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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

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,
2003

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.    x

The aggregate market value of the
registrants common stock as of April 30, 2003 held by
non-affiliates as of April 30, 2003 (based on the last
reported price of the Common Stock on the Nasdaq National Market
System on such date) was $868,218,232. 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 January 15, 2004 there were
381,927,013 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 15, 2004, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.









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|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1.Business                                                                                        
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|              | Item 9A. Controls and Procedures                                                                       
|PART III     
|              | Item 10. Directors and Executive Officers of Registrant                                                
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Principal Accountants Fees and Services                                                      
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.20
|EXHIBIT 21   
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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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 and
    Related Stockholder Matters                          |  |      | 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                                     |  |      | 41 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 42 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and
    Financial Disclosure       |  |      | 84 | 
|Item 9A. |  | Controls and Procedures                                                                            |  |      | 84 | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 84 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 84 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 84 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 85 | 
|Item 14. |  | Principal Accountants Fees and Services                                                           |  |      | 85 | 
|        
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  |      | 86 | 

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 Exchange Act of 1934, as amended. All statements,
other than statements of historical facts included in this
Annual Report on Form 10-K, regarding our strategy, future
operations, financial position, estimated revenue, projected
costs, prospects, plans, and objectives of management constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As contained
herein, the words expect, anticipate,
believe, intend, will, and
similar types of expressions identify such statements, although
not all forward-looking statements contain these identifying
words. These statements are based on information that is
currently available to the Company, speak only as of the date
hereof, and are subject to certain risks and uncertainties. We
expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our
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 such forward-looking statements. Factors that may cause such
a difference include, but are not limited to, those discussed in
the section in Item 7 entitled Factors Affecting
Future Results of Operations. Readers should carefully
review the risk factors described in this document and in other
documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by the Company in our
fiscal 2004.




PART I




Item 1. Business

The Company

Novell, Inc. has been a thought leader in the
field of computer networking since our development and release
of NetWare® in 1983. Building on this foundation, we
recently acquired two companies that are key players in the
Linux market. As a result of our 20 years of experience as
a leader in the field of computer networking, and the expertise
in the companies that we recently acquired, we believe we employ
some of the best engineers in the world. These engineers, in
collaboration with our consulting professionals, create
world-class information technology (IT) solutions.
We are proud of our people, their skills, and the dedication
they give the company. Leveraging this expertise, we expect to
continue the evolution of our cross-platform strategy and become
a leader in providing cross-platform solutions, web services,
and identity management. During fiscal 2003, we announced our
strategy to support Linux as well as NetWare, giving our
customers a choice by providing Novell® products and
services that run on both NetWare and Linux platforms. Our
solutions leverage our network expertise and the Web to help to
create a world without information boundaries.

Networking is more than connecting computers
together or routing and managing data. Networks are inherently a
varied mix of business process, infrastructure, computer
systems, applications, and other devices. Networking is about
connecting people to each other and the information they need.
We provide business solutions that work across multiple
platforms and are designed to secure and empower the networked
world, help organizations solve complex business challenges,
simplify their systems and processes, and capture new
opportunities. These include software applications that are
developed using open Internet standards, our own
eDirectoryTM network infrastructure products and
consulting services. They support highly distributed network
solutions and capitalize on the growth of the Internet. With
both software and service offerings, we can determine how
business solutions can be optimally used by our customers, and
we can provide the framework and applications for managing,
maintaining, and accessing the information and services of our
customers



|                          |  
|------------------------- | -
|Novell annual report 2003 | 1









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networks. The outcome is a business solution that
helps our customer deliver the right information, to the right
individual, at the right time, and on the right device.


Our training, service and support, and consulting
groups also support our business solutions by providing
worldwide consulting, training, developer, and distribution
channel programs that support our product offerings.

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 Paris, France, telephone number
(33) 1 5669 5300. We conduct primary product
development activities in Provo, Utah; Waltham, Massachusetts;
Cambridge, Massachusetts; Ireland; Germany; and India. We also
contract out some product development activities to third-party
developers. Our website address, where we provide a link to our
previous and current reports as soon as reasonably practicable
after they are filed with the SEC, is
http://www.novell.com/company/shareholder/.

Our Annual Report, SEC filings, earnings
announcements, and other financial information are available on
our Investor Relations website at www.novell.com/ir. Mailed
copies of financial materials 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.

Principal Markets and 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.

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 management consulting, which provides operational
strategy and implementation consulting services.

The geographic segments are:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Americas  includes the United States,
    Canada, and Latin America                       
|
| |  | EMEA  includes Eastern and Western
    Europe, Middle East, and Africa                    
|
| |  | Asia Pacific  includes China, Japan,
    Southeast Asia, Australia, New Zealand, and India

All geographic segments sell our software and
services. Celerant offers management consulting services. Our
software offerings are sold in the United States via direct,
original equipment manufacturer (OEM), reseller, and
distributor channels, and internationally are sold directly and
through distributors who sell to dealers and end users.

Segment disclosures and geographical information
for fiscal years 2003, 2002, and 2001 are presented in
Part II, Item 8, Footnote Q 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 we view
financial information to best evaluate performance and operating
results may also change.

Components of Business Solutions

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



| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identity management and web
    services solutions that
    help customers with their identity management and security
    issues. Products include Secure-Login/ Single Sign-On,
    DirXML®, iChain®,



|  |                          
|- | -------------------------
|2 | Novell annual report 2003









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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | exteNdTM, and BorderManager®.
    Products in this category are branded as NsureTM and
    exteNd. Nsure capabilities redefine security within an
    enterprise by providing policy-based integration between various
    information systems, ensuring that identity is unified across
    those systems, forming a single view of enterprise business
    systems. Nsure brings together four major components:
    directories that hold the personal data used to grant access; a
    management system to add, modify, or delete the data; a security
    system that regulates access; and an auditing system designed to
    ensure company compliance with privacy regulations. Novell
    exteNd provides the software and support needed by customers to
    decouple business processes and information from their limited,
    single-purpose platforms and integrate them, thereby enabling
    collaboration and interaction with other people, systems and
    transactions, inside or outside the organization.
|
| |  | Cross-platform
    services 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, GroupWise®,
    ZENworks®, and Novell iFolder®. Products in this
    category are branded as NterpriseTM. Novell Nterprise
    offerings provide a robust, scalable, dependable service
    infrastructure that supports mixed networks and heterogeneous
    business systems. In addition, our directory-based management
    modules allow customers to manage their entire mixed
    environment  including desktops, servers, and
    devices  from a single, central location.                                                                                                                                                                                                                                                                
|
| |  | Worldwide
    services comprehensive
    worldwide IT consulting, education, 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. Services
    in this category are branded as NgageSM. Novell Ngage
    provides the technical support, planning assistance, and
    training needed to effectively apply technology to solve
    business problems.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Celerant management
    consulting operational
    strategy and implementation consulting services offered to a
    wide range of customers across various sectors, worldwide
    services in this category are branded as Celerant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Product Descriptions

The following management services products
perform the core of our Nterprise solutions set:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NetWare is a product 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.
    NetWare accounted for 30% of our total revenue during fiscal
    2003.                                                                                   
|
| |  | 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. ZENworks products accounted for 10% of our total
    revenue in fiscal 2003.
|
| |  | GroupWise collaboration products offer
    traditional and mobile users support for any communication over
    intranets, extranets and the Internet. GroupWise products
    accounted for 10% of total revenue in fiscal 2003.                                                                                                                                                                         
|
| |  | BorderManager collaboration products are 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.                                                                                                                                                                         



|                          |  
|------------------------- | -
|Novell annual report 2003 | 3









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The following Nterprise product offerings were
added as a result of our acquisitions of SUSE LINUX AG and
Ximian, Inc.:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SUSE® LINUX Enterprise Server is a 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 Openexchange Server is a groupware and
    communication solution that offers tools modern enterprises and
    organizations need for communication: email server, web server,
    groupware, collaboration, and messaging. It contains superior
    technical features, hardware independence, smooth migration, and
    a wide range of supported clients and various web browsers.
|
| |  | SUSE LINUX Desktop is a desktop operating system
    which includes office applications and email. It provides a
    flexible platform to accommodate the needs of the typical
    user  ranging from standard environments up to Thin
    Client functionality for use with legacy servers.                                                                                                   
|
| |  | Ximian® Red CarpetTM provides
    software management for systems running Linux, allowing users to
    install, update and manage software on Linux workstations and
    servers. It also simplifies the ability to update and manage
    Linux desktops with package inventory, update history and remote
    operation as well as offering a broad choice of client
    interfaces.           
|
| |  | Ximian Desktop is a complete enterprise Linux
    desktop. It provides full desktop productivity for Linux users,
    featuring an integrated suite of applications that delivers
    support for Windows file formats, networks and standards.                                                                                                                                                 

The following directory services products make up
our identity management solutions set known as Nsure:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | eDirectory is a full-service,
    platform-independent directory, which significantly simplifies
    the complexities of managing users and resources in a mixed
    Win2000, NT, NetWare, UNIX and Linux 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.
|
| |  | 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 ensuring that trusted e-business customers, partners,
    and suppliers are accessing consistent information, regardless
    of the applications and directories to which they have access.
|
| |  | 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 Net.                                                                           
|
| |  | Single Sign-On  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.                                                                                                                                                                    

The following directory services products make up
our identity management and web services solutions set known as
exteNd:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | exteNd DirectorTM, which provides
    interaction and portal services applications for the Web.
|
| |  | exteNd ComposerTM, which provides
    business process management XML integration services.    



|  |                          
|- | -------------------------
|4 | Novell annual report 2003









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| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | exteNd WorkbenchTM, which simplifies
    and accelerates the development of customer applications and
    increases developer productivity with automatic code completion,
    fast editing tools, conversion tools for updating projects to
    new standards, and support for source control.
|
| |  | exteNd Application Server, which provides a
    complete foundation for building and deploying cross-platform,
    high-performance, Web-based applications using J2EE.                                                                                                                        

The following product-related service, support
and training offerings are a key component of our
NgageSM solutions set:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Novell training services include networking
    certification such as Certified Novell EngineerSM
    (CNE®) and Certified Directory Engineer® (CDESM).
    Training also offers education to end users through nearly 700
    independent Novell Authorized Education CentersSM
    (NAECSM) and 600 Novell Education Academic
    PartnersSM (NEAPSM) worldwide.                                                                                                                                                           
|
| |  | Novell Technical ServicesTM offers a
    wide variety of flexible support offerings, bringing critical
    network issues to a quick and efficient resolution. Premium
    Services includes around-the-clock direct access to
    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. Technical Services accounted for 12%
    of total revenue in fiscal 2003.

Acquisitions

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 expands 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 (stack)
available.

On August 4, 2003, we acquired Ximian, Inc.
(Ximian), a privately-held company and leading
provider of desktop and server solutions that enable enterprise
Linux adoption. The acquisitions of both Ximian and SUSE expand
our ability to support Linux solutions, providing us with Linux
desktop, groupware and management technologies. These
acquisitions also bring leaders in the open source community and
a strong core of Linux developers to Novell.

On July 19, 2002, we acquired SilverStream
Software, Inc. (SilverStream), a technology company
whose products complemented our existing identity management
products and helped us to grow our web services product
offerings.

Strategy

Our strategy is to provide solutions that help
our customers address their information needs. A significant
aspect of our overall corporate strategy is to embrace the open
source movement, specifically, the Linux operating system. This
strategy benefits our customers by giving them expanded system
and platform alternatives and by providing them with our
trusted, proven expertise in both enterprise software and
services so they can deploy Linux strategically. Our strategies
regarding Linux and open source and each of our four solution
categories are as follows:

Linux
and open source



| |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Open source is a term used to describe software
    source code made available under a license that generally allows
    use, modification, and distribution of the code without
    obligations of payment or confidentiality, provided that the
    terms of the license are complied with. These licenses are
    typically presented in the source code itself or in an
    accompanying file, and no signatures are required.



|                          |  
|------------------------- | -
|Novell annual report 2003 | 5









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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy in this area is to provide safe,
    secure, and reliable services on Linux from the server to the
    desktop. Our intent is to use our significant engineering and
    support resources to help customers adopt Linux with more
    confidence, 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. Now that we
    have completed our acquisition of SUSE, we believe we are the
    only vendor who provides a full range of industry-leading Linux
    services, including servers, a comprehensive desktop with an
    office productivity suite, system management tools, a
    standard-based development environment, and security and
    collaborations solutions. Our Linux offerings are designed to
    run on the leading commercial Linux distributions, Red Hat and
    SUSE Linux.
|
| | We will continue to offer services on the NetWare
    kernel to our customers and offer an alternative to those
    customers who want to take a Linux path.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Identity
management and web services



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy in this area is to go beyond
    traditional security measures that protect the borders of an
    enterprise to offer Nsure products that manage and protect all
    information assets. Our goal is to enable IT operations
    personnel to centralize and simplify security operations. This
    gives the technical staff access to a single security system
    that could change any resource ad hoc or automatically in
    response to rules-based policies. In addition, our strategy is
    to provide greater flexibility and lower the costs associated
    with the construction and integration of application
    functionality across disparate systems by enabling the reuse of
    existing databases and software applications without the need to
    rewrite them, through our exteNd products. A key strategic point
    is our support of both of todays most popular application
    development environments, helping customers leverage available
    in-house skills and making it easier to transfer existing
    applications from one platform to another.

Cross-platform
services



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy in this area is to offer Nterprise
    operational services  like file, print, messaging,
    calendaring, virtual office, etc.  that run
    cross-platform and add value in any information systems
    environment. We are taking the next step in our open,
    cross-platform computing strategy by extending and strengthening
    our ability to sell and support Linux in addition to NetWare.
    Over the past year, we have increasingly demonstrated our
    commitment to the open source development model, embraced open
    source technologies in our product offerings, and invested
    significant energy and resources in key open source initiatives.

Worldwide
services



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy in this area is to offer directly,
    or through our business partners, Ngage services focused on
    reducing impediments to technology deployment in the enterprise.
    We utilize our consulting capabilities that help customers
    determine the viability, necessity and value associated with the
    introduction of new technologies. Our strategy is to offer
    services that include comprehensive IT inventories, operational
    recommendations, optimized designs, migration planning, and
    rapid technology implementation. Our strategy will then be to
    provide full systems documentation, knowledge transfer,
    technical training, and full technical support. Another
    strategic focus is to ensure that our customers receive
    high-quality consulting assistance by offering training in these
    capabilities to our business partners.

Celerant
management consulting



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy in this area 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 extensive experience and strong relationships in
    the energy, manufacturing telecommunications and process
    industries. We will



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | also strive to build on our recent successes in
    the pharmaceuticals, retail, and utilities industries, among
    others. Some of our recent growth stems from a select set of
    alliances. We expect to continue to pursue this and other
    business development channels. While the scope of our work and
    our people are truly global, we will continue to base our core
    operations in North America and Europe in the near term.

Training and Support Programs

Technical Support:We provide phone-based, web-based, and
onsite technical support for our products, including Linux,
through five Premium Support programs. Premium Support provides
customers with services that may include stated response times,
around-the-clock support, service account management, and
dedicated resources. We have committed more technical support
resources to the Linux open source platform than any other major
Linux distribution vendor. We also offer a full array of remote
monitoring services and managed services. These services help
customers increase system uptime by using Novell experts to
monitor and maintain Novell technologies.

Technical Support Alliance:In May 1991, Novell and 40 other
software and technology companies announced the formation of the
Technical Support Alliance (TSA). The TSA was
organized to provide one-stop multi-vendor support. Member
companies provide cooperative efforts to support their
customers. Current membership consists of over 130 companies
worldwide, including Apple, Compaq, Hewlett-Packard, Intel, IBM,
Microsoft, and Oracle.

Training Services:Through our Training Services, we
offer both instructor-led and remote solutions directly to
customers and through our global channel of authorized Novell
training partners. These courses provide customers with a
thorough understanding of the implementation, configuration, and
administration of various Novell products. Additionally, they
offer a consultative Technical Skills Assessment and evaluation
of our customers proficiency and knowledge gaps. Training
Services also provides Advanced Technical TrainingTM
at an engineering level to customers on a global basis.

Certified Novell
EngineerSM(CNE) Program:Through the
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 Engineer (CLE)
Program:Announced in 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.

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. A partial list of our strategic alliances
includes: BearingPoint (formerly KPMG Consulting), Dell
Corporation, Deloitte & Touche, EMC, Hewlett-Packard, IBM,
Intel, PricewaterhouseCoopers, SAP and Siebel Systems. The
combination of our powerful technology and solutions delivery
capability with the carefully integrated skills and competencies
of our partners, allows us to go to market with enhanced
capability.

Application Partners and Resellers.We work closely with application
developers to provide integrated software products and support
for end users. This program is designed to help assure broad
availability of well-integrated, multi-vendor software
applications.

Enterprise Consulting Partners.Leading systems integrators and
consulting organizations work with us to deliver distributed
client/server solutions for customers with large enterprise-wide
networks.



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Worldwide Service and Support.We are committed to providing service
and support on a worldwide basis to our resellers and to our
end-user customers. We have established agreements with
third-party service vendors to expand and complement the service
provided directly by our service personnel and our resellers.

Multiple Channel Distribution Network.We market and deliver our products
through a broad range of distributors, dealers, value-added
resellers (VARs), systems integrators, and OEMs, as
well as to major end users.

Product Development

Due to the rapid pace of technological change in
our industry, we believe that our future success will depend, in
part, on our ability to enhance and develop our business
solutions in a manner that satisfactorily meets dynamic market
needs. Product development expenses for the fiscal years 2003,
2002, and 2001 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.

Our strategy has resulted in greater direct
interaction between the product development groups and
customers. Our acquisition of Cambridge Technology Partners,
Inc. (Cambridge) in 2001, provided our consulting
operations with increased ability to better integrate our
products and consulting within the customers business and
to provide the solutions our customers require. It has also led
to increased interaction between business groups within our
organization, resulting in better solutions for customers.
Software developers work with consulting and support to solve
specific customer problems and in the process generate
integrated solutions that can be used more broadly.

Product development activities are placed
strategically throughout the world to develop, translate, test,
and meet the needs of our customers worldwide. 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 been
expanded.

Sales and Marketing

We sell business solutions that deliver identity
management (Nsure), web services (exteNd) and cross-platform
networking services (Nterprise), all supported by worldwide
strategic consulting and professional services (Ngage). This is
accomplished via our go to market model (entitled Clear
Channel) with value add 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 offices in Waltham,
Massachusetts, and Provo, Utah, and from our 35 U.S. and
76 international sales offices.

Distributors.We
have established a network of independent distributors who sell
our products to resellers, dealers, VARs, and computer retail
outlets. As of December 31, 2003, there were two
U.S. distributors and approximately 40 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.

OEMs.We license
subsets of products to domestic and international OEMs for
integration with their products and/or solutions.

End-User Customers.We have 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.



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International Revenue.In fiscal 2003, 2002, and 2001,
approximately 54%, 49%, and 44%, respectively, of our revenue
was from customers outside the U.S. Approximately 23% of all
international revenue was invoiced by us in U.S. dollars.
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.

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, other
C level officers, and other customer management,
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. We have improved
our support materials that we provide to our channel partners
and distributors. In April 2003, the eighteenth annual
BrainShare® Conference was held to inform and educate
developers about our product strategy, our open architecture
programming interfaces, and our third-party product
certification programs. 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.

Major Customers

None of our customers accounted for more than 10%
of our revenue in fiscal years 2003, 2002, or 2001.

Manufacturing Suppliers

Our physical products, which consist primarily of
compact diskettes and manuals, are duplicated by outside
vendors. This allows us to minimize the need for expensive
capital equipment. 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
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.

Competition

Geographic segments

The market for networking applications and
solutions as well as IT consulting 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 operating segments include: our ability to sell both
products and services as part of an overall solution; the
breadth of our



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offerings; the pricing of our products and
services; and the timing and market acceptance of new solutions
developed by us and our competitors. In addition to these
factors, other key competitive factors include brand and product
awareness; the performance, reliability, and security of our
products; the ability to preserve our legacy customer base; the
completeness of our suite of product and solutions offerings;
our ability to establish and maintain key strategic
relationships with distributors, resellers, and other partners;
and the pricing strategies of our competitors. Our key
competitors in our geographic segments include Microsoft Corp.
(Microsoft), International Business Machines
Corporation (IBM), Sun Microsystems, Inc.
(Sun), Altiris, Inc., Netegrity, Inc., and Computer
Associates. Our competitors in the Linux market include BEA
Systems, Inc., Red Hat, Inc. (Red Hat), and
Turbolinux, Inc. One pervasive factor facing 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. 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 will
not significantly affect Microsofts practices. This
concern seems increasingly to be shared by the Department of
Justice and the litigating states. For example, in the past,
Microsoft has employed tactics that limit or block effective and
efficient interoperability between Novell and Microsoft
products. At the most recent status conference in U.S. v.
Microsoft held on January 23, 2004, the Department of
Justice expressed concern that the license Microsoft is offering
for its communications protocols, as required by the court to
facilitate interoperability, might not be having the desired
effect of fostering competition. We will ensure, to the best of
our ability that our products will interoperate with those of
Microsoft as they enhance operating systems and applications.


Celerant management consulting
segment

The key competitive factors faced by the Celerant
segment are attracting and retaining the highest quality
consultants; the depth of our skills and expertise; the breadth
of 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 possible competitors include:
A.T. Kearney, McKinsey & Co., Thomas Group Inc.,
IBM Services, Cap Gemini, 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, copyrights, and
trademarks as a whole are material to our business; no one piece
of intellectual property is critical to our business, so no
individual piece is discussed on its own. 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. We also have a concern that
computer industry companies that have huge financial resources
and patent portfolios, such as Lucent, AT&T, Microsoft, Sun,
and IBM, will assert patent infringement claims against smaller
companies such as ours. We also have a concern that we will face
more frequent patent infringement claims from patent licensing
agencies because it has become more common for such agencies to
be able to find attorneys who are willing to represent them or
their clients on a contingency basis. While we have no reason to
think we would not have strong defenses to such claims, the cost
and time of defending any such claims could be significant.
Although we intend to protect our patent rights vigorously,
there can be no assurance that these measures will be successful
or that the claims in any patents held by us will be
sufficiently broad to protect our technology. In



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addition, no assurance can be given that any
patents issued to us will not be challenged, invalidated or
circumvented or that the rights granted hereunder will provide
us with competitive advantages. The loss of patent protection on
our technology or the circumvention of our patent protection by
competitors could have a material adverse effect on our ability
to compete successfully.


The software industry is characterized by
frequent litigation regarding copyright, patent, and other
intellectual property rights. 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 that are expected 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 third party 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.

Although we do incorporate software we license
from third parties into our products and our solutions, no one
license is critical to our business.

Seasonality

All four 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 in
the software industry.

Employees

As of December 31, 2003, we had
5,734 permanent and temporary employees. The functional
distribution of our employees was: sales and
marketing  1,232; product development 
1,466; general and administrative  747; and service,
consulting, training, and operations  2,289. Of
these, 2,960 employees are in locations outside the U.S. All of
our other 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.

Even in light of the current economic downturn,
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.



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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         |  |     | 63 |          |  | Chairman of the Board, President and Chief
    Executive Officer
|Joseph S. Tibbetts, Jr. |  |     | 51 |          |  | Senior Vice President, Chief Financial Officer                  
|Alan J. Friedman        |  |     | 56 |          |  | Senior Vice President, People                                   
|Joseph A. LaSala, Jr.   |  |     | 49 |          |  | Senior Vice President, General Counsel and
    Secretary        
|Christopher Stone       |  |     | 46 |          |  | Vice Chairman, Office of the CEO                                
|Ronald W. Hovsepian     |  |     | 42 |          |  | President, Novell North America                                 
|Gerard Van Kemmel       |  |     | 64 |          |  | 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 the
Cambridge acquisition 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., 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 in connection with joining 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. Tibbets 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. Prior to that, 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 the
Cambridge acquisition. 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.

Joseph
A. LaSala, Jr.

Joseph A. LaSala, Jr. became Senior Vice
President, General Counsel and Secretary of Novell in July 2001
in connection with the Cambridge acquisition. 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 Union Pacific Resources Group Inc. from
January



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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.




| |                  
| | -----------------
| | Christopher Stone

Christopher Stone joined Novell in March 2002 as
Vice Chairman, Office of the CEO. From January 2000 until March
2002, Mr. Stone served as President and Chief Executive
Officer of Tilion, Inc., a software company that he founded,
which provides event management solutions for logistics and
supply chain managers. Prior to founding Tilion, Mr. Stone
served as our Vice President for Strategy and Development from
September 1997 to October 1999. Prior to joining our team, from
September 1989 to September 1997, Mr. Stone served as the
Chief Executive Officer of Object Management Group, a software
development standardization group that he founded and that
established the software standard CORBA.



| |                    
| | -------------------
| | 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.



| |                  
| | -----------------
| | Gerard Van Kemmel

Gerard Van Kemmel joined Novell as President,
Europe, Middle East, Africa (EMEA) in July 2001 in
connection with the Cambridge acquisition. Prior to that,
Mr. Van Kemmel joined Cambridge in November 1997 in
connection with Cambridges acquisition of Peter Chadwick
Holdings Limited, a strategic management consulting firm.
Mr. Van Kemmel served as Cambridges Senior Vice
President, Cambridge Management Consulting from November 1997
until June 1999, and served as Cambridges Executive Vice
President and Chief Operating Officer from June 1999 until July
2001. Prior to joining Cambridge, Mr. Van Kemmel was
Chairman of Continental Europe for Peter Chadwick Holdings
Limited from July 1997 to November 1997. From 1966 until 1996,
Mr. Van Kemmel was employed by Andersen Consulting, a
systems integration consulting firm that is now known as
Accenture, holding many positions, including France Andersen
Managing Partner, Worldwide Executive Committee member and
Chairman of the Andersen Worldwide Board. Mr. Van Kemmel
also served as a senior advisor to the French Minister of
Finance from 1996 to January 1997.






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

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 executive and
administrative offices, and also functions as our primary
product development center.

We also own 218,873 square feet of office
space in a business complex in Orem, Utah. We lease
112,244 square feet of the owned space in Orem, Utah to
various tenants. We have the ability to build on our land in
Provo and Orem, Utah.

In addition, we own a 380,000 square-foot
manufacturing and distribution facility on 23 acres in Lindon,
Utah, 338,000 square feet of which is leased to a third party.



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|Novell annual report 2003 | 13









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We lease and occupy a 105,324 square-foot
office building in Waltham, Massachusetts, which is the location
of our corporate headquarters and principal executive offices
and is also used for product development.

In addition, we lease a 177,226 square-foot
office building in Cambridge, Massachusetts, of which
approximately 133,014 square-feet is subleased with
approximately 22,512 square-feet unoccupied. We assumed the
lease of a 100,000 square foot facility in Billerica,
Massachusetts, in conjunction with the SilverStream acquisition.
This facility is currently unoccupied.

We lease sales and support offices in Arizona,
California, Colorado, Connecticut, Florida, Georgia, Illinois,
Massachusetts, Michigan, Minnesota, Missouri, New York, Ohio,
Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, and
Washington.

Internationally, we own an
84,650 square-foot office building in the 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 21,057 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, UK, which is used as Celerant headquarters
and administrative offices, and an 80,000 square-foot
facility in Bangalore, India, which is used as a product
development center.

In conjunction with the SUSE acquisition, we
assumed the leases of various facilities in Germany totaling
182,000 square feet.

We have subsidiaries in Argentina, Australia,
Austria, Belgium, Brazil, Canada, 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 21 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 February 1998, a suit was filed in the U.S.
District Court, District of Utah, against us and certain of our
officers and directors, alleging violation of federal securities
laws by concealing the true nature of our financial condition
and seeking unspecified damages. The lawsuit was brought as a
purported class action on behalf of purchasers of our common
stock from November 1, 1996 through April 22, 1997.
After a first dismissal of the suit on November 3, 2000 and
a subsequent amendment to the complaint filed on
February 20, 2001, the U.S. District Court dismissed the
amended complaint with prejudice for failure to state a claim.
Much of the District Courts Order of Dismissal was
recently affirmed by the Tenth Circuit Court of Appeals while
certain claims were remanded for the District Courts
further review. Novell believes it has meritorious defenses to
these remaining claims. While there can be no assurance as to
the ultimate disposition of the lawsuit, we do not believe that
the resolution of this litigation will have a material adverse
effect on our financial position, results of operations or cash
flows.

SilverStream and several of its former officers
and directors, as well as the underwriters who handled
SilverStreams two public offerings, were named as
defendants in several class action complaints that were filed on
behalf of certain former stockholders of SilverStream who
purchased shares of SilverStream common stock between
August 16, 1999 and December 6, 2000. These complaints
are closely related to several hundred other complaints that the
same plaintiffs have brought against other issuers and
underwriters. These



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complaints all allege violations of the
Securities Exchange Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. In particular, they allege,
among other things, that there was undisclosed compensation
received by the underwriters of the public offerings of all of
these issuers, including SilverStreams. The plaintiffs are
seeking monetary damages, statutory compensation and other
relief that may be deemed appropriate by the court. While Novell
believes that SilverStream and its former officers and directors
have meritorious defenses to the claims, a Memorandum of
Understanding has been reached between many of the defendants
and the plaintiffs which contemplates a settlement of the
claims. The finalization of any settlement, however, has not
been completed. 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 2002, France Telecom SA and U.S. Philips
Corporation, alleged co-owners of a U.S. patent, filed suit in
the U.S. District Court, District of Delaware, against Novell.
The plaintiffs allege that Novells NetWare client software
infringes the patent. In the suit, the plaintiffs seek
unspecified monetary damages and an injunction prohibiting
infringement of the patent. 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.

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. SCO alleges
that our public statements and filings regarding the ownership
of the copyrights in UNIX and UnixWare have harmed SCOs
business reputation and affected its efforts to protect its
ownership interest in UNIX and UnixWare. SCO seeks to require us
to assign all copyrights that we have registered in UNIX and
UnixWare to SCO, to prevent us from representing that we have
any ownership interest in the UNIX and UnixWare copyrights, to
require us to withdraw all representations we have made
regarding our ownership of the UNIX and UnixWare copyrights, and
actual, special and punitive damages in an amount to be proven
at trial. We believe that we have meritorious defenses to these
claims and intend to vigorously defend ourselves in this suit.
Although there can be no assurance as to the ultimate
disposition of the suit, we do not believe that the resolution
of this litigation will have a material adverse effect on our
financial position, results of operations or cash flows.






|        |                                                        
|------- | -------------------------------------------------------
|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 2003 | 15









---



##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

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 2003 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |      
|            | High |         | $ | 3.980   |  |         | $ | 3.290   |  |  | $ | 3.850 |  |  | $ | 6.350 | 
|            | Low  |         | $ | 2.630   |  |         | $ | 2.150   |  |  | $ | 2.720 |  |  | $ | 3.460 | 
|Fiscal 2002 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |      
|            | High |         | $ | 5.580   |  |         | $ | 5.170   |  |  | $ | 3.910 |  |  | $ | 2.860 | 
|            | Low  |         | $ | 3.710   |  |         | $ | 3.590   |  |  | $ | 2.170 |  |  | $ | 1.580 | 

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 9,080 stockholders of record at
January 15, 2004.



|   |                          
|-- | -------------------------
|16 | Novell annual report 2003









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##### Table of Contents








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

|                                                          |         |                                               |           |             |   |             |           |             |   |             |           |       |   |   |           |      |  |   |           |      | 
|--------------------------------------------------------- | ------- | --------------------------------------------- | --------- | ----------- | - | ----------- | --------- | ----------- | - | ----------- | --------- | ----- | - | - | --------- | ---- |  | - | --------- | ---- | 
|                                                          |         |                                              
|                                                          |         | Fiscal Year Ended                            
|                                                          |         |                                              
|                                                          |         | October 31,                                   |           | October 31, |   | October 31, |           | October 31, |   | October 31,
|                                                          |         | 2003                                          |           | 2002        |   | 2001        |           | 2000        |   | 1999       
|                                                          |         |                                               |           |             |   |             |           |             |   |            
|                                                          |         |                                              
|                                                          |         | (Amounts in thousands, except per share data)
|Statement of operations                                   |         |                                               |           |             |   |             |           |             |   |             |           |       |   |   |           |      |  |   |           |     
|Revenue                                                   |         | $                                             | 1,105,496 |             |   | $           | 1,134,320 |             |   | $           | 1,050,796 |       |   | $ | 1,161,735 |      |  | $ | 1,272,820 |     
|Gross profit                                              |         |                                               | 666,778   |             |   |             | 684,902   |             |   |             | 712,162   |       |   |   | 834,337   |      |  |   | 974,979   |     
|Income (loss) from operations                             |         |                                               | (27,822   | )           |   |             | (68,125   | )           |   |             | (120,813  | )     |   |   | (31,582   | )    |  |   | 223,052   |     
|Income (loss) before taxes                                |         |                                               | (55,010   | )           |   |             | (92,225   | )           |   |             | (276,766  | )     |   |   | 70,672    |      |  |   | 243,836   |     
|Income tax expense (benefit)                              |         |                                               | 106,894   |             |   |             | 10,896    |             |   |             | (14,944   | )     |   |   | 21,202    |      |  |   | 53,089    |     
|Net income (loss) before accounting change                |         |                                               | (161,904  | )           |   |             | (103,121  | )           |   |             | (261,822  | )     |   |   | 49,470    |      |  |   | 190,747   |     
|Cumulative effect of accounting change, net of
    tax(a) |         |                                               |          |             |   |             | (143,702  | )           |   |             | (11,048   | )     |   |   |          |      |  |   |          |     
|Net income (loss)                                         |         | $                                             | (161,904  | )           |   | $           | (246,823  | )           |   | $           | (272,870  | )     |   | $ | 49,470    |      |  | $ | 190,747   |     
|Net income (loss) per share:                              |         |                                               |           |             |   |             |           |             |   |             |           |       |   |   |           |      |  |   |           |     
|                                                          | Basic   |                                               | $         | (0.44       | ) |             | $         | (0.68       | ) |             | $         | (0.82 | ) |   | $         | 0.15 |  |   | $         | 0.57 | 
|                                                          | Diluted |                                               | $         | (0.44       | ) |             | $         | (0.68       | ) |             | $         | (0.82 | ) |   | $         | 0.15 |  |   | $         | 0.55 | 
|Balance sheet                                             |         |                                               |           |             |   |             |           |             |   |             |           |       |   |   |           |      |  |   |           |     
|Cash and short-term investments                           |         | $                                             | 751,852   |             |   | $           | 635,858   |             |   | $           | 705,243   |       |   | $ | 698,193   |      |  | $ | 895,404   |     
|Working capital                                           |         |                                               | 404,095   |             |   |             | 328,031   |             |   |             | 416,463   |       |   |   | 552,281   |      |  |   | 895,984   |     
|Total assets                                              |         |                                               | 1,567,653 |             |   |             | 1,665,065 |             |   |             | 1,904,006 |       |   |   | 1,712,346 |      |  |   | 1,942,319 |     
|Long-term obligations                                     |         |                                               |          |             |   |             |          |             |   |             |          |       |   |   |          |      |  |   |          |     
|Stockholders equity                                      |         | $                                             | 934,470   |             |   | $           | 1,065,542 |             |   | $           | 1,270,667 |       |   | $ | 1,245,085 |      |  | $ | 1,492,241 |     




|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 2003 | 17









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##### Table of Contents








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

Introduction

Novell, Inc. has been a thought leader in the
field of computer networking since our development and release
of NetWare® in 1983. Building on this foundation, we
recently acquired two companies that are key players in the
Linux market. As a result of our 20 years of experience as
a leader in the field of computer networking, and the expertise
in the companies that we recently acquired, we believe we employ
some of the best engineers in the world. These engineers, in
collaboration with our consulting professionals, create
world-class information technology (IT) solutions.
We are proud of our people, their skills, and the dedication
they give the company. Leveraging this expertise, we expect to
continue the evolution of our cross-platform strategy and become
a leader in providing cross-platform solutions, web services,
and identity management. During fiscal 2003, we announced our
strategy to support Linux as well as NetWare, giving our
customers a choice by providing Novell® products and
services that run on both NetWare and Linux platforms. Our
solutions leverage our network expertise and the Web to help to
create a world without information boundaries.

On January 12, 2004, we acquired SUSE, a
privately-held company and leading distributor of commercial
Linux for enterprise servers. The acquisition of SUSE expands
our ability to support and distribute a complete package of
Linux solutions and provides us the ability to offer the most
complete open source application stack available.

On August 4, 2003, we acquired Ximian, a
privately-held company and leading provider of desktop and
server solutions that enable enterprise Linux adoption. The
acquisition of Ximian expands our ability to support Linux
solutions, providing us with Linux desktop, groupware and
management technologies. The acquisition also brings leaders in
the open source community and a strong core of Linux developers
to Novell.

With the acquisitions of SUSE and Ximian, we
believe we will be the only vendor who can provide complete,
industry-leading network services on Linux from the server to
the desktop, giving organizations a safe, secure, reliable,
mature, and proven approach with worldwide enterprise-level
support for investing in Linux.

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.Revenue from software license fees is
recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or
determinable and collection is probable. If the fee due from the
customer is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collection is not
considered probable, revenue is recognized when the fee is
collected. 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, support and
other similar services, is recognized as services are performed.
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. Revenue recognized on multiple-element arrangements is
allocated to each element of the arrangement based on the
relative fair values of the elements, which may include software
products, unspecified product upgrade protection, software
support services, consulting, and training. Fair value is
determined by vendor-specific objective evidence of the



|   |                          
|-- | -------------------------
|18 | Novell annual report 2003









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##### Table of Contents



price charged to other customers when each
element is sold separately. We have established sufficient
vendor-specific objective evidence of the fair value of all
elements of a multiple element arrangement.


Consulting 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 fixed-price
contracts is recognized using the proportional performance
method, using the estimated time-to-completion to measure the
percent complete. The cumulative impact of any revision in
estimates of the percent complete or recognition of losses on
contracts is reflected in the period in which the changes or
losses become known.

We record provisions against revenue for
estimated sales returns and allowances on product and
service-related sales in the same period as the related revenue
is recorded. We also record a provision to operating expenses
for bad debts resulting from customers inability to pay
for the products or services they have received, due to such
factors as bankruptcy. These estimates are based on historical
sales returns and bad debt expense, analyses of credit memo
data, and other known factors. 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 fixed
assets, long-term investments, goodwill, and other intangible
assets. At October 31, 2003, our long-lived assets included
$256 million of net fixed assets, $51 million of
long-term investments, $213 million of goodwill, and
$11 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 operating 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 investees market value, and the volatility
    inherent in the external markets for these investments. In
    assessing potential impairment for these private equity
    investments, we consider these factors as well as the forecasted
    financial performance of 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 2003 we recognized $35 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|                          |   
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|Novell annual report 2003 | 19









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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | throughout the analysis. If these estimates or
    their related assumptions change in the future, or if actual
    cash flows are below our estimates, we may be required to record
    impairment charges for these assets not previously recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | On November 1, 2001, we adopted
    SFAS No. 142 Goodwill and Other Intangible
    Assets, and therefore, we were required to perform an
    impairment test on our goodwill and other intangibles with
    indefinite lives during the first six months of fiscal 2002 and
    then on a periodic basis thereafter. Our initial goodwill
    impairment analysis was completed during the second quarter of
    fiscal 2002 and was based on November 1, 2001 balances.
    This analysis resulted in an impairment charge of
    $144 million related to goodwill. Subsequently, during the
    fourth quarters of fiscal 2002 and fiscal 2003, we completed our
    annual impairment review based on August 1, 2002 and 2003
    balances and determined that there was no impairment as of those
    dates. However, changes in the assumptions used in the analysis
    could have changed the resulting outcome. For example, to
    estimate the fair value of our reporting units, we made
    estimates and judgments about future cash flows based on our
    fiscal 2004 forecast and current long-range plans used to manage
    the business. These long-range estimates could change in the
    future depending on internal changes in our company as well as
    external factors. Future changes in estimates could possibly
    result in a non-cash goodwill impairment charge that could have
    a material adverse impact on our results of operations.
|
| | During the third quarter of fiscal 2003, we
    determined that impairment indicators existed related to the
    developed technology and trade names we acquired from
    SilverStream, mainly as a result of failure to achieve revenue
    growth targets for the exteNd products. Based on an
    independent valuation of these assets, we recorded a
    $23.6 million impairment charge to write down these assets
    to their estimated fair value. This charge is included in cost
    of revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | As a result of the impairment recorded on these
    intangible assets, we also analyzed our other long-lived assets
    for indicators of impairment, as required by SFAS No. 142,
    in the third quarter. This analysis included goodwill and fixed
    assets acquired from SilverStream. Applying the provisions of
    SFAS No. 142 and SFAS No. 144 for goodwill and
    property, plant and equipment, respectively, we noted no
    additional indicators of impairment., as previously noted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Developed technology is amortized over three
    years as a cost of revenue. Amortization for fiscal 2003 and
    fiscal 2002 was $9.3 million and $4.1 million,
    respectively. Trade names have an indefinite life and therefore
    are not amortized but are reviewed for impairment at least
    annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Deferred Tax Assets.We perform quarterly and annual assessments of the realization
of our deferred tax assets considering all available evidence,
both positive and negative. Assessments of the realization of
deferred tax assets require that management make significant
judgments about many factors, including the amount and
likelihood of future taxable income. As a result of these
assessments, 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. As deferred tax assets or liabilities
increase or decrease in the future, or if a portion or all of
the valuation allowance is no longer deemed to be necessary, the
adjustments to the valuation allowance will increase or decrease
future income tax provisions.



|   |                          
|-- | -------------------------
|20 | Novell annual report 2003









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##### Table of Contents



Results of Operations

Acquisitions



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

Pursuant to the terms of an Agreement and Plan of
Merger by and among Novell, Foxboro Acquisition Corp., a wholly
owned subsidiary of Novell (Foxboro), and Ximian on
August 4, 2003, we acquired Ximian by merging Foxboro into
Ximian with Ximian being the surviving corporation.

The value of the acquisition was preliminarily
allocated as follows:

|                                      |                                               |                  |        |                       |  |            |                        
|------------------------------------- | --------------------------------------------- | ---------------- | ------ | --------------------- |  | ---------- | -----------------------
|                                      |                                               | Estimated        |        |                      
|                                      |                                               | Acquisition Cost |        | Asset Life (in years)
|                                      |                                               |                  |        |                      
|                                      |                                               | (In thousands)   |        |                      
|Adjusted 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                              |                                               |                  | 35,002 |                       |  | Indefinite
|                                      |                                               |                  |        |                       |  |           
|                                      |                                               | $                | 40,677 |                       |  |           
|                                      |                                               |                  |        |                       |  |           

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.

The allocation will be adjusted as integration
plans are finalized, as allowed by Statement of Financial
Accounting Standards No. 141 (SFAS 141),
Business Combinations. There are no other
outstanding contingencies that could materially affect the
allocation.

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 and will be included with the cross-platform services
solutions group of products.

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 currently
technologically feasible, 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, 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



|                          |   
|------------------------- | --
|Novell annual report 2003 | 21









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##### Table of Contents



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 $5.8 million
($3.5 million, net of income tax effect) for developed
technology, which had reached technological feasibility.


The valuation of customer relationships in the
amount of $307,000, net of tax, was determined by comparing
estimated future cash flows with the relationship in place,
versus such cash flows 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 $1.23 million
($0.75 million, net of taxes).



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

On July 17, 2002, we purchased almost all of
the outstanding shares of SilverStream common stock at a price
of $211 million. Direct transaction costs were estimated to
be $4 million and the fair value, measured using the
Black-Scholes model, of SilverStream stock options assumed, both
vested and unvested, totaled $29 million.

The value of the acquisition was allocated as
follows:

|                                      |                                               |                  |     |                       |  |            |                        
|------------------------------------- | --------------------------------------------- | ---------------- | --- | --------------------- |  | ---------- | -----------------------
|                                      |                                               | Acquisition Cost |     | Asset Life (in years)
|                                      |                                               |                  |     |                      
|                                      |                                               | (in millions)    |     |                      
|Adjusted net tangible assets acquired |                                               | $                | 86  |                       |  | N/A       
|Deferred compensation                 |                                               |                  | 5   |                       |  | 2 years   
|Intangible assets                     |                                               |                  |     |                       |  |           
|                                      | Purchased in-process research and development |                  |     | 3                     |  |            | Expensed in fiscal 2002
|                                      | Developed technology                          |                  |     | 20                    |  |            | 3 years                
|                                      | Trademarks/trade names                        |                  |     | 2                     |  |            | Indefinite             
|Goodwill                              |                                               |                  | 128 |                       |  | Indefinite
|                                      |                                               |                  |     |                       |  |           
|                                      |                                               | $                | 244 |                       |  |           
|                                      |                                               |                  |     |                       |  |           

Results of operations for SilverStream are
included in our results of operations beginning July 17,
2002. During the third quarter of fiscal 2003, we determined
that impairment indicators existed related to the developed
technology and trade names we acquired from SilverStream, mainly
as a result of failure to achieve revenue growth targets for the
exteNd products. Based on an independent valuation of these
assets, we recorded a $23.6 million charge to write down
these assets to their determined fair value.

Because the intangibles were determined to be
impaired, we also analyzed our other long-lived assets for
indicators of impairment. This included goodwill and fixed
assets acquired from SilverStream. Goodwill is reflective of the
segment to which it is allocated, not necessarily the company or
technology from which it originated thus the analysis of
goodwill is performed on geographic segment performance. No
indicators of impairments were noted. Fixed assets consisted
mainly of computers and software, none of which had become
impaired.



| |                              
| | -----------------------------
| | Cambridge Technology Partners

On July 10, 2001, the stockholders of
Cambridge approved the acquisition of Cambridge by Novell. We
issued 0.668 shares of our common stock for each share of
Cambridge common stock outstanding on July 10, 2001. The
transaction was accounted for as a purchase and the fair value
of the consideration was



|   |                          
|-- | -------------------------
|22 | Novell annual report 2003









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##### Table of Contents



approximately $261 million, of which
$251 million related to the number of shares exchanged at a
per share value of $5.907 (the average closing price of a share
of Novell common stock for the seven trading day period
beginning three days before the announcement date of the
acquisition), and $10 million related to direct transaction
costs. The value of the acquisition was allocated as follows:


|                             |  |                  |     | 
|---------------------------- |  | ---------------- | --- | 
|                             |  | Acquisition Cost
|                             |  |                 
|                             |  | (in millions)   
|Adjusted net assets acquired |  | $                | 81  | 
|Goodwill                     |  |                  | 180 | 
|                             |  |                  |     | 
|                             |  | $                | 261 | 
|                             |  |                  |     | 

Results of operations for Cambridge are included
in our results of operations beginning July 10, 2001. Our
adoption of SFAS No. 142 required us to perform an
initial impairment analysis within the first six months
following November 1, 2001, the date of adoption. We
completed our goodwill impairment analysis during the second
quarter of fiscal 2002 and recognized a transitional goodwill
impairment loss of $144 million as of November 1,
2001, which was recorded as the cumulative effect of a change in
accounting principle in our consolidated Statements of
Operations.

Revenue



| |                   
| | ------------------
| | Operating Segments

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

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 management consulting. The geographic segments are
Americas, EMEA, and Asia Pacific. 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 management consulting segment. Financial data
for these four reporting segments is not separately available
for 2001, with the exception of net revenue as shown below.

The geographic segments are:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Americas    includes
    the United States, Canada, and Latin America                     
|
| |  | EMEA      includes
    Eastern and Western Europe, Middle East, and Africa                
|
| |  | Asia Pacific  includes China,
    Japan, Southeast Asia, Australia, New Zealand, and India

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

The following summarizes revenue by segment:

|             |  |               |       |        |  |      |     |        |  |      |       |  |  |  |     |    |  |   |       |    
|------------ |  | ------------- | ----- | ------ |  | ---- | --- | ------ |  | ---- | ----- |  |  |  | --- | -- |  | - | ----- | ---
|             |  | 2003          |       | Change |  | 2002 |     | Change |  | 2001
|             |  |               |       |        |  |      |     |        |  |     
|             |  |              
|             |  | (In millions)
|Americas     |  | $             | 532   |        |  |      | (12 | )%     |  | $    | 604   |  |  |  | (5  | )% |  | $ | 636   |    
|EMEA         |  |               | 348   |        |  |      | 8   | %      |  |      | 323   |  |  |  | 10  | %  |  |   | 294   |    
|Asia Pacific |  |               | 86    |        |  |      | 5   | %      |  |      | 82    |  |  |  | (1  | )% |  |   | 83    |    
|Celerant     |  |               | 139   |        |  |      | 11  | %      |  |      | 125   |  |  |  | 229 | %  |  |   | 38    | (a)
|             |  |               |       |        |  |      |     |        |  |      |       |  |  |  |     |    |  |   |       |    
|Net revenue  |  | $             | 1,105 |        |  |      | (3  | )%     |  | $    | 1,134 |  |  |  | 8   | %  |  | $ | 1,051 |    
|             |  |               |       |        |  |      |     |        |  |      |       |  |  |  |     |    |  |   |       |    



---



|    |                                                             
|--- | ------------------------------------------------------------
|(a) | represents Celerant revenue recorded after July
    11, 2001



|                          |   
|------------------------- | --
|Novell annual report 2003 | 23









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##### Table of Contents



Revenue in the Americas segment decreased by 12%
in 2003 compared to 2002 and decreased by 5% in 2002 compared to
2001. The decreases in both years are mainly a result of
declining NetWare license maintenance sales, and lower IT
consulting revenues. Due to the difficult economy in the past
two years, corporate IT spending in general has been down.
However, NetWare has also lost market share over that time
period as well.

Revenue in the EMEA segment increased by 8% in
2003 compared to 2002 and increased by 10% in 2002 compared to
2001. The increases in both years are mainly a result of
favorable exchange rates coupled with slight increases in
product and IT consulting sales.

Revenue in the Asia Pacific segment increased by
5% in 2003 compared to 2002 and decreased by 1% in 2002 compared
to 2001. The increase in 2003 is mainly a result of favorable
exchange rates coupled with flat product and services sales. The
decrease in 2002 is mainly a result of decreases in product
sales.

Revenue in the Celerant management consulting
segment increased by 11% in 2003 compared to 2002 due to
favorable exchange rates and increased demand for their services
in difficult economic circumstances. We only recognized
approximately four months of Celerant revenue in 2001.

Geographic information

Sales in the U.S. were $512 million in
fiscal 2003 and $582 million in fiscal 2002, and sales to
customers outside the U.S. were $593 million in fiscal 2003
and $552 million in fiscal 2002. In fiscal 2003 and fiscal
2002, sales in EMEA accounted for 75% and 73%, respectively, of
our total sales outside the U.S. No single country outside the
U.S. accounted for more than 10% of our total revenue.

Solutions Categories

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identity management and web services 
    solutions that help customers with their identity management and
    security issues. Products include Secure-Login/ Single Sign-On,
    DirXML®, iChain®, exteNdTM, and
    BorderManager®. Products in this category are branded as
    NsureTM and exteNd.                                                                                               
|
| |  | Cross-platform services  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, GroupWise®,
    ZENworks®, and Novell iFolder®. Products in this
    category are branded as NterpriseTM.                       
|
| |  | Worldwide services  comprehensive
    worldwide IT consulting, education, 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. Services
    in this category are branded as NgageSM.
|
| |  | Celerant management consulting 
    operational strategy and implementation consulting services
    offered to a wide range of customers across various sectors,
    worldwide.                                                                                                                                                                                                                       



|   |                          
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|24 | Novell annual report 2003









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##### Table of Contents



|                                        |  |               |       |        |  |      |    |        |  |      |       |  |  |  |     |    |  |   |       |    
|--------------------------------------- |  | ------------- | ----- | ------ |  | ---- | -- | ------ |  | ---- | ----- |  |  |  | --- | -- |  | - | ----- | ---
|                                        |  | 2003          |       | Change |  | 2002 |    | Change |  | 2001
|                                        |  |               |       |        |  |      |    |        |  |     
|                                        |  |              
|                                        |  | (in millions)
|Identity management and web services    |  | $             | 97    |        |  |      | 18 | %      |  | $    | 82    |  |  |  | 41  | %  |  | $ | 58    |    
|Cross-platform services                 |  |               | 570   |        |  |      | (6 | )%     |  |      | 609   |  |  |  | (12 | )% |  |   | 689   |    
|                                        |  |               |       |        |  |      |    |        |  |      |       |  |  |  |     |    |  |   |       |    
|Total software licenses and maintenance |  |               | 667   |        |  |      | (3 | )%     |  |      | 691   |  |  |  | (7  | )% |  |   | 747   |    
|Worldwide services                      |  |               | 299   |        |  |      | (6 | )%     |  |      | 318   |  |  |  | 20  | %  |  |   | 266   |    
|                                        |  |               |       |        |  |      |    |        |  |      |       |  |  |  |     |    |  |   |       |    
|Total IT software and solutions         |  |               | 966   |        |  |      | (4 | )%     |  |      | 1,009 |  |  |  | (0  | )% |  |   | 1,013 |    
|Celerant management consulting          |  |               | 139   |        |  |      | 11 | %      |  |      | 125   |  |  |  | 229 | %  |  |   | 38    | (a)
|                                        |  |               |       |        |  |      |    |        |  |      |       |  |  |  |     |    |  |   |       |    
|Total net revenue                       |  | $             | 1,105 |        |  |      | (3 | )%     |  | $    | 1,134 |  |  |  | 8   | %  |  | $ | 1,051 |    
|                                        |  |               |       |        |  |      |    |        |  |      |       |  |  |  |     |    |  |   |       |    



---

(a) represents Celerant revenue recorded
after July 11, 2001

Identity management and web services revenue
increased by 18% in 2003 from 2002 and increased by 41% in 2002
from 2001. The increases in 2003 and 2002 were due mainly to the
inclusion of a full year and a partial year, respectively, of
exteNd branded products acquired in the SilverStream merger.

Cross platform services revenue decreased by 6%
in 2003 from 2002 and decreased by 12% in 2002 from 2001. The
decreases in both 2003 and 2002 over the previous years were due
to decreasing NetWare licenses and maintenance sales. The
aforementioned decreases in NetWare sales are also the main
reason for the overall decrease in software licenses and
maintenance revenue of 3% and 7% in 2003 and 2002, respectively.

Worldwide services revenue decreased by 6% in
2003 from 2002 and increased by 20% in 2002 from 2001. The
decrease in 2003 over 2002 was due to the poor market for
consulting services in a difficult economy. The increase in 2002
over 2001 was due to the inclusion of revenue from Cambridge for
a full year.

Revenue in the Celerant management consulting
solution category is discussed previously in the Celerant
management consulting segment section.

Forward-looking revenue trends

NetWare revenue for fiscal 2003 was down 12%
compared to fiscal 2002 and was down 15% from fiscal 2001 to
fiscal 2002. These declines are primarily a result of loss of
market share. In fiscal 2004, we expect NetWare to continue to
decrease. However, as previously discussed, a significant aspect
of our overall corporate strategy is to embrace the open source
movement, specifically, the Linux operating system. We believe
our acquisitions of Ximian and SUSE make us the only major
company to offer a complete vertically-integrated Linux system
from server to desktop. Accordingly, we believe that our Linux
initiatives provide revenue opportunities for the sale of new
products and will help assist and augment our existing product
revenue streams and trends.

At October 31, 2003 we had $322 million
of deferred revenue representing revenue that is expected to be
recognized in future periods. The majority of this deferred
revenue relates to maintenance contracts, which are recognized
ratably over the maintenance period. We have either received
payment or recorded a receivable for the deferred revenue, and
have determined collectability to be probable. Direct costs
incurred to fulfill these maintenance obligations are recognized
as work is performed.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 25









---



##### Table of Contents



Gross profit

|                                                 |                    |                |         |         |  |      |         |         |  |   |         |         | 
|------------------------------------------------ | ------------------ | -------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                 |                    | 2003           |         | 2002    |  | 2001
|                                                 |                    |                |         |         |  |     
|                                                 |                    |               
|                                                 |                    | (in thousands)
|New software licenses                            |                    | $              | 233,483 |         |  | $    | 288,106 |         |  | $ | 334,607 |        
|as a percent of new software license revenue     |                    |                | 88      | %       |  |      | 90      | %       |  |   | 91      | %      
|Maintenance and services                         |                    | $              | 433,295 |         |  | $    | 396,796 |         |  | $ | 377,555 |        
|as a percent of maintenance and services revenue |                    |                | 52      | %       |  |      | 49      | %       |  |   | 55      | %      
|                                                 |                    |                |         |         |  |      |         |         |  |   |         |        
|                                                 | Total gross profit |                | $       | 666,778 |  |      | $       | 684,902 |  |   | $       | 712,162 | 

Gross profit as a percentage of revenue on
software licenses decreased from 91% in 2001, to 90% in 2002,
and decreased to 88% in 2003. The slight decreases are a result
of competitive pricing pressure on new license sales.

Gross profit as a percentage of revenue on
maintenance and services increased from 49% in 2002 to 52% in
2003 due to efforts to improve resource utilization in our IT
consulting services such as elimination of excess capacity.
Gross profit as a percentage of revenue on new maintenance and
services decreased from 55% in 2002 to 49% in 2002 due to the
inclusion of Cambridge for a full year. Consulting services have
a lower gross profit margin than maintenance contracts and other
services such as training and support. With the purchase of
Cambridge in July of 2001, consulting revenue became a larger
portion of our maintenance and services revenue resulting in
lower overall gross profit margins. Gross profit in 2003 was
also impacted by a $23.6 million intangible asset
impairment charge that was included in cost of revenue.

Operating expenses

|                                              |                       |               |     |        |    |      |      |        |  |      |     |    |   |  |     |    |  |   |     |    |  
|--------------------------------------------- | --------------------- | ------------- | --- | ------ | -- | ---- | ---- | ------ |  | ---- | --- | -- | - |  | --- | -- |  | - | --- | -- | -
|                                              |                       | 2003          |     | Change |    | 2002 |      | Change |  | 2001
|                                              |                       |               |     |        |    |      |      |        |  |     
|                                              |                       |              
|                                              |                       | (in millions)
|Sales and marketing                           |                       | $             | 381 |        |    |      | 6    | %      |  | $    | 359 |    |   |  | (19 | )% |  | $ | 444 |   
|                                              | Percentage of revenue |               |     | 34     | %  |      |      |        |  |      |     | 32 | % |  |     |    |  |   |     | 42 | %
|Product development                           |                       | $             | 184 |        |    |      | 9    | %      |  | $    | 169 |    |   |  | (12 | )% |  | $ | 192 |   
|                                              | Percentage of revenue |               |     | 17     | %  |      |      |        |  |      |     | 15 | % |  |     |    |  |   |     | 18 | %
|General and administrative                    |                       | $             | 111 |        |    |      | (10  | )%     |  | $    | 123 |    |   |  | 5   | %  |  | $ | 117 |   
|                                              | Percentage of revenue |               |     | 10     | %  |      |      |        |  |      |     | 11 | % |  |     |    |  |   |     | 11 | %
|Restructuring charges                         |                       | $             | 43  |        |    |      | 126  | %      |  | $    | 19  |    |   |  | (76 | )% |  | $ | 80  |   
|                                              | Percentage of revenue |               |     | 4      | %  |      |      |        |  |      |     | 2  | % |  |     |    |  |   |     | 8  | %
|Purchased in-process research and development |                       | $             | 1   |        |    |      | (67  | )%     |  | $    | 3   |    |   |  |    | %  |  |   |    |   
|                                              | Percentage of revenue |               |     |       | %  |      |      |        |  |      |     |   | % |  |     |    |  |   |     |   | %
|(Gains) impairments on real property          |                       | $             | (25 | )      |    |      | (131 | )%     |  | $    | 80  |    |   |  |    | %  |  |   |    |   
|                                              | Percentage of revenue |               |     | (2     | )% |      |      |        |  |      |     | 7  | % |  |     |    |  |   |     |   | %
|Total operating expenses                      |                       | $             | 695 |        |    |      | (8   | )%     |  | $    | 753 |    |   |  | (10 | )% |  | $ | 833 |   
|                                              | Percentage of revenue |               |     | 63     | %  |      |      |        |  |      |     | 66 | % |  |     |    |  |   |     | 79 | %

Operating expenses, in total and as a percentage
of revenue, decreased in fiscal 2003 compared to fiscal 2002
mainly due to a $25 million gain on the sale of our San
Jose facility in 2003 compared with an $80 million
impairment on that facility that was recognized in 2002.
Operating expenses, in total and as a percentage of revenue,
decreased in fiscal 2002 compared to fiscal 2001 primarily due
to lower salary costs resulting from the fiscal 2001 and 2002
restructurings, the elimination of many redundant functions and
costs related to Cambridge, which was acquired in July 2001,
lower advertising costs, and lower restructuring charges. These
decreases were offset somewhat by the addition of approximately
$19 million of SilverStream operating costs beginning in
July 2002, integration costs related to merging SilverStream
into Novell,



|   |                          
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|26 | Novell annual report 2003









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##### Table of Contents



purchased in-process research and development
costs of $3 million from the acquisition of SilverStream,
and $80 million of non-cash impairment charges primarily
related to our owned facilities in San Jose, California.


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.
Sales and marketing expense, in total and as a percentage of
revenue, decreased in fiscal 2002 compared to fiscal 2001
primarily as a result of lower advertising costs and reduced
headcount resulting from the fiscal 2001 and 2002 restructuring
activities. Sales and marketing headcount decreased by
208 employees from the fourth quarter of fiscal 2001,
excluding the addition of 192 SilverStream employees who
became our sales and marketing employees in July 2002. The
fiscal 2002 decrease was offset somewhat by the addition of
approximately $11 million of SilverStream sales and
marketing costs, including the 192 SilverStream headcount.

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
SilverStream® product development costs, including
SilverStream employees who became Novell product development
employees in July 2002. Product development expenses, in total
and as a percentage of revenue, decreased in fiscal 2002
compared to fiscal 2001 primarily due to decreased headcount as
a result of the fiscal 2000, 2001 and 2002 restructurings.
Product development headcount decreased by 82 heads in
fiscal 2002 compared to the fourth quarter of fiscal 2001,
excluding the addition of 123 SilverStream employees who became
Novell product development employees in July 2002.

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. General and administrative
expenses increased, in total and as a percentage of revenue, in
fiscal 2002 from fiscal 2001 primarily due to a full years
impact of Cambridge general and administrative costs, the
addition of SilverStream general and administrative costs
beginning in July 2002 and integration costs related to the
Cambridge and SilverStream acquisitions. These increases were
offset somewhat by headcount reductions resulting from the
restructurings, which lowered general and administrative
headcount by 245 employees, excluding 11 SilverStream
general and administrative employees. As a percentage of
revenue, general and administrative costs remained relatively
flat in fiscal 2002 compared to fiscal 2001 due to higher fiscal
2002 revenue.

Purchased in-process research and development
relates to the acquisitions of Ximian and SilverStream and is
discussed in the Acquisitions section, above.

Gain (impairment) on real property

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 here 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



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

During the third quarter of fiscal 2003, we
recorded a pre-tax restructuring charge of approximately
$28 million resulting from the restructuring of our
operations in response to changes in general market conditions,



|                          |   
|------------------------- | --
|Novell annual report 2003 | 27









---



##### Table of Contents



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. By reporting segment, the Americas accounted for
$20 million, EMEA accounted for $6 million, and Asia
Pacific accounted for $2 million.


As of October 31, 2003, the remaining
balance of the third quarter of fiscal 2003 restructuring charge
included accrued liabilities related to severance and benefits,
which will be paid out over the remaining severance obligation
period, and 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.

The following table summarizes the activity
during fiscal 2003 related to this restructuring.

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

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 Americas reporting segment.

As a result of the restructuring activities
undertaken in fiscal 2003, we expect to reduce our quarterly
operating expenses by over $20 million.

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. This release is reflected in the second
quarter fiscal 2002 table below. The net impact of the third
quarter fiscal 2003 restructuring and the release of the excess
fiscal 2002 restructuring reserves was a charge 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. 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 charge of approximately
$20 million. The charge 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%)



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|28 | Novell annual report 2003









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##### Table of Contents



across all functional areas, consolidating
facilities, closing offices in unprofitable locations, and
disposing of excess property and equipment. The following table
summarizes the activity during fiscal 2003 related to the second
quarter fiscal 2002 restructuring.


|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 
|-------------------------------------------- |  | ------------- | - | -------- |  | ----------- | -- | ----------- |  | - | - |  |  | - | - | 
|                                             |  | Balance at    |   |          |  | Non-Cash    |    | Balance at 
|                                             |  | October 31,   |   | Cash     |  | Charges/    |    | October 31,
|                                             |  | 2002          |   | Payments |  | Adjustments |    | 2003       
|                                             |  |               |   |          |  |             |    |            
|                                             |  |              
|                                             |  | (in millions)
|Severance and benefits                       |  | $             | 4 |          |  | $           | (3 | )           |  | $ |  |  |  | $ | 1 | 
|Excess facilities and property and equipment |  |               | 4 |          |  |             | (4 | )           |  |   | 4 |  |  |   | 4 | 
|Other restructuring-related costs            |  |               | 1 |          |  |             | (1 | )           |  |   |  |  |  |   |  | 
|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 
|                                             |  | $             | 9 |          |  | $           | (8 | )           |  | $ | 4 |  |  | $ | 5 | 
|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 

As of October 31, 2003, the remaining
balance of the second quarter 2002 restructuring charge included
accrued liabilities related to severance and benefits, which
will be paid over the remaining severance obligation period, and
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

At the end of fiscal 2001, we recorded
$51 million of pre-tax, restructuring charges resulting
from changes in general market conditions, changing customer
demands, and our 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 current revenue levels and our 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 during
fiscal 2003, related to the fourth quarter 2001 restructuring.

|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 
|-------------------------------------------- |  | ------------- | - | -------- |  | ----------- | -- | ----------- |  | - | - |  |  | - | - | 
|                                             |  | Balance at    |   |          |  | Non-Cash    |    | Balance at 
|                                             |  | October 31,   |   | Cash     |  | Charges/    |    | October 31,
|                                             |  | 2002          |   | Payments |  | Adjustments |    | 2003       
|                                             |  |               |   |          |  |             |    |            
|                                             |  |              
|                                             |  | (in millions)
|Severance and benefits                       |  | $             | 1 |          |  | $           | (1 | )           |  | $ |  |  |  | $ |  | 
|Excess facilities and property and equipment |  |               | 5 |          |  |             | (2 | )           |  |   |  |  |  |   | 3 | 
|Other restructuring-related costs            |  |               | 1 |          |  |             | (1 | )           |  |   |  |  |  |   |  | 
|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 
|                                             |  | $             | 7 |          |  | $           | (4 | )           |  | $ |  |  |  | $ | 3 | 
|                                             |  |               |   |          |  |             |    |             |  |   |   |  |  |   |   | 

As of October 31, 2003, 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.



|                          |   
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|Novell annual report 2003 | 29









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##### Table of Contents



Third
quarter of fiscal 2001

During the third quarter of fiscal 2001, we
recorded a restructuring charge 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 integrated strategy, and discontinuing
unprofitable product lines. The following table summarizes the
activity during fiscal 2003, related to the third quarter 2001
restructuring costs.

|                                                        |  |               |   |          |  |          |    |             |  |   |   |  |  |   |   | 
|------------------------------------------------------- |  | ------------- | - | -------- |  | -------- | -- | ----------- |  | - | - |  |  | - | - | 
|                                                        |  | Balance at    |   |          |  |          |    | Balance at 
|                                                        |  | October 31,   |   | Cash     |  | Non-Cash |    | October 31,
|                                                        |  | 2002          |   | Payments |  | Charges  |    | 2003       
|                                                        |  |               |   |          |  |          |    |            
|                                                        |  |              
|                                                        |  | (in millions)
|Severance and benefits                                  |  | $             |  |          |  | $        |   |             |  | $ |  |  |  | $ |  | 
|Abandoned technology and unprofitable product
    lines |  |               |  |          |  |          |   |             |  |   |  |  |  |   |  | 
|Excess facilities and property and equipment            |  |               | 4 |          |  |          | (2 | )           |  |   | 1 |  |  |   | 3 | 
|                                                        |  |               |   |          |  |          |    |             |  |   |   |  |  |   |   | 
|                                                        |  | $             | 4 |          |  | $        | (2 | )           |  | $ | 1 |  |  | $ | 3 | 
|                                                        |  |               |   |          |  |          |    |             |  |   |   |  |  |   |   | 

As of October 31, 2003, the remaining
balance of the third quarter 2001 restructuring charge included
accrued liabilities related to excess facilities costs, which
will be paid over the respective remaining lease terms.

As a result of the fiscal 2002 and the two fiscal
2001 restructurings, we reduced our expenses by approximately
$50 million on a quarterly basis, before any increased
strategic expenditures and the impact of the SilverStream
acquisition.

Employees

|                                     |  |             |       |        |  |             |     |        |  |             |       |  |  |  |     |    |  |   |       | 
|------------------------------------ |  | ----------- | ----- | ------ |  | ----------- | --- | ------ |  | ----------- | ----- |  |  |  | --- | -- |  | - | ----- | 
|                                     |  | October 31, |       |        |  | October 31, |     |        |  | October 31,
|                                     |  | 2003        |       | Change |  | 2002        |     | Change |  | 2001       
|                                     |  |             |       |        |  |             |     |        |  |            
|Employees                            |  |             | 5,634 |        |  |             | (10 | )%     |  |             | 6,233 |  |  |  | (11 | )% |  |   | 7,003 | 
|Revenue per average employee (000s) |  | $           | 186   |        |  |             |     |        |  | $           | 171   |  |  |  |     |    |  | $ | 175   | 

Fiscal 2003 headcount decreased compared to
fiscal 2002 primarily due to restructuring efforts and the
elimination of duplicate functions resulting from the
SilverStream acquisition, but partially offset by the addition
of 70 Ximian employees. Fiscal 2002 headcount decreased
compared to fiscal 2001 due primarily to restructuring efforts
and the elimination of duplicate functions resulting from the
Cambridge acquisition, offset slightly by the addition of
SilverStream in July 2002, which added 403 employees.

Other income (expense), net

|                                       |  |      |     |        |  |      |     |        |  |      |     |    |  |  |    |   |  |   |      |   
|-------------------------------------- |  | ---- | --- | ------ |  | ---- | --- | ------ |  | ---- | --- | -- |  |  | -- | - |  | - | ---- | --
|                                       |  | 2003 |     | Change |  | 2002 |     | Change |  | 2001
|                                       |  |      |     |        |  |      |     |        |  |     
|Other income (expense), net (millions) |  | $    | (27 | )      |  |      | (13 | )%     |  | $    | (24 | )  |  |  | 85 | % |  | $ | (156 | ) 
|Percentage of revenue                  |  |      | (2  | )%     |  |      |     |        |  |      | (2  | )% |  |  |    |   |  |   | (15  | )%

The primary component of other income (expense),
net, in fiscal 2003, was a net investment loss of
$22 million. The net investment loss in 2003 included
impairment losses on long-term investments totaling
$35 million, realized net gains on the sale of short-term
equity securities of $2 million, and interest income of
$12 million.

The primary component of other income (expense),
net, in fiscal 2002, was a net investment loss of
$33 million. The net investment loss in 2002 included
impairment losses primarily on long-term investments



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|30 | Novell annual report 2003









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##### Table of Contents



totaling $58 million, realized net gains on
the sale of short-term equity securities of $7 million, and
interest income of $18 million.


The primary component of other income (expense),
net, in fiscal 2001, was a net investment loss of
$155 million. The net investment loss in 2001 included
impairment losses on several short and long-term investments
totaling $208 million, offset by realized net gains on
investments totaling $9 million, and interest income of
$44 million.

Income tax expense (benefit)

|                                       |  |      |     |        |  |      |     |        |  |      |    |   |  |  |     |   |  |   |     |   
|-------------------------------------- |  | ---- | --- | ------ |  | ---- | --- | ------ |  | ---- | -- | - |  |  | --- | - |  | - | --- | --
|                                       |  | 2003 |     | Change |  | 2002 |     | Change |  | 2001
|                                       |  |      |     |        |  |      |     |        |  |     
|Income tax expense (benefit)(millions) |  | $    | 107 |        |  |      | 873 | %      |  | $    | 11 |   |  |  | 173 | % |  | $ | (15 | ) 
|Percentage of revenue                  |  |      | 10  | %      |  |      |     |        |  |      | 1  | % |  |  |     |   |  |   | (1  | )%
|Effective tax (benefit) rate           |  |      | 194 | %      |  |      |     |        |  |      | 12 | % |  |  |     |   |  |   | (5  | )%

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 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.

The 2003 fiscal year effective tax rate differs
from the statutory rate of 35% primarily for the same reasons as
noted above partially offset by benefits from tax-exempt income,
research and development tax credits and foreign income that is
taxed at lower rates than the U.S. statutory rate.

The effective tax rate for fiscal 2002 was
different from the effective tax benefit rate for fiscal 2001
primarily as a result of the need for additional valuation
allowances in fiscal 2002. An additional valuation allowance was
required in fiscal 2002 for capital losses resulting from
investment impairments. An additional valuation allowance was
also required in fiscal 2002 against foreign tax credits since
current forecasts, which included the impact of the impairment
on the San Jose campus, did not assure sufficient taxable income
to absorb the foreign tax credits during the remaining limited
carry-over period.

The 2002 fiscal year effective tax rate was
different from the statutory benefit rate of 35% primarily for
the same reasons as noted above, partially offset by benefits
from tax exempt income, research and development tax credits and
foreign income that is taxed at lower rates than the U.S.
statutory rate.



|                          |   
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|Novell annual report 2003 | 31









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##### Table of Contents



Net loss and net loss per share

|                                                   |         |               |      |        |   |      |     |        |   |      |      |       |   |  |        |    |   |   |      |       |  
|-------------------------------------------------- | ------- | ------------- | ---- | ------ | - | ---- | --- | ------ | - | ---- | ---- | ----- | - |  | ------ | -- | - | - | ---- | ----- | -
|                                                   |         | 2003          |      | Change |   | 2002 |     | Change |   | 2001
|                                                   |         |               |      |        |   |      |     |        |   |     
|                                                   |         |              
|                                                   |         | (in millions)
|Net loss before accounting change                  |         | $             | (162 | )      |   |      | (57 | )%     |   | $    | (103 | )     |   |  | 61     | %  |   | $ | (262 | )    
|Percentage of revenue                              |         |               | (15  | )%     |   |      |     |        |   |      | (9   | )%    |   |  |        |    |   |   | (25  | )%   
|Cumulative effect of accounting change, net of tax |         | $             |     |        |   |      |    | %      |   | $    | (144 | )     |   |  | (1,209 | )% |   | $ | (11  | )    
|Net loss                                           |         | $             | (162 | )      |   |      | 34  | %      |   | $    | (247 | )     |   |  | 10     | %  |   | $ | (273 | )    
|Percentage of revenue                              |         |               | (15  | )%     |   |      |     |        |   |      | (22  | )%    |   |  |        |    |   |   | (26  | )%   
|Net loss per share:                                |         |               |      |        |   |      |     |        |   |      |      |       |   |  |        |    |   |   |      |      
|                                                   | Basic   |               | $    | (0.44  | ) |      |     | 35     | % |      | $    | (0.68 | ) |  |        | 17 | % |   | $    | (0.82 | )
|                                                   | Diluted |               | $    | (0.44  | ) |      |     | 35     | % |      | $    | (0.68 | ) |  |        | 17 | % |   | $    | (0.82 | )

Net loss per share decreased in fiscal 2003
compared to fiscal 2002 primarily due to a goodwill impairment
charge of $144 (pre-tax) million recorded in 2002 and a
long-lived asset impairment charge of $80 million (pre-tax)
recorded in 2002, offset by a $119 million increase in the
deferred tax asset valuation recorded in 2003 and an increase of
$24 million of restructuring costs. Net loss per share
decreased in fiscal 2002 compared to fiscal 2001 primarily due
to a $61 million (pre-tax) decrease in restructuring costs,
a $122 million (pre-tax) decrease in investment losses, and
lower salary costs due to restructuring activities, offset by an
$80 million (pre-tax) impairment charge and lower gross
margins, as discussed above.

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.

The fiscal 2001 change in accounting principle
pertains to the change in our methodology for recognizing
revenue to distribution channel partners.

Liquidity and Capital Resources

|                                           |  |             |     |        |  |             |    |   |  |   |     |  
|------------------------------------------ |  | ----------- | --- | ------ |  | ----------- | -- | - |  | - | --- | -
|                                           |  | October 31, |     |        |  | October 31,
|                                           |  | 2003        |     | Change |  | 2002       
|                                           |  |             |     |        |  |            
|Cash and short-term investments (millions) |  | $           | 752 |        |  |             | 18 | % |  | $ | 636 |  
|Percentage of total assets                 |  |             | 48  | %      |  |             |    |   |  |   | 38  | %

Cash and short-term investments increased to
$752 million at October 31, 2003, compared to
$636 million at October 31, 2002. We used
$210 million of this cash in January 2004 in connection
with our purchase of SUSE, excluding merger and transaction
costs. The fiscal 2003 net increase in cash is attributed to
cash received from the sale of our San Jose facility of
$125 million, cash provided by operations of
$55 million, and cash proceeds from issuances in
conjunction with stock option exercises of $20 million,
partially offset by cash paid for Ximian of $40 million,
purchases of fixed assets of $39 million, and expenditures
for long-term investments of $14 million.

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



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|32 | Novell annual report 2003









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securities and mutual funds, which incur market
risk. Our short-term investment portfolio includes gross
unrealized gains of $2 million as of October 31, 2003.
We monitor our investments and record losses when a decline in
the investments market value is determined to be other
than temporary.


We also invest excess cash in long-term
investments 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, 2003, we had a
balance of $50 million related to investments in various venture
capital funds and had commitments to contribute an additional
$56 million to these funds, of which we estimate
approximately $19 million could be contributed in fiscal
2004, approximately $16 million in fiscal 2005, and
approximately $21 million thereafter as requested by the
fund managers. We, through our acquisition of Cambridge, also
own both limited and general partnership interests in the
CTC I of approximately 24%. As of October 31, 2003, 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, 2003, we have various
operating leases related to our facilities with remaining terms
of more than one year. These leases have minimum annual lease
commitments of $32 million in fiscal 2004, $27 million
in fiscal 2005, $22 million in fiscal 2006,
$18 million in fiscal 2007, $13 million in fiscal
2008, and $16 million thereafter. Furthermore, we have
$33 million of minimum rentals to be received in the future
from subleases.

As of October 31, 2003, we had cash and
other short-term investments of $452 million held in
accounts outside the United States. Repatriation of any portion
of this amount would result in United States federal taxable
income. We have provided for the tax liability on these amounts
for financial statement purposes. Repatriation, however, could
result in a loss of certain tax attributes of up to
$40 million. We used $210 million of this cash in
January 2004 in connection with our purchase of SUSE, reducing
the potential loss of these tax attributes.

Our principal source of liquidity continues to be
from operations, cash on hand, and short-term investments. At
October 31, 2003, our principal unused sources of liquidity
consisted of cash in the amount of $367 million, short-term
investments in the amount of $385 million, and available
borrowing capacity of approximately $3 million under our
lines of credit. Our liquidity needs are principally for
financing of accounts receivable, fixed assets, strategic
investments, product development, and flexibility in a dynamic
and competitive operating environment.

During fiscal 2003, we generated $55 million
of cash flow from operations. We anticipate generating positive
cash flows from operations in addition to investment income in
fiscal 2004 sufficient to fund operations. We anticipate being
able to fund our current operations, any future acquisitions,
any further integration, restructuring or any merger-related
costs, and planned capital expenditures for the foreseeable
future 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 if the need arises,
although such offerings may not be available to us on acceptable
terms, given current market conditions. 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. For example, on
January 12, 2004, we purchased SUSE for approximately
$210 million in cash, not including merger and transaction
costs. We also anticipate having adequate cash in fiscal 2004
for any necessary capital expenditures.



|                          |   
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|Novell annual report 2003 | 33









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##### Table of Contents



Recent Pronouncements

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS No. 148 provides
companies with alternative methods of transition to the
fair-value based method of accounting for stock-based employee
compensation. We use the intrinsic value method of accounting,
and have not elected the fair value-based method of accounting.
SFAS No. 148 also amends the disclosure about the effects
on reported net income of an entitys accounting policy
decisions with respect to stock-based employee compensation, as
reflected in Note B to the consolidated financial
statements. Finally, SFAS No. 148 requires disclosure about
those effects in future interim financial information.

In January 2003, the FASB issued Financial
Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities.
FIN 46 requires that if an entity is the primary
beneficiary of a variable interest entity, the assets,
liabilities and results of operations of the variable interest
entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46 were
revised in December 2003 to be effective for financial
statement periods ended after December 15, 2003 for those
variable interest entities in existence prior to
February 1, 2003. FIN 46 is effective, however, for
certain variable interest entities created after
February 1, 2003. We do not currently have any arrangements
with variable interest entities that will require consolidation
of their financial information in our financial statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 149
is effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this Statement did not
have an effect on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. Many of these instruments were
previously classified as equity. SFAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise was effective at the beginning
of the first interim period beginning after June 15, 2003,
which for Novell, was the fourth quarter of 2003. The adoption
of this Statement did not have an effect on our financial
statements.

Factors Affecting Future Results of
Operations

Our future results of operations involve a number
of risks and uncertainties. A number of these risks and
uncertainties are discussed below.

The Current Economic Climate and Outlook in
the Technology and Information Technology Services Sector Is
Very Weak, Causing Our Business to Suffer

The weakened global economic climate,
particularly in the technology sector, has had an adverse effect
on our ability to sell products and services. Future economic
projections for this sector are uncertain. A continuation of the
weakened global economy could have further negative effects on
our ability to sell products and services in the future.

We May Not Be Able to Successfully Compete in
a Challenging Market for Computer Software and Consulting
Services

The market for networking applications and
solutions as well as IT consulting is highly competitive and
subject to rapid technological change. We expect competition to
continue to increase both from existing



|   |                          
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|34 | Novell annual report 2003









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competitors and new market entrants. We believe
that competitive factors common to all of our operating segments
include: our ability to sell both products and services as part
of an overall solution; the breadth of our offerings; the
pricing of our products and services; and the timing and market
acceptance of new solutions developed by us and our competitors.




| |                    
| | -------------------
| | Geographic segments

The market for networking applications and
solutions as well as IT consulting 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 operating segments include: our ability to sell both
products and services as part of an overall solution; the
breadth of our offerings; the pricing of our products and
services; and the timing and market acceptance of new solutions
developed by us and our competitors. In addition to the factors
listed above, other key competitive factors include brand and
product awareness; the performance, reliability and security of
our products; the ability to preserve our legacy customer base;
the completeness of our suite of product and solutions
offerings; our ability to establish and maintain key strategic
relationships with distributors, resellers and other partners;
and the pricing strategies of our competitors. Our key
competitors in our geographic segments include Microsoft, IBM,
Sun, Altiris, Inc., Netegrity, Inc., and Computer Associates.
Our competitors in the Linux market include BEA Systems, Inc.,
Red Hat, and Turbolinux, Inc. One pervasive factor facing 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. 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 will not significantly affect
Microsofts practices. This concern seems increasingly to
be shared by the Department of Justice and the litigating
states. For example, in the past, Microsoft has employed tactics
that limit or block effective and efficient interoperability
between Novell and Microsoft products. At the most recent status
conference in U.S. v. Microsoft held on January 23,
2004, the Department of Justice expressed concern that the
license Microsoft is offering for its communications protocols,
as required by the court to facilitate interoperability, might
not be having the desired effect of fostering competition. We
will ensure, to the best of our ability that our products will
interoperate with those of Microsoft as they enhance new
operating systems and applications.



| |                                           
| | ------------------------------------------
| | Celerant management consulting
    segment

The key competitive factors faced by the Celerant
segment are attracting and retaining the highest quality
consultants; the depth of our skills and expertise; the breadth
of 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 consulting area, which could inhibit our
ability to grow our consulting business. Additionally, the
worldwide marketplace for consulting services is highly
fragmented. In different regions of the world, there may be
multiple competitors, many with niche consultancies. Examples of
possible competitors include A.T. Kearney, McKinsey &
Co., Thomas Group Inc., IBM Services, Cap Gemini, and The
Management Consulting Group PLC.

If We Are Not Successful in our Strategy of
Taking a Competitive Position in the Linux Market, Our Revenue
Will Not Grow at the Rate We Anticipate

A significant aspect of our overall corporate
strategy is to embrace the open source movement, specifically,
the Linux operating system. It is our goal to stabilize the
decline in our NetWare revenue by offering our customers a clear
migration path to Linux should they decide to adopt an open
source solution, and yet enable them to stay with NetWare until
they are ready to make that decision. Over the past year, we
have increasingly demonstrated our commitment to the open source
development model, embraced open



|                          |   
|------------------------- | --
|Novell annual report 2003 | 35









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##### Table of Contents



source technologies in our own offerings,
invested significant energy and resources in key open source
initiatives, and contributed to the open source movement. We
plan to continue to do so in the future. We are strengthening
our ability to sell and support Linux in addition to NetWare.
Our ability to achieve success with our Linux and open source
products and services is dependent on a number of factors
including, but not limited to, the following: the growth of the
Linux market; the acceptance of Linux solutions by clients;
development of key Linux product solutions and upgrades; and the
acceptance of those products by large industry partners and
major accounts. If we are unable to grow the Linux products and
services to become a major component of our business, our
long-term growth will be negatively impacted.


If We Are Not Successful in Developing a
Strong Business with Our exteNd Products and Services, Our
Revenue Will Not Grow at the Rate We Anticipate

One key element of our strategy is to be a
leading force in the development of solutions that make the
process of developing open-standards, Web-based applications
fast, simple, and cost effective. Our exteNd solution set
leverages the power of standards such as Java and XML to unify
relevant information and services while enabling customers to
leverage prior technology investments and help them rapidly
deliver Web-based applications that are scalable, reliable, and
secure. The acquisition of SilverStream helped further our
development of web services products and enhanced our business
solutions product offerings. Our ability to achieve success with
our exteNd products and services is dependent on a number of
factors including, but not limited to, the following: the growth
of the Web-based applications industry; the acceptance of the
exteNd solution set by clients; development of key exteNd
product solutions and upgrades; and the acceptance of those
products by large industry partners and major accounts. If we
are unable to grow the exteNd products and services, our
long-term growth will be negatively impacted.

Our Existing Product Revenue May Deteriorate
More Rapidly Than Any Increase in Sales of Our New
Products

We have several existing products, which we have
been selling and upgrading for many years. Sales of these
existing products are declining at a faster rate than we are
able to increase sales of new products or technologies. Overall,
revenue in the Americas segment declined by $73 million in
fiscal 2003, primarily as a result of declining NetWare license
and maintenance sales and IT consulting sales. If we are
unsuccessful in increasing sales of new products or
technologies, particularly in our identity management and web
services product line, our long-term growth will be negatively
impacted.

If We Do Not Generate New Customers, Our
Ability to Grow Our Business Will Be Negatively
Impacted

A significant percentage of our revenue is
generated from existing customers. In order to achieve our
growth objectives, we must accelerate the rate at which we
generate new business. We have initiated several new sales and
marketing initiatives in order to accomplish this goal. If those
initiatives are not successful, our ability to cultivate new
customers may be adversely affected.

The Legal Actions Being Taken By the SCO Group
Could Adversely Affect Our Revenues Because of a Reduction in
Demand for Our SUSE Linux and Ximian Products

SCO filed legal action in March 2003 against IBM
alleging misappropriation of trade secrets, tortious
interference, unfair competition and breach of contract relating
to IBMs sale of products based on the Linux operating
system. Among other things, SCO maintains 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.
SCO has warned that legal liability for the use of Linux may
extend to commercial users, and SCO has threatened users with
litigation and sought licensing fees from them. 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 products and services could decrease, thereby reducing
revenue.



|   |                          
|-- | -------------------------
|36 | Novell annual report 2003









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Our Financial and Operating Results May Vary,
Negatively Affecting our Ability to Detect Trends

We often experience a higher volume of revenue at
the end of each quarter and during our fourth quarter. 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.

Operating results have been, and may also be,
affected by other factors including, but not limited to:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Timing of orders from customers and shipments to
    customers;                                       
|
| |  | Product mix, including a shift from higher margin
    to lower margin products or services;           
|
| |  | 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 derive benefits from the
    restructurings and our corporate strategy; and              
|
| |  | Inability to deliver solutions as expected by our
    customers and systems integration partners.     

We Have Experienced Delays in the Introduction
and Acceptance of New Products Due to Various Factors

As is common in the computer software industry,
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, and the
need to debug products prior to extensive
distribution. Significant delays in developing, completing, or
shipping new or enhanced products would adversely affect us.

Moreover, we may experience delays in market
acceptance of new releases of our products as we engage in
marketing and education of the user base regarding the
advantages of and system requirements for new products and as
customers evaluate the advantages and disadvantages of
upgrading. We have encountered these issues on each major new
release of our products, and expect that we will encounter such
issues in the future. Our ability to achieve desired levels of
revenue growth depends at least in part on the successful
completion, introduction, and sale of new versions of our
products. There can be no assurance that we will be able to
respond effectively to technological changes or new product
announcements by others, or that our research and development
efforts will be successful. Should we experience material delays
or revenue shortfalls with respect to new product releases, our
revenue and net income could be adversely affected.

We May Not be Able To Attract and Retain
Qualified Personnel Because of the Intense Competition for
Qualified Personnel in the Computer and Consulting
Industries

Our ability to maintain our competitive
technological position will depend, in large part, on our
ability to attract and retain highly qualified development,
consulting, and managerial personnel. Even in light of the
current economic downturn, competition for personnel of the
highest caliber is intense in the software and consulting
industries. The loss of a significant group of key personnel
would adversely affect our performance. The failure to
successfully promote and hire suitable replacements in a timely
manner could have a material adverse effect on our business.

If We Are Unable to Unify Our Diverse
Cultures, the Benefits of Our Solutions Strategy May Not Be
Fully Realized

We have a talented, energetic, and exciting group
of employees. As a result of our recent acquisitions, a number
of these employees come from diverse corporate cultural
backgrounds. We are in the process of a culture initiative to
bring us together towards a new common culture that revolves
around our solutions offerings. If we are not successful in
forging a new, vibrant culture with unified goals and a common
vision that



|                          |   
|------------------------- | --
|Novell annual report 2003 | 37









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##### Table of Contents



is solutions-based, employee energies may be
diverted or diluted and we may not achieve the full benefits of
our solutions strategy.


In The Event Significant Claims Are Brought
Under Our Recently Announced Novell Linux Indemnification
Program, We Could Incur Significant Expenses, Thereby Adversely
Affecting Our Results Of Operations.

We recently announced 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 SUSE®
Enterprise Linux Server 8 and who, after January 12, 2004,
obtain upgrade protection and a qualifying technical support
contract from us or a participating Novell or SUSE LINUX channel
partner. Although indemnification programs for proprietary
software are common in our industry, indemnification programs
that cover open source software are not. Copyright infringement
claims are not often brought against distributors of open source
software, but because of the relatively unique nature of the
Novell Linux Indemnification Program, the number and extent of
claims that might be brought thereunder is uncertain. SCO has
threatened to bring claims against end users of Linux for
copyright violations arising out of the facts alleged in
SCOs lawsuit against IBM and in SCOs public
statements, and some of these claims could be indemnified under
Novells Linux Indemnification Program. In the event that
claims for indemnification are brought under the Novell Linux
Indemnification Program, we could incur significant expense
reimbursing customers for their legal costs and, in the event
those claims are successful, for damages.

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 Internet and software industries. We have in
the past received letters or been the subject of claims
suggesting that it is infringing upon the intellectual rights of
others. For example, in May 2002, a suit was filed by France
Telecom SA and U.S. Philips Corporation against Novell
alleging infringement and seeking unspecified damages and an
injunction. In addition, we have faced and expect to continue to
face from time to time disputes over rights and obligations
concerning intellectual property. While we have no knowledge of
grounds for any such claims, the cost and time of defending
ourselves can be significant. In addition, we indemnify
customers against certain claims that our products infringe upon
the intellectual property rights of others. We could incur
substantial costs in defending ourselves and our customers
against infringement claims. 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.

We May Not Be Able to Protect Our Confidential
Information, Which May Adversely Affect Our Business

We generally enter into contractual relationships
with our employees that protect our confidential information. In
the event that our trade secrets or other proprietary
information is misappropriated, our business could be seriously
harmed. 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.



|   |                          
|-- | -------------------------
|38 | Novell annual report 2003









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We Face Increased Risks in Conducting a Global
Business, Which May Damage Business Results

We are a multi-national 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.                                          

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 fiscal 2003, we
recorded an impairment charge of $35 million related to
some of the investments in our portfolio whose market value had
experienced an other-than-temporary decline. As of
October 31, 2003, we had net unrealized gains, net of
taxes, on investments totaling approximately $1 million;
however, there can be no assurances that these gains will be
realized and that losses will not occur. 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 experience initial public offerings, the value of
our investments will decrease.

Our Existing Relationships With Other IT
Services Organizations May Be Impaired and We Could Lose
Business

We maintain relationships with IT services
organizations that recommend, design, and implement solutions
for their customers eBusiness that include our products.
At the same time, our service offerings compete with those of
these same organizations. Although many companies in
high-technology industries co-exist in a similar state of
competition, 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 could adversely affect our
business.

Our Business May Be Negatively Affected if We
Do Not Continue to Adapt to Rapid Technological Change, Evolving
Business Practices, and Changing Client Requirements

The software industry and Internet professional
services market is characterized by rapidly changing technology,
evolving business practices, and changing client needs.
Accordingly, our future success will depend in part on our
ability to continue to adapt and meet these challenges. Among
the most important challenges facing us, are the needs to
continue to:



| |   |                                                   
| | - | --------------------------------------------------
| |  | Effectively identify and use leading technologies;
|
| |  | Develop strategic and technical expertise;        



|                          |   
|------------------------- | --
|Novell annual report 2003 | 39









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##### Table of Contents





| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Influence and respond to emerging industry
    standards and other technology changes and to orient management
    teams to capitalize on these changes;
|
| |  | Recruit and retain qualified project personnel;                                                                                                         
|
| |  | Enhance current services;                                                                                                                               
|
| |  | Develop new services that meet changing customer
    needs; and                                                                                         
|
| |  | Effectively advertise and market business
    solutions.                                                                                                

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 it 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. Additionally, our Celerant management 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.

Our Stock Price Will Fluctuate

Our future earnings and stock price could be
subject to significant volatility, particularly on a quarterly
basis. Due to analysts expectations of continued growth,
any shortfall in anticipated earnings can be expected to have an
immediate and significant adverse effect on the trading price of
our common stock in any given period. Revenue fluctuations may
also contribute to the volatility of the trading price of our
common stock in any given period.

In addition, the market prices for securities of
software companies have been, and continue to be, very volatile.
The market price of our common stock, in particular, has been
subject to wide fluctuations in the past. As a result of the
foregoing factors and other factors that may arise in the
future, the market price of our common stock may be subject to
significant fluctuations within a short period of time. These
fluctuations may be due to factors specific to us, to changes in
analysts earnings estimates, or to factors affecting the
computer industry or the securities markets in general.



|   |                          
|-- | -------------------------
|40 | Novell annual report 2003









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##### Table of Contents






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, 2003.

Interest Rate Risk

The primary objective of our short-term
investment activities is to preserve principal while maximizing
yields without significantly increasing risk. Our strategy is to
invest in widely diversified short-term investments, consisting
primarily of investment grade securities, substantially all of
which either mature within the next twelve months or have
characteristics of short-term investments. A hypothetical 50
basis point increase in interest rates would result in an
approximately $1.6 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,
2003, gross unrealized gains, before tax effect on the
short-term public equity securities totaled $0.5 million. A
reduction in prices of 10% of these short-term equity securities
would result in approximately a $0.5 million decrease (less
than 0.5%) in the fair value of our short-term investments.

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

Foreign Currency Risk

We use derivatives to hedge those net assets and
liabilities that, when re-measured or settled according to
accounting principles generally accepted in the 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
$2 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, 2003. Actual results may differ
materially.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 41









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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

Novell, Inc.

|                                                               |  |      |    | 
|-------------------------------------------------------------- |  | ---- | -- | 
|                                                               |  | Page
|                                                               |  |     
|Consolidated Statements of Operations                          |  |      | 43 | 
|Consolidated Balance Sheets                                    |  |      | 44 | 
|Consolidated Statements of Stockholders
    Equity            |  |      | 45 | 
|Consolidated Statements of Cash Flows                          |  |      | 46 | 
|Notes to Consolidated Financial Statements                     |  |      | 47 | 
|Report of Ernst & Young LLP, Independent
    Auditors          |  |      | 82 | 
|Selected Consolidated Quarterly Financial
    Data  Unaudited |  |      | 83 | 



|   |                          
|-- | -------------------------
|42 | Novell annual report 2003









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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,
|                                                         |                                               | 2003                                                     |           | 2002        |         | 2001       
|                                                         |                                               |                                                          |           |             |         |            
|Net revenue:                                             |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         | Original software licenses                    |                                                          | $         | 265,256     |         |             | $         | 319,281 |         |   | $         | 366,878  |         
|                                                         | Maintenance and services                      |                                                          |           | 840,240     |         |             |           | 815,039 |         |   |           | 683,918  |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Total net revenue                                        |                                               |                                                          | 1,105,496 |             |         |             | 1,134,320 |         |         |   | 1,050,796 |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Cost of revenue:                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         | New software licenses                         |                                                          |           | 31,773      |         |             |           | 31,175  |         |   |           | 32,271   |         
|                                                         | Maintenance and services                      |                                                          |           | 406,945     |         |             |           | 418,243 |         |   |           | 306,363  |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Total cost of revenue                                    |                                               |                                                          | 438,718   |             |         |             | 449,418   |         |         |   | 338,634   |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Gross profit                                             |                                               |                                                          | 666,778   |             |         |             | 684,902   |         |         |   | 712,162   |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Operating expenses:                                      |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         | Sales and marketing                           |                                                          |           | 380,826     |         |             |           | 358,742 |         |   |           | 443,828  |         
|                                                         | Product development                           |                                                          |           | 183,758     |         |             |           | 169,247 |         |   |           | 191,709  |         
|                                                         | General and administrative                    |                                                          |           | 110,963     |         |             |           | 122,588 |         |   |           | 117,261  |         
|                                                         | Restructuring charges                         |                                                          |           | 43,067      |         |             |           | 19,100  |         |   |           | 80,177   |         
|                                                         | Purchased in-process research and development |                                                          |           | 920         |         |             |           | 3,000   |         |   |           |         |         
|                                                         | (Gain on sale) impairment of real property    |                                                          |           | (24,934     | )       |             |           | 80,350  |         |   |           |         |         
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         |                                               | Total operating expenses                                 |           |             | 694,600 |             |           |         | 753,027 |   |           |          | 832,975  |  
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Loss from operations                                     |                                               |                                                          | (27,822   | )           |         |             | (68,125   | )       |         |   | (120,813  | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Other income (expense):                                  |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         | Investment loss                               |                                                          |           | (21,702     | )       |             |           | (32,918 | )       |   |           | (154,572 | )       
|                                                         | Other, net                                    |                                                          |           | (5,486      | )       |             |           | 8,818   |         |   |           | (1,381   | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         |                                               | Other (expense), net                                     |           |             | (27,188 | )           |           |         | (24,100 | ) |           |          | (155,953 | )
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Loss before taxes                                        |                                               |                                                          | (55,010   | )           |         |             | (92,225   | )       |         |   | (276,766  | )       
|Income tax expense (benefit)                             |                                               |                                                          | 106,894   |             |         |             | 10,896    |         |         |   | (14,944   | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Loss before accounting change                            |                                               |                                                          | (161,904  | )           |         |             | (103,121  | )       |         |   | (261,822  | )       
|Cumulative effect of accounting change, net of
    taxes |                                               |                                                          |          |             |         |             | (143,702  | )       |         |   | (11,048   | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Net loss                                                 |                                               | $                                                        | (161,904  | )           |         | $           | (246,823  | )       |         | $ | (272,870  | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|Weighted-average shares outstanding:                     |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         | Basic and diluted                             |                                                          |           | 370,545     |         |             |           | 363,569 |         |   |           | 332,582  |         
|Net loss per share, basic and diluted:                   |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         |                                               | Before cumulative effect of accounting change            |           | $           | (0.44   | )           |           | $       | (0.28   | ) |           | $        | (0.79    | )
|                                                         |                                               | Cumulative effect of accounting change, net of
    taxes |           |             |        |             |           |         | (0.40   | ) |           |          | (0.03    | )
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         
|                                                         |                                               | $                                                        | (0.44     | )           |         | $           | (0.68     | )       |         | $ | (0.82     | )       
|                                                         |                                               |                                                          |           |             |         |             |           |         |         |   |           |         

See notes to consolidated financial statements.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 43









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##### Table of Contents



NOVELL, INC.

CONSOLIDATED BALANCE SHEETS

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


ASSETS

|                                     |                                                                   |                                                                   |                                            |             |        |           |         |         |        |           | 
|------------------------------------ | ----------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------ | ----------- | ------ | --------- | ------- | ------- | ------ | --------- | 
|                                     |                                                                   | October 31,                                                       |                                            | October 31,
|                                     |                                                                   | 2003                                                              |                                            | 2002       
|                                     |                                                                   |                                                                   |                                            |            
|Current assets:                      |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     | Cash and short-term investments                                   |                                                                   | $                                          | 751,852     |        |           | $       | 635,858 |       
|                                     | Receivables, less allowances ($26,852 
    2003, $39,676  2002) |                                                                   |                                            | 232,492     |        |           |         | 214,827 |       
|                                     | Prepaid expenses                                                  |                                                                   |                                            | 23,005      |        |           |         | 24,077  |       
|                                     | Deferred income taxes                                             |                                                                   |                                            |            |        |           |         | 21,204  |       
|                                     | Other current assets                                              |                                                                   |                                            | 23,204      |        |           |         | 23,572  |       
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total current assets                       |             |        | 1,030,553 |         |         |        | 919,538   | 
|Property, plant and equipment, net   |                                                                   |                                                                   | 255,526                                    |             |        |           | 369,189 |        
|Long-term investments                |                                                                   |                                                                   | 50,948                                     |             |        |           | 73,452  |        
|Goodwill                             |                                                                   |                                                                   | 213,300                                    |             |        |           | 179,534 |        
|Intangible assets, net               |                                                                   |                                                                   | 10,800                                     |             |        |           | 36,351  |        
|Other assets                         |                                                                   |                                                                   | 6,526                                      |             |        |           | 87,001  |        
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total assets                               |             | $      | 1,567,653 |         |         | $      | 1,665,065 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     | Accounts payable                                                  |                                                                   | $                                          | 50,258      |        |           | $       | 57,241  |       
|                                     | Accrued compensation                                              |                                                                   |                                            | 101,164     |        |           |         | 87,778  |       
|                                     | Other accrued liabilities                                         |                                                                   |                                            | 117,073     |        |           |         | 134,850 |       
|                                     | Income taxes payable                                              |                                                                   |                                            | 35,493      |        |           |         | 36,294  |       
|                                     | Deferred revenue                                                  |                                                                   |                                            | 322,470     |        |           |         | 275,344 |       
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total current liabilities                  |             |        | 626,458   |         |         |        | 591,507   | 
|Minority interests                   |                                                                   |                                                                   | 6,725                                      |             |        |           | 8,016   |        
|Stockholders equity:                |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     | Preferred stock, par value $.10 per share                         |                                                                   |                                            |             |        |           |         |         |       
|                                     |                                                                   | Authorized  500,000 shares;                                      |                                            |             |        |           |         |         |        |          
|                                     |                                                                   | Issued  0 shares                                                 |                                            |             |       |           |         |         |       |          
|                                     | Common stock, par value $.10 per share                            |                                                                   |                                            |             |        |           |         |         |       
|                                     |                                                                   | Authorized  600,000,000 shares;                                  |                                            |             |        |           |         |         |        |          
|                                     |                                                                   | Issued  376,460,107 shares 
    2003; 367,537,926 shares  2002 |                                            |             | 37,646 |           |         |         | 36,753 |          
|                                     | Additional paid-in capital                                        |                                                                   |                                            | 319,016     |        |           |         | 297,139 |       
|                                     | Retained earnings                                                 |                                                                   |                                            | 576,759     |        |           |         | 738,663 |       
|                                     | Accumulated other comprehensive income                            |                                                                   |                                            | 7,068       |        |           |         | 57      |       
|                                     | Other                                                             |                                                                   |                                            | (6,019      | )      |           |         | (7,070  | )     
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total stockholders equity                 |             |        | 934,470   |         |         |        | 1,065,542 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total liabilities and stockholders equity |             | $      | 1,567,653 |         |         | $      | 1,665,065 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        

See notes to consolidated financial statements.



|   |                          
|-- | -------------------------
|44 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(Amounts in thousands)


|                                                         |  |        |         |        |  |            |        |          |  |               |         |       |  |       |           |   |  |   |         |   |  |   |         |   |  |   |           |  
|-------------------------------------------------------- |  | ------ | ------- | ------ |  | ---------- | ------ | -------- |  | ------------- | ------- | ----- |  | ----- | --------- | - |  | - | ------- | - |  | - | ------- | - |  | - | --------- | -
|                                                         |  | Common |         |        |  |            |        |          |  | Accumulated   |         |       |  |      
|                                                         |  | Stock  |         | Common |  | Additional |        |          |  | Other         |         |       |  |      
|                                                         |  | No. of |         | Stock  |  | Paid-In    |        | Retained |  | Comprehensive |         |       |  |      
|                                                         |  | Shares |         | Amount |  | Capital    |        | Earnings |  | Income (Loss) |         | Other |  | Total
|                                                         |  |        |         |        |  |            |        |          |  |               |         |       |  |      
|Balance  October 31, 2000                               |  |        | 327,618 |        |  | $          | 32,762 |          |  | $             |        |       |  | $     | 1,319,853 |   |  | $ | (84,427 | ) |  | $ | (23,103 | ) |  | $ | 1,245,085 |  
|Stock issued from stock plans                            |  |        | 6,095   |        |  |            | 608    |          |  |               | 28,660  |       |  |       |          |   |  |   |        |   |  |   | (12,380 | ) |  |   | 16,888    |  
|Stock issued for acquisitions                            |  |        | 42,416  |        |  |            | 4,242  |          |  |               | 246,323 |       |  |       |          |   |  |   |        |   |  |   |        |   |  |   | 250,565   |  
|Shares cancelled                                         |  |        | (1,240  | )      |  |            | (124   | )        |  |               | (9,517  | )     |  |       |          |   |  |   |        |   |  |   | 3,981   |   |  |   | (5,660    | )
|Shares repurchased and retired                           |  |        | (12,548 | )      |  |            | (1,254 | )        |  |               | (9,134  | )     |  |       | (61,497   | ) |  |   |        |   |  |   |        |   |  |   | (71,885   | )
|Amortization of unearned stock compensation              |  |        |        |        |  |            |       |          |  |               |        |       |  |       |          |   |  |   |        |   |  |   | 21,662  |   |  |   | 21,662    |  
|Change in unrealized loss on investments, net of
    tax |  |        |        |        |  |            |       |          |  |               |        |       |  |       |          |   |  |   | 86,226  |   |  |   |        |   |  |   | 86,226    |  
|Cumulative translation adjustment, net of tax            |  |        |        |        |  |            |       |          |  |               |        |       |  |       |          |   |  |   | 656     |   |  |   |        |   |  |   | 656       |  
|Net loss                                                 |  |        |        |        |  |            |       |          |  |               |        |       |  |       | (272,870  | ) |  |   |        |   |  |   |        |   |  |   | (272,870  | )
|                                                         |  |        |         |        |  |            |        |          |  |               |         |       |  |       |           |   |  |   |         |   |  |   |         |   |  |   |           |  
|Comprehensive loss                                       |  |        |        |        |  |            |       |          |  |               |        |       |  |       |          |   |  |   |        |   |  |   |        |   |  |   | (185,988  | )
|                                                         |  |        |         |        |  |            |        |          |  |               |         |       |  |       |           |   |  |   |         |   |  |   |         |   |  |   |           |  
|Balance  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  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  October 31, 2003                               |  |        | 376,460 |        |  | $          | 37,646 |          |  | $             | 319,016 |       |  | $     | 576,759   |   |  | $ | 7,068   |   |  | $ | (6,019  | ) |  | $ | 934,470   |  
|                                                         |  |        |         |        |  |            |        |          |  |               |         |       |  |       |           |   |  |   |         |   |  |   |         |   |  |   |           |  

See notes to consolidated financial statements.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 45









---



##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Amounts in thousands)


|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |          |         |  
|----------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------- | -------- | ----------- | -------- | ----------- | -------- | -------- | ------ | - | -------- | -------- | ------- | -
|                                                                                    |                                                              |                                                        
|                                                                                    |                                                              | Fiscal Year Ended                                      
|                                                                                    |                                                              |                                                        
|                                                                                    |                                                              | October 31,                                             |          | October 31, |          | October 31,
|                                                                                    |                                                              | 2003                                                    |          | 2002        |          | 2001       
|                                                                                    |                                                              |                                                         |          |             |          |            
|Cash flows from operating activities                                                |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Net loss                                                                            |                                                              | $                                                       | (161,904 | )           |          | $           | (246,823 | )        |        | $ | (272,870 | )       
|Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    | Depreciation and amortization                                |                                                         |          | 61,058      |          |             |          | 68,785   |        |   |          | 86,708   |        
|                                                                                    | Gain on sale of fixed assets                                 |                                                         |          | (25,299     | )        |             |          | (8,762   | )      |   |          |         |        
|                                                                                    | Loss on impaired goodwill                                    |                                                         |          | 13,935      |          |             |          | 143,702  |        |   |          |         |        
|                                                                                    | Loss on impaired investments and fixed assets                |                                                         |          | 34,735      |          |             |          | 137,922  |        |   |          | 215,472  |        
|                                                                                    | Non-cash restructuring charges                               |                                                         |          | 31,268      |          |             |          | 16,426   |        |   |          | 67,646   |        
|                                                                                    | Purchased in-process research and development                |                                                         |          | 920         |          |             |          | 3,000    |        |   |          |         |        
|                                                                                    | (Increase) decrease in receivables                           |                                                         |          | (17,215     | )        |             |          | 18,599   |        |   |          | 47,682   |        
|                                                                                    | Decrease in prepaid expenses                                 |                                                         |          | 1,135       |          |             |          | 7,580    |        |   |          | 317      |        
|                                                                                    | Increase (decrease) in deferred income taxes                 |                                                         |          | 105,277     |          |             |          | (14,035  | )      |   |          | (18,691  | )      
|                                                                                    | Decrease in other current assets                             |                                                         |          | 368         |          |             |          | 7,741    |        |   |          | 10,460   |        
|                                                                                    | Increase in deferred revenue                                 |                                                         |          | 47,195      |          |             |          | 32,083   |        |   |          | 33,683   |        
|                                                                                    | (Decrease) in accounts payable                               |                                                         |          | (7,213      | )        |             |          | (23,386  | )      |   |          | (25,335  | )      
|                                                                                    | (Decrease) in accrued liabilities                            |                                                         |          | (29,254     | )        |             |          | (91,358  | )      |   |          | (53,095  | )      
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    |                                                              | Net cash provided by operating activities               |          |             | 55,006   |             |          |          | 51,474 |   |          |          | 91,977  |  
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Cash flows from financing activities                                                |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    | Issuance of common stock, net                                |                                                         |          | 20,130      |          |             |          | 13,186   |        |   |          | 11,228   |        
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    | Repurchases of common stock                                  |                                                         |          |            |          |             |          |         |        |   |          | (71,885  | )      
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    |                                                              | Net cash provided by (used in) financing
    activities |          |             | 20,130   |             |          |          | 13,186 |   |          |          | (60,657 | )
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Cash flows from investing activities                                                |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    | Expenditures for property, plant and equipment               |                                                         |          | (39,468     | )        |             |          | (27,610  | )      |   |          | (33,289  | )      
|                                                                                    | Proceeds from the sale of property, plant and
    equipment  |                                                         |          | 125,000     |          |             |          | 16,050   |        |   |          |         |        
|                                                                                    | Purchases of short-term investments                          |                                                         |          | (727,817    | )        |             |          | (549,008 | )      |   |          | (752,833 | )      
|                                                                                    | Maturities of short-term investments                         |                                                         |          | 117,485     |          |             |          | 262,974  |        |   |          | 639,507  |        
|                                                                                    | Sales of short-term investments                              |                                                         |          | 396,462     |          |             |          | 477,313  |        |   |          | 114,047  |        
|                                                                                    | Proceeds from investment by Volera minority
    stockholders |                                                         |          |            |          |             |          |         |        |   |          | 25,975   |        
|                                                                                    | Cash acquired from acquisitions                              |                                                         |          | 159         |          |             |          | 108,286  |        |   |          | 72,358   |        
|                                                                                    | Cash paid for acquisition of Ximian                          |                                                         |          | (40,205     | )        |             |          |         |        |   |          |         |        
|                                                                                    | Cash paid for acquisition of SilverStream                    |                                                         |          |            |          |             |          | (211,261 | )      |   |          |         |        
|                                                                                    | Cash paid for acquisition of Volera minority
    interest    |                                                         |          | (1,050      | )        |             |          | (3,500   | )      |   |          |         |        
|                                                                                    | Purchases of long-term investments                           |                                                         |          | (14,322     | )        |             |          | (26,143  | )      |   |          | (36,461  | )      
|                                                                                    | Other                                                        |                                                         |          | 11,565      |          |             |          | 14,299   |        |   |          | (12,234  | )      
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|                                                                                    |                                                              | Net cash (used in) provided by investing
    activities |          |             | (172,191 | )           |          |          | 61,400 |   |          |          | 17,070  |  
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Total (decrease) increase in cash and cash
    equivalents                          |                                                              |                                                         | (97,055  | )           |          |             | 126,060  |          |        |   | 48,390   |         
|Cash and cash equivalents  beginning
    of period                                 |                                                              |                                                         | 463,987  |             |          |             | 337,927  |          |        |   | 289,537  |         
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Cash and cash equivalents  end of
    period                                       |                                                              |                                                         | 366,932  |             |          |             | 463,987  |          |        |   | 337,927  |         
|Short-term investments  end of period                                              |                                                              |                                                         | 384,920  |             |          |             | 171,871  |          |        |   | 367,316  |         
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Cash and short-term investments  end
    of period                                 |                                                              | $                                                       | 751,852  |             |          | $           | 635,858  |          |        | $ | 705,243  |         
|                                                                                    |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Supplemental disclosures of non-cash financing
    and investing activities:        |                                                              |                                                         |          |             |          |             |          |          |        |   |          |         
|Issuance of stock for acquisitions                                                  |                                                              | $                                                       |         |             |          | $           |         |          |        | $ | 250,565  |         
|Property, plant and equipment acquired with
    restricted cash                     |                                                              | $                                                       |         |             |          | $           |         |          |        | $ | 223,027  |         
|Cash paid for income taxes                                                          |                                                              | $                                                       | 17,806   |             |          | $           | 20,514   |          |        | $ | 13,710   |         

See notes to consolidated financial statements.



|   |                          
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|46 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

October 31, 2003


A. Summary of Business Operations

Novell, Inc. has been a thought leader in the
field of computer networking since our development and release
of NetWare® in 1983. Building on this foundation, we
recently acquired two companies that are key players in the
Linux market. As a result of our 20 years of experience as
a leader in the field of computer networking, and the expertise
in the companies that we recently acquired, we believe we employ
some of the best engineers in the world. These engineers, in
collaboration with our consulting professionals, create
world-class information technology (IT) solutions.
We are proud of our people, their skills, and the dedication
they give the company. Leveraging this expertise, we expect to
continue the evolution of our cross-platform strategy and become
a leader in providing cross-platform solutions, web services,
and identity management. During fiscal 2003, we announced our
strategy to support Linux as well as NetWare, giving our
customers a choice by providing Novell® products and
services that run on both NetWare and Linux platforms. Our
solutions leverage our network expertise and the Web to help to
create a world without information boundaries.

Networking is more than connecting computers
together or routing and managing data. Networks are inherently a
varied mix of business process, infrastructure, computer
systems, applications, and other devices. Networking is about
connecting people to each other and the information they need.
We provide business solutions that work across multiple
platforms and are designed to secure and empower the networked
world, help organizations solve complex business challenges,
simplify their systems and processes, and capture new
opportunities. These include software applications and
consulting services that are developed using open Internet
standards and our own eDirectoryTM network
infrastructure products. They support highly distributed network
solutions and capitalize on the growth of the Internet. With
both software and service offerings, we can determine how
business solutions can be optimally used by our customers, and
we can provide the framework and applications for managing,
maintaining, and accessing the information and services of our
customers networks. The outcome is a business solution
that helps our customer deliver the right information, to the
right individual, at the right time, and on the right device.

Our strategy is to provide solutions that help
our customers address their information needs. A significant
aspect of our overall corporate strategy is to embrace the open
source movement, specifically, the Linux operating system. This
strategy benefits our customers by giving them expanded system
and platform alternatives and by providing them with our
trusted, proven expertise in both enterprise software and
services so they can deploy Linux strategically.

B. Summary of Significant Accounting
Policies

The accompanying consolidated financial
statements reflect the application of certain accounting
policies as described in this note and elsewhere in the
accompanying consolidated financial statements. We believe that
a critical accounting policy is one that is both important to
the portrayal of our financial condition and results and
requires managements most difficult, subjective or complex
judgments, often as the result of the need to make estimates
about the effect of matters that are inherently uncertain.

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.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 47









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.                                                         
|
| | 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.

Reclassifications



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain amounts reported in prior years have been
    adjusted from what was previously reported to reflect certain
    reclassifications to conform to the current years
    presentation. In addition, we have reclassified certain amounts
    as previously reported in our quarterly financial results for
    the third quarter of fiscal 2003 as reported in Form 10-Q.
    We reclassified an intangible impairment loss of
    $23.6 million from other income (expense) to cost of
    revenue in the statement of operations, decreasing gross profit
    as reported by $23.6 million. We also reclassified a gain
    on the sale of our San Jose, California, facility in the amount
    of $24.9 million from other income (expense) to operating
    expenses in the statement of operations, decreasing total
    operating expenses by $24.9 million from the amount
    previously reported. The net impact of these two
    reclassifications is a $1.3 million increase in income from
    operations and no effect on the net loss as reported on
    Form 10-Q in the third quarter of fiscal 2003.

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, to be the local currency.
    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. Such 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.

Cash,
Cash Equivalents, and Short-Term Investments



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



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Variable rate preferred stock instruments that
    are publicly traded and earn dividends periodically at a rate
    set in an auction. These instruments have auction dates within
    180 days of the prior auction date.



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|48 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fixed income securities, which have contractual
    maturities 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No other short-term investments have contractual
    maturities. 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 O). 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, trade accounts receivable and long-term
    investments. 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 provided for sales returns and bad debts.
    Provisions 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, 2003 or 2002. 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.
|
| | During the years ended October 31, 2003,
    2002 and 2001 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. Property, plant
    and equipment are reviewed periodically for indicators of
    impairment and assets are written down as appropriate.
    Depreciation and amortization expense related to plant and
    equipment totaled $47 million, $58 million and
    $57 million, in fiscal 2003, 2002 and 2001, respectively.
    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 | 



|                          |   
|------------------------- | --
|Novell annual report 2003 | 49









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                            
| | ---------------------------------------------------------------------------
| | At October 31, property, plant and equipment
    consists of the following:

|                                      |  |                        |          |             |  |   |          |  
|------------------------------------- |  | ---------------------- | -------- | ----------- |  | - | -------- | -
|                                      |  | October 31,            |          | October 31,
|                                      |  | 2003                   |          | 2002       
|                                      |  |                        |          |            
|                                      |  |                       
|                                      |  | (Amounts in thousands)
|Buildings and land                    |  | $                      | 226,971  |             |  | $ | 317,456  |  
|Furniture and equipment               |  |                        | 220,914  |             |  |   | 251,939  |  
|Leasehold improvements and other      |  |                        | 91,454   |             |  |   | 95,108   |  
|                                      |  |                        |          |             |  |   |          |  
|Property, plant and equipment at cost |  |                        | 539,339  |             |  |   | 664,503  |  
|Accumulated depreciation              |  |                        | (283,813 | )           |  |   | (295,314 | )
|                                      |  |                        |          |             |  |   |          |  
|Property, plant and equipment, net    |  | $                      | 255,526  |             |  | $ | 369,189  |  
|                                      |  |                        |          |             |  |   |          |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. In December 2001, we completed
    the sale of our 100,000 square foot office building in Herndon,
    Virginia for $16 million cash, resulting in a net gain of
    approximately $9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | At the beginning of fiscal 2002, we adopted
    Statement of Financial Accounting Standards (SFAS)
    No. 144, Accounting for the Impairment or Disposal of
    Long-Lived Assets, which addresses financial accounting
    and reporting for the impairment of long-lived assets and for
    long-lived assets to be disposed. 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 changes in the intended
    use of the facilities, as well as changes in local commercial
    real estate market conditions. We then performed an analysis of
    the properties undiscounted future cash flows and determined
    that their estimated future cost recovery was lower than the net
    book value of the assets recorded by the Company. Based on the
    results of this analysis, we obtained independent appraisals to
    determine the fair values of these properties. Based on the
    independent appraisals, we recorded a non-cash impairment charge
    of $80 million within operating expenses on the statement
    of operations. The building in Provo, Utah is classified as held
    and used because we do not have immediate plans to sell it. The
    facility in San Jose, California was sold in 2003 as described
    in the preceding paragraph. As of October 31, 2003, we have
    not identified any additional impairment of our long-lived
    assets.

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.

Disclosure
of Fair Value of Financial Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial instruments mainly consist of cash
    and cash equivalents and short-term investments, accounts
    receivable, long-term investments, and accounts payable. 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



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2003 and 2002, we did not hold any
    publicly-traded long-term equity securities.

Revenue



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue from software license fees is recognized
    when persuasive evidence of an agreement exists, delivery of the
    product has occurred, the fee is fixed or determinable and
    collection is probable. If the fee due from the customer is not
    fixed or determinable, revenue is recognized as payments become
    due from the customer. If collection is not considered probable,
    revenue is recognized when the fee is collected. 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, support and
    other similar services, is recognized as services are performed.
    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. Revenue recognized on multiple-element arrangements is
    allocated to each element of the arrangement based on the
    relative fair values of the elements, which may include software
    products, unspecified product upgrade protection, software
    support services, consulting, and training. Fair value is
    determined by vendor-specific objective evidence of the price
    charged to other customers when each element is sold separately.
    We have established sufficient vendor-specific objective
    evidence of the fair value of all elements of a multiple element
    arrangement.
|
| | Consulting 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 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.                                                                                                                                                                                                                                                                                 
|
| | Revenue includes reimbursable expenses charged to
    our clients. At the beginning of the second quarter of fiscal
    2002, we adopted Emerging Issues Task Force (EITF)
    Issue No. 01-14, Income Statement Characterization of
    Reimbursements Received for Out-of-Pocket Expenses
    Incurred and began to account for reimbursements received
    for incurred out-of-pocket expenses as revenue and the related
    expenses as cost of revenue. The adoption of EITF Issue
    No. 01-14 did not have an impact on net earnings in any
    reported period. We restated the prior periods, thereby
    increasing revenue and cost of revenue by $11 million in
    fiscal 2001.                                                                                                                                                                                                                                                 

Cost
of Revenue



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Amortization charges for developed technology are
    recorded as a cost of product 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.



|                          |   
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|Novell annual report 2003 | 51









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising costs are expensed as incurred.
    Advertising expenses totaled $38 million, $20 million
    and $52 million, in fiscal 2003, 2002 and 2001,
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | At October 31, 2003, we had authorized
    several stock-based compensation plans which are more fully
    described in Note M. Under these plans, options to purchase
    shares of our common stock could be granted to employees,
    consultants, and outside directors. We apply the intrinsic value
    method and related interpretations in accounting for our
    stock-based compensation. We adopted the disclosure-only
    provisions of SFAS No. 148. Accordingly, no compensation
    expense (except compensation expense related to restricted stock
    purchase grants, below-market option grants, and grants to
    non-employees) has been recognized for our stock-based
    compensation. If compensation expense for our stock-based
    compensation had been determined based on the fair value of the
    stock grants, our net loss and net loss per share would have
    been the pro forma amounts indicated below:

|                    |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |          |  
|------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | - | ----------- | - | ----------- | - | -------- | - |  | - | -------- | -
|                    |                                                                                                                                          |                          
|                    |                                                                                                                                          | Fiscal Year Ended        
|                    |                                                                                                                                          |                          
|                    |                                                                                                                                          | October 31,               |   | October 31, |   | October 31,
|                    |                                                                                                                                          | 2003                      |   | 2002        |   | 2001       
|                    |                                                                                                                                          |                           |   |             |   |            
|                    |                                                                                                                                          |                          
|                    |                                                                                                                                          | (Amounts in thousands,   
|                    |                                                                                                                                          | except per share amounts)
|Net loss:           |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                    | As reported                                                                                                                              |                           | $ | (161,904    | ) |             | $ | (246,823 | ) |  | $ | (272,870 | )
|                    | Less: total stock-based compensation expense
    determined under fair value-based method for all awards, net of
    related tax effects |                           |   | (28,753     | ) |             |   | (63,086  | ) |  |   | (84,828  | )
|                    | Add: total stock-based compensation expense
    recorded in the statement of operations                                                  |                           |   | 3,445       |   |             |   | 7,534    |   |  |   | 18,628   |  
|                    |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                    | Pro forma                                                                                                                                |                           | $ | (187,212    | ) |             | $ | (302,375 | ) |  | $ | (339,070 | )
|                    |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|Net loss per share: |                                                                                                                                          |                           |   |             |   |             |   |          |   |  |   |         
|                    | As reported basic                                                                                                                        |                           | $ | (0.44       | ) |             | $ | (0.68    | ) |  | $ | (0.82    | )
|                    | Pro forma basic                                                                                                                          |                           | $ | (0.51       | ) |             | $ | (0.83    | ) |  | $ | (1.02    | )
|                    | As reported diluted                                                                                                                      |                           | $ | (0.44       | ) |             | $ | (0.68    | ) |  | $ | (0.82    | )
|                    | Pro forma diluted                                                                                                                        |                           | $ | (0.51       | ) |             | $ | (0.83    | ) |  | $ | (1.02    | )



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2003,
    2002 and 2001: a risk-free interest rate of approximately 2.8%
    for fiscal 2003, 3.6% for fiscal 2002, and 4.8% for fiscal 2001;
    a dividend yield of 0.0% for all years; a weighted-average
    expected life of five years for all years; and a volatility
    factor of the expected market price of our common stock of 0.85
    for fiscal 2003, 0.87 for fiscal 2002, and 0.82 for fiscal 2001.
    The weighted-average fair value of options granted in fiscal
    2003, 2002, and 2001 was $2.38, $1.70, and $3.52, respectively.



|   |                          
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|52 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2003, 2002, and 2001: a dividend yield
    of 0.0% for all years; an expected life of six months for all
    years; an expected volatility factor of 0.85 for fiscal 2003,
    0.87 for fiscal 2002, and 0.82 for fiscal 2001; and a risk-free
    interest rate of approximately 1.1% for fiscal 2003, 1.5% for
    fiscal 2002, and 4.4% for fiscal 2001. The weighted-average fair
    value of the purchase rights granted on April 18, 2003,
    October 21, 2002, April 22, 2002, October 22,
    2001, April 23, 2001, and October 23, 2000, was $0.99,
    $0.93, $1.50, $1.52, $1.78, and $3.10, respectively.

Net
Loss Per Share



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic and diluted net loss per share is presented
    in conformity with SFAS No. 128, Earnings per
    Share. Basic net income loss per share is computed by
    dividing net loss by the weighted-average number of common
    shares outstanding during the period and excludes any dilutive
    effects of stock options, warrants, and convertible securities.
    Dilutive earnings per share include the dilutive effects of
    stock options, warrants, and convertible securities. The effects
    of stock options have not been included in fiscals 2003, 2002 or
    2001 diluted loss per share, as their effect would have been
    anti-dilutive.

|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |          |         | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------- | - | ----------- | ------- | ----------- | - | -------- | ------- |  | - | -------- | ------- | 
|                                          |                                                                                                            |                                            
|                                          |                                                                                                            | Fiscal Year Ended                          
|                                          |                                                                                                            |                                            
|                                          |                                                                                                            | October 31,                                 |   | October 31, |         | October 31,
|                                          |                                                                                                            | 2003                                        |   | 2002        |         | 2001       
|                                          |                                                                                                            |                                             |   |             |         |            
|                                          |                                                                                                            |                                            
|                                          |                                                                                                            | (Amounts in thousands,                     
|                                          |                                                                                                            | except per share data)                     
|Basic net loss per share computation:     |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|                                          | Net loss                                                                                                   |                                             | $ | (161,904    | )       |             | $ | (246,823 | )       |  | $ | (272,870 | )      
|                                          | Weighted-average shares outstanding                                                                        |                                             |   | 370,545     |         |             |   | 363,569  |         |  |   | 332,582  |        
|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|                                          | Basic net loss per share                                                                                   |                                             | $ | (0.44       | )       |             | $ | (0.68    | )       |  | $ | (0.82    | )      
|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|Diluted net income per share computation: |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|                                          | Net loss                                                                                                   |                                             | $ | (161,904    | )       |             | $ | (246,823 | )       |  | $ | (272,870 | )      
|                                          | Weighted-average shares outstanding                                                                        |                                             |   | 370,545     |         |             |   | 363,569  |         |  |   | 332,582  |        
|                                          | Incremental shares attributable to the assumed
    exercise of outstanding options (treasury stock method) |                                             |   |            |         |             |   |         |         |  |   |         |        
|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|                                          |                                                                                                            | Diluted weighted-average shares outstanding |   | $           | 370,545 |             |   | $        | 363,569 |  |   | $        | 332,582 | 
|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         
|                                          | Diluted net loss per share                                                                                 |                                             | $ | (0.44       | )       |             | $ | (0.68    | )       |  | $ | (0.82    | )      
|                                          |                                                                                                            |                                             |   |             |         |             |   |          |         |  |   |         



| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Had we recognized net income in fiscal 2003, 2002
    and 2001, incremental shares attributable to the assumed
    exercise of outstanding options would have increased diluted
    shares outstanding by 50,497, 70,308 and 50,983 shares,
    respectively.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 53









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Change
In Accounting Principle

Adoption
of SFAS No. 142



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 1, 2001, we adopted SFAS
    No. 142, resulting in a transitional goodwill impairment
    loss recorded as a change in accounting principle. See
    Note F for further details regarding the impairment loss.

Revenue
Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Prior to fiscal 2001, we recognized product
    revenue from sales to distribution channel partners upon
    shipment to the partner, and provided a reserve for contractual
    return obligations and other estimated product returns.
    Effective November 1, 2000, we changed our method of
    accounting for revenue related to these product sales to
    recognize such revenue upon the sell-through of the respective
    product from the distribution channel partner to the reseller or
    end user. We believe this change in accounting principle is
    preferable based on guidance provided in Staff Accounting
    Bulletin No. 101, Revenue Recognition in Financial
    Statements. The $11 million ($0.03 per share) charge
    for the cumulative effect of the change (after reduction for
    income taxes of $6 million) was included in income in the
    first quarter of fiscal 2001. Also, during the three months
    ended January 31, 2001, we recognized $7 million in
    revenue that was included in the cumulative effect adjustment at
    November 1, 2000. The effect of that revenue on the first
    quarter was to increase net income by $5 million ($0.01 per
    share).
|
| | Had we reported under our previous method of
    accounting for revenue recognition, the effect on earnings
    without consideration of the cumulative effect of the change
    would have been a decrease in earnings of approximately
    $10 million, or $0.03 per share, during fiscal 2001. The
    pro forma amounts presented in the consolidated statements of
    income were calculated assuming the accounting change was made
    retroactively to prior periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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 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, 2003 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. We do not currently hedge currency risks related to
    revenue or expenses denominated in foreign currencies.

Recent
Pronouncements



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the Financial Accounting
    Standards Board (FASB) issued SFAS No. 148,
    which provides companies with alternative methods of transition
    to the fair value method of accounting for stock-based employee
    compensation. We use the intrinsic value method of accounting
    for stock based



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|54 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | employee compensation, and have not elected the
    fair value-based method of accounting. SFAS No. 148 also
    amends the disclosure about the effects on reported net income
    of an entitys accounting policy decisions with respect to
    stock-based employee compensation, as reflected in Note B
    to the consolidated financial statements. Finally, SFAS
    No. 148 requires disclosure about those effects in future
    interim financial information.                                                                                                                                                                                                                                                                                       
|
| | In January 2003, the FASB issued Financial
    Interpretation No. (FIN) 46,
    Consolidation of Variable Interest Entities, was
    issued in January 2003. FIN 46 requires that if an entity is the
    primary beneficiary of a variable interest entity, the assets,
    liabilities and results of operations of the variable interest
    entity should be included in the consolidated financial
    statements of the entity. The provisions of FIN 46 were revised
    in December 2003 to be effective for financial statements
    periods ended after December 15, 2003. We do not have any
    arrangements with variable interest entities that will require
    consolidation of their financial information in our financial
    statements.
|
| | In April 2003, the FASB issued SFAS No. 149,
    Amendment of Statement 133 on Derivative Instruments
    and Hedging Activities. SFAS No. 149 amends and
    clarifies financial accounting and reporting for derivative
    instruments, including certain derivative instruments embedded
    in other contracts (collectively referred to as derivatives) and
    for hedging activities under SFAS No. 133, Accounting
    for Derivative Instruments and Hedging Activities. SFAS
    No. 149 is effective for contracts entered into or modified
    after June 30, 2003, and for hedging relationships designated
    after June 30, 2003. The adoption of this Statement did not
    have an effect on our financial statements.                   
|
| | In May 2003, the FASB issued SFAS No. 150,
    Accounting for Certain Financial Instruments with
    Characteristics of Both Liabilities and Equity. SFAS
    No. 150 establishes standards for how an issuer classifies
    and measures certain financial instruments with characteristics
    of both liabilities and equity. SFAS No. 150 is effective
    for financial instruments entered into or modified after
    May 31, 2003, and otherwise was effective at the beginning
    of the first interim period beginning after June 15, 2003,
    which for Novell, was the fourth quarter of 2003. The adoption
    of this Statement did not have an effect on our financial
    statements.                                                        

C. Acquisitions

Ximian,
Inc.

Pursuant to the terms of an Agreement and Plan of
Merger, dated as of August 4, 2003 by and among Novell,
Foxboro Acquisition Corp., a wholly owned subsidiary of Novell
(Foxboro), and Ximian, Inc. (Ximian),
Foxboro commenced a purchase of all of the outstanding shares of
Ximian common stock for approximately $41 million
consisting of cash consideration of $40 million and estimated
transaction costs of $1 million. On August 4, 2003, we
completed our acquisition of Ximian by merging Foxboro into
Ximian. 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.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 55









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The value of the acquisition was preliminarily
allocated as follows:

|                                      |                                               |                  |        |                       |  |            |                        
|------------------------------------- | --------------------------------------------- | ---------------- | ------ | --------------------- |  | ---------- | -----------------------
|                                      |                                               | Estimated        |        |                      
|                                      |                                               | Acquisition Cost |        | Asset Life (in years)
|                                      |                                               |                  |        |                      
|                                      |                                               | (In thousands)   |        |                      
|Adjusted 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                              |                                               |                  | 35,002 |                       |  | Indefinite
|                                      |                                               |                  |        |                       |  |           
|                                      |                                               | $                | 40,677 |                       |  |           
|                                      |                                               |                  |        |                       |  |           

The allocation will be adjusted as integration
plans are finalized, as allowed by SFAS No. 141,
Business Combinations. There are no other
outstanding contingencies that could affect the allocation. We
used an independent valuation firm to value the intangible
assets.

Goodwill from the Ximian 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 was allocated
to our geographic segments. Revenue from Ximian® products
will be included in the Cross-Platform Services
solutions group.

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

The $.92 million of in-process research and
development pertained to technology that was not currently
technologically feasible, 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, 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 directly from the related
products. Completion of development of these products is
dependent upon us delivering our Linux applications products and
successfully integrating Ximian. The in-process research and
development did not have any alternative future use and did not
otherwise qualify for capitalization.

Developed technology relates to Ximians
products that are commercially available and can be combined
with our current products and services. To determine the value
of developed technology, the expected future cash flow
attributable to the products was discounted taking into account
the risk associated with these assets. The analysis resulted in
a valuation of approximately $5.75 million (on a pretax
basis) 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 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. A 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
$1.23 million (on a pre-tax basis).



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|56 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SilverStream
Software, Inc.

In July 2002, we acquired 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 $211 million. Direct
transaction costs were approximately $4 million and the
fair value of SilverStream stock options assumed, both vested
and unvested, totaled $29 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 has been
deducted from the fair value of the unvested options and
recorded as deferred compensation. This deferred compensation
will be amortized over the remaining vesting period of
approximately two years, in accordance with FIN 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%.                                                                                                                                                                      
|
| |  | 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)
|                                      |                                               |                  |         |                      
|                                      |                                               | (Amounts in      |         |                      
|                                      |                                               | thousands)       |         |                      
|Adjusted 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                              |                                               |                  | 127,935 |                       |  | Indefinite
|                                      |                                               |                  |         |                       |  |           
|                                      |                                               | $                | 243,844 |                       |  |           
|                                      |                                               |                  |         |                       |  |           

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 and is
included in our web directory services group of products.



|                          |   
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|Novell annual report 2003 | 57









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

The value of deferred compensation of
approximately $5 million represents the intrinsic value of
the unvested options assumed by us as determined under the
guidance of FIN 44.

The $3 million of in-process research and
development pertains to replacement and enhancement technology
that was included in the next versions of the
exteNdTM product suite, and was not currently
technologically feasible, 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 currently shipping
and could be combined with our current 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 (on a
pre-tax basis) 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 (on a pre-tax basis).

Our statement of operations includes SilverStream
results for the period July 20, 2002 through
October 31, 2002 and for the full fiscal year 2003. The
unaudited pro forma consolidated statement of operations data
for fiscal years 2002 and 2001 set forth below gives effect to
the acquisition of SilverStream as if it had occurred on
November 1, 2000. 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 142 at the beginning of each of these
periods.

|                                       |  |                        |           |             |  |   |           |  
|-------------------------------------- |  | ---------------------- | --------- | ----------- |  | - | --------- | -
|                                       |  |                       
|                                       |  | Fiscal Year Ended     
|                                       |  |                       
|                                       |  | October 31,            |           | October 31,
|                                       |  | 2002                   |           | 2001       
|                                       |  |                        |           |            
|                                       |  |                       
|                                       |  | (Amounts in thousands,
|                                       |  | except per share data)
|Net revenue                            |  | $                      | 1,162,176 |             |  | $ | 1,135,072 |  
|Net loss before accounting change      |  |                        | (189,909  | )           |  |   | (326,538  | )
|Net loss                               |  |                        | (333,645  | )           |  |   | (337,620  | )
|Net loss per share  basic and diluted |  | $                      | (0.92     | )           |  | $ | (1.02     | )



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|58 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Cambridge
Technology Partners

On July 10, 2001, the stockholders of
Cambridge approved the acquisition of Cambridge by Novell and
beginning July 11, 2001, the Cambridge results of
operations were included in Novells financial statements.
The Company issued 0.668 shares of its common stock for each
share of Cambridge common stock outstanding on July 10,
2001. The transaction was accounted for as a purchase, and the
fair value of the consideration was approximately
$261 million, of which $251 million related to the
number of shares exchanged at a per share value of $5.907 (the
average closing price of a share of Novell common stock for the
seven-trading-day period beginning three days before the
announcement date of the acquisition), and $10 million
related to direct transaction costs. The value of the
acquisition was allocated as follows:

|                                  |  |                        |          |  
|--------------------------------- |  | ---------------------- | -------- | -
|                                  |  | (Amounts in thousands)
|Cash                              |  | $                      | 72,358   |  
|Accounts receivable, net          |  |                        | 61,825   |  
|Other current assets              |  |                        | 86,699   |  
|Net fixed assets and other assets |  |                        | 77,751   |  
|Liabilities assumed               |  |                        | (218,050 | )
|Goodwill                          |  |                        | 180,460  |  
|                                  |  |                        |          |  
|Total purchase consideration      |  | $                      | 261,043  |  
|                                  |  |                        |          |  

Assumed liabilities include approximately
$109 million of estimated merger-related costs, including
costs to exit certain activities of Cambridge. These costs
included approximately $12 million to involuntarily
terminate and relocate certain Cambridge employees,
approximately $18 million to exit certain Cambridge
facilities, approximately $77 million related to a
valuation allowance on Cambridge deferred tax assets, and
approximately $2 million for other related costs. Deferred
tax assets are discussed in Note G.

The Company did not amortize the goodwill
associated with the Cambridge acquisition but does review
goodwill periodically for potential impairment issues under the
guidance of SFAS No. 142. Based on the Companys
initial analysis under SFAS No. 142, performed as of
November 1, 2001, the Company recorded an impairment charge
of $144 million related to goodwill acquired as a part of
the Cambridge acquisitions. See Note F for further
information regarding this charge.

The unaudited pro forma consolidated statement of
operations data for fiscal years 2001 and 2000 set forth below
gives effect to the acquisition of Cambridge as if it occurred
on November 1, 1999. The unaudited pro forma results for
this period include an adjustment to reflect amortization of
goodwill recorded in conjunction with the acquisition. The basic
and diluted net loss per share amounts are computed using the
weighted-average number of shares of common stock outstanding
after the issuance of the Companys common stock to acquire
the outstanding shares of Cambridge.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 59









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                  |  |                        |           |             |  |   |           |  
|--------------------------------- |  | ---------------------- | --------- | ----------- |  | - | --------- | -
|                                  |  |                       
|                                  |  | Fiscal Year Ended     
|                                  |  |                       
|                                  |  | October 31,            |           | October 31,
|                                  |  | 2001                   |           | 2000       
|                                  |  |                        |           |            
|                                  |  |                       
|                                  |  | (Amounts in thousands,
|                                  |  | except per share data)
|Net revenue                       |  | $                      | 1,340,982 |             |  | $ | 1,764,705 |  
|Net loss before accounting change |  |                        | (370,310  | )           |  |   | (61,446   | )
|Net loss                          |  |                        | (381,358  | )           |  |   | (61,446   | )
|Net loss per share  basic        |  | $                      | (1.04     | )           |  | $ | (0.17     | )
|Net loss per share  diluted      |  | $                      | (1.04     | )           |  | $ | (0.16     | )

D.     Cash and
Short-Term Investments

Following is a summary of our cash and short-term
investments at October 31, 2003 and 2002:

|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |         |         | 
|-------------------------- | ------------------------------------- | ------------------------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                           |                                       |                                       |   |            |         |            |   | Fair       
|                           |                                       |                                       |   |            |         |            |   | Market     
|                           |                                       | Cost at                               |   | Gross      |         | Gross      |   | Value at   
|                           |                                       | October 31,                           |   | Unrealized |         | Unrealized |   | October 31,
|                           |                                       | 2003                                  |   | Gains      |         | Losses     |   | 2003       
|                           |                                       |                                       |   |            |         |            |   |            
|                           |                                       |                                      
|                           |                                       | (Amounts in thousands)               
|Cash and cash equivalents: |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           | Cash                                  |                                       | $ | 150,147    |         |            | $ |            |       |  | $ |     |      |   | $ | 150,147 |        
|                           | Corporate debt                        |                                       |   | 11,600     |         |            |   |            |       |  |   |     |      |   |   | 11,600  |        
|                           | U.S. Government and Agency Securities |                                       |   | 45,069     |         |            |   |            |       |  |   |     |      |   |   | 45,069  |        
|                           | Money market funds                    |                                       |   | 160,116    |         |            |   |            |       |  |   |     |      |   |   | 160,116 |        
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total cash and cash equivalents       |   |            | 366,932 |            |   |             |      |  |   |      |     |   |   |         | 366,932 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|Short-term investments:    |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           | Variable rate instruments             |                                       |   | 76,600     |         |            |   | 14          |       |  |   | (7   | )    |   |   | 76,607  |        
|                           | U.S. Government and Agency Securities |                                       |   | 115,538    |         |            |   | 388         |       |  |   | (127 | )    |   |   | 115,799 |        
|                           | Corporate debt                        |                                       |   | 186,242    |         |            |   | 1,326       |       |  |   | (209 | )    |   |   | 187,359 |        
|                           | Equity securities                     |                                       |   | 4,742      |         |            |   | 413         |       |  |   |     |      |   |   | 5,155   |        
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total short-term investments          |   |            | 383,122 |            |   |             | 2,141 |  |   |      | (343 | ) |   |         | 384,920 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total cash and short-term investments |   | $          | 750,054 |            |   | $           | 2,141 |  |   | $    | (343 | ) |   | $       | 751,852 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        





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|60 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |         |         | 
|-------------------------- | ------------------------------------- | ------------------------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                           |                                       |                                       |   |            |         |            |   | Fair       
|                           |                                       |                                       |   |            |         |            |   | Market     
|                           |                                       | Cost at                               |   | Gross      |         | Gross      |   | Value at   
|                           |                                       | October 31,                           |   | Unrealized |         | Unrealized |   | October 31,
|                           |                                       | 2002                                  |   | Gains      |         | Losses     |   | 2002       
|                           |                                       |                                       |   |            |         |            |   |            
|                           |                                       |                                      
|                           |                                       | (Amounts in thousands)               
|Cash and cash equivalents: |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           | Cash                                  |                                       | $ | 179,098    |         |            | $ |            |       |  | $ |     |      |   | $ | 179,098 |        
|                           | Corporate debt                        |                                       |   | 23,219     |         |            |   |            |       |  |   |     |      |   |   | 23,219  |        
|                           | U.S. Government and Agency Securities |                                       |   | 60,121     |         |            |   |            |       |  |   |     |      |   |   | 60,121  |        
|                           | Money market funds                    |                                       |   | 201,549    |         |            |   |            |       |  |   |     |      |   |   | 201,549 |        
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total cash and cash equivalents       |   |            | 463,987 |            |   |             |      |  |   |      |     |   |   |         | 463,987 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|Short-term investments:    |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           | U.S. Government and Agency Securities |                                       |   | 38,025     |         |            |   | 379         |       |  |   |     |      |   |   | 38,404  |        
|                           | Corporate debt                        |                                       |   | 125,245    |         |            |   | 2,534       |       |  |   | (113 | )    |   |   | 127,666 |        
|                           | Equity securities                     |                                       |   | 5,982      |         |            |   | 368         |       |  |   | (549 | )    |   |   | 5,801   |        
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total short-term investments          |   |            | 169,252 |            |   |             | 3,281 |  |   |      | (662 | ) |   |         | 171,871 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        
|                           |                                       | Total cash and short-term investments |   | $          | 633,239 |            |   | $           | 3,281 |  |   | $    | (662 | ) |   | $       | 635,858 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        

We had net unrealized gains related to short-term
investments, net of deferred taxes, of $1 million and
$2 million at October 31, 2003 and 2002, respectively.
We realized gains on the sales of securities of $2 million,
$8 million, and $11 million, in fiscal 2003, 2002, and
2001, respectively, while realizing losses on sales of
securities of $1 million, $1 million, and
$2 million, during those same periods, respectively. In
addition, during fiscal 2002 we recognized a $3 million
loss on short-term investments due to a change in market value
that was considered to be other-than-temporary.

E.     Long-Term
Investments

The primary components of long-term investments
as of October 31, 2003 and 2002 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.

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 2003,
2002, and 2001 we recognized impairment losses on long-term
investments totaling $35 million, $54 million and
$177 million, respectively. As of October 31, 2003 and
2002, there were no unrealized losses on public long-term equity
securities.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 61









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

F. Goodwill and Intangible
Assets



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

Goodwill includes approximately $127 million
from the July 2002 acquisition of SilverStream, approximately
$43 million from the July 2001 acquisition of Cambridge,
approximately $35 million from the August 2003 acquisition
of Ximian, and approximately $9 million related to the
acquisition of several small technology-related companies.
Goodwill has been allocated to our operating segments which are:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Americas  includes the United States,
    Canada, and Latin America                       
|
| |  | EMEA  includes Eastern and Western
    Europe, Middle East, and Africa                    
|
| |  | Asia Pacific  includes China, Japan,
    Southeast Asia, Australia, New Zealand, and India
|
| |  | Celerant Management Consulting                                                             

The following is a summary of goodwill, which has
been reallocated to these new segments, which we consider to be
reporting units for allocating and evaluating goodwill:

|                               |  |                |        |      |  |              |        |          |  |       |       |   |  |   |        |  |  |   |         |  
|------------------------------ |  | -------------- | ------ | ---- |  | ------------ | ------ | -------- |  | ----- | ----- | - |  | - | ------ |  |  | - | ------- | -
|                               |  | Americas       |        | EMEA |  | Asia Pacific |        | Celerant |  | Total
|                               |  |                |        |      |  |              |        |          |  |      
|                               |  |               
|                               |  | (In thousands)
|Balance as of November 1, 2002 |  | $              | 69,842 |      |  | $            | 60,447 |          |  | $     | 6,745 |   |  | $ | 42,500 |  |  | $ | 179,534 |  
|Acquisition of Ximian          |  |                | 17,598 |      |  |              | 14,204 |          |  |       | 3,200 |   |  |   |       |  |  |   | 35,002  |  
|Adjustments*                   |  |                | (623   | )    |  |              | (551   | )        |  |       | (62   | ) |  |   |       |  |  |   | (1,236  | )
|                               |  |                |        |      |  |              |        |          |  |       |       |   |  |   |        |  |  |   |         |  
|Balance as of October 31, 2003 |  | $              | 86,817 |      |  | $            | 74,100 |          |  | $     | 9,883 |   |  | $ | 42,500 |  |  | $ | 213,300 |  
|                               |  |                |        |      |  |              |        |          |  |       |       |   |  |   |        |  |  |   |         |  

* Adjustments relate to the determination of
contingencies related to the acquisition of SilverStream
merger-related liabilities.

We adopted SFAS No. 142 in the first quarter
of fiscal 2002. The following table shows what net loss would
have been had SFAS No. 142 been applied at the
beginning of fiscal 2001:

|                                      |             |                        |   |             |   |             |   |          |   |  |   |          |  
|------------------------------------- | ----------- | ---------------------- | - | ----------- | - | ----------- | - | -------- | - |  | - | -------- | -
|                                      |             |                       
|                                      |             | Fiscal Year Ended     
|                                      |             |                       
|                                      |             | October 31,            |   | October 31, |   | October 31,
|                                      |             | 2003                   |   | 2002        |   | 2001       
|                                      |             |                        |   |             |   |            
|                                      |             |                       
|                                      |             | (Amounts in thousands)
|Loss before extraordinary item:       |             |                        |   |             |   |             |   |          |   |  |   |         
|                                      | As reported |                        | $ | (161,904    | ) |             | $ | (103,121 | ) |  | $ | (261,822 | )
|                                      | Pro forma   |                        | $ | (161,904    | ) |             | $ | (103,121 | ) |  | $ | (258,894 | )
|Net loss:                             |             |                        |   |             |   |             |   |          |   |  |   |         
|                                      | As reported |                        | $ | (161,904    | ) |             | $ | (246,823 | ) |  | $ | (272,870 | )
|                                      | Pro forma   |                        | $ | (161,904    | ) |             | $ | (246,823 | ) |  | $ | (269,942 | )
|Basic and diluted net loss per share: |             |                        |   |             |   |             |   |          |   |  |   |         
|                                      | As reported |                        | $ | (0.44       | ) |             | $ | (0.68    | ) |  | $ | (0.82    | )
|                                      | Pro forma   |                        | $ | (0.44       | ) |             | $ | (0.68    | ) |  | $ | (0.81    | )

SFAS No. 142 also required that
companies perform an impairment test within six months of
adopting the statement. 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. Upon adoption, we
completed



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|62 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

our initial impairment test during the second
quarter of fiscal 2002. In Step 1, we reviewed our three
operating segments at that time (product, consulting, and
Volera), and determined our four reporting units (product,
Volera, IT consulting, and Celerant management consulting). Our
consulting segment was further segmented into two reporting
units (IT consulting and Celerant management consulting), based
on our internal reporting structure and because the units do not
share the same customer base or offer similar services. Based on
the present value of expected future cash flows and analysis of
qualitative factors, we determined that the IT consulting unit
had a fair value that was less than its carrying amount.
Step 2 was then performed for this unit to determine the
impairment amount, resulting in a transitional goodwill
impairment charge of $144 million as of November 1,
2001, which was recorded as a cumulative effect of an accounting
change in our Consolidated Statements of Operations. The decline
in fair value of the IT consulting unit was primarily due to a
softening in the consulting and technology markets as well as
the global economy, causing a sharp decline in IT consulting
revenue and profitability.

In the fourth quarter of fiscal 2003, we
performed our annual goodwill impairment test under SFAS
No. 142. This test was performed as of August 1, 2003.
To estimate the fair value of our current reporting units,
management made estimates and judgments about future cash flows
based on assumptions that are consistent with our fiscal 2004
budget and long-range plans used to manage the business. We also
considered our market capitalization as of August 1, 2003,
the date of our testing. Based on the results of our Step 1
analysis, we determined that no goodwill impairment existed in
any of our reporting units.

Changes to the estimates used in the Step 1
analysis, 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 $213 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,
|                        |  | 2003                   |        | 2002       
|                        |  |                        |        |            
|                        |  |                       
|                        |  | (Amounts in thousands)
|Developed technology    |  | $                      | 8,410  |             |  | $ | 32,769 | 
|Trade names             |  |                        | 2,390  |             |  |   | 3,582  | 
|                        |  |                        |        |             |  |   |        | 
|Total intangible assets |  | $                      | 10,800 |             |  | $ | 36,351 | 
|                        |  |                        |        |             |  |   |        | 

Developed technology at October 31, 2003,
related primarily to the cross-platform services product line as
a result of our August 2003 acquisition of Ximian and the exteNd
product line that we acquired as a part of our July 2002
acquisition of SilverStream. Trade names relate to the Ximian
and SilverStream individual product names, which we continue to
use. 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
an independent 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.

Because certain intangible assets were determined
to be impaired, we also analyzed our other long-lived assets for
indicators of impairment. This included goodwill and fixed
assets acquired from SilverStream.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 63









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Goodwill is reflective of the segment to which it
is allocated, not necessarily the company or technology from
which it originated, thus the analysis of goodwill is performed
on a geographic segment basis. No indicators of impairments were
noted. Fixed assets consisted mainly of computers and software,
none of which had become impaired. Our annual goodwill
impairment analysis is performed during our fourth fiscal
quarter of each year.

Intangible assets are shown net of accumulated
amortization of $11 million in fiscal 2003 and
$6 million in fiscal 2002. Amortization of intangibles is
estimated to be approximately $3 million in fiscal 2004,
$3 million in fiscal 2005, and $2 million in fiscal
2006.

G. 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
(benefit) consist of the following:

|                              |           |                        |                                    |             |        |             |  |   |         |         |   |   |         |         |  
|----------------------------- | --------- | ---------------------- | ---------------------------------- | ----------- | ------ | ----------- |  | - | ------- | ------- | - | - | ------- | ------- | -
|                              |           |                       
|                              |           | Fiscal Year Ended     
|                              |           |                       
|                              |           | October 31,            |                                    | October 31, |        | October 31,
|                              |           | 2003                   |                                    | 2002        |        | 2001       
|                              |           |                        |                                    |             |        |            
|                              |           |                       
|                              |           | (Amounts in thousands)
|Income tax expense (benefit): |           |                        |                                    |             |        |             |  |   |         |         |   |  
|                              | Current:  |                        |                                    |             |        |             |  |   |         |         |   |   |        
|                              |           | Federal                |                                    | $           |       |             |  | $ |        |         |   | $ |        |        
|                              |           | State                  |                                    |             | 800    |             |  |   | 1,488   |         |   |   | 555     |        
|                              |           | Foreign                |                                    |             | 23,512 |             |  |   | 19,625  |         |   |   | 16,851  |        
|                              |           |                        |                                    |             |        |             |  |   |         |         |   |  
|                              |           |                        | Total current income tax expense   |             |        | 24,312      |  |   |         | 21,113  |   |   |         | 17,406  |  
|                              |           |                        |                                    |             |        |             |  |   |         |         |   |  
|                              | Deferred: |                        |                                    |             |        |             |  |   |         |         |   |   |        
|                              |           | Federal                |                                    |             | 88,747 |             |  |   | (14,696 | )       |   |   | (35,475 | )      
|                              |           | State                  |                                    |             | (4,222 | )           |  |   | (5,093  | )       |   |   | (4,412  | )      
|                              |           | Foreign                |                                    |             | (1,943 | )           |  |   | 9,572   |         |   |   | 7,537   |        
|                              |           |                        |                                    |             |        |             |  |   |         |         |   |  
|                              |           |                        | Total deferred income tax benefit  |             |        | 82,582      |  |   |         | (10,217 | ) |   |         | (32,350 | )
|                              |           |                        |                                    |             |        |             |  |   |         |         |   |  
|                              |           |                        | Total income tax expense (benefit) |             | $      | 106,894     |  |   | $       | 10,896  |   |   | $       | (14,944 | )
|                              |           |                        |                                    |             |        |             |  |   |         |         |   |  



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|64 | Novell annual report 2003









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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,
|                                                                     |  | 2003              |       | 2002        |  | 2001       
|                                                                     |  |                   |       |             |  |            
|U.S. statutory rate                                                  |  |                   | (35.0 | )%          |  |             | (35.0 | )% |  |  | (35.0 | )%
|State income taxes, net of federal tax effect                        |  |                   | (4.0  | )           |  |             | (2.5  | )  |  |  | (0.9  | ) 
|Research and development tax credits                                 |  |                   | (6.7  | )           |  |             | (4.2  | )  |  |  | (1.9  | ) 
|Tax exempt income                                                    |  |                   |      |             |  |             | (0.9  | )  |  |  | (1.2  | ) 
|Foreign income taxed at different rates than
    U.S. statutory rate |  |                   | (9.8  | )           |  |             | (8.0  | )  |  |  |      |   
|Foreign losses not deductible in the
    U.S.                        |  |                   | 4.0   |             |  |             | 5.9   |    |  |  | 2.1   |   
|Valuation allowances                                                 |  |                   | 205.2 |             |  |             | 53.1  |    |  |  | 30.8  |   
|Reversal of permanently invested earnings                            |  |                   | 32.9  |             |  |             |      |    |  |  |      |   
|Other, net                                                           |  |                   | 7.7   |             |  |             | 3.4   |    |  |  | 0.7   |   
|                                                                     |  |                   |       |             |  |             |       |    |  |  |       |   
|Effective tax (benefit) rate                                         |  |                   | 194.3 | %           |  |             | 11.8  | %  |  |  | (5.4  | )%
|                                                                     |  |                   |       |             |  |             |       |    |  |  |       |   

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

|                           |  |                        |          |             |  |             |          |   |  |   |          |  
|-------------------------- |  | ---------------------- | -------- | ----------- |  | ----------- | -------- | - |  | - | -------- | -
|                           |  |                       
|                           |  | Fiscal Year Ended     
|                           |  |                       
|                           |  | October 31,            |          | October 31, |  | October 31,
|                           |  | 2003                   |          | 2002        |  | 2001       
|                           |  |                        |          |             |  |            
|                           |  |                       
|                           |  | (Amounts in thousands)
|Domestic                   |  | $                      | (129,395 | )           |  | $           | (168,341 | ) |  | $ | (309,864 | )
|Foreign                    |  |                        | 74,385   |             |  |             | 76,116   |   |  |   | 33,098   |  
|                           |  |                        |          |             |  |             |          |   |  |   |          |  
|Total loss before taxes    |  | $                      | (55,010  | )           |  | $           | (92,225  | ) |  | $ | (276,766 | )
|                           |  |                        |          |             |  |             |          |   |  |   |          |  
|Cash paid for income taxes |  | $                      | 17,806   |             |  | $           | 20,514   |   |  | $ | 13,710   |  
|                           |  |                        |          |             |  |             |          |   |  |   |          |  



|                          |   
|------------------------- | --
|Novell annual report 2003 | 65









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of deferred tax assets at
October 31, 2003 and 2002 are as follows:

|                        |                           |                                  |                           |                                |         |          |         |   |         |          |         |  
|----------------------- | ------------------------- | -------------------------------- | ------------------------- | ------------------------------ | ------- | -------- | ------- | - | ------- | -------- | ------- | -
|                        |                           | October 31,                      |                           | October 31,                   
|                        |                           | 2003                             |                           | 2002                          
|                        |                           |                                  |                           |                               
|                        |                           |                                 
|                        |                           | (Amounts in thousands)          
|Deferred income taxes:  |                           |                                  |                           |                                |         |          |         |  
|                        | Deferred tax assets:      |                                  |                           |                                |         |          |         |   |        
|                        |                           | Accruals                         |                           | $                              | 25,332  |          |         | $ | 25,692  |         
|                        |                           | Capital loss carryforward        |                           |                                | 40,053  |          |         |   | 39,538  |         
|                        |                           | Credit carryforwards             |                           |                                | 134,093 |          |         |   | 121,065 |         
|                        |                           | Depreciation                     |                           |                                |        |          |         |   | 11,815  |         
|                        |                           | Net operating loss carryforwards |                           |                                | 237,421 |          |         |   | 179,033 |         
|                        |                           | Intangibles from acquisitions    |                           |                                | 3,856   |          |         |   |        |         
|                        |                           | Investment impairments           |                           |                                | 56,081  |          |         |   | 46,105  |         
|                        |                           | Receivable valuation accounts    |                           |                                | 5,848   |          |         |   | 15,973  |         
|                        |                           | Unrealized loss on investments   |                           |                                | 44,385  |          |         |   | 44,269  |         
|                        |                           | Other items                      |                           |                                | (664    | )        |         |   | 1,392   |         
|                        |                           |                                  |                           |                                |         |          |         |  
|                        |                           |                                  | Gross deferred tax assets |                                |         | 546,405  |         |   |         | 484,882  |        
|                        |                           |                                  | Valuation allowance       |                                |         | (476,617 | )       |   |         | (346,032 | )      
|                        |                           |                                  |                           |                                |         |          |         |  
|                        |                           |                                  |                           | Total deferred tax assets      |         |          | 69,788  |   |         |          | 138,850 |  
|                        | Deferred tax liabilities: |                                  |                           |                                |         |          |         |   |        
|                        |                           | Depreciation                     |                           |                                | (7,660  | )        |         |   |        |         
|                        |                           | Foreign earnings                 |                           |                                | (62,128 | )        |         |   | (39,302 | )       
|                        |                           | Intangibles from acquisitions    |                           |                                |        |          |         |   | (4,021  | )       
|                        |                           |                                  |                           |                                |         |          |         |  
|                        |                           |                                  |                           | Total deferred tax liabilities |         |          | (69,788 | ) |         |          | (43,323 | )
|                        |                           |                                  |                           |                                |         |          |         |  
|Net deferred tax assets |                           | $                                |                          |                                |         | $        | 95,527  |  
|                        |                           |                                  |                           |                                |         |          |         |  

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, 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. 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. The valuation allowance on deferred tax assets increased
by $131 million, $98 million, and $175 million in
2003, 2002, and 2001, respectively.

As of October 31, 2003, we had U.S. net
operating loss carryforwards for federal tax purposes of
approximately $438 million. If not utilized, these
carryforwards will expire in fiscal years 2020 through 2023.
These amounts do not include an additional $268 million in
net operating loss carryforwards from acquired



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
$19 million of foreign loss carryforwards, of which
$1 million, $7 million, $4 million, and
$2 million are subject to expiration in years 2004, 2006,
2007, and 2008, respectively. The remaining losses do not
expire. We have $104 million in capital loss carryforwards,
which, if not utilized, will expire in fiscal years 2006 through
2008. We have foreign tax credit carryforwards of
$32 million that expire between 2004 and 2008, and general
business credits carryforwards of $86 million that expire
between 2018 and 2023. The remaining credits do not expire.

As of October 31, 2003, deferred tax assets
of approximately $40 million pertain to certain tax credits
and net operating loss carryforwards resulting from the exercise
of employee stock options. In addition, deferred tax assets of
approximately $44 million pertain to unrealized losses on
investments. A valuation allowance was provided for these
amounts. When recognized, the tax benefit of these credits and
losses will be accounted for as a credit to stockholders
equity. Deferred tax assets of $131 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. Of this,
$7 million related to deferred tax assets from the Ximian
acquisition. This acquired deferred tax assets subject to
limitation under the change of ownership rules of the Internal
Revenue Code, and is fully reserved. 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.

In conjunction with our decision to provide a
full valuation allowance on our net deferred tax assets, 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.

H. Restructuring Charges

During the third quarter of fiscal 2003, we
recorded a pre-tax restructuring charge 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. 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. By reporting segment, the Americas accounted for
$19.4 million of the restructuring charge, EMEA accounted
for $6.0 million, and Asia Pacific accounted for
$2.4 million.

During the fourth quarter of fiscal 2003, we
accrued an additional $10 million related to the fiscal
2003 restructuring plan as a result of the completion of
restructuring activities undertaken in the previous quarter. The
additional accrual relates mainly to the severance of
approximately 100 employees across all functional areas and
the closing of excess facilities. Such activities occurred
mostly in the Americas reporting segment.



|                          |   
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|Novell annual report 2003 | 67









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
during fiscal 2003 related to this restructuring:

|                                             |  |                        |        |          |  |             |         |             |  |   |        |  |  |   |        | 
|-------------------------------------------- |  | ---------------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | - | ------ |  |  | - | ------ | 
|                                             |  |                        |        |          |  |             |         | Balance at 
|                                             |  | Original               |        | Cash     |  | Non-Cash    |         | October 31,
|                                             |  | Charge                 |        | Payments |  | Adjustments |         | 2003       
|                                             |  |                        |        |          |  |             |         |            
|                                             |  |                       
|                                             |  | (Amounts In thousands)
|Severance and benefits                       |  | $                      | 20,287 |          |  | $           | (17,163 | )           |  | $ | 3,755  |  |  | $ | 6,879  | 
|Excess facilities and property and equipment |  |                        | 5,778  |          |  |             | (3,079  | )           |  |   | 5,735  |  |  |   | 8,434  | 
|Other restructuring-related costs            |  |                        | 1,729  |          |  |             | (423    | )           |  |   | 536    |  |  |   | 1,842  | 
|                                             |  |                        |        |          |  |             |         |             |  |   |        |  |  |   |        | 
|                                             |  | $                      | 27,794 |          |  | $           | (20,665 | )           |  | $ | 10,026 |  |  | $ | 17,155 | 
|                                             |  |                        |        |          |  |             |         |             |  |   |        |  |  |   |        | 

As of October 31, 2003, the remaining
balance of the third quarter of fiscal 2003 restructuring charge
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 next four quarters.

During the third quarter of fiscal 2003, we also
released approximately $1.4 million related to excess
restructuring reserves related to the second quarter fiscal 2002
restructuring event. This release is reflected in the second
quarter fiscal 2002 table below. The net impact of the third
quarter fiscal 2003 restructuring and the release of the excess
fiscal 2002 reserves was a charge of $26.4 million.

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 $8.7 million. The original
liability was based on estimated sublease rates and timing,
which have been affected by the decline in the real estate
market. This additional amount, which pertains to three separate
restructuring events, is included in the following tables.

During the second quarter of fiscal 2002, we
recorded a pre-tax restructuring charge of approximately
$20 million. The charge was a result of our continued move
towards 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 during fiscal 2003 related to the second quarter
fiscal 2002 restructuring:

|                                             |  |                        |       |          |  |          |        |             |  |   |       |   |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ----- | -------- |  | -------- | ------ | ----------- |  | - | ----- | - |  | - | ----- | 
|                                             |  | Balance at             |       |          |  |          |        | Balance at 
|                                             |  | October 31,            |       | Cash     |  | Non-Cash |        | October 31,
|                                             |  | 2002                   |       | Payments |  | Charges  |        | 2003       
|                                             |  |                        |       |          |  |          |        |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Severance and benefits                       |  | $                      | 4,258 |          |  | $        | (3,152 | )           |  | $ | (100  | ) |  | $ | 1,006 | 
|Excess facilities and property and equipment |  |                        | 4,221 |          |  |          | (4,460 | )           |  |   | 4,381 |   |  |   | 4,142 | 
|Other restructuring-related costs            |  |                        | 300   |          |  |          |       |             |  |   |      |   |  |   | 300   | 
|                                             |  |                        |       |          |  |          |        |             |  |   |       |   |  |   |       | 
|                                             |  | $                      | 8,779 |          |  | $        | (7,612 | )           |  | $ | 4,281 |   |  | $ | 5,448 | 
|                                             |  |                        |       |          |  |          |        |             |  |   |       |   |  |   |       | 

As of October 31, 2003, the remaining
balance of the second quarter 2002 restructuring charge included
accrued liabilities related to severance and benefits, which
will be paid out over the remaining severance obligation period,
and redundant facilities and other fixed contracts, which will
be paid over the respective remaining contract terms.



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

At the end of the fourth quarter of fiscal 2001,
we recorded $51 million of pre-tax restructuring charges
resulting from changes in general market conditions, changing
customer demands, and our evolution of our business strategy.
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 current revenue levels and our 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 fit 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 during fiscal 2003 related to the fourth quarter 2001
restructuring:

|                                             |  |                        |       |          |  |             |        |             |  |   |     |  |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ----- | -------- |  | ----------- | ------ | ----------- |  | - | --- |  |  | - | ----- | 
|                                             |  | Balance at             |       |          |  | Non-Cash    |        | Balance at 
|                                             |  | October 31,            |       | Cash     |  | Charges/    |        | October 31,
|                                             |  | 2002                   |       | Payments |  | Adjustments |        | 2003       
|                                             |  |                        |       |          |  |             |        |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Severance and benefits                       |  | $                      | 1,117 |          |  | $           | (1,013 | )           |  | $ |    |  |  | $ | 104   | 
|Excess facilities and property and equipment |  |                        | 4,651 |          |  |             | (2,181 | )           |  |   | 262 |  |  |   | 2,732 | 
|Other restructuring-related costs            |  |                        | 624   |          |  |             | (439   | )           |  |   |    |  |  |   | 185   | 
|                                             |  |                        |       |          |  |             |        |             |  |   |     |  |  |   |       | 
|                                             |  | $                      | 6,392 |          |  | $           | (3,633 | )           |  | $ | 262 |  |  | $ | 3,021 | 
|                                             |  |                        |       |          |  |             |        |             |  |   |     |  |  |   |       | 

As of October 31, 2003, 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.

During the third quarter of fiscal 2001, we
recorded a restructuring charge 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.



|                          |   
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|Novell annual report 2003 | 69









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the our new integrated strategy, and
discontinuing unprofitable product lines. The following table
summarizes the activity during fiscal 2003 related to the third
quarter 2001 restructuring costs.

|                                             |  |                        |       |          |  |          |        |             |  |   |     |  |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ----- | -------- |  | -------- | ------ | ----------- |  | - | --- |  |  | - | ----- | 
|                                             |  | Balance at             |       |          |  |          |        | Balance at 
|                                             |  | October 31,            |       | Cash     |  | Non-Cash |        | October 31,
|                                             |  | 2002                   |       | Payments |  | Charges  |        | 2003       
|                                             |  |                        |       |          |  |          |        |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Excess facilities and property and equipment |  | $                      | 3,889 |          |  | $        | (1,914 | )           |  | $ | 678 |  |  | $ | 2,653 | 
|Other restructuring-related costs            |  |                        | 137   |          |  |          | (137   | )           |  |   |    |  |  |   |      | 
|                                             |  |                        |       |          |  |          |        |             |  |   |     |  |  |   |       | 
|                                             |  | $                      | 4,026 |          |  | $        | (2,051 | )           |  | $ | 678 |  |  | $ | 2,653 | 
|                                             |  |                        |       |          |  |          |        |             |  |   |     |  |  |   |       | 

As of October 31, 2002, the remaining
balance of the third quarter 2001 restructuring charge was
comprised of accrued liabilities largely related to excess
facilities costs, which will be paid over the respective
remaining lease terms.

I. Line of Credit

We currently have a $15 million bank line of
credit, $13 million of which is secured. The line of credit
expires on April 1, 2004. The line is used primarily for
letter of credit purposes and is subject to the terms of a loan
agreement containing financial covenants and restrictions, none
of which are expected to significantly affect our operations. At
October 31, 2003, there were standby letters of credit of
$13 million outstanding under this agreement.

In addition, at October 31, 2003, we had
outstanding letters of credit of an insignificant amount at some
other banks, all of which have also been collateralized.

Our subsidiary in China has a $0.9 million
short-term revolving line of credit, which expires on
February 29, 2004. The line is being used for our China
operations, where there are restrictions on transfers of cash
into the country. This line is collateralized by standby letters
of credit, discussed above. At October 31, 2003, there was
$0.9 million outstanding under this revolving line.

J. 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 lease in the Czech Republic whereby we agreed to pay
any and all monies due under the lease, including legal fees if
the new lessee defaults on the lease. During fiscal 2003, we
paid approximately $100,000 against this guarantee and have
accrued an additional $0.7 million, which represents our
liability exposure if the new lessee continues in default,
excluding legal fees.

As an element of our standard contract terms, we
include an indemnification clause in our agreements with our
customers that indemnifies the licensee against certain
liability and damages arising from intellectual property
infringement claims arising from their use or distribution of
our software. These terms are relatively common in the
high-technology industry. We do not record a liability for
potential litigation claims related to indemnification
agreements with our customers. We do not believe the likelihood
of a material obligation is probable.



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

K. Commitments and
Contingencies

The Board of Directors has established the Novell
Venture account 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, 2003, we had a
carrying value of $50 million related to investments in
various venture capital funds and had commitments to contribute
an additional $56 million to these funds, of which
approximately $19 million could be contributed in fiscal
2004, approximately $16 million in fiscal 2005, and
approximately $21 million thereafter as requested by the
fund managers. We, through our acquisition of Cambridge, also
own both limited and general partnership interests in the
CTC I of approximately 24%. As of October 31, 2003, 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, 2003, we have various
operating leases related to our facilities with remaining terms
of more than one year. These leases have minimum annual lease
commitments of $32 million in fiscal 2004, $27 million
in fiscal 2005, $22 million in fiscal 2006,
$18 million in fiscal 2007, $13 million in fiscal 2008, and
$16 million thereafter. Furthermore, we have
$43 million of minimum rentals to be received in the future
from subleases.

Rent expense for operating and month-to-month
leases was $24 million, $29 million, and
$35 million, in fiscal 2003, 2002, and 2001, respectively.

L. Legal Proceedings

In May 2002, France Telecom SA and U.S. Philips
Corporation, alleged co-owners of a U.S. patent, filed suit in
the U.S. District Court, District of Delaware, against Novell.
The plaintiffs allege that Novells NetWare client software
infringes the patent. In the suit, the plaintiffs seek
unspecified monetary damages and an injunction prohibiting
infringement of the patent. 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 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 Exchange Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. In particular, they allege,
among other things, that there was undisclosed compensation
received by the underwriters of the public offerings of all of
these issuers, including SilverStreams. The plaintiffs are
seeking monetary damages, statutory compensation and other
relief that may be deemed appropriate by the court. While Novell
believes that SilverStream and its former officers and directors
have meritorious defenses to the claims, a Memorandum of
Understanding has been reached between many of the defendants
and the plaintiffs which contemplates a settlement of the
claims. The finalization of any settlement, however, has not
been completed. 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 annual report 2003 | 71









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##### Table of Contents



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. Novell believes it has meritorious defenses to
these remaining claims. While there can be no assurance as to
the ultimate disposition of the lawsuit, we do not believe that
the resolution of this litigation will have a material adverse
effect on our financial position, results of operations or cash
flows.

We are currently party to various legal
proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of
these matters cannot be predicted with certainty, we do not
believe that the outcome of any of these claims or any of the
above mentioned legal matters will have a material adverse
effect on our consolidated financial position, results of
operations or cash flow.

M. Stockholders Equity

In December 1988, the Board of Directors adopted
a Preferred Shares 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
preferred stock. Each 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 500,000 authorized shares of preferred
stock with a par value of $0.10 per share, none of which were
issued or outstanding at October 31, 2003 or
October 31, 2002.

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
after fiscal year end 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 $9.139, 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
thereunder by 8.1 million shares, the excess of the number
of options tendered over the number of options reissued.



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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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. Information below is as of fiscal year end, and does not
include the newly-issued options on December 16, 2003,
under the stock option exchange program.



| |                                                
| | -----------------------------------------------
| | 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, 2003, a total of 5,550,623 shares of common
stock remained available for issuance pursuant to the 2000 Plan.
The 1991 Stock Plan (the 1991 Plan), with an
aggregate of 80,278,305 shares of common stock reserved for
issuance, provides for the grant of incentive stock options,
nonqualified stock options, restricted stock purchase rights,
stock appreciation rights and long-term performance awards and
was most recently approved by the stockholders in March 1994. As
of October 31, 2003, a total of 28,446,515 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 30, 36 or 42 months), are exercisable upon vesting and
expire either 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 $.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, although some restricted stock grants made
during fiscal 2001 became fully vested in either nine or twelve
months from grant date. There were 1,498,154 shares of
outstanding restricted common stock that remained unvested and
subject to repurchase at our fiscal year end. 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 make a designation at the time of their election to
defer and 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,
2003, a total of 19,337,497 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 30, 36 or 42 months), are exercisable upon
vesting and expire either eight or ten years from the date of
grant.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 73









---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Novell/ SilverStream 1997 Stock Option Plan
(the SilverStream 1997 Plan), with an aggregate of
20,621,671 shares of common stock reserved for issuance,
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, 2003, a total of 14,106,804
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. 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, 2003, a
total of 533,165 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, 2003, a total of 754,500
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.



|   |                          
|-- | -------------------------
|74 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of our stock option plans
as of October 31, 2003, 2002 and 2001 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 $9.139 per share.

|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |       | 
|-------------------------------- | -------------------------------- | -------------------------------- | ------ | -------------- | - | ----------- | ---- | -------------- |  | --------- | ------ | -------------- | - | - | ---- | ----- |  |  | ------ | ------- | - | - | ----- | ----- | 
|                                 |                                  |                                  |        |                |   |            
|                                 |                                  | Fiscal 2003                      |        | Fiscal 2002    |   | Fiscal 2001
|                                 |                                  |                                  |        |                |   |            
|                                 |                                  |                                  |        | 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 |                                  |                                  | 75,814 |                |   | $           | 7.75 |                |  |           | 74,510 |                |   | $ | 8.79 |       |  |  | 67,108 |         |   | $ | 15.38 |      
|Granted:                         |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      
|                                 | Price at fair value              |                                  |        | 6,387          |   |             |      | 3.27           |  |           |        | 5,053          |   |   |      | 3.96  |  |  |        | 33,720  |   |   |       | 4.89  | 
|                                 | Price at greater than fair value |                                  |        |               |   |             |      |               |  |           |        |               |   |   |      |      |  |  |        | 134     |   |   |       | 19.30 | 
|                                 | Price at less than fair value    |                                  |        | 820            |   |             |      | 0.10           |  |           |        | 400            |   |   |      | 0.10  |  |  |        | 2,114   |   |   |       | 0.37  | 
|Assumed:                         |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      
|                                 | Price at greater than fair value |                                  |        |               |   |             |      |               |  |           |        | 6,857          |   |   |      | 11.10 |  |  |        |        |   |   |       |      | 
|                                 | Price at less than fair value    |                                  |        |               |   |             |      |               |  |           |        | 8,163          |   |   |      | 1.11  |  |  |        |        |   |   |       |      | 
|Exercised                        |                                  |                                  | (4,725 | )              |   |             | 2.38 |                |  |           | (1,369 | )              |   |   | 2.00 |       |  |  | (2,718 | )       |   |   | 2.30  |      
|Cancelled:                       |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      
|                                 | Forfeited                        |                                  |        | (35,051        | ) |             |      | 10.49          |  |           |        | (17,694        | ) |   |      | 9.70  |  |  |        | (25,793 | ) |   |       | 20.91 | 
|                                 | Expired                          |                                  |        | (1,370         | ) |             |      | 8.40           |  |           |        | (106           | ) |   |      | 23.92 |  |  |        | (55     | ) |   |       | 6.99  | 
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      
|Outstanding at end of year       |                                  |                                  | 41,875 |                |   | $           | 5.21 |                |  |           | 75,814 |                |   | $ | 7.75 |       |  |  | 74,510 |         |   | $ | 8.79  |      
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      
|Exercisable at end of year       |                                  |                                  | 26,887 |                |   | $           | 6.04 |                |  |           | 48,349 |                |   | $ | 8.92 |       |  |  | 29,879 |         |   | $ | 11.12 |      
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |      |       |  |  |        |         |   |   |       |      

The following table summarizes information about
stock options outstanding at October 31, 2003:

|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 
|--------------- |  | -------------------------------- | ------ | ------------------- |  | ------------------- | -------- | ----------- |  | -------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|                |  |                                  |        |                     |  |                     |          |            
|                |  |                                  |        | Options Outstanding |  |                    
|                |  |                                  |        |                     |  | Options Exercisable
|                |  |                                  |        | Weighted-           |  |                     |          |            
|                |  | Number of                        |        | Average             |  | Weighted-           |          | Number of   |  | Weighted-     
|                |  | Options                          |        | Remaining           |  | Average             |          | Options     |  | Average       
|                |  | Outstanding                      |        | Contractual Life    |  | Exercise Price      |          | Exercisable |  | Exercise Price
|                |  |                                  |        |                     |  |                     |          |             |  |               
|                |  |                                 
|                |  | (Number of options in thousands)
|$ 0.10  $ 3.06 |  |                                  | 8,525  |                     |  |                     | 7.44 yrs |             |  | $              | 2.28  |  |  |  | 2,402  |  |  | $ | 1.87  | 
|$ 3.12  $ 3.93 |  |                                  | 7,150  |                     |  |                     | 7.80 yrs |             |  |                | 3.77  |  |  |  | 2,517  |  |  |   | 3.86  | 
|$ 3.94  $ 4.68 |  |                                  | 9,188  |                     |  |                     | 7.64 yrs |             |  |                | 4.62  |  |  |  | 8,100  |  |  |   | 4.65  | 
|$ 4.70  $ 6.31 |  |                                  | 8,712  |                     |  |                     | 7.52 yrs |             |  |                | 5.17  |  |  |  | 6,056  |  |  |   | 5.16  | 
|$ 6.58  $10.63 |  |                                  | 7,135  |                     |  |                     | 5.24 yrs |             |  |                | 8.86  |  |  |  | 6,694  |  |  |   | 8.84  | 
|$10.80  $38.88 |  |                                  | 1,165  |                     |  |                     | 6.00 yrs |             |  |                | 18.03 |  |  |  | 1,118  |  |  |   | 18.05 | 
|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 
|$ 0.10  $38.88 |  |                                  | 41,875 |                     |  |                     | 7.15 yrs |             |  | $              | 5.21  |  |  |  | 26,887 |  |  | $ | 6.04  | 
|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 



|                          |   
|------------------------- | --
|Novell annual report 2003 | 75









---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                |  |                       |         |             |  |  |         |    
|--------------------------------------------------------------- |  | --------------------- | ------- | ----------- |  |  | ------- | ---
|Other information:                                              |  | Fiscal 2003           |         | Fiscal 2002
|                                                                |  |                       |         |            
|                                                                |  |                      
|                                                                |  | (Number of shares and
|                                                                |  | options in thousands)
|Options available for future grants                             |  |                       | 68,727  |             |  |  | 40,880  |    
|Shares of common stock outstanding at year end                  |  |                       | 376,460 |             |  |  | 367,538 |    
|Option reserve increase                                         |  |                       |        |             |  |  | 9,741   | (1)
|Options granted as a percentage of outstanding
    common stock |  |                       | 2%      |             |  |  | 6%      | (2)
|Option holders as a percentage of total employees               |  |                       | 82%     |             |  |  | 92%     |    



---



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | Increase in reserve due to the assumption of the
    SilverStream 1997 Plan and the SilverStream 2001 Plan.
|   
|(2) | Includes 15 million outstanding options
    assumed in connection with the SilverStream acquisition.       



| |                             
| | ----------------------------
| | 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
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 33%
of the eligible employees participated in the Purchase Plan in
fiscal 2003, 34% in fiscal 2002, and 43% in fiscal 2001. Under
the Purchase Plan, we issued 4 million shares to employees
in each of fiscal 2003 and 2002 and 3 million shares to
employees in fiscal 2001. This plan has approximately
9 million shares available for future issuance.

N. 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, whereby
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, whereby
eligible employees could contribute up to 20% of their annual
compensation, subject to limitations established by the Internal
Revenue Code of 1986. On January 1, 2004, Ximian employees
were eligible to participate in the Novell, Inc. 401(k)
retirement and savings plan, as amended. As soon as
administratively possible thereafter, the Ximian plan assets
will be rolled into the Novell, Inc. 401(k) retirement and
savings plan.

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



|   |                          
|-- | -------------------------
|76 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company matching contributions on our 401(k)
savings and retirement plan and other retirement plans were
$23 million, $19 million and $15 million, in
fiscal 2003, 2002 and 2001, respectively.

O. Comprehensive Income

Our other comprehensive income (loss) is
comprised of:

|                                                                                                                                                     |  |                        |        |             |  |             |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ----------- |  | ----------- | ------- | - |  | - | ------- | -
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | Fiscal Year Ended     
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | October 31,            |        | October 31, |  | October 31,
|                                                                                                                                                     |  | 2003                   |        | 2002        |  | 2001       
|                                                                                                                                                     |  |                        |        |             |  |            
|                                                                                                                                                     |  |                       
|                                                                                                                                                     |  | (Amounts in thousands)
|Total gross unrealized loss on investments during
    the year, net of tax benefit of $941, $6,408, and $33,634,
    respectively                    |  | $                      | (1,503 | )           |  | $           | (10,203 | ) |  | $ | (53,546 | )
|Add: adjustment for unrealized loss on investment
    impairments                                                                                    |  |                        |       |             |  |             | 3,130   |   |  |   | 136,851 |  
|Adjustment for net realized gains on investments
    included in net income (loss), net of tax expense of $500,
    $2,666, and $1,835, respectively |  |                        | 798    |             |  |             | 4,245   |   |  |   | 2,921   |  
|                                                                                                                                                     |  |                        |        |             |  |             |         |   |  |   |         |  
|Net unrealized gain (loss) on investments                                                                                                            |  |                        | (705   | )           |  |             | (2,828  | ) |  |   | 86,226  |  
|Cumulative translation adjustments, net of tax
    (expense) benefit of ($4,828), ($270), and ($412), respectively                                   |  |                        | 7,716  |             |  |             | 430     |   |  |   | 656     |  
|                                                                                                                                                     |  |                        |        |             |  |             |         |   |  |   |         |  
|Other comprehensive income (loss)                                                                                                                    |  | $                      | 7,011  |             |  | $           | (2,398  | ) |  | $ | 86,882  |  
|                                                                                                                                                     |  |                        |        |             |  |             |         |   |  |   |         |  

P. Related Party Transactions

During 2003 and 2002, 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 fiscal 2003 and 2002, services in the
amount of $0.2 million were provided by J.D. Robinson.

In fiscal 2002 and 2001 legal fees of
approximately $3 million each year were paid to Wilson,
Sonsini, Goodrich & Rosati, a law firm in which
Mr. Larry W. Sonsini, a former member of our Board is a
senior partner. Mr. Sonsini resigned as a board member in
the third quarter of fiscal 2002.

Q. 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 management consulting. The geographic segments are
Americas, EMEA, and Asia Pacific. 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 management consulting segment.

The geographic segments include:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Americas  includes the United States,
    Canada, and Latin America                       
|
| |  | EMEA  includes Eastern and Western
    Europe, Middle East, and Africa                    
|
| |  | Asia Pacific  includes China, Japan,
    Southeast Asia, Australia, New Zealand, and India



|                          |   
|------------------------- | --
|Novell annual report 2003 | 77









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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 2003            |           | Fiscal 2002  
|                                                                |                                    |                        |           |              
|                                                                |                                    |                        |           | Operating     |  |             |         | Operating    
|                                                                |                                    | Net Revenue            |           | Income (Loss) |  | Net Revenue |         | Income (Loss)
|                                                                |                                    |                        |           |               |  |             |         |              
|                                                                |                                    |                       
|                                                                |                                    | (Amounts in thousands)
|                                                                | Americas                           |                        | $         | 531,562       |  |             | $       | 182,971       |   |   | $         | 604,537 |  |   | $        | 279,162  |  
|                                                                | EMEA                               |                        |           | 348,105       |  |             |         | 98,085        |   |   |           | 322,712 |  |   |          | 122,010  |  
|                                                                | Asia Pacific                       |                        |           | 86,500        |  |             |         | 8,608         |   |   |           | 81,839  |  |   |          | 13,819   |  
|                                                                | Common unallocated operating costs |                        |           |              |  |             |         | (284,704      | ) |   |           |        |  |   |          | (382,360 | )
|                                                                |                                    |                        |           |               |  |             |         |               |   |   |           |         |  |   |          |         
|Total geographic segments                                       |                                    |                        | 966,167   |               |  |             | 4,960   |               |   |   | 1,009,088 |         |  |   | 32,631   |         
|Celerant management consulting                                  |                                    |                        | 139,329   |               |  |             | 5,115   |               |   |   | 125,232   |         |  |   | 5,167    |         
|Unallocated integration costs and restructuring
    adjustments |                                    |                        |          |               |  |             | (37,897 | )             |   |   |          |         |  |   | (105,923 | )       
|                                                                |                                    |                        |           |               |  |             |         |               |   |   |           |         |  |   |          |         
|Total                                                           |                                    | $                      | 1,105,496 |               |  | $           | (27,822 | )             |   | $ | 1,134,320 |         |  | $ | (68,125  | )       
|                                                                |                                    |                        |           |               |  |             |         |               |   |   |           |         |  |   |          |         

As noted above, we reorganized our operations and
began reporting our financial results in these four segments
beginning November 1, 2002. Financial data for fiscal 2001
is not separately available for the current segments.

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identity management and web services 
    solutions that help customers with their identity management and
    security issues. Products include Secure-Login/ Single Sign-On,
    DirXML®, iChain®, exteNdTM, and
    BorderManager®. Products in this category are branded as
    NsureTM and exteNd.                                                                                               
|
| |  | Cross-platform services  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®, GroupWise®,
    ZENworks®, and Novell iFolder®. Products in this
    category are branded as NterpriseTM.                      
|
| |  | Worldwide services  comprehensive
    worldwide IT consulting, education, 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. Services
    in this category are branded as NgageSM.
|
| |  | Celerant management consulting 
    operational strategy and implementation consulting services
    offered to a wide range of customers across various sectors,
    worldwide.                                                                                                                                                                                                                       



|   |                          
|-- | -------------------------
|78 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue by Solution Category

|                                        |                                      |                        |           |         |  |      |           |         |  |   |           |         | 
|--------------------------------------- | ------------------------------------ | ---------------------- | --------- | ------- |  | ---- | --------- | ------- |  | - | --------- | ------- | 
|                                        |                                      | 2003                   |           | 2002    |  | 2001
|                                        |                                      |                        |           |         |  |     
|                                        |                                      |                       
|                                        |                                      | (Amounts in thousands)
|                                        | Identity management and web services |                        | $         | 96,977  |  |      | $         | 82,610  |  |   | $         | 57,521  | 
|                                        | Cross-platform services              |                        |           | 569,859 |  |      |           | 608,750 |  |   |           | 689,519 | 
|                                        |                                      |                        |           |         |  |      |           |         |  |   |           |        
|Total software licenses and maintenance |                                      |                        | 666,836   |         |  |      | 691,360   |         |  |   | 747,040   |        
|Worldwide services                      |                                      |                        | 299,331   |         |  |      | 317,728   |         |  |   | 265,784   |        
|                                        |                                      |                        |           |         |  |      |           |         |  |   |           |        
|Total IT software and solutions         |                                      |                        | 966,167   |         |  |      | 1,009,088 |         |  |   | 1,012,824 |        
|Celerant management consulting          |                                      |                        | 139,329   |         |  |      | 125,232   |         |  |   | 37,972    |        
|                                        |                                      |                        |           |         |  |      |           |         |  |   |           |        
|Total net revenue                       |                                      | $                      | 1,105,496 |         |  | $    | 1,134,320 |         |  | $ | 1,050,796 |        
|                                        |                                      |                        |           |         |  |      |           |         |  |   |           |        

Geographic Information

Sales outside the United States are comprised of
sales to customers in Europe, Africa, the Middle East, Canada,
South America, Australia, and Asia Pacific. Other than sales in
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 subsidiary acts as the
sales principal and thus records the revenue on shipments it
makes. The Irish subsidiary 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,
|                               |                                | 2003                                |   | 2002        |           | 2001       
|                               |                                |                                     |   |             |           |            
|                               |                                |                                    
|                               |                                | (Amounts in thousands)             
|Revenue:                       |                                |                                     |   |             |           |             |   |           |           |  |   |          
|                               | U.S. operations                |                                     | $ | 682,909     |           |             | $ | 711,320   |           |  | $ | 745,046   |          
|                               | Irish operations               |                                     |   | 305,697     |           |             |   | 270,126   |           |  |   | 278,085   |          
|                               | Other international operations |                                     |   | 216,364     |           |             |   | 211,001   |           |  |   | 90,477    |          
|                               | Eliminations                   |                                     |   | (99,474     | )         |             |   | (58,127   | )         |  |   | (62,812   | )        
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |          
|                               |                                | Total revenue                       |   | $           | 1,105,496 |             |   | $         | 1,134,320 |  |   | $         | 1,050,796 | 
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |          
|Long-lived assets at year end: |                                |                                     |   |             |           |             |   |           |           |  |   |          
|                               | U.S. operations                |                                     | $ | 753,712     |           |             | $ | 1,007,391 |           |  | $ | 1,176,378 |          
|                               | Irish operations               |                                     |   | 108,709     |           |             |   | 109,250   |           |  |   | 109,554   |          
|                               | Other international operations |                                     |   | 94,528      |           |             |   | 75,476    |           |  |   | 74,290    |          
|                               | Eliminations                   |                                     |   | (426,438    | )         |             |   | (520,913  | )         |  |   | (542,960  | )        
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |          
|                               |                                | Total long-lived assets at year end |   | $           | 530,511   |             |   | $         | 671,204   |  |   | $         | 817,262   | 
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |          



|                          |   
|------------------------- | --
|Novell annual report 2003 | 79









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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,
|                       |              | 2003                   |           | 2002        |  | 2001       
|                       |              |                        |           |             |  |            
|                       |              |                       
|                       |              | (Amounts in thousands)
|Long-lived assets      |              | $                      | 530,511   |             |  | $           | 671,204 |           |  | $ | 817,262   |          
|Other long-term assets |              |                        | 6,589     |             |  |             | 74,323  |           |  |   | 59,378    |          
|Current assets         |              |                        | 1,030,553 |             |  |             | 919,538 |           |  |   | 1,027,366 |          
|                       |              |                        |           |             |  |             |         |           |  |   |           |          
|                       | Total assets |                        | $         | 1,567,653   |  |             | $       | 1,665,065 |  |   | $         | 1,904,006 | 
|                       |              |                        |           |             |  |             |         |           |  |   |           |          

In fiscal 2003, 2002, and 2001, sales to
international customers were approximately $593 million,
$552 million, and $460 million, respectively. In
fiscal 2003, 2002, and 2001, international sales to the EMEA
segment were 75%, 73%, and 68% 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.

R. Other Accrued Liabilities

Other accrued liabilities consist of the
following:

|                                 |  |                        |         |             |  |   |         | 
|-------------------------------- |  | ---------------------- | ------- | ----------- |  | - | ------- | 
|                                 |  | October 31,            |         | October 31,
|                                 |  | 2003                   |         | 2002       
|                                 |  |                        |         |            
|                                 |  |                       
|                                 |  | (Amounts in thousands)
|Other accrued expenses           |  | $                      | 58,837  |             |  | $ | 82,724  | 
|Restructuring reserves           |  |                        | 28,277  |             |  |   | 20,043  | 
|Accrued property and other taxes |  |                        | 17,309  |             |  |   | 16,156  | 
|Accrued marketing expenses       |  |                        | 6,940   |             |  |   | 10,159  | 
|Accrued royalties                |  |                        | 5,710   |             |  |   | 5,768   | 
|                                 |  |                        |         |             |  |   |         | 
|Total other accrued liabilities  |  | $                      | 117,073 |             |  | $ | 134,850 | 
|                                 |  |                        |         |             |  |   |         | 

S. Joint Venture

In April 2001, we completed the formation of
Volera, Inc., a majority owned joint venture among Novell,
Nortel Networks Corp., and Accenture Ltd. We contributed cash,
fixed assets, products, and technologies in exchange for a 89.9%
ownership in Volera. Nortel and Accenture contributed
$26 million in cash for the remaining 10.1% ownership. On
October 31, 2002, we acquired all of the outstanding shares
of Volera held by Nortel for $3.5 million, and in the first
quarter of fiscal 2003, we acquired all of the outstanding
shares of Volera held by Accenture for $1 million, making
Volera our wholly-owned subsidiary. Volera has since been merged
into Novell, with Novell being the surviving entity.

T. Subsequent Events

On January 12, 2004, Novell purchased SUSE
Linux AG (SUSE), a privately-held company and a
leading provider of Linux-based solutions, for approximately
$210 million in cash, not including merger and transaction
costs. The acquisition of SUSE enables us to offer a full range
of enterprise solutions on the Linux platform, from the server
to the desktop. We have retained an independent appraisal firm
to assist with the purchase price allocation, which will be
disclosed in our first quarter fiscal 2004 Form 10-Q.



|   |                          
|-- | -------------------------
|80 | Novell annual report 2003









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NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We recently announced 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 SUSE®
Enterprise Linux Server 8 and who, after January 12, 2004,
obtain upgrade protection and a qualifying technical support
contract from us or a participating Novell or SUSE LINUX channel
partner. We do not record a liability for potential claims
related to the Novell Linux Indemnification Program. We do not
believe the likelihood of a material obligation is probable.

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. SCO alleges
that our public statements and filings regarding the ownership
of the copyrights in UNIX and UnixWare have harmed SCOs
business reputation and affected its efforts to protect its
ownership interest in UNIX and UnixWare. SCO seeks to require us
to assign all copyrights that we have registered in UNIX and
UnixWare to SCO, to prevent us from representing that we have
any ownership interest in the UNIX and UnixWare copyrights, to
require us to withdraw all representations we have made
regarding our ownership of the UNIX and UnixWare copyrights, and
actual, special and punitive damages in an amount to be proven
at trial. We believe that we have meritorious defenses to these
claims and intend to vigorously defend ourselves in this suit.
Although there can be no assurance as to the ultimate
disposition of the suit, we do not believe that the resolution
of this litigation will have a material adverse effect on our
financial position, results of operations or cash flows.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 81









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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

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, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
October 31, 2003. 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
auditing standards generally accepted in the 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, 2003 and 2002, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended October 31, 2003, in conformity
with accounting principles generally accepted in the United
States. 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.



| |                      
| | ---------------------
| | ERNST
    & YOUNG LLP

San Jose, California

November 18, 2003, except for


Note T, as to which


the date is January 20, 2004




|   |                          
|-- | -------------------------
|82 | Novell annual report 2003









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##### Table of Contents



NOVELL, INC.

SELECTED CONSOLIDATED QUARTERLY FINANCIAL
DATA

Unaudited


|                                                          |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |       |  
|--------------------------------------------------------- | ------- | --------------------------------------------- | ------- | ------- | - | ------- | -------- | ------- | - | ----------- | ------- | ----- | - | - | -------- | ----- | - | - | --------- | ----- | -
|                                                          |         |                                               |         |         |   |         |          |         |   | Fiscal Year
|                                                          |         | First                                         |         | Second  |   | Third   |          | Fourth  |   | Ended      
|                                                          |         | Quarter                                       |         | Quarter |   | Quarter |          | Quarter |   | October 31,
|                                                          |         |                                               |         |         |   |         |          |         |   |            
|                                                          |         |                                              
|                                                          |         | (Amounts in thousands, except per share data)
|Fiscal 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 before accounting change                         |         |                                               | (11,888 | )       |   |         | (28,612  | )       |   |             | (12,400 | )     |   |   | (109,004 | )     |   |   | (161,904  | )    
|Net loss                                                  |         | $                                             | (11,888 | )       |   | $       | (28,612  | )       |   | $           | (12,400 | )     |   | $ | (109,004 | )     |   | $ | (161,904  | )    
|Net loss per share before accounting change:              |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | (0.03   | ) |         | $        | (0.08   | ) |             | $       | (0.03 | ) |   | $        | (0.29 | ) |   | $         | (0.44 | )
|                                                          | Diluted |                                               | $       | (0.03   | ) |         | $        | (0.08   | ) |             | $       | (0.03 | ) |   | $        | (0.29 | ) |   | $         | (0.44 | )
|Net loss per share:                                       |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | (0.03   | ) |         | $        | (0.08   | ) |             | $       | (0.03 | ) |   | $        | (0.29 | ) |   | $         | (0.44 | )
|                                                          | Diluted |                                               | $       | (0.03   | ) |         | $        | (0.08   | ) |             | $       | (0.03 | ) |   | $        | (0.29 | ) |   | $         | (0.44 | )
|Fiscal 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) per share before
    accounting change: |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | 0.02    |   |         | $        | (0.08   | ) |             | $       | 0.03  |   |   | $        | (0.25 | ) |   | $         | (0.28 | )
|                                                          | Diluted |                                               | $       | 0.02    |   |         | $        | (0.08   | ) |             | $       | 0.03  |   |   | $        | (0.25 | ) |   | $         | (0.28 | )
|Net income (loss) per share:                              |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | 0.02    |   |         | $        | (0.48   | ) |             | $       | 0.03  |   |   | $        | (0.25 | ) |   | $         | (0.68 | )
|                                                          | Diluted |                                               | $       | 0.02    |   |         | $        | (0.48   | ) |             | $       | 0.03  |   |   | $        | (0.25 | ) |   | $         | (0.68 | )
|Fiscal 2001                                               |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|Revenue                                                   |         | $                                             | 245,035 |         |   | $       | 240,755  |         |   | $           | 255,009 |       |   | $ | 309,997  |       |   | $ | 1,050,796 |      
|Gross profit                                              |         |                                               | 178,081 |         |   |         | 173,630  |         |   |             | 172,908 |       |   |   | 187,543  |       |   |   | 712,162   |      
|Income (loss) before taxes                                |         |                                               | 4,547   |         |   |         | (154,176 | )       |   |             | (23,068 | )     |   |   | (104,069 | )     |   |   | (276,766  | )    
|Net income (loss) before accounting change                |         |                                               | 3,274   |         |   |         | (151,311 | )       |   |             | (19,274 | )     |   |   | (94,511  | )     |   |   | (261,822  | )    
|Net loss                                                  |         | $                                             | (7,774  | )       |   | $       | (151,311 | )       |   | $           | (19,274 | )     |   | $ | (94,511  | )     |   | $ | (272,870  | )    
|Net income (loss) per share before
    accounting change  |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | 0.01    |   |         | $        | (0.48   | ) |             | $       | (0.06 | ) |   | $        | (0.26 | ) |   | $         | (0.79 | )
|                                                          | Diluted |                                               | $       | 0.01    |   |         | $        | (0.48   | ) |             | $       | (0.06 | ) |   | $        | (0.26 | ) |   | $         | (0.79 | )
|Net loss per share                                        |         |                                               |         |         |   |         |          |         |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | (0.02   | ) |         | $        | (0.48   | ) |             | $       | (0.06 | ) |   | $        | (0.26 | ) |   | $         | (0.82 | )
|                                                          | Diluted |                                               | $       | (0.02   | ) |         | $        | (0.48   | ) |             | $       | (0.06 | ) |   | $        | (0.26 | ) |   | $         | (0.82 | )



---



|  |                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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 2003 | 83









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##### Table of Contents








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

Not applicable.






|         |                        
|-------- | -----------------------
|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.




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 15, 2004, 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.



|   |                          
|-- | -------------------------
|84 | Novell annual report 2003









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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|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 Accountants 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
Accountants Fees and Services of the Proxy Statement.



|                          |   
|------------------------- | --
|Novell annual report 2003 | 85









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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(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, 2003, October 31, 2002
    and October 31, 2001.          
|
| | Consolidated Balance Sheets at October 31,
    2003 and October 31, 2002.                                                                  
|
| | Consolidated Statements of Stockholders
    Equity for the fiscal years ended October 31, 2003,
    October 31, 2002 and October 31, 2001.
|
| | Consolidated Statements of Cash Flows for the
    fiscal years ended October 31, 2003, October 31, 2002
    and October 31, 2001.          
|
| | Notes to Consolidated Financial Statements.                                                                                                
|
| | Report of Ernst & Young LLP, Independent
    Auditors.                                                                                     

2. Financial Statement Schedules:

The following consolidated financial statement
schedule is included on page 89 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 90 of this Form 10-K, which immediately precedes
    such exhibits, and is incorporated herein by reference.

(b) Reports on Form 8-K



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | The following Reports on Form 8-K were filed
    by the Registrant during the quarter ended October 31, 2003:



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Report on Form 8-K providing notice of
    Novells scheduled report of third quarter results and
    related conference call to be held on August 21, 2003,
    filed on August 4, 2003 under Item 5.

(c) Exhibits



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

(d) Financial Statement Schedules



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



|   |                          
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|86 | Novell annual report 2003









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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 28, 2004

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

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



|                          |   
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|Novell annual report 2003 | 87









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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 28, 2004
|                                                                           
|/s/  Joseph
    S. Tibbetts, Jr.              (Joseph
    S. Tibbetts, Jr.) |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer)          |  | January 28, 2004
|                                                                           
|/s/  Albert
    Aiello              (Albert
    Aiello)                     |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Fred
    Corrado              (Fred
    Corrado)                       |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Richard
    L. Crandall              (Richard
    L. Crandall)         |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Wayne
    Mackie              (Wayne
    Mackie)                       |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Claudine
    B. Malone              (Claudine
    B. Malone)           |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Richard
    L. Nolan              (Richard
    L. Nolan)               |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Thomas
    G. Plaskett              (Thomas
    G. Plaskett)           |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  John
    W. Poduska, Sr.              (John
    W. Poduska, Sr.)       |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  James
    D. Robinson, III              (James
    D. Robinson, III)   |  | Director                                                                                                 |  | January 28, 2004
|                                                                           
|/s/  Kathy
    Brittain White              (Kathy
    Brittain White)       |  | Director                                                                                                 |  | January 28, 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, 2001 |  | $              | 33,469 |            |  | $          | 29,727 |             |  | $          | 4,287 |            |  | $         | 21,580 |  |  | $ | 39,394 |  |  | $ | 2,420  |  |  | $ | 47,249 | 
|Fiscal year ended October 31, 2002 |  | $              | 47,249 |            |  | $          | 30,916 |             |  | $          | 2,819 |            |  | $         | 1,861  |  |  | $ | 32,734 |  |  | $ | 10,435 |  |  | $ | 39,676 | 
|Fiscal year ended October 31, 2003 |  | $              | 39,676 |            |  | $          | 9,838  |             |  | $          | 2,134 |            |  | $         |       |  |  | $ | 20,527 |  |  | $ | 4,269  |  |  | $ | 26,852 | 



|                          |   
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|Novell annual report 2003 | 89









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##### Table of Contents






EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                                                               
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 2.1    |             |  | Agreement and Plan of Reorganization, dated as of
    March 12, 2001, by and among Novell, Inc., Ceres Neptune
    Acquisition Corp. and Cambridge Technology Partners
    (Massachusetts), Inc.(1) (Exhibit 2.1)             
|        | 2.2    |             |  | 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.(2) (Annex A)
|        | 2.3    |             |  | Agreement and Plan of Merger, dated as of
    June 9, 2002 by and among Novell, Inc., Delaware Planet,
    Inc. and SilverStream Software, Inc.(3) (Exhibit 2.1)                                                              
|        | 3.1    |             |  | Restated Certificate of Incorporation, as amended
    and restated July 10, 2001.(2) (Exhibit 3(i))                                                                                                                           
|        | 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)    
|        | 10.1*  |             |  | Novell Inc., Employee Retirement and Savings Plan
    dated December 8, 1996.(7) (Exhibit 10.9)                                                                                                                               
|        | 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* |             |  | Key Employment Agreement dated as of May 22,
    2001 between Novell, Inc. and Jack L. Messman.(2)
    (Exhibit C to Annex A)                                                                                                 
|        | 10.14* |             |  | Letter Agreement dated January 30, 2002
    between Novell, Inc. and Chris Stone.(15) (Exhibit 10.1)                                                                                                                          
|        | 10.15* |             |  | Key Employment Agreement dated July 1, 2002
    between Novell, Inc. and Gerard Van Kemmel.(16)
    (Exhibit 10.1)                                                                                                            
|        | 10.16* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Alan J. Friedman.(17)                                                                                                                           
|        | 10.17* |             |  | Severance Agreement dated as of May 29, 2003
    between the Registrant and Ronald W. Hovsepian.(17)                                                                                                                          
|        | 10.18* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Joseph A. LaSala, Jr.(17)                                                                                                                       



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##### Table of Contents



|        |        |             |  |                                                                                                                                   
|------- | ------ | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.19* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Chris Stone.(18)
    (Exhibit 10.1)                 
|        | 10.20* |             |  | Severance Agreement dated as of February 10,
    2003 between the Registrant and Joseph S. Tibbetts, Jr.(17)                      
|        | 10.21* |             |  | Severance Agreement dated as of March 25,
    2003 between the Registrant and Gerard Van Kemmel.(18)
    (Exhibit 10.2)           
|        | 10.22* |             |  | Letter Agreement dated December 15, 1995
    between Novell, Inc. and RRE Advisors, LLC.(19)
    (Exhibit 10.2)                   
|        | 10.23* |             |  | Letter Agreement dated July 14, 2001 between
    Novell, Inc. and Dennis R. Raney.(20) (Exhibit 10.15)                            
|        | 21     |             |  | Subsidiaries of the Registrant.(17)                                                                                               
|        | 23.1   |             |  | Consent of Ernst & Young LLP, Independent
    Auditors.(17)                                                                       
|        | 31.1   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002(17)
|        | 31.2   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002(17)
|        | 32.1   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(17)
|        | 32.2   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(17)




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



| |     |                                                                                                                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Report on Form 8-K, filed March 16,
    2001 (File No. 0-13351).                                                                                                                           
|
| | (2) | 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.
|
| | (3) | 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).                                                                                                                        
|
| | (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 Annual Report on Form 10-K, filed for the
    fiscal year ended October 25, 1986 (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).                                                                                                       



|                          |   
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|Novell annual report 2003 | 91









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##### Table of Contents





| |     |                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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).                              
|    
|(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) | 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, 2002 (File
    No. 0-13351).  
|    
|(16) | 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, 2003 (File
    No. 0-13351).
|    
|(17) | Filed herewith.                                                                                                                                                                                                                   
|    
|(18) | 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, 2003 (File
    No. 0-13351).  
|    
|(19) | 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).
|    
|(20) | 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).          



|   |                          
|-- | -------------------------
|92 | Novell annual report 2003