmans
employment with us were to be terminated without a change in
control, we would provide the following benefits: (i) an
amount equal to two times Mr. Messmans base salary
and target bonus; (ii) a prorated bonus for the year of
termination; (iii) twelve months of continued health and
dental coverage; (iv) one year of accelerated vesting of
Mr. Messmans stock options; (v) one year of
accelerated vesting of Mr. Messmans restricted common
stock; and (vi) reimbursement for outplacement benefits
that are actually provided, not to exceed 20% of
Mr. Messmans base salary. In the event of an
involuntary termination in connection with a change in control,
Mr. Messman would receive the following benefits:
(i) an amount equal to three times Mr. Messmans
base salary and target bonus; (ii) a prorated bonus for the
year of termination; (iii) 36 months of continued
health and dental coverage; (iv) a lump sum cash payment of
what Novell would have paid as matching contributions under the
Novell 401(k) plan for 36 months after
Mr. Messmans termination date; (v) a lump sum
cash payment of what Novell would have paid as premiums under
Mr. Messmans split-dollar life insurance policy for
36 months after Mr. Messmans termination date;
(vi) payment of certain legal fees; (vii) outstanding
restricted common stock, if any, and other equity rights, if
any, will become fully vested; (viii) outstanding stock
options will become fully vested; (ix) a lump sum payment
equal to 20% of Mr. Messmans base salary which may be
used to cover the costs of outplacement assistance; and
(x) if the payments provided to the executive exceed the
amount that triggers the excise tax under section 4999 of the
Tax Code by more than 10%, the payments will be grossed-up.
Mr. Messman also has the right to terminate his employment
for any reason during the 30-day period after the first
anniversary of a change in control and still receive these
benefits. Additionally, the Agreement contains non-competition
and non-solicitation provisions.



|   |                          
|-- | -------------------------
|92 | Novell annual report 2004












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##### Table of Contents






PART III






|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of
    Registrant

The information required with respect to
directors is incorporated herein by reference to the information
contained in the section captioned Election of
Directors of our definitive proxy statement (the
Proxy Statement) for the Annual Meeting of
Stockholders to be held April 14, 2005, to be filed with
the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities and Exchange Act of
1934, as amended (the Exchange Act). The information
with respect to our audit committee financial expert is
incorporated herein by reference to the information contained in
the section captioned Corporate Governance of the
Proxy Statement. We have undertaken to provide to any person
without charge, upon request, a copy of our code of ethics
applicable to our chief executive officer and senior financial
officers. You may obtain a copy of this code of ethics through
our automated telephone access system at 800-317-3195 or by
e-mailing Novells investor relations department at
irmail@novell.com. The information required by this Item
regarding our executive officers is set forth above in
Item 1 in Part I hereof under the heading entitled
Executive Officers which information is incorporated
by reference into this Part III, Item 10.

The information regarding filings under
Section 16(a) of the Exchange Act is incorporated herein by
reference to the section captioned Section 16(a)
Beneficial Ownership Reporting Compliance of the Proxy
Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by Item 11 of
Form 10-K is incorporated by reference to the information
contained in the section captioned Executive
Compensation of the Proxy Statement.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by Item 12 of
Form 10-K is incorporated by reference to the information
contained in the section captioned Securities Ownership by
Principal Stockholders and Management of the Proxy
Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by Item 13 of
Form 10-K is incorporated by reference to the information
contained in the sections captioned Executive
Compensation  Employment Contracts, Termination of
Employment and Change-in-Control Arrangements and
Certain Transactions of the Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by Item 14 of
Form 10-K is incorporated by reference to the information
contained in the sections captioned Principal Accountant
Fees and Services of the Proxy Statement.



|                          |   
|------------------------- | --
|Novell annual report 2004 | 93












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##### Table of Contents






PART IV






|         |                                               
|-------- | ----------------------------------------------
|Item 15. | Exhibits and Financial Statement
    Schedules

(a)      (1.) Financial
Statements:

The following documents are filed as a part of
this Annual Report on Form 10-K for Novell, Inc.:



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Operations for the
    fiscal years ended October 31, 2004, October 31, 2003
    and October 31, 2002.          
|
| | Consolidated Balance Sheets at October 31,
    2004 and October 31, 2003.                                                                  
|
| | Consolidated Statements of Stockholders
    Equity for the fiscal years ended October 31, 2004,
    October 31, 2003 and October 31, 2002.
|
| | Consolidated Statements of Cash Flows for the
    fiscal years ended October 31, 2004, October 31, 2003
    and October 31, 2002.          
|
| | Notes to Consolidated Financial Statements.                                                                                                
|
| | Report of Ernst & Young LLP, Independent
    Registered Public Accounting Firm.                                                            

(2.) Financial Statement Schedules:

The following consolidated financial statement
schedule is included on page 97 of this Form 10-K:

Schedule II  Valuation and
Qualifying Accounts



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedules other than that listed above are
    omitted because they are not required, not applicable or because
    the required information is shown in the consolidated financial
    statements or notes thereto.

(3.) Exhibits:



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A list of the exhibits required to be filed as
    part of this report is set forth in the Exhibit Index on
    page 98 of this Form 10-K, which immediately precedes
    such exhibits, and is incorporated herein by reference.

(b) Exhibits



| |                   
| | ------------------
| | See Item 15(a)(3).

(c) Financial Statement Schedules



| |                   
| | ------------------
| | See Item 15(a)(2).



|   |                          
|-- | -------------------------
|94 | Novell annual report 2004












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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |             
| | ------------
| | Novell, Inc.
| | (Registrant)

Date: January 13, 2005

| |     |                    
| | --- | -------------------
| | By: | /s/ JACK L. MESSMAN

| |                                 
| | --------------------------------
| |                                 
| | Jack L. Messman,                
| | Chairman of the Board, President
| | and Chief Executive Officer     



|                          |   
|------------------------- | --
|Novell annual report 2004 | 95












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##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                                           |  |                                                                                                          |  |                 
|-------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | ----------------
|Name                                                                       |  | Title                                                                                                    |  | Date            
|                                                                           |  |                                                                                                          |  |                 
|/s/
    JACK L. MESSMAN              (Jack
    L. Messman)                 |  | Chairman of the Board, President, Chief Executive
    Officer and Director (Principal Executive Officer) |  | January 13, 2005
|                                                                          
|/s/
    JOSEPH S. TIBBETTS, JR.              (Joseph
    S. Tibbetts, Jr.) |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer)          |  | January 13, 2005
|                                                                          
|/s/
    ALBERT AIELLO              (Albert
    Aiello)                     |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    FRED CORRADO              (Fred
    Corrado)                       |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    RICHARD L. CRANDALL              (Richard
    L. Crandall)         |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    WAYNE MACKIE              (Wayne
    Mackie)                       |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|(Claudine
    B. Malone)                                                   |  | Director                                                                                                 |  |                 
|                                                                          
|/s/
    RICHARD L. NOLAN              (Richard
    L. Nolan)               |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    THOMAS G. PLASKETT              (Thomas
    G. Plaskett)           |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    JOHN W. PODUSKA, SR.              (John
    W. Poduska, Sr.)       |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    JAMES D. ROBINSON, III              (James
    D. Robinson, III)   |  | Director                                                                                                 |  | January 13, 2005
|                                                                          
|/s/
    KATHY BRITTAIN WHITE              (Kathy
    Brittain White)       |  | Director                                                                                                 |  | January 13, 2005



|   |                          
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|96 | Novell annual report 2004












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##### Table of Contents



NOVELL, INC.

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Accounts Receivable Allowance


|                  |                  |                |   |            |  |            |   |             |  |            |   |            |  |           |   |       |  |  |   |        |  |  |   |        |  |  |   |        | 
|----------------- | ---------------- | -------------- | - | ---------- |  | ---------- | - | ----------- |  | ---------- | - | ---------- |  | --------- | - | ----- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                  |                  |                |   | Additions  |  | Additions  |   |             |  | Deductions |   | Deductions |  |          
|                  |                  | Balance at     |   | Charged to |  | Charged to |   | Additions   |  | from       |   | from Bad   |  | Balance  
|                  |                  | Beginning      |   | Return     |  | Bad Debt   |   | from        |  | Return     |   | Debt       |  | at End   
|                  |                  | of Period      |   | Allowances |  | Allowances |   | Acquisition |  | Allowances |   | Allowances |  | of Period
|                  |                  |                |   |            |  |            |   |             |  |            |   |            |  |          
|                  |                  |               
|                  |                  | (In thousands)
|Fiscal year ended |                  |                |   |            |  |            |   |             |  |            |   |            |  |           |   |       |  |  |   |        |  |  |   |        |  |  |   |       
|                  | October 31, 2002 |                | $ | 47,249     |  |            | $ | 30,916      |  |            | $ | 2,819      |  |           | $ | 1,861 |  |  | $ | 32,734 |  |  | $ | 10,435 |  |  | $ | 39,676 | 
|                  | October 31, 2003 |                | $ | 39,676     |  |            | $ | 9,838       |  |            | $ | 2,134      |  |           | $ |      |  |  | $ | 20,527 |  |  | $ | 4,269  |  |  | $ | 26,852 | 
|                  | October 31, 2004 |                | $ | 26,852     |  |            | $ | 30,301      |  |            | $ | 763        |  |           | $ | 2,468 |  |  | $ | 32,854 |  |  | $ | 3,133  |  |  | $ | 24,396 | 



|                          |   
|------------------------- | --
|Novell annual report 2004 | 97












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##### Table of Contents



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                                                              
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 2.1    |             |  | Amendment No. 1 to Agreement and Plan of
    Reorganization, dated as of May 24, 2001, by and among
    Novell, Inc., Ceres Neptune Acquisition Corp. and Cambridge
    Technology Partners (Massachusetts), Inc.(1)(Annex A)
|        | 2.2    |             |  | Agreement and Plan of Merger, dated as of
    June 9, 2002 by and among Novell, Inc., Delaware Planet,
    Inc. and SilverStream Software, Inc.(2)(Exhibit 2.1)                                                              
|        | 3.1    |             |  | Certificate of Incorporation.(3)(Exhibit 3.1)                                                                                                                                                                                
|        | 3.2    |             |  | By-Laws, as amended and restated
    February 26, 2002.(4)(Exhibit 3.2)                                                                                                                                                      
|        | 4.1    |             |  | Reference is made to Exhibit 3.1.                                                                                                                                                                                            
|        | 4.2    |             |  | Form of certificate representing the shares of
    Novell common stock.(5)(Exhibit 4.3)                                                                                                                                      
|        | 4.3    |             |  | Preferred Shares Rights Agreement, dated as of
    December 7, 1988, as amended and restated effective
    September 20, 1999, by and between Novell, Inc. and
    ChaseMellon Shareholder Services, L.L.C.(6)(Exhibit 1)    
|        | 4.4    |             |  | Indenture dated as of July 2, 2004 between
    the Registrant and Wells Fargo Bank, National Association, as
    Trustee.(7)(Exhibit 4.1)                                                                                    
|        | 10.1   |             |  | Registration Rights Agreement dated July 2,
    2004 between the Registrant and Citigroup Global Markets Inc.,
    for itself and on behalf of certain
    purchasers.(7)(Exhibit 10.1)                                      
|        | 10.2*  |             |  | Novell, Inc. 1989 Employee Stock Purchase
    Plan.(8)(Exhibit 4.1)                                                                                                                                                          
|        | 10.3*  |             |  | Novell, Inc. 1991 Stock Plan.(9)(Exhibit 4.1)                                                                                                                                                                                
|        | 10.4*  |             |  | Novell, Inc. 2000 Stock
    Plan.(10)(Exhibit 4.2)                                                                                                                                                                           
|        | 10.5*  |             |  | Novell, Inc. 2000 Stock Option
    Plan.(10)(Exhibit 4.1)                                                                                                                                                                    
|        | 10.6*  |             |  | UNIX System Laboratories, Inc. Stock Option
    Plan.(11)(Exhibit 4.3)                                                                                                                                                       
|        | 10.7*  |             |  | Novell, Inc. Stock Option Plan for Non-Employee
    Directors.(12)(Exhibit 4.1)                                                                                                                                              
|        | 10.8*  |             |  | Novell, Inc./ SilverStream Software, Inc. 1997
    Stock Incentive Plan.(13)(Exhibit 4.2)                                                                                                                                    
|        | 10.9*  |             |  | Novell, Inc./ SilverStream Software, Inc. 2001
    Stock Incentive Plan.(13)(Exhibit 4.3)                                                                                                                                    
|        | 10.10* |             |  | Novell, Inc./ SilverStream Software,
    Inc./eObject, Inc. 2000 Stock Plan.(13)(Exhibit 4.4)                                                                                                                                
|        | 10.11* |             |  | Novell, Inc./ SilverStream Software, Inc./ Bondi
    Software, Inc. Employee Stock Option Plan.(13)(Exhibit 4.5)                                                                                                             
|        | 10.12* |             |  | Novell, Inc. Stock Based Deferred Compensation
    Plan.(14)(Appendix E)                                                                                                                                                     
|        | 10.13* |             |  | Novell, Inc. Stock-Based Deferred Compensation
    Plan  Stock Purchase Assistance Subplan.(15)                                                                                                                             
|        | 10.14* |             |  | Key Employment Agreement dated as of May 22,
    2001 between the Registrant and Jack L.
    Messman.(1)(Exhibit C to Annex A)                                                                                               
|        | 10.15* |             |  | Severance Agreement dated as of January 7,
    2005 between the Registrant and Jack L. Messman.(15)                                                                                                                          
|        | 10.16* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Alan J.
    Friedman.(16)(Exhibit 10.16)                                                                                                       
|        | 10.17* |             |  | Severance Agreement dated as of May 29, 2003
    between the Registrant and Ronald W.
    Hovsepian.(16)(Exhibit 10.17)                                                                                                      
|        | 10.18* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Joseph A.
    LaSala, Jr.(16)(Exhibit 10.18)                                                                                                   



|   |                          
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|98 | Novell annual report 2004












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|        |        |             |  |                                                                                                                            |                                                                                                                        |     
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.19* |             |  | Severance Agreement dated as of February 10, 2003 between the Registrant and Joseph S. Tibbetts, Jr.(16)(Exhibit  10.20)  
|        | 10.20* |             |  | Letter Agreement dated December 15, 1995 between Novell, Inc. and RRE Advisors, LLC.(17)(Exhibit 10.2)                    
|        | 10.21* |             |  | Letter Agreement dated July 14, 2001 between Novell, Inc. and Dennis R. Raney.(18)(Exhibit 10.15)                         
|        | 10.22* |             |  | Novell, Inc. Non-employee Director Compensation Summary.(15)                                                              
|        | 10.23* |             |  | Novell, Inc. Deferred Compensation Plan.(15)                                                                              
|        | 21     |             |  | Subsidiaries of the Registrant.(15)                                                                                       
|        | 23.1   |             |  | Consent of Ernst & Young LLP, Independent Auditors.(15)                                                                   
|        | 31.1   |             |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
|        | 31.2   |             |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(15)
|        | 32.1   |             |  |                                                                                                                            | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (15)
|        | 32.2   |             |  |                                                                                                                            | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (15)



---



| |   |                                                         
| | - | --------------------------------------------------------
| | * | Indicates management contracts or compensatory
    plans



| |     |                                                                                                                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Annex or Exhibit
    identified in parentheses, filed as an annex or exhibit to the
    Proxy Statement-Prospectus forming a part of the Registration
    Statement on Form S-4 (Reg. No. 333-59326) of the
    Registrant, filed April 20, 2001 and amended May 25,
    2001.
|
| | (2) | Incorporated by reference to the Exhibit
    identified in the parentheses, filed as an exhibit to the
    Registrants Report on Form 8-K, filed June 10,
    2002 (File No. 0-13351).                                                                                                                        
|
| | (3) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Quarterly Report on Form 10-Q, filed for
    the fiscal quarter ended April 30, 2004 (File
    No. 0-13351).                                                                               
|
| | (4) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Annual Report on Form 10-K, filed for the
    fiscal year ended October 31, 2002.                                                                                                          
|
| | (5) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-1, filed
    November 30, 1984, and amendments thereto (File
    No. 2-94613).                                                                            
|
| | (6) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Report on Form 8-A, dated
    December 13, 1999 (File No. 0-13351).                                                                                                                        
|
| | (7) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Quarterly Report on Form 10-Q, filed for
    the fiscal quarter ended July 31, 2004 (File
    No. 0-13351).                                                                                
|
| | (8) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    October 12, 2001 (File No. 333-62087).                                                                                                       
|
| | (9) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    May 29, 1996 (File No. 333-04775).                                                                                                           



|     |                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    July 1, 2000 (File No. 333-41328).



|                          |   
|------------------------- | --
|Novell annual report 2004 | 99












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##### Table of Contents





|     |                                                                                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    July 2, 1993 (File No. 33-65440).                               
|    
|(12) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    May 30, 1996 (File No. 333-04823).                              
|    
|(13) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Registration Statement on Form S-8, filed
    August 6, 2002 (File No. 333-97713).                            
|    
|(14) | Incorporated by reference to the Appendix
    identified in parentheses, filed as an exhibit to the Proxy
    Statement of the Registrant filed March 17, 2003.                                                                   
|    
|(15) | Filed herewith.                                                                                                                                                                                                                   
|    
|(16) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Annual Report on Form 10-K, filed for the
    fiscal year ended October 31, 2003 (File No. 0-13351).          
|    
|(17) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Quarterly Report on Form 10-Q, filed for
    the fiscal quarter ended January 31, 2002 (File
    No. 0-13351).
|    
|(18) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Annual Report on Form 10-K, filed for the
    fiscal year ended October 31, 2001 (File No. 0-13351).          



|    |                          
|--- | -------------------------
|100 | Novell annual report 2004