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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K



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

SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended October 31,
2002

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.)

1800 South Novell Place

Provo, Utah 84606


(Address of principal executive offices and
zip code)


(801) 861-7000

(Registrants telephone number, including
area code)


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

None


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

Common Stock, par value $.10 per
share

(Title of Class)


Preferred Share Purchase Rights

(Title of Class)


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

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

The aggregate market value of the
registrants common stock held by non-affiliates on
January 17, 2003 (based on the last reported price of the
common stock on the NASDAQ National Market System on such date)
was $1,282,678,383. The aggregate market value of the
registrants common stock held by non-affiliates as of
April 30, 2002 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date)
was $1,341,256,619. 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 17, 2003 there were
368,248,694 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 8, 2003, 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. Qualitative and Quantitative Disclosures About Market Risk                         
|             | Item 8. Financial Statements and Supplementary Data                                         
|             | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III    
|             | Item 10.Directors and Executive Officers of Registrant                                      
|             | Item 11.Executive Compensation                                                              
|             | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|             | Item 13.Certain Relationships and Related Transactions                                      
|             | Item 14.Controls and Procedures                                                             
|PART IV     
|             | Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES  
|EXHIBIT 3.2 
|EXHIBIT 21  
|EXHIBIT 23.1
|EXHIBIT 99.1
|EXHIBIT 99.2



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NOVELL, INC.

TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|Item 2.  |  | Properties                                                                                |  |      | 12 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 13 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 14 | 
|        
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 15 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 16 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 17 | 
|Item 7A  |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 39 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 40 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 76 | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 76 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 76 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 76 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 76 | 
|Item 14. |  | Controls and Procedures                                                                   |  |      | 76 | 
|        
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |      | 77 | 

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 revenues, projected
costs, prospects, plans, and objectives of management are
forward-looking statements. As contained herein, the words
expects, anticipates,
believes, intends, will, and
similar types of expressions identify forward-looking
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. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any
change in the Companys 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. The Companys 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 2003.




PART I




Item 1. Business

The Company

Novell, Inc. has been a pioneer in the field of
computer networking since its development and release of
NetWare® in the mid 1980s. Networking is more than
connecting two or more computers together, or routing and
managing data. Networking is about connecting people to each
other, and connecting people to the information that they need.
The popularization of the Internet, an international computer
network linking together thousands of individual networks, and
the introduction of the World Wide Web (Web), a set of protocols
and standards that makes browsing the Internet both fast and
intuitive, have revolutionized networking, and opened up myriad
new opportunities for Novell. Similar to NetWare, Unix, Linux,
or Windows, which are operating systems on which applications
like word processors and spreadsheet programs run, the Web is a
new platform on which existing and new generations of powerful
applications may be run. Now more than ever we have a great
opportunity to leverage our networking expertise and deliver
world-class solutions to bring people and information together.

To most, the Net is just another word for the
Internet. To us, when we use the word Net, we use it to mean one
Net, communities of interconnected people. By combining
innovative technology with business and information technology
(IT) expertise, we help our customers break down
large applications to deliver business resources and services to
their workforce, partners, and customers. Information is safely
and securely delivered to authorized users at any location using
not only their computers, but also cell phones, PDAs and
other wireless devices. Our solutions leverage our network
expertise and the Web to help to create a world without
information boundaries.

As a result of our 20 years of expertise as
a leader in the field of computer networking, we have over a
thousand of the best networking engineers in the world. These
engineers work closely with our highly-qualified consulting
force to create world-class solutions. We are extraordinarily
proud of our people, the skills that they



|                          |  
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|Novell annual report 2002 | 1









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have, and the dedication that they bring to our
company. This is a tremendous strategic asset upon which we
intend to continue to capitalize. Leveraging this expertise, we
expect to become the leading company in providing secure Web
services and secure identity management.


Today we provide Net business solutions designed
to secure and power the networked world, helping organizations
solve complex business challenges, simplify their systems and
processes, and capture new opportunities. Net business solutions
include software applications and consulting services, developed
using open Internet standards and our own eDirectory
network infrastructure products, that support highly distributed
network solutions and capitalize on the growth of the Internet.
With both software and services offerings, we can determine how
Net business solutions can be used by an organization and the
requirements necessary to ensure proper security and access,
which can then be turned into a Net solutions approach that
helps our customer deliver the right information, to the right
individual, at the right time, and on the right device.

In addition, our Net business solutions include
essential network management, messaging, and collaboration
capabilities integrated through our directory services. Networks
are inherently a varied mix of business process, infrastructure,
computer systems, applications, and other devices. Our software
provides the framework and applications for managing,
maintaining and accessing the information and services of these
networks.

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

In fiscal 2002, we organized our operations into
the following three segments  product, consulting,
and Volera.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product  includes Net management
    services products, Net directory services products and
    product-related service support and training. Net management
    services products include products that provide networking
    capabilities, products that allow management of networks by
    protecting their integrity, products that allow collaboration or
    communication inside and outside a network, and products that
    enable customers to network securely, allowing insiders access
    to the Internet and authorized outsiders access to internal
    intranets. Net directory services products include products that
    allow customers to manage, simply and centrally, users and
    resources, products that enable automatic distribution of new or
    updated information across a network, products that allow
    customers to control access to applications, the Web, and
    network resources using policy-based management, and products
    that enable and simplified password management. Product-related
    services, support and training include networking
    certifications, technical services and customer support.
|
| |  | Consulting  is comprised of worldwide
    consulting services including information technology consulting,
    which provides consulting and support services that apply Net
    business solutions, and Celerant management consulting, which
    provides operational strategy and implementation consulting
    services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Volera  provides networking solutions
    that reduce the complexity and cost of deploying content and
    applications electronically, while improving scalability,
    management and security.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

We market our products and consulting services
through 45 U.S. and 83 international sales offices. We license
our products through site-license agreements that are either
sold by us, directly, or through service providers or software
distribution channel partners. We also distribute licenses as
packaged software products that are resold by systems
integrators and other value-added resellers (VARs),
and we license our products to original equipment manufacturers
(OEMs).

Novell was incorporated in Delaware on
January 25, 1983. Our headquarters and principal executive
offices are located at 1800 South Novell Place, Provo, Utah
84606. Our telephone number at that address is



|  |                          
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|2 | Novell annual report 2002









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(801) 861-7000. We also have executive
offices located in Waltham, Massachusetts, telephone number
(781) 464-8000. 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; Ireland; and India. We also contract out some
product development activities to third-party developers.


Principal Markets and Segment and Geographic
Information

We sell our products, technologies, and solutions
primarily to large-scale corporations, government entities,
educational institutions, resellers, and distributors both
domestically and internationally. Prior to fiscal 2002, we
operated in one business segment: directory-enabled networking
software and services. All products, technologies and solutions
were evaluated as a single unit. With the acquisition of
Cambridge Technology Partners (Massachusetts), Inc.
(Cambridge) in July 2001 and the formation of
Volera, Inc. (Volera), in May 2001, we organized our
business into three segments: product, consulting, and Volera.
Financial information was available for these three segments
beginning November 1, 2001. Segment disclosures and
geographical information for fiscal years 2002, 2001, and 2000
are presented in Part II, Item 8, Footnote O to 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 will also change. For instance, at the beginning of
fiscal 2003, Volera was integrated with the products segment.
Further changes in segment disclosures could occur during fiscal
2003.

Components of Net Business Solutions

Our principal products and services, by segment,
are as follows:

Products
segment



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The following Net management services products
    perform the core of our NterpriseTM 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 32% of our total revenue during fiscal
    2002.                                                                                    
|
| |  | 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 2002.
|
| |  | GroupWise® collaboration products offer
    traditional and mobile users support for any communication over
    intranets, extranets and the Internet. GroupWise products
    accounted for 9% of total revenue in fiscal 2002.                                                                                                                                                                          
|
| |  | 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.                                                                                                                                                                         



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | The following Net directory services products
    make up our secure identity management solutions set known as
    NsureTM:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



|                          |  
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|Novell annual report 2002 | 3









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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 net directory services products
    make up our secure identity management solutions set known as
    exteNdTM:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | exteNd DirectorTM, which provides
    interaction and portal services applications for the Web.                                                                                                                                                                                                
|
| |  | exteNd ComposerTM, which provides
    business process management XML integration services.                                                                                                                                                                                                    
|
| |  | 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 11%
    of total revenue in fiscal 2002.



| |                   
| | ------------------
| | Consulting Segment

Our Consulting segment, which is the core
component of our Ngage solutions set, is comprised of:



| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IT consulting provides comprehensive worldwide
    consulting and support services that apply Net business
    solutions to our customers business situations. IT
    consulting accounted for 16% of total revenue in fiscal 2002.                                                                      
|
| |  | Celerant management consulting provides
    operational strategy and implementation consulting services,
    which result in quantifiable value, to a wide range of customers
    across various sectors, worldwide. Celerant management
    consulting accounted for 11% of total revenue in fiscal 2002.



|  |                          
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|4 | Novell annual report 2002









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Volera



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Volera segment includes content distribution
    network software products, as well as the knowledge and
    expertise customers require in order to architect, integrate,
    and operate content networking solutions. Voleras content
    management software products are packaged under the name
    Velocity CDNTM. At the beginning of fiscal 2003,
    Volera was integrated with the products segment.

Acquisition

On July 19, 2002, we acquired SilverStream
Software, Inc. (SilverStream), a technology company
whose products leverage the power of internet standards, such as
Java and XML, to unify and repurpose existing applications and
information by harnessing the value of customers prior
technology investments and to help them rapidly deliver
Web-based applications that are scalable, reliable, and secure.

These products complemented our existing secure
identity management products and helped us to grow our secure
Web services product offerings. SilverStreams operations
have been integrated into the products segment and the exteNd
products are included in the Net directory services product
category, as described above. SilverStreams results of
operations were included with Novells beginning July 19,
2002.

Strategy

Our strategy is to integrate our products and
consulting services into solutions that help our customers
address their information technology issues. We have moved from
being focused on approximately 160 products to focusing on four
solutions sets. We categorize our solution sets as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | exteNd  solutions that make the
    process of developing open-standards, Web-based applications
    fast, simple, and cost effective. exteNd uses the technology we
    acquired with the SilverStream acquisition.                                                                                                                                                                                                                                                                                         
|
| |  | Nsure  solutions that help customers
    with their identity management and security issues. These
    include services that allow people access to the tools and
    resources they need, whether they are inside or outside of the
    customers organization. Nsure, which uses our Net
    directory services products, ensures that the right people have
    access to the right applications and information, and that
    companies can securely manage their employees, customers, and
    devices.
|
| |  | Nterprise  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. Nterprise
    uses our Net management services products such as NetWare,
    GroupWise and Novell iFolder®.                                                                                                                                                                        
|
| |  | Ngage  comprehensive worldwide
    consulting and support services that apply Net business
    solutions to our customers business situations. Ngage
    provides the business knowledge and technical expertise to help
    our customers implement exteNd, Nsure, and Nterprise.                                                                                                                                                                                                                          

Training and Support Programs

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, Lotus, Microsoft,
and Oracle.

Certified Novell Engineer
(CNE) Program:Through the CNE
program, we are strengthening the networking industrys
Level I support self-sufficiency. CNE certificate holders are
individuals who have received in depth training and information
and passed a comprehensive test validating their ability to
proficiently administer Novell networks and other networks.



|                          |  
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|Novell annual report 2002 | 5









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Certified Directory Engineer
(CDE) Program:Through the CDE
program, we are strengthening the IT industrys
Level II support for directory technologies. CDE
certificate holders are individuals who have completed advanced
directory training and have demonstrated proficiency and skills
through the completion of a hands-on exam.

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

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 revenues, and enhance our exposure to
customers around the world. A partial list of our strategic
alliances includes: BearingPoint (formerly KPMG Consulting),
CapGemini, Computer Science Corporation, Dell Corporation,
Deloitte and Touche, EMC, Hewlett-Packard, IBM, Intel, Nortel
Networks, PricewaterhouseCoopers, SAP and Siebel Systems. The
combination of powerful technology and solutions delivery
capability from Novell, with the carefully integrated skills and
competencies of our partners, allows us to go to market with
enhanced capability and completeness of vision.

Application Partner and Resellers.We work closely with application
developers to provide integrated software products and support
for end users. As Net management and directory services
solutions grow in importance, 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.

Worldwide Service and
Support.Novell is a global
corporation, and we serve our customers from offices located
throughout the world. 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, 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 Net business
solutions that satisfactorily meet dynamic market needs. Product
development expenses for the fiscal years 2002, 2001, and 2000
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 provided the consulting
segment the potential 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.
Business unit developers work with consulting and support to
solve specific customer problems and in the process generate
integrated solutions that can be used more broadly.



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Product development activities are placed
strategically throughout the world to translate, test, and meet
the needs of our customers worldwide. Our commitment to deliver
world-class products that simplify, secure, and accelerate the
Net means continued investment in product development.

Sales and Marketing

We sell Net business solutions that deliver
secure identity management (Nsure), Web application development
(exteNd) and cross-platform networking services (Nterprise), all
supported by strategic consulting and professional services
(Ngage). This is accomplished via our Clear Channel go to
market model 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, Provo, Utah, and from our 45 U.S. and 83
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, 2002, 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,
solutions and services through license agreements through
partners or resellers in or near their geographic locations.

International Revenue.In fiscal 2002, 2001, and 2000,
approximately 49%, 44%, and 43%, respectively, of our revenue
were to customers outside the U.S. Approximately 26% of all
international revenue have been 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 CIO
importance and control. Our primary marketing audience is the
CIO and CXO, the other members of management of customer
organizations, 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. We will be conducting a
global advertising campaign that will build market awareness.
The events that we sponsor will be tightly focused and will
leverage our resources. We have improved our support materials
that we provide to our channel partners and distributors. In
March 2002, the seventeenth annual BrainShare® Conference
was held to inform and educate developers about our product



|                          |  
|------------------------- | -
|Novell annual report 2002 | 7









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##### Table of Contents



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 Net services solutions in general, as well as to promote
our products.


Major Customers

None of our customers accounted for more than 10%
of our revenue in fiscal years 2002, 2001, or 2000.

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

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.

Product and Volera segments

In addition to the factors listed above, key
competitive factors in the product and Volera segments 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 the product and Volera segments include
Microsoft, IBM, BEA Systems, Sun Microsystems, Altiris,
Netegrity, and Computer Associates.

Consulting segment

The key competitive factors faced by the
consulting 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 consulting services is highly
competitive due to the existence of several large consulting
firms specializing in the information systems area, such as IBM,
Accenture, EDS and Microsoft. 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.



|  |                          
|- | -------------------------
|8 | Novell annual report 2002









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General

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 are
concerned, however, that the settlement of that litigation
between the Department of Justice and Microsoft will not
significantly affect Microsofts practices, and that
Microsoft may continue to engage in business practices that
unfairly inhibit the growth of its competitors, including
Novell. For example, in the past, Microsoft has employed tactics
that limit or block effective and efficient interoperability
between its products and Novells. 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.

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
Microsystems 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
addition, no assurance can be given that any patents issued to
us will not be challenged, invalidated or circumvented or that
the rights granted thereunder 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 unsatisfactory results
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.



|                          |  
|------------------------- | -
|Novell annual report 2002 | 9









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##### Table of Contents



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 three 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, 2002, we had 6,524
permanent and temporary employees. The functional distribution
of our employees was: sales and marketing  1,542;
product development  1,548; general and
administrative  912; and service, consulting,
training, and operations  2,522. Of these,
2,926 employees are in locations outside the U.S. All our
other personnel are based at our facilities in Utah, California,
Massachusetts, 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.

Executive Officers of the Registrant

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

|                      |  |     |    |          |  |                                                                 
|--------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Jack L. Messman       |  |     | 62 |          |  | Chairman of the Board, President and Chief
    Executive Officer
|Ronald C. Foster      |  |     | 52 |          |  | Senior Vice President, Chief Financial Officer                  
|Alan J. Friedman      |  |     | 55 |          |  | Senior Vice President, People                                   
|Joseph A. LaSala, Jr. |  |     | 48 |          |  | Senior Vice President, General Counsel and
    Secretary        
|Carl S. Ledbetter     |  |     | 53 |          |  | Senior Vice President, Engineering, Research and
    Development
|H. Carvel Moore       |  |     | 46 |          |  | President, Novell Americas                                      
|Christopher Stone     |  |     | 45 |          |  | Vice Chairman, Office of the CEO                                
|Gerard Van Kemmel     |  |     | 63 |          |  | 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 USDATA Corporation.



|   |                          
|-- | -------------------------
|10 | Novell annual report 2002









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| |                 
| | ----------------
| | Ronald C. Foster

Ronald C. Foster has served as Senior Vice
President and Chief Financial Officer of Novell since July 2001.
Mr. Foster joined Novell as Vice President and Corporate
Controller in November 1998. Prior to joining Novell,
Mr. Foster served as Vice President of Finance, Operations
Controller with Applied Materials, Inc., a manufacturer of
semiconductor fabrication equipment, from March 1996 to October
1998.



| |                 
| | ----------------
| | 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
1996 to March 2000.



| |                         
| | ------------------------
| | Carl S. Ledbetter, Ph.D.

Carl S. Ledbetter, Ph.D. has served as Senior
Vice President, Engineering, Research and Development of Novell
since May 2002. Prior to that, Dr. Ledbetter had served as
Senior Vice and Chief Technology Officer from May 2000 to May
2002. Dr. Ledbetter joined Novell in October 1999 as Senior
Vice President, Business and Corporate Development. From January
1996 to October 1999, Dr. Ledbetter served as Chairman of
the Board of Directors, President, and Chief Executive Officer
of Hybrid Networks, Inc., a manufacturer and supplier of
broadband access products for wireless systems. From April 1993
to January 1996, Dr. Ledbetter served as president of the
consumer products division of AT&T, and from October 1991 to
April 1993, Dr. Ledbetter served as the head of the PC
networking division of Sun Microsystems, a computer
manufacturer. In July 2000, Dr. Ledbetter entered into a
settlement agreement in the form of a consent decree with the
Securities and Exchange Commission (the SEC) in
connection with the SECs investigation of Hybrid Networks,
Inc. of which Dr. Ledbetter served as Chairman, President
and Chief Executive Officer, generally concerning alleged
violations of the federal securities laws. Without admitting or
denying any violations of the federal securities laws,
Dr. Ledbetter agreed to pay a civil fine and entered into a
permanent injunction prohibiting him from knowingly
circumventing or failing to implement a system of internal
accounting controls and from engaging in violations of certain
specified reporting provisions and accounting control provisions
of the federal securities laws.



| |                
| | ---------------
| | H. Carvel Moore

H. Carvel Moore joined Novell as President,
Novell Americas in July 2001 in connection with the Cambridge
acquisition. Prior to that, Mr. Moore joined Cambridge in
September 1998 in connection with Cambridges acquisition
of Excell Data Corporation, a consulting and network services
firm, and served as Vice President of Cambridge Network Services
from September to December 1998, as Senior Vice President of
North America Consulting and Sales from December 1998 to March
2000, and as President, North America from March 2000 until July
2001. Mr. Moore served as President and Chief Operating
Officer of



|                          |   
|------------------------- | --
|Novell annual report 2002 | 11









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Excell Data Corporation from August 1997 until
September 1998, and as Senior Vice President of Sales and
Marketing for Excell Data Corporation from March 1995 to July
1997.




| |                  
| | -----------------
| | 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 ad Chief Executive
Officer of Tilion, Inc., a software company providing event
management solutions for logistics and supply chain managers
that he founded. Prior to founding Tilion, Mr. Stone served
as Novells Vice President for Strategy and Development
from September 1997 to October 1999. Prior to joining Novell,
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 that
established the software standard CORBA. Prior to that,
Mr. Stone was in various engineering and product roles at
Data General from 1980 to 1989.



| |                  
| | -----------------
| | 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 and occupy approximately 872,000 square
feet of office space on 46 acres in Provo, Utah, which is
the location of our corporate headquarters and is also used as
our primary product development center. Additionally, we own
approximately 48 acres of land in San Jose, California
where it owns a 512,000 square-foot office complex, which is
currently used as an administrative office, of which
approximately 222,000 rentable square-feet is subleased to
various tenants and 175,000 square-feet is unoccupied.

We also own 218,873 square feet of office space
and lease an additional 235,274 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 San Jose, California, and 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.

We lease and occupy a 105,324 square-foot office
building in Waltham, Massachusetts, which is used as
administrative offices and for product development.

In addition, we lease a 177,226 square-foot
office building in Cambridge, Massachusetts of which
approximately 89,614 square-feet is subleased with the balance
of space unoccupied. We acquired a 100,000 square foot leased
facility in Billerica, Massachusetts with the SilverStream
acquisition, which is unoccupied.



|   |                          
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|12 | Novell annual report 2002









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

Internationally, we own a 84,650 square-foot
office building in the United Kingdom, a 42,000 square-foot
building in the Netherlands, and a 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 28,000 square-foot facility in
Richmond, UK, which is used as administrative offices, and an
80,000 square-foot facility in Bangalore, India, which is used
as a product development center.

We have subsidiaries in Argentina, Australia,
Austria, Belgium, Brazil, Canada, China, Colombia, 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 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
our 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. This litigation is in
its early stages. 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, are named as
defendants in several class action complaints that have been
filed on behalf of certain of 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 plaintiffs have brought against other
issuers and underwriters. These complaints all allege violations
of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. In particular, they allege,
among other things, that there was undisclosed compensation
received by the underwriters of the public offerings of all of
these issuers, including SilverStreams. The plaintiffs are
seeking monetary damages, statutory compensation and other
relief that may be deemed appropriate by the court. A
Consolidated Amended Complaint was filed with respect to all of
these complaints in the U.S. District Court, Southern
District of New York, on April 19, 2002. All issuers,
including SilverStream, filed a Motion to Dismiss on
July 15, 2002. We believe that SilverStream and its former
officers and directors have meritorious defenses to the claims
made in the complaints and intends to contest the lawsuits
vigorously. 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 its financial position, results of operations, or cash
flows.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 13









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In February 1998, a suit was filed in the
U.S. District Court, District of Utah, against Novell and
certain of its officers and directors, alleging violation of
federal securities laws by concealing the true nature of
Novells 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 Judge dismissed the amended complaint
with prejudice for failure to state a claim. The Order of
Dismissal was entered on April 16, 2002 and the plaintiffs
have filed a Notice of Appeal to the Tenth Circuit Court of
Appeals. We intend to vigorously defend to uphold the
U.S. District Courts ruling. 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 a party to a number of additional legal
claims arising in the ordinary course of our business. We
believe the ultimate resolution of these claims will not 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.



|   |                          
|-- | -------------------------
|14 | Novell annual report 2002









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##### 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 NASDAQ 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 2002 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |      
|            | High |         | $ | 5.580   |  |         | $ | 5.170   |  |  | $ | 3.910 |  |  | $ | 2.860 | 
|            | Low  |         | $ | 3.710   |  |         | $ | 3.590   |  |  | $ | 2.170 |  |  | $ | 1.580 | 
|Fiscal 2001 |      |         |   |         |  |         |   |         |  |  |   |       |  |  |   |      
|            | High |         | $ | 9.344   |  |         | $ | 8.719   |  |  | $ | 5.690 |  |  | $ | 5.050 | 
|            | Low  |         | $ | 4.906   |  |         | $ | 3.550   |  |  | $ | 4.500 |  |  | $ | 3.100 | 

No dividends have been declared on our common
stock. We have no current plans to pay dividends and intend to
retain our earnings for use in our business. There were 9,290
stockholders of record at January 17, 2003.



|                          |   
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|Novell annual report 2002 | 15









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

|                                                          |         |                                               |           |             |   |             |           |             |   |             |           |      |  |   |           |      |  |   |           |      | 
|--------------------------------------------------------- | ------- | --------------------------------------------- | --------- | ----------- | - | ----------- | --------- | ----------- | - | ----------- | --------- | ---- |  | - | --------- | ---- |  | - | --------- | ---- | 
|                                                          |         |                                              
|                                                          |         | Fiscal Year Ended                            
|                                                          |         |                                              
|                                                          |         | October 31,                                   |           | October 31, |   | October 31, |           | October 31, |   | October 31,
|                                                          |         | 2002                                          |           | 2001        |   | 2000        |           | 1999        |   | 1998       
|                                                          |         |                                               |           |             |   |             |           |             |   |            
|                                                          |         |                                              
|                                                          |         | (Amounts in thousands, except per share data)
|Statement of operations                                   |         |                                               |           |             |   |             |           |             |   |             |           |      |  |   |           |      |  |   |           |     
|Revenue                                                   |         | $                                             | 1,134,320 |             |   | $           | 1,050,796 |             |   | $           | 1,161,735 |      |  | $ | 1,272,820 |      |  | $ | 1,083,887 |     
|Gross profit                                              |         |                                               | 684,902   |             |   |             | 712,162   |             |   |             | 834,337   |      |  |   | 974,979   |      |  |   | 825,992   |     
|Income (loss) from operations                             |         |                                               | (68,125   | )           |   |             | (120,813  | )           |   |             | (31,582   | )    |  |   | 223,052   |      |  |   | 98,446    |     
|Income (loss) before taxes                                |         |                                               | (92,225   | )           |   |             | (276,766  | )           |   |             | 70,672    |      |  |   | 243,836   |      |  |   | 141,634   |     
|Income tax expense (benefit)                              |         |                                               | 10,896    |             |   |             | (14,944   | )           |   |             | 21,202    |      |  |   | 53,089    |      |  |   | 39,658    |     
|Net income (loss) before accounting change                |         |                                               | (103,121  | )           |   |             | (261,822  | )           |   |             | 49,470    |      |  |   | 190,747   |      |  |   | 101,976   |     
|Cumulative effect of accounting change, net of
    tax(a) |         |                                               | (143,702  | )           |   |             | (11,048   | )           |   |             |          |      |  |   |          |      |  |   |          |     
|Net income (loss)                                         |         | $                                             | (246,823  | )           |   | $           | (272,870  | )           |   | $           | 49,470    |      |  | $ | 190,747   |      |  | $ | 101,976   |     
|Net income (loss) per share:                              |         |                                               |           |             |   |             |           |             |   |             |           |      |  |   |           |      |  |   |           |     
|                                                          | Basic   |                                               | $         | (0.68       | ) |             | $         | (0.82       | ) |             | $         | 0.15 |  |   | $         | 0.57 |  |   | $         | 0.29 | 
|                                                          | Diluted |                                               | $         | (0.68       | ) |             | $         | (0.82       | ) |             | $         | 0.15 |  |   | $         | 0.55 |  |   | $         | 0.29 | 
|Balance sheet                                             |         |                                               |           |             |   |             |           |             |   |             |           |      |  |   |           |      |  |   |           |     
|Cash and short-term investments                           |         | $                                             | 635,858   |             |   | $           | 705,243   |             |   | $           | 698,193   |      |  | $ | 895,404   |      |  | $ | 1,007,167 |     
|Working capital                                           |         |                                               | 328,031   |             |   |             | 416,463   |             |   |             | 552,281   |      |  |   | 895,984   |      |  |   | 1,021,005 |     
|Total assets                                              |         |                                               | 1,665,065 |             |   |             | 1,904,006 |             |   |             | 1,712,346 |      |  |   | 1,942,319 |      |  |   | 1,924,112 |     
|Long-term obligations                                     |         |                                               |          |             |   |             |          |             |   |             |          |      |  |   |          |      |  |   |          |     
|Stockholders equity                                      |         | $                                             | 1,065,542 |             |   | $           | 1,270,667 |             |   | $           | 1,245,085 |      |  | $ | 1,492,241 |      |  | $ | 1,493,498 |     




|    |                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In fiscal 2001 the Company changed its 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 the Company adopted 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.



|   |                          
|-- | -------------------------
|16 | Novell annual report 2002









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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 pioneer in the field of
computer networking since its development and release of NetWare
in the mid 1980s. As a result of our 20 years of expertise as a
leader in the field of computer networking, we have over a
thousand of the best networking engineers in the world. These
engineers work closely with Novells highly-qualified
consulting force to create world-class solutions. We are
extraordinarily proud of our people, the skills that they have
and the dedication that they bring to our company. This is a
tremendous strategic asset upon which we intend to continue to
capitalize. Leveraging this expertise, we expect to become the
leading company in providing secure Web services and secure
identity management. Our solutions leverage our network
expertise and the Web to help to create a world without
information boundaries.

Today we provide Net business solutions designed
to secure and power the networked world, helping organizations
solve complex business challenges, simplify their systems and
processes, and capture new opportunities. Net business solutions
include software applications and consulting services, developed
using open Internet standards and our own
eDirectoryTM network infrastructure products, that
support highly distributed network solutions and capitalize on
the growth of the Internet. With both software and services
offerings, we can determine how Net business solutions can be
used by an organization and the requirements necessary to ensure
proper security and access, which can then be turned into a Net
solutions approach that helps our customer deliver the right
information, to the right individual, at the right time, and on
the right device.

In addition, our Net business solutions include
essential network management, messaging, and collaboration
capabilities integrated through our directory services. Networks
are inherently a varied mix of business process, infrastructure,
computer systems, applications, and other devices. Our software
provides the framework and applications for managing,
maintaining and accessing the information and services of these
networks.

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

On July 19, 2002, we acquired SilverStream
Software Inc., (SilverStream), a technology company
whose products leverage the power of internet standards, such as
Java and XML, to unify and repurpose existing applications and
information by harnessing the value of customers prior
technology investments and to help them rapidly deliver
Web-based applications that are scalable, reliable, and secure.
The acquisition of SilverStream helped further our development
of future Net products and solutions using Web technology and
enhanced our current Net business solution product offerings.

Critical Accounting Policies

An accounting policy is deemed to be critical if
it requires the Company 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. The Company
considers 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.The Companys IT consulting business derives a portion of
its revenue from fixed-price, fixed-time contracts, which
require the accurate estimation of the cost, scope, and duration
of each engagement. Revenue and the related costs for these
projects are recognized using the percentage of completion
method, using time-to-completion to measure the percent complete
with revisions to estimates



|                          |   
|------------------------- | --
|Novell annual report 2002 | 17









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##### Table of Contents



reflected in the period in which changes become
known. If the Company does not accurately estimate the resources
required or the scope of work to be performed, or does not
manage its projects properly within the planned periods of time
or satisfy its obligations under the contracts, future
consulting margins may be significantly and negatively affected
or losses on existing contracts may need to be recognized. Any
such resulting reductions in margins or contract losses could be
material to the Companys results of operations.


The Company records a provision against revenue
for estimated sales returns and allowances on product and
service related sales in the same period as the related revenues
are recorded. The Company also records a provision to other
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 data, analysis of credit
memo data, and other known factors. If the historical data the
Company uses to calculate these estimates does not properly
reflect future returns or bad debts, revenue or net income could
be over or understated.

Long-lived Assets.The Companys long-lived assets include fixed assets,
long-term investments, goodwill and other intangible assets. At
October 31, 2002, the Companys long-lived assets
included $369 million of net fixed assets, $73 million
of long-term investments, $180 million of goodwill,
$36 million of identifiable intangible assets, and
$96 million of current and non-current net deferred tax
assets.

Property, Plant and Equipment.The Company periodically reviews its
property, plant and equipment for impairment in accordance with
Statement of Financial Accounting Standards No. 144
(SFAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets. In determining whether
an asset is impaired, the Company 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,
the Company may be required to record impairment charges for
these assets. For example, in the fourth quarter of fiscal 2002,
the Company determined that its 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.
This resulted in a pre-tax, non-cash impairment charge of
$80 million. Depending upon relevant factors, such as the
continuing decline in real estate market conditions, or the
Companys decision to change its intentions for the
facilities and place them for sale, the Company could be
required to record further impairment charges.

Long-term Investments.The fair value of the long-term
investments is dependant on the actual financial performance of
the companies or venture funds in which the Company has
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, the Company considers these factors as well as the
forecasted financial performance of its investees, liquidation
preference value of the stock Novell holds, 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, the Company may have to record
additional impairment charges not previously recognized. During
fiscal 2002, the Company recognized $54 million of
impairment losses related to its 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, the Companys investments could
become other-than-temporarily impaired as their values decline,
causing the Company to record further investment impairment
charges.

Goodwill and Intangible Assets.In assessing the recoverability of the
Companys goodwill and other intangible assets, the Company
must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective
assets. This process is subjective and requires judgment at many
points throughout the analysis. If these estimates or their
related assumptions change in the future, the Company may be
required to record impairment charges for these assets not
previously recorded.

On November 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible
Assets, and was, therefore, required to perform an



|   |                          
|-- | -------------------------
|18 | Novell annual report 2002









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##### Table of Contents



impairment test on its goodwill and other
intangibles with indefinite lives during the first six months of
fiscal 2002, and then on a periodic basis thereafter. The
Companys 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
in its IT Consulting reporting unit. Subsequently, during the
fourth quarter of fiscal 2002, the Company completed its annual
impairment review based on August 1, 2002 balances and
determined that there was no impairment as of that date.
However, changes in the assumptions used in the analysis could
have changed the resulting outcome. For example, to estimate the
fair value of the Companys reporting units, management
made estimates and judgments about future cash flows based on
the Companys fiscal 2003 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 the
Company as well as external factors. Future changes in estimates
could possibly result in a non-cash goodwill impairment that
could have a material adverse impact on our financial condition
and results of operations.


As a part of the SilverStream acquisition, the
Company determined that it had acquired developed technology
related to Silverstreams exteNd products that were
currently shipping and could be combined with Novell products
and services. The value of this intangible asset was determined
using expected future cash flows for the exteNd products as well
as the combined products, and an estimated discount factor to
account for risks associated with the product business and
future versions of the exteNd products. The Company also
periodically reviews its identifiable intangible assets for
impairment in accordance with Statement of SFAS 144. In
determining whether an intangible asset is impaired, the Company
must make assumptions regarding estimated future cash flows from
the asset, intended use of the asset and other related factors.
If the estimates or the related assumptions used to determine
the value of the intangible assets change, the Company may be
required to record impairment charges for these assets. For
example, if the Company were to abandon its products which
integrate the exteNd Web-based technology that was acquired from
SilverStream, or if the sales forecasts for these secure Web
services products were to change, the Company could be required
to record an impairment charge in future periods.

Deferred Tax Assets.The carrying value of the
Companys net deferred tax assets assumes that the Company
will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions,
including the Companys financial performance and general
market conditions. Management evaluates the realizability of the
deferred tax assets and assesses the need for additional
valuation allowances on a quarterly basis. During fiscal 2002,
the Company increased the valuation allowance by
$98 million against various deferred tax assets, including
assets from the Silver Stream acquisition, capital losses
resulting from investment impairments, and foreign tax credits.
If these estimates and related assumptions change in the future,
the Company may be required to record additional valuation
allowances against its deferred tax assets, resulting in
additional income tax expense recorded in the Companys
consolidated statement of operations.

Results of operations

Acquisitions



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

Pursuant to the terms of an Agreement and Plan of
Merger, dated as of June 9, 2002 by and among Novell,
Delaware Planet, Inc., a wholly owned subsidiary of Novell
(Delaware Planet), and SilverStream, Delaware Planet
commenced a cash tender offer on June 18, 2002 to acquire
all of the outstanding shares of SilverStream common stock at a
price of $9.00 per share. On July 17, 2002, Delaware Planet
announced the completion of its cash tender offer, pursuant to
which it purchased almost all of the outstanding shares of
SilverStream common stock at a price of $9.00 per share. On
July 19, 2002, Novell completed its acquisition of
SilverStream by merging Delaware Planet into SilverStream.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 19









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##### Table of Contents



At the closing date of the merger, there were
23,473,205 shares of SilverStream common stock outstanding,
resulting in a total cash acquisition price of
$211 million. Direct transaction costs were estimated to be
$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 Financial Accounting
Standards Board Interpretation No. 44 (FIN 44).
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
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 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 preliminarily
allocated as follows:

|                                      |                                               |                  |     |                       |  |         |                        
|------------------------------------- | --------------------------------------------- | ---------------- | --- | --------------------- |  | ------- | -----------------------
|                                      |                                               | Estimated        |     |                      
|                                      |                                               | 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 life        
|Goodwill                              |                                               |                  | 128 |                       |  | N/ A   
|                                      |                                               |                  |     |                       |  |        
|                                      |                                               | $                | 244 |                       |  |        
|                                      |                                               |                  |     |                       |  |        

The allocation will be adjusted over the next
three quarters 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 affect the
allocation.

Goodwill from the acquisition resulted from the
Companys belief that the technology SilverStream had
developed is valuable to the Companys secure Web services
product offerings. The Company also believed it was more
beneficial to acquire such technology rather than to develop it
in-house. The goodwill from the SilverStream acquisition has
been allocated to the Companys product segment as the
exteNd product suite will be included with the Net directory
services group of products. In accordance with SFAS 142,
the Company does not amortize goodwill or intangibles with
indefinite lives resulting from this acquisition, and reviews
these assets periodically for potential impairment issues.
Goodwill is not deductible for tax purposes.



|   |                          
|-- | -------------------------
|20 | Novell annual report 2002









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##### Table of Contents



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 Novell as determined under the
guidance of FIN 44.

The $3 million of in-process research and
development pertains to replacement and enhancement technology
that will be included in the next versions of the exteNd product
suite and is not currently technologically feasible, meaning it
has not reached the working model stage, does not contain all of
the major functions planned for the product, and is not ready
for initial customer testing. Shortly before the acquisition,
SilverStream released its latest version of each of its 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 Company delivering its secure Web services
products and successfully integrating SilverStream. The
in-process research and development does not have any
alternative future use and did not otherwise qualify for
capitalization.

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

The value of trademarks and trade names was
determined based on assigning a royalty rate to the revenue
streams that were 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. The pre-tax
royalty rates of 0.5 percent were applied to the product
revenues and discounted to a present value, resulting in a
valuation of approximately $2 million.



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

On July 10, 2001, the stockholders of
Cambridge approved the acquisition of Cambridge by Novell. 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 (in millions):

|                             |  |   |     | 
|---------------------------- |  | - | --- | 
|Adjusted net assets acquired |  | $ | 81  | 
|Goodwill                     |  |   | 180 | 
|                             |  |   |     | 
|                             |  | $ | 261 | 
|                             |  |   |     | 

Results of operations for Cambridge are included
in Novells results of operations beginning July 10,
2001. In accordance with SFAS 142, the Company did not amortize
the goodwill associated with this acquisition. In addition,
SFAS 142 required the Company to perform an initial
impairment analysis within the first six months following
November 1, 2001, the date of adoption. The Company
completed its 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 the Companys consolidated
Statements of Operations.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 21









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##### Table of Contents



Revenue

|                        |                 |                       |       |        |  |      |  |        |       |      |  |       |  |   |       |       | 
|----------------------- | --------------- | --------------------- | ----- | ------ |  | ---- |  | ------ | ----- | ---- |  | ----- |  | - | ----- | ----- | 
|                        |                 | 2002                  |       | Change |  | 2001 |  | Change |       | 2000
|                        |                 |                       |       |        |  |      |  |        |       |     
|                        |                 |                      
|                        |                 | (Amounts in millions)
|                        | Product segment |                       | $     | 826    |  |      |  |        | $     | 879  |  |       |  |   | $     | 1,103 | 
|                        | Volera segment  |                       |       | 8      |  |      |  |        |       | 8    |  |       |  |   |       | 7     | 
|                        |                 |                       |       |        |  |      |  |        |       |      |  |       |  |   |       |      
|Product-related revenue |                 |                       | 834   |        |  |      |  |        | 887   |      |  |       |  |   | 1,110 |      
|Consulting segment      |                 |                       | 300   |        |  |      |  |        | 164   |      |  |       |  |   | 52    |      
|                        |                 |                       |       |        |  |      |  |        |       |      |  |       |  |   |       |      
|Total Revenue           |                 | $                     | 1,134 |        |  | 8%   |  | $      | 1,051 |      |  | (10)% |  | $ | 1,162 |      
|                        |                 |                       |       |        |  |      |  |        |       |      |  |       |  |   |       |      

In fiscal 2002, Novell organized its operations
into the following segments: product, consulting, and Volera



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product  includes Net management
    services products, Net directory services products and
    product-related service support and training. Net management
    services products include products that provide networking
    capabilities, products that allow management of networks by
    protecting their integrity, products that allow collaboration or
    communication inside and outside a network, and products that
    enable customers to network securely, allowing insiders access
    to the Internet and authorized outsiders access to internal
    intranets. Net directory services products include products that
    allow customers to manage, simply and centrally, users and
    resources, products that enable automatic distribution of new or
    updated information across a network, products that allow
    customers to control access to applications, the Web, and
    network resources using policy-based management, and products
    that enable and simplified password management. Product-related
    services, support and training include networking
    certifications, technical services and customer support.
    Products in this segment are packaged under the names NetWare,
    ZENworks, GroupWise, eDirectory, DirXML, iChain, Single Sign On,
    exteNd (SilverStream product suite).
|
| |  | Consulting  is comprised of worldwide
    consulting services including information technology
    (IT) consulting, which provides consulting and
    support services that apply Net business solutions, and Celerant
    management consulting, which provides operational strategy and
    implementation consulting services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Volera  provides networking solutions
    that reduce the complexity and cost of deploying content and
    applications electronically, while improving scalability,
    management and security.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

The Companys chief decision-makers, the
President and Chief Executive Officer and members of the
Companys Worldwide Management Committee, evaluate the
performance of the Company based on operating segment revenue,
expenses, and profitability. Separate financial information is
not available by segment in regards to asset allocation. Prior
to fiscal 2002, the Company operated in one operating segment.



| |        
| | -------
| | Product

Product segment revenue was $826 million
(73% of total revenues) in fiscal 2002 compared to
$879 million (84% of total revenues) in fiscal 2001, and
$1,103 million (95% of total revenues) in fiscal 2000.
Within the product segment, revenue from Net management services
products decreased $80 million or 11% in fiscal 2002
compared to fiscal 2001 primarily due to a 15% decrease in sales
of NetWare, which is a result of declining sales of versions 3,
4, and 5 that more than offset increased sales of version 6, a
5% decrease in sales of Management and Collaboration products,
and lower UNIX royalty revenue from expiring royalty contracts.
Revenue from Net directory services products increased
$28 million or 91% in fiscal 2002 compared to fiscal 2001
primarily due to increased revenue from DirXML and Single Sign
On  Secure Login, which have both grown over 300% in
fiscal 2002 compared to fiscal 2001 as these newer products gain
traction, and the addition of SilverStream revenue for the
period of July 20, 2002 through October 31, 2002,
which amounted to



|   |                          
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|22 | Novell annual report 2002









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##### Table of Contents



$5 million. Product related service,
support, and training remained relatively flat during in fiscal
2002 compared to fiscal 2001.


The decrease in product revenue from fiscal 2000
to fiscal 2001 was primarily the result of the decline in sales
of the older NetWare versions 3, 4 and 5, lower Management
and Collaboration product revenue, and lower UNIX and other
royalties, partially offset by sales of NetWare version 6
and higher Net directory services revenue due to a full year of
DirXML and iChain sales. The Net management services products
represented 68% of total revenue in fiscal 2001 compared to 79%
of total revenue in fiscal 2000.

Prior to fiscal 2001, the Company recognized
revenue related to product 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, the Company changed
its method of accounting for revenue related to these product
sales to recognize such revenues upon the sell-through of the
respective product from the distribution channel partner to the
reseller or end user. The Company believes this change in
accounting principle is preferable based on guidance provided in
the Securities and Exchange Commissions Staff Accounting
Bulletin 101. The $11 million ($0.03 per share)
cumulative effect of the change (after reduction for income
taxes of $6 million) was reflected in net income in the
first quarter of fiscal 2001. Also, during the three months
ended January 31, 2001, the Company 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 the Company reported
under its previous method of accounting for revenue recognition,
the effect on earnings, without consideration of the cumulative
effect of the change, would be a decrease in earnings of
approximately $10 million, or $0.03 per share, during
fiscal 2001.



| |       
| | ------
| | Volera

During fiscal 2001, Novell completed the
formation of Volera, Inc. as majority owned joint venture among
Novell, Inc., Nortel Networks Corp., and Accenture Ltd. Prior to
2001, Volera was a product group within Novell. Revenue from
Volera was relatively flat in fiscal 2002 compared to fiscal
2001. Revenue from Volera was $8 million in fiscal 2001
compared to $7 million in fiscal 2000. The increase in
fiscal 2001 revenue was due primarily to improved sales and
marketing efforts. Volera revenues were less than 1% of total
revenues in fiscal 2002, 2001, and 2000.

Voleras performance did not our meet the
growth expectations and thus management determined that the best
strategy for Volera was to integrate its products and operations
back into Novell. On October 31, 2002, the Company acquired
the outstanding shares of Volera held by Nortel for
$3.5 million and in November 2002, it acquired the
outstanding shares of Volera held by Accenture for
$1 million. As a result of the acquisition of the minority
shares, beginning in fiscal 2003 the Volera segment has been
integrated into the products segment.



| |           
| | ----------
| | Consulting

Consulting revenue was $137 million (84%)
higher in fiscal 2002 compared to fiscal 2001, due to the
acquisition of Cambridge at the end of the third quarter of
fiscal 2001. Cambridge operations were included in the
Companys operating results for approximately four months
in fiscal 2001 compared to a full year in fiscal 2002.
Consulting revenue from IT consulting services decreased each
quarter during the first three quarters of fiscal 2002 and
remained flat in the last quarter of fiscal 2002 compared to the
prior quarter due to a weakened services market and decreased
demand for the Companys systems integration and Net
business solutions. Consulting revenue from Celerant management
consulting remained relatively flat throughout fiscal 2002.

Consulting revenue was $111 million higher
in fiscal 2001 compared to fiscal 2000 primarily due to the
acquisition of Cambridge, which contributed $74 million
from IT consulting and $38 million from Celerant



|                          |   
|------------------------- | --
|Novell annual report 2002 | 23









---



##### Table of Contents



management consulting, offset by a small
decreases in existing Novell consulting. Consulting revenue was
27% of total revenue in fiscal 2002, 16% in fiscal 2001, and 5%
in fiscal 2000.


At the beginning of the second quarter of fiscal
2002, the Company adopted FASB Emerging Issues Task Force
(EITF) No. 01-14, Income Statement
Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred.
EITF 01-14 requires companies to account for reimbursements
received for incurred out-of-pocket expenses as revenue and the
related expenses as cost of revenue. Previously they were not
included in the statement of operations. Reimbursable expense
revenue is now included in consulting revenue in all periods
presented. The Company restated the prior periods, thereby
increasing consulting revenue and cost of revenue sold
$11 million in fiscal 2001. Prior to fiscal 2001,
reimbursed out-of-pocket expenses were immaterial and included
in revenue and cost of revenue.

Geographic information

International revenue, comprised of revenue to
international customers in Europe, the Middle East, Africa,
Canada, South America, Australia, and Asia Pacific, represented
49% of total revenue in fiscal 2002 compared to 44% in fiscal
2001. During fiscal 2002, international revenue increased 19%
while domestic revenue decreased 1% compared to fiscal 2001.
Internationally, revenue increases during the year were due to
the addition of Cambridge in fiscal 2001, favorable foreign
exchange rates, and recovering European market conditions, which
resulted in greater demand for the Companys products and
services. The slight decrease in domestic revenue during fiscal
2002 was largely due to lower revenue in the product segment
offset somewhat by higher revenue in the consulting segment due
to a full year of Cambridge revenue in fiscal 2002.

International revenue represented 44% of total
revenue in fiscal 2001 compared to 43% of total revenue in
fiscal 2000. Domestic revenue represented 56% of total revenue
in fiscal 2001 compared to 57% in fiscal 2000. The increase in
international revenue in fiscal 2001 was due primarily to the
addition of Cambridge for a four-month period. The decrease in
domestic revenue as a percentage of total revenue was due to
increased international sales, declining NetWare revenue and
lower UNIX royalties, offset somewhat by to the addition of
Cambridge for a four-month period.

Forward-looking revenue trends

Although NetWare revenue improved somewhat in the
second half of fiscal 2002 due to growth in NetWare 6
revenue, NetWare revenue for fiscal 2002 was down 15% compared
to fiscal 2001. The Company is working to address the long-term
growth potential of the NetWare product line. In addition, the
Company is addressing declining revenue in the consulting
segment in an effort to improve results in future periods. As
part of these efforts, the Company completed its integration of
Cambridge during the first half of fiscal 2002, and has
reorganized its sales force to provide better coverage and
resources for its customers and partners, focusing on solving
business issues with Net business solutions and services. In
addition, the Company is continuing to integrate the
SilverStream products into its offerings and integrating
SilverStreams operations as deemed appropriate. The
Company anticipates that it will take several quarters to fully
realize the benefits from these actions.

The Company believes the product segment revenues
for fiscal 2003 will increase approximately 5% over fiscal 2002
levels, partially as a result of having a full year of
SilverStream product revenue, and partially due to increases in
management and collaboration products and Net directory services
revenue, offset somewhat by continued decreases in overall
NetWare revenue. The Company does not expect to see an increase
in the demand for IT consulting services over the next few
quarters as the economy stabilizes and companies slowly start to
increase investments in technology solutions. Celerant
management consulting is expected to grow approximately 7% in
fiscal 2003 compared to fiscal 2002.

At October 31, 2002, the Company had
$275 million of deferred revenue representing revenue that
will be recognized in future periods. The majority of this
deferred revenue relates to maintenance contracts, which



|   |                          
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|24 | Novell annual report 2002









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##### Table of Contents



are recognized ratably over the maintenance
period. The Company has either received payment or recorded a
receivable for the deferred revenue, and has determined
collectability to be reasonably certain. Direct costs incurred
to fulfill these maintenance obligations are relatively small
and are recognized as work is performed.


Gross profit

|                        |  |      |     |        |  |      |  |        |     |      |  |       |  |   |     |  
|----------------------- |  | ---- | --- | ------ |  | ---- |  | ------ | --- | ---- |  | ----- |  | - | --- | -
|                        |  | 2002 |     | Change |  | 2001 |  | Change |     | 2000
|                        |  |      |     |        |  |      |  |        |     |     
|Gross profit (millions) |  | $    | 685 |        |  | (4)% |  | $      | 712 |      |  | (15)% |  | $ | 834 |  
|Percentage of revenue   |  |      | 60  | %      |  |      |  |        | 68  | %    |  |       |  |   | 72  | %

Gross profit as a percentage of revenue decreased
in fiscal 2002 compared to 2001, and in fiscal 2001 compared to
fiscal 2000, primarily due to the effects of a higher mix of
lower-margin consulting business along with decreased product
revenue levels. The mix between product revenue and consulting
revenue has shifted due to the acquisition of Cambridge in July
2001, causing product revenue to become a smaller percentage of
total revenue. During fiscal 2002, gross margin for the
consulting segment was 4% compared to 80% for the product
segment. The low consulting margins are primarily due to
increased consulting competition, reduced billing rates, and
increased costs related to excess consultants who were not fully
utilized on consulting engagements. Product margins increased to
80% in fiscal 2002 from 78% in fiscal 2001 and 76% in fiscal
2000. This increase is due primarily to better inventory
management and lower royalty costs. The Company does not expect
overall gross profit margins to return to fiscal 2000 levels in
the future due to the increase in the consulting business as a
percentage of total revenue. Margins in the consulting industry,
in general, are lower than those in the software industry. The
Company does believe that the current overall gross profit
margin of 60% is too low and should be at least in the 65% to
68% range or better and Management is currently exploring
alternatives to improve the gross margin percentage in future
periods, such as improving utilization and increasing consulting
billing rates.

As described above, the Company adopted
EITF 01-14, which requires companies to account for
reimbursements received for out-of-pocket expenses incurred as
revenue and the related expenses as cost of revenue. This change
did not have a significant effect on gross margin.

Operating expenses

|                                                             |                       |      |     |        |   |       |  |        |     |      |   |       |  |   |     |    |  
|------------------------------------------------------------ | --------------------- | ---- | --- | ------ | - | ----- |  | ------ | --- | ---- | - | ----- |  | - | --- | -- | -
|                                                             |                       | 2002 |     | Change |   | 2001  |  | Change |     | 2000
|                                                             |                       |      |     |        |   |       |  |        |     |     
|Sales and marketing (millions)                               |                       | $    | 359 |        |   | (19)% |  | $      | 444 |      |   | (10)% |  | $ | 495 |   
|                                                             | Percentage of revenue |      |     | 32     | % |       |  |        |     | 42   | % |       |  |   |     | 43 | %
|Product development (millions)                               |                       | $    | 169 |        |   | (12)% |  | $      | 192 |      |   | (16)% |  | $ | 228 |   
|                                                             | Percentage of revenue |      |     | 15     | % |       |  |        |     | 18   | % |       |  |   |     | 20 | %
|General and administrative (millions)                        |                       | $    | 123 |        |   | 5%    |  | $      | 117 |      |   | 24%   |  | $ | 95  |   
|                                                             | Percentage of revenue |      |     | 11     | % |       |  |        |     | 11   | % |       |  |   |     | 8  | %
|Restructuring charges (millions)                             |                       | $    | 19  |        |   | (76)% |  | $      | 80  |      |   | 67%   |  | $ | 48  |   
|                                                             | Percentage of revenue |      |     | 2      | % |       |  |        |     | 8    | % |       |  |   |     | 4  | %
|Purchased in-process research and development
    (millions) |                       | $    | 3   |        |   |      |  |        |    |      |   |      |  |   |    |   
|                                                             | Percentage of revenue |      |     |       | % |       |  |        |     |      |   |       |  |   |     |    |  
|Impairments (millions)                                       |                       | $    | 80  |        |   |      |  |        |    |      |   |      |  |   |    |   
|                                                             | Percentage of revenue |      |     | 7      | % |       |  |        |     |      |   |       |  |   |     |    |  
|Total operating expenses (millions)                          |                       | $    | 753 |        |   | (10)% |  | $      | 833 |      |   | (4)%  |  | $ | 866 |   
|                                                             | Percentage of revenue |      |     | 66     | % |       |  |        |     | 79   | % |       |  |   |     | 75 | %

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



|                          |   
|------------------------- | --
|Novell annual report 2002 | 25









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##### Table of Contents



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, 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 the Companys owned facilities
in San Jose, California. Operating expenses decreased in fiscal
2001 compared to fiscal 2000 due primarily to lower salary costs
resulting from the fiscal 2000 and 2001 restructurings and
decreased advertising costs, offset somewhat by $37 million
of additional operating expenses related to the addition of
Cambridge, $80 million in restructuring charges compared to
$48 million in fiscal 2000 and $9 million of
integration expense related to the acquisition of Cambridge.
Operating expenses increased as a percentage of revenue in
fiscal 2001 compared to fiscal 2000 due to decreased revenue.


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 Novell 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.
Sales and marketing expense in total and as a percentage of
revenue decreased in fiscal 2001 compared to fiscal 2000 due
primarily to decreased headcount resulting from the
restructurings and lower advertising and marketing promotions
offset somewhat by Cambridge sales and marketing costs of
approximately $16 million. Sales and marketing expenses can
fluctuate as a percentage of revenue in any given period due to
product promotions, advertising, and other discretionary
expenses. The Company plans to increase its advertising and
marketing costs during fiscal 2003 in an effort to increase
revenue and attract new customers.

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 compared to the
fourth quarter of fiscal 2001, excluding the addition of 123
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 2001
compared to fiscal 2000 due primarily to lower headcount
resulting from the fiscal 2000 and 2001 restructurings. Product
development expense is expected to increase in fiscal 2003
primarily as a result of having SilverStream costs included for
the full twelve months.

General and administrative expenses increased
from fiscal 2001 to fiscal 2002 primarily due to a full
years impact of Cambridge general and administrative
costs, the addition of SilverStream general and administrative
costs 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. General and administrative expenses increased in
total and as a percentage of revenue during fiscal 2001 compared
to fiscal 2000 primarily due to Cambridge integration costs,
$19 million related to the addition of Cambridge general
and administrative costs during the last four months of fiscal
2001, costs related to the formation of Volera, and lower
revenue.

Purchased in-process research and development
relates to the acquisition of SilverStream and is discussed in
the Acquisitions section, above.

At the beginning of fiscal 2002, the Company
adopted SFAS No. 144, 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, the Company determined that there were indicators
of impairment related to its facility in San Jose, California
and a small building in Provo, Utah due to changes in the
intended



|   |                          
|-- | -------------------------
|26 | Novell annual report 2002









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##### Table of Contents



use of the facilities, as well as changes in the
local real estate market. The Company 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 recorded by
the Company. Based on the results of this analysis, the Company
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, the Company recorded a
pre-tax non-cash impairment charge of $80 million. Both of
the impaired facilities are classified as held and used as the
Company does not have immediate plans to sell them.


During the second quarter of fiscal 2002, the
Company recorded a pre-tax restructuring charge of approximately
$20 million. The charge was a result of the Companys
continued move towards its business strategy of improving the
Companys status as a Net business solutions provider,
addressing changes in the market due to technology changes, and
becoming more customer-focused. Specific actions taken included
reducing the Companys workforce worldwide by approximately
50 employees (less than 1%), consolidating facilities,
closing offices in unprofitable locations, and disposing of
excess property and equipment. The following table summarizes
the activity during fiscal 2002 related to the second quarter
fiscal 2002 restructuring.

|                                             |  |               |    |          |  |          |     |             |  |   |    |   |  |   |   | 
|-------------------------------------------- |  | ------------- | -- | -------- |  | -------- | --- | ----------- |  | - | -- | - |  | - | - | 
|                                             |  | Total         |    |          |  |          |     | Balance at 
|                                             |  | Restructuring |    | Cash     |  | Non-Cash |     | October 31,
|                                             |  | Charge        |    | Payments |  | Charges  |     | 2002       
|                                             |  |               |    |          |  |          |     |            
|                                             |  |              
|                                             |  | (in millions)
|Severance and benefits                       |  | $             | 15 |          |  | $        | (9  | )           |  | $ | (2 | ) |  | $ | 4 | 
|Excess facilities and property and equipment |  |               | 5  |          |  |          | (1  | )           |  |   |   |   |  |   | 4 | 
|Other restructuring-related costs            |  |               | 1  |          |  |          |    |             |  |   |   |   |  |   | 1 | 
|                                             |  |               |    |          |  |          |     |             |  |   |    |   |  |   |   | 
|                                             |  | $             | 21 |          |  | $        | (10 | )           |  | $ | (2 | ) |  | $ | 9 | 
|                                             |  |               |    |          |  |          |     |             |  |   |    |   |  |   |   | 

As of October 31, 2002, 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.

During the second quarter of fiscal 2002, the
Company 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 the nine months ended July 31, 2002. These excess
accruals relate to facilities and legal costs that were not
required.

At the end of fiscal 2001, the Company recorded
$51 million of pre-tax, restructuring charges resulting
from changes in general market conditions, changing customer
demands, and the Companys evolution of its business
strategy, all of which required the Company to restructure its
operations. This business strategy focuses on Net business
solutions designed to secure and power the networked world
across leading operating systems. The execution of this strategy
included refining the Companys 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 the Companys direction.

Specific actions included reducing the
Companys 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 the Companys strategic focus, and abandoning and
writing off technologies that no longer fit within the
Companys new strategy. The Company



|                          |   
|------------------------- | --
|Novell annual report 2002 | 27









---



##### Table of Contents



also realigned its remaining resources to better
manage and control its business. The following table summarizes
the costs and activities during fiscal 2002, related to the
fourth quarter 2001 restructuring.


|                                             |  |                       |    |          |  |             |     |             |  |   |    |   |  |   |   | 
|-------------------------------------------- |  | --------------------- | -- | -------- |  | ----------- | --- | ----------- |  | - | -- | - |  | - | - | 
|                                             |  | Balance at            |    |          |  | Non-Cash    |     | Balance at 
|                                             |  | October 31,           |    | Cash     |  | Charges/    |     | October 31,
|                                             |  | 2001                  |    | Payments |  | Adjustments |     | 2002       
|                                             |  |                       |    |          |  |             |     |            
|                                             |  |                      
|                                             |  | (Amounts in millions)
|Severance and benefits                       |  | $                     | 33 |          |  | $           | (28 | )           |  | $ | (4 | ) |  | $ | 1 | 
|Excess facilities and property and equipment |  |                       | 11 |          |  |             | (8  | )           |  |   | 2  |   |  |   | 5 | 
|Other restructuring-related costs            |  |                       | 1  |          |  |             |    |             |  |   |   |   |  |   | 1 | 
|                                             |  |                       |    |          |  |             |     |             |  |   |    |   |  |   |   | 
|                                             |  | $                     | 45 |          |  | $           | (36 | )           |  | $ | (2 | ) |  | $ | 7 | 
|                                             |  |                       |    |          |  |             |     |             |  |   |    |   |  |   |   | 

As of October 31, 2002, the remaining
balance of the fourth quarter 2001 restructuring charge included
accrued liabilities largely redundant facilities costs, which
will be paid over the respective remaining lease terms.

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

Specific actions included reducing the
Companys 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
integrated Companys new strategy, and discontinuing
unprofitable product lines. The following table summarizes the
activity during fiscal 2002, related to the third quarter 2001
restructuring costs.

|                                                        |  |                       |    |          |  |          |     |             |  |   |   |  |  |   |   | 
|------------------------------------------------------- |  | --------------------- | -- | -------- |  | -------- | --- | ----------- |  | - | - |  |  | - | - | 
|                                                        |  | Balance at            |    |          |  |          |     | Balance at 
|                                                        |  | October 31,           |    | Cash     |  | Non-Cash |     | October 31,
|                                                        |  | 2001                  |    | Payments |  | Charges  |     | 2002       
|                                                        |  |                       |    |          |  |          |     |            
|                                                        |  |                      
|                                                        |  | (Amounts in millions)
|Severance and benefits                                  |  | $                     | 3  |          |  | $        | (3  | )           |  | $ |  |  |  | $ |  | 
|Abandoned technology and unprofitable product
    lines |  |                       | 1  |          |  |          | (1  | )           |  |   |  |  |  |   |  | 
|Excess facilities and property and equipment            |  |                       | 10 |          |  |          | (6  | )           |  |   |  |  |  |   | 4 | 
|                                                        |  |                       |    |          |  |          |     |             |  |   |   |  |  |   |   | 
|                                                        |  | $                     | 14 |          |  | $        | (10 | )           |  | $ |  |  |  | $ | 4 | 
|                                                        |  |                       |    |          |  |          |     |             |  |   |   |  |  |   |   | 

As of October 31, 2002, 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, the Company reduced its expenses by
approximately $50 million on a quarterly basis, before any
increased strategic expenditures and the impact of the
SilverStream acquisition.

The Company could incur additional restructuring
charges in the future as it continues to develop its Net
solutions strategy and react to market conditions.

Employees

|                                     |  |             |       |        |  |             |     |        |  |             |       |  |  |  |    |   |  |   |       | 
|------------------------------------ |  | ----------- | ----- | ------ |  | ----------- | --- | ------ |  | ----------- | ----- |  |  |  | -- | - |  | - | ----- | 
|                                     |  | October 31, |       |        |  | October 31, |     |        |  | October 31,
|                                     |  | 2002        |       | Change |  | 2001        |     | Change |  | 2000       
|                                     |  |             |       |        |  |             |     |        |  |            
|Employees                            |  |             | 6,233 |        |  |             | (11 | )%     |  |             | 7,003 |  |  |  | 43 | % |  |   | 4,893 | 
|Revenue per average employee (000s) |  | $           | 171   |        |  |             |     |        |  | $           | 175   |  |  |  |    |   |  | $ | 225   | 

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



|   |                          
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|28 | Novell annual report 2002









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##### Table of Contents



SilverStream in July 2002, which added
403 employees. Headcount in fiscal 2001 increased compared
to fiscal 2000 due to the acquisition of Cambridge, offset
somewhat by employee reductions. The acquisition of Cambridge
increased headcount by approximately 2,500 employees. The
Company continues to monitor headcount to ensure the
Companys resources are aligned with expected business
levels and its business strategy, as well as in line with
leading industry benchmarks.


Other income (expense), net

|                                       |  |      |     |        |  |      |    |        |  |      |      |    |  |  |      |    |  |   |     |  
|-------------------------------------- |  | ---- | --- | ------ |  | ---- | -- | ------ |  | ---- | ---- | -- |  |  | ---- | -- |  | - | --- | -
|                                       |  | 2002 |     | Change |  | 2001 |    | Change |  | 2000
|                                       |  |      |     |        |  |      |    |        |  |     
|Other income (expense), net (millions) |  | $    | (24 | )      |  |      | 85 | %      |  | $    | (156 | )  |  |  | (253 | )% |  | $ | 102 |  
|Percentage of revenue                  |  |      | (2  | )%     |  |      |    |        |  |      | (15  | )% |  |  |      |    |  |   | 9   | %

The primary component of other income (expense),
net, is net investment income (loss), which was a loss of
$33 million in fiscal 2002, a loss of $155 million in
fiscal 2001 and income of $109 million in fiscal 2000. In
fiscal 2002, the net investment loss included impairment losses
on short and long-term investments totaling $58 million,
realized net gains on the sale of short-term equity securities
of $7 million, and earned $18 million in interest
income. In fiscal 2001, net investment loss included impairment
losses on several short and long-term investments totaling
$208 million, realized net gains on investments totaling
$9 million, and earned $44 million in interest income.
There were no investment impairments recorded in fiscal 2000.
Other income, net, excluding investment income increased
$10 million in fiscal 2002 from fiscal 2001 due primarily
to a $9 million gain on the sale of a building. Other
income, net, excluding investment income, increased slightly in
fiscal 2001 compared to fiscal 2000 primarily due to the impact
of decreased minority interest profits in Volera and the
Companys Japan subsidiary.

Income tax expense (benefit)

|                                       |  |      |    |        |  |      |     |        |  |      |     |    |  |  |      |    |  |   |    |  
|-------------------------------------- |  | ---- | -- | ------ |  | ---- | --- | ------ |  | ---- | --- | -- |  |  | ---- | -- |  | - | -- | -
|                                       |  | 2002 |    | Change |  | 2001 |     | Change |  | 2000
|                                       |  |      |    |        |  |      |     |        |  |     
|Income tax expense (benefit)(millions) |  | $    | 11 |        |  |      | 173 | %      |  | $    | (15 | )  |  |  | (171 | )% |  | $ | 21 |  
|Percentage of revenue                  |  |      | 1  | %      |  |      |     |        |  |      | (1  | )% |  |  |      |    |  |   | 2  | %
|Effective tax (benefit) rate           |  |      | 12 | %      |  |      |     |        |  |      | (5  | )% |  |  |      |    |  |   | 30 | %

The effective tax rate for fiscal 2002 was
different than the effective tax benefit 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. The Company cannot be assured at this
time that it can generate sufficient capital gains during the
five-year carry-over period to recognize the tax benefit of the
capital losses. An additional valuation allowance was also
required in fiscal 2002 against foreign tax credits since
current forecasts, which include the impact of the impairment on
the San Jose campus, do 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 is
different than 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.

The tax benefit rate for fiscal 2001 was
different than the effective tax rate in fiscal 2000 primarily
as a result of additional valuation allowance that was required
in fiscal 2001 for capital losses resulting from investment
impairments. The Company cannot be assured at this time that it
can generate sufficient capital gains during the five year
carry-over period to recognize the tax benefit of the capital
losses. The 2001 fiscal year effective tax benefit rate was
different than the statutory benefit rate of 35% primarily for
the same reasons as noted above partially offset by the benefits
from tax exempt income, and research and development tax credits.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 29









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##### Table of Contents



The 2000 fiscal year effective tax rate was
different than the statutory rate of 35% primarily because of
the benefit the Company receives from tax exempt income,
research and development tax credits and foreign income that is
taxed at lower rates than the U.S. statutory rate offset by
non-deductible goodwill, valuation allowance on net operating
losses of an acquired company and other miscellaneous items.

At October 31, 2002, the Company had
deferred tax assets of $139 million, net of a valuation
allowance. A portion of these assets is realizable based on the
Companys ability to offset existing deferred tax
liabilities of $43 million. Realization of the remaining
portion of these assets is dependent on the Companys
ability to generate approximately $480 million of future
taxable income. Management believes that sufficient taxable
income will be earned in the future to realize these assets net
of the valuation allowance. Management will evaluate the
realizability of the deferred tax assets quarterly and assess
the need for additional valuation allowances.

Net income (loss) and net income (loss) per
share

|                                                                  |         |      |      |        |   |      |        |        |   |      |      |       |   |  |      |      |    |   |    |      | 
|----------------------------------------------------------------- | ------- | ---- | ---- | ------ | - | ---- | ------ | ------ | - | ---- | ---- | ----- | - |  | ---- | ---- | -- | - | -- | ---- | 
|                                                                  |         | 2002 |      | Change |   | 2001 |        | Change |   | 2000
|                                                                  |         |      |      |        |   |      |        |        |   |     
|Net income (loss) before accounting change
    (millions)         |         | $    | (103 | )      |   |      | 61     | %      |   | $    | (262 | )     |   |  | (629 | )%   |    | $ | 49 |     
|Percentage of revenue                                             |         |      | (9   | )%     |   |      |        |        |   |      | (25  | )%    |   |  |      |      |    |   | 4  | %   
|Cumulative effect of accounting change, net of
    tax (millions) |         | $    | (144 | )      |   |      | (1,201 | )%     |   | $    | (11  | )     |   |  |     |      |    |   |   |     
|Net income (loss) (millions)                                      |         | $    | (247 | )      |   |      | 10     | %      |   | $    | (273 | )     |   |  | (652 | )%   |    | $ | 49 |     
|Percentage of revenue                                             |         |      | (22  | )%     |   |      |        |        |   |      | (26  | )%    |   |  |      |      |    |   | 4  | %   
|Net income (loss) per share:                                      |         |      |      |        |   |      |        |        |   |      |      |       |   |  |      |      |    |   |    |     
|                                                                  | Basic   |      | $    | (0.68  | ) |      |        | 17     | % |      | $    | (0.82 | ) |  |      | (642 | )% |   | $  | 0.15 | 
|                                                                  | Diluted |      | $    | (0.68  | ) |      |        | 17     | % |      | $    | (0.82 | ) |  |      | (642 | )% |   | $  | 0.15 | 

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,
offset by $80 million (pre-tax) impairment charges and
lower gross margins, as discussed above. Net income (loss) per
share decreased in fiscal 2001 compared to fiscal 2000 due
primarily to lower revenue, $80 million (pre-tax)
restructuring charges (compared to $48 million in fiscal
2000), $208 million (pre-tax) impairment charges and
$9 million (pre-tax) integration costs related to the
acquisition of Cambridge, as discussed above. In addition,
shares of the Companys common stock outstanding increased
during fiscal 2001 due to the issuance of shares for the
acquisition of Cambridge.

Change in Accounting Principle

Effective November 1, 2001 the Company
adopted SFAS 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 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. The Company completed its
goodwill impairment analysis during the second quarter of fiscal
2002 and recognized a transitional goodwill impairment loss of
$144 million related to its consulting segment as of
November 1, 2001, which was recorded as the cumulative
effect of a change in accounting principle in the Companys
consolidated Statements of Operations.

In the fourth quarter of fiscal 2002, the Company
performed its required annual goodwill impairment test under
SFAS 142. This test was performed as of August 1, 2002
on goodwill related to the Celerant management consulting
reporting unit and products reporting unit resulting from the
SilverStream acquisition. To estimate the fair value of the
Companys reporting units, management made estimates and
judgments



|   |                          
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|30 | Novell annual report 2002









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##### Table of Contents



about future cash flows based on assumptions that
are consistent with the Companys fiscal 2003 budget and
long-range plans used to manage the business. The Company also
considered its market capitalization as of August 1, 2002,
the date of our testing. Based on the results of its analysis,
the Company determined that there was no goodwill impairment in
any of its reporting units.


Changes to the estimates used in the 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 $180 million, depending
on the estimated value of the segments and the value of the net
assets attributable to those segments at that time. Any further
impairment losses recorded in the future could have a material
adverse impact on our financial conditions and results of
operations.

The fiscal 2001 change in accounting principle
pertains to the change in the Companys methodology for
recognizing revenue to distribution channel partners, discussed
in the product revenue section above.

Liquidity and capital resources

|                                           |  |             |     |        |  |             |     |    |  |   |     |  
|------------------------------------------ |  | ----------- | --- | ------ |  | ----------- | --- | -- |  | - | --- | -
|                                           |  | October 31, |     |        |  | October 31,
|                                           |  | 2002        |     | Change |  | 2001       
|                                           |  |             |     |        |  |            
|Cash and short-term investments (millions) |  | $           | 636 |        |  |             | (10 | )% |  | $ | 705 |  
|Percentage of total assets                 |  |             | 38  | %      |  |             |     |    |  |   | 37  | %

Cash and short-term investments decreased to
$636 million at October 31, 2002 compared to
$705 million at October 31, 2001. The fiscal 2002
decrease in cash can be attributed to cash paid for SilverStream
of $211 million, expenditures for fixed assets of
$28 million, cash paid to acquire Volera minority interest
shares from Nortel of $3.5 million, and net cash paid for
long-term investments, venture capital funds and other long-term
investing activities of $14 million, offset somewhat by
cash provided by operations of $51 million, cash acquired
from SilverStream of $108 million, cash proceeds from stock
issuances of $13 million, and cash received from the sale
of a building of $16 million.

The Companys short-term investment
portfolio is diversified among security types, industry groups,
and individual issuers. To achieve potentially higher returns, a
portion of the Companys investment portfolio is invested
in equity securities and mutual funds, which incur market risk.
The Companys short-term investment portfolio includes
gross unrealized gains of $3 million and gross unrealized
losses of $1 million as of October 31, 2002. The
Company monitors its investments and records losses when a
decline in the investments market value is determined to
be other than temporary.

The Company also invests excess cash in long-term
investments through the Novell Venture account, Cambridge
Technology Capital Fund I L.P. (CTC I),
and direct investments in long-term private equity securities.
Investments made through the Novell Venture account and
CTC I generally are in private companies, including small
capitalization stocks in the high-technology industry sector,
and expansion-stage private companies. Within the Novell Venture
account there are also investments in venture capital funds that
are managed largely by external venture capitalists. CTC I
is managed internally. The value of the investments made through
the Novell Venture account and CTC I is dependent on the
performance, successful acquisition, and/or initial public
offering of the investees. As of October 31, 2002, the
Company had commitments to contribute an additional
$72 million to the externally managed venture capital
funds, of which approximately $20 million is to be paid out
during fiscal 2003, approximately $20 million in fiscal
2004, and approximately $16 million in fiscal 2005, as
requested by the fund managers and commitments to the CTC 1
fund to contribute an additional $300,000 through 2007. The
Company intends to fund these investments with cash from
operations and cash and short-term investments on hand.

As of October 31, 2002, the Company has
various operating leases related to the Companys
facilities with remaining terms of more than one year. These
leases have minimum annual lease commitments of



|                          |   
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|Novell annual report 2002 | 31









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##### Table of Contents



$30 million in fiscal 2003, $27 million
in fiscal 2004, $22 million in fiscal 2005,
$16 million in fiscal 2006, $13 million in fiscal
2007, and $39 million thereafter. The Company also has
$62 million of minimum rentals to be received in the future
from subleases. The Company intends to fund these lease
commitments with cash from operations and cash and short-term
investments on hand.


As of October 31, 2002, Novell had cash and
other short-term investments of $398 million held in
accounts outside the U.S. Repatriation of any portion of this
amount would be subject to U.S. federal income taxes. The
Company has provided for the tax liability on these amounts for
financial statement purposes except for $15 million of
earnings, which is permanently invested outside the
U.S. Repatriation, however, could result in a loss of
certain tax attributes of up to $35 million and result in
additional U.S. federal income tax payments of such amounts in
future years.

The Companys principal source of liquidity
continues to be from operations and on-hand cash and short-term
investments. At October 31, 2002, the Companys
principal unused sources of liquidity consisted of cash in the
amount of $464 million, short-term investments in the
amount of $172 million, and available borrowing capacity of
approximately $3 million under its lines of credit. The
Companys 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 2002, the Company generated
$52 million of cash flow from operations, and anticipates
generating positive cash flows from operations in addition to
investment income in fiscal 2003 sufficient to fund operations.
The Company anticipates being able to fund its 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. The Company believes that
borrowings under the Companys credit facilities or
offerings of equity or debt securities are possible if the need
arises, although such offerings may not be available to the
Company 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. Capital
expenditures in fiscal 2003 are anticipated to be approximately
$40 million, but could be reduced if the growth of the
Company is less than presently anticipated.

During the fourth quarter of 2001, the Board of
Directors extended the Companys stock repurchase program
through June 30, 2003 and authorized the use of up to
$500 million for the repurchase of additional outstanding
shares of the Companys common stock. As of
October 31, 2002, $89 million of the authorized amount
had been spent to repurchase 14 million shares under this
plan at an average price of $6.23 per share. No shares were
repurchased during fiscal 2002.

Recent Pronouncements

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. The Statement
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
This statement eliminates the definition and requirements for
recognition of exit costs in the EITF Issues 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity, which
defined the requirements for recognition of a liability at the
date an entity commits to a restructuring plan. This statement
also established that fair value is the objective for initial
measurement of the liability. The provisions of the
SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, with early
application encouraged. The Company adopted this statement in
the fourth quarter of fiscal 2002 resulting in no effect on its
results of operations.



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|32 | Novell annual report 2002









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Factors Affecting Future Results of
Operations

Novells 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 Novells stock price and ability to sell products and
services. Future economic projections for this sector do not
anticipate a quick recovery. A continuation of the weakened
global economy could have further negative effects on
Novells stock price and ability to sell products and
services in the future.

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

Novell often experiences a higher volume of
revenue at the end of each quarter and during Novells
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;           
|
| |  | delays or problems with our fulfillment agents;                                                       
|
| |  | 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 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 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.



| |                            
| | ---------------------------
| | Product and Volera segments

In addition to the factors listed above, key
competitive factors in the product and Volera segments 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 the product and Volera segments include
Microsoft, IBM, BEA Systems, Sun Microsystems, Altiris,
Netegrity, Computer Associates and Critical Path.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 33









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| |                    
| | -------------------
| | Consulting segments

The key competitive factors faced by the
consulting 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 consulting services is highly
competitive due to the existence of several large consulting
firms specializing in the information systems area such as IBM,
Accenture, EDS and Microsoft. Many of these companies have
greater financial, technical and marketing resources and greater
name recognition in the consulting area, which could inhibit the
Companys ability to grow its 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.



| |        
| | -------
| | General

We do not have the product breadth and market
power of Microsoft. Microsofts ability to ship networking
products with features and functionality that compete with ours,
together with its ability to offer incentives to customers to
purchase certain products in order to obtain favorable sales
terms or necessary compatibility or information with respect to
other products, may significantly inhibit our ability to grow
our business. Microsoft has significant financial resources,
which could allow it to aggressively price its products and
services for long periods of time to the potential detriment of
competitors. We believe, and the courts have agreed, that
Microsoft exploits its desktop operating monopoly in
anticompetitive ways designed to maintain that monopoly and, in
our view, to extend its market power to quash competitive
alternatives to Microsoft products. For example, in the past,
Microsoft has employed tactics that limit or block effective and
efficient interoperability with our products. 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.

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

The ability of Novell to maintain its competitive
technological position will depend, in large part, on its
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 Novells performance. The failure to
successfully promote and hire suitable replacements in a timely
manner could have a material adverse effect on Novells
business.

If We Are Not Successful in Developing a
Strong Business with Our exteNd Products and Services, Our
Revenues Will Not Grow at the Rates We Have Projected

One key element of Novells 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. Novells 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
Novells development of secure Web services products and
enhanced its Net business solutions product offerings.
Novells ability to achieve success with its 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 to become a major
component of our business, our long-term growth will be
negatively impacted.



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|34 | Novell annual report 2002









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

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

Novell has several existing products, which it
has been selling and upgrading for many years. Sales of these
existing products are declining at a faster rate than Novell is
able to increase sales of new products or technologies. Overall,
the products segment revenues declined by $53 million in
fiscal 2002, primarily due to a decrease in revenues from Net
Management Services products of $80 million, and only
partially offset by an increase in revenues from Net Directory
Services products of $28 million. If we are unsuccessful in
increasing sales of new products or technologies, particularly
in our exteNd solution set and Net Directory 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.

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

As is common in the computer software industry,
Novell has 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 Novell.

Moreover, Novell may experience delays in market
acceptance of new releases of its products as Novell engages 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. Novell has encountered these issues on each major new
release of its products, and expects that it will encounter such
issues in the future. Novells ability to achieve desired
levels of revenue growth depends at least in part on the
successful completion, introduction and sale of new versions of
its products. There can be no assurance that Novell will be able
to respond effectively to technological changes or new product
announcements by others, or that Novells research and
development efforts will be successful. Should Novell experience
material delays or revenue shortfalls with respect to new
product releases, Novells revenue and net income could be
adversely affected.

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. Novell has in
the past received letters or been the subject of claims
suggesting that it is infringing upon the



|                          |   
|------------------------- | --
|Novell annual report 2002 | 35









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##### Table of Contents



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, Novell has faced and expects to continue to face
from time to time disputes over rights and obligations
concerning intellectual property. Novell expects third-party
infringement claims involving Internet technologies and software
products and services to increase 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 Novell has no reason to think it would not have
strong defenses to such claims, the cost and time of defending
itself can be significant. In addition, Novell has agreed, and
may agree in the future, to indemnify customers against claims
that its products infringe upon the intellectual property rights
of others. Novell could incur substantial costs in defending
itself and its customers against infringement claims. If an
infringement claim is successful, Novell and its customers may
be required to obtain one or more licenses from third parties,
and Novell may be obligated to pay or reimburse its customers
for monetary damages. In such instances, Novell or its 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

Novell generally enters into contractual
relationships with its employees that protect its confidential
information. In the event that Novells trade secrets or
other proprietary information are misappropriated, Novells
business could be seriously harmed. In addition, Novell may not
be able to timely detect unauthorized use of its intellectual
property and take appropriate steps to enforce its rights. In
the event Novell is unable to enforce these contractual
obligations and its intellectual property rights, its business
could be adversely affected.

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

Novell is a multi-national corporation with
offices and subsidiaries around the world and, as such, it faces
risks in doing business abroad that it does not face
domestically. Certain aspects inherent in transacting business
internationally could negatively impact the operating results of
Novell, 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 Novells costs.                                     

Some of Our Short-term, Long-term, and Venture
Capital Fund Investments Have Become Impaired and Additional
Investments Could Become Impaired

Novells 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 its fiscal 2002 year, Novell recorded an impairment
charge of $58 million related to some of the investments in
its portfolio whose market value had experienced an other than
temporary decline. As of October 31, 2002, Novell had net
unrealized gains,



|   |                          
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|36 | Novell annual report 2002









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net of taxes, on investments totaling
approximately $2 million; however, there can be no
assurances that these gains will be realized and that losses
will not occur. If the companies and funds in which Novell has
invested suffer poor financial performance, or if the private
companies in which Novell has invested are not successfully
acquired or experience initial public offerings, the value of
our investments will decrease.


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

Novell maintains relationships with IT services
organizations that recommend, design and implement solutions for
their customers eBusiness that include Novell Net services
products. At the same time, Novells 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 recommend
our products. A change in the willingness of these information
technology service organizations to do business with Novell
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 Consumer Requirements

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



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | effectively identify and use leading technologies;                                                                                                      
|
| |  | develop strategic and technical expertise;                                                                                                              
|
| |  | 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 Net business
    solutions.                                                                                            

Our Consulting Services Contracts Contain
Pricing Risks and, If Our Estimates Prove Inaccurate, We Could
Lose Money

Novells IT consulting business derives a
portion of its 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.
Novell has occasionally had to commit unanticipated additional
resources to complete projects, and it may have to take similar
action in the future. Novell may not be compensated for these
additional costs or the commitment of these additional
resources. Additionally, Novells Celerant management
consulting business derives revenues from projects priced on a
contingency basis. If results are not met, or if a dispute
arises, potentially large revenues may not be realized.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 37









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Our IT Consulting Clients Can Cancel or Reduce
the Scope of Their Engagements With Us on Short Notice

If Novells clients cancel or reduce the
scope of an engagement with the IT Consulting business or the
Celerant management consulting business, Novell may be unable to
reassign its professionals to new engagements without delay.
Personnel and related costs constitute a substantial portion of
Novells operating expenses. Because these expenses are
relatively fixed, and because Novell establishes 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 Novells
professional services employees, causing significant reductions
in operating results for a particular quarter.

Our Stock Price Will Fluctuate

Novells 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 Novells common stock in any given period. Revenue
fluctuations may also contribute to the volatility of the
trading price of Novell common stock in any given period.

In addition, the market prices for securities of
software companies have been, and continues to be, very
volatile. The market price of Novell 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 Novells common
stock may be subject to significant fluctuations within a short
period of time. These fluctuations may be due to factors
specific to Novell, to changes in analysts earnings
estimates, or to factors affecting the computer industry or the
securities markets in general.



|   |                          
|-- | -------------------------
|38 | Novell annual report 2002









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Item 7A.     Qualitative
and Quantitative Disclosures About Market Risk

The Company is exposed to financial market risks,
including changes in interest rates, foreign currency exchange
rates, and marketable equity security prices. To mitigate some
of these risks, the Company utilizes currency forward contracts
and currency options. The Company does not use derivative
financial instruments for speculative or trading purposes, and
no significant derivative financial instruments were outstanding
at October 31, 2002.

Interest Rate Risk

The primary objective of the Companys
short-term investment activities is to preserve principal while
maximizing yields without significantly increasing risk. The
strategy used by the Company to achieve this 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 $0.7 million decrease (less than 0.5%) in the fair
value of the Companys available-for-sale securities.

Market Risk

The Company also holds available-for-sale equity
securities in its short-term investment portfolio. As of
October 31, 2002, gross unrealized losses, before tax
effect on the short-term public equity securities totaled
$0.2 million. A reduction in prices of 10% of these
short-term equity securities would result in approximately a
$0.6 million decrease (less than 0.5%) in the fair value of
the Companys short-term investments.

In addition, the Company invests in private
equity securities, included in its long-term portfolio of
investments, primarily for the promotion of business and
strategic objectives. These investments are generally in small
capitalization stocks in the high-technology industry sector or
venture capital funds. Because of the nature of these
investments, the Company is exposed to equity price risks. The
Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in
equity prices of long-term equity securities would result in an
approximately $7 million decrease in the fair value of the
Companys available-for-sale long-term securities.

Foreign Currency Risk

The Company uses derivatives to hedge those net
assets and liabilities that, when remeasured or settled
according to accounting principles generally accepted in the
U.S., impact the condensed consolidated statement of operations.
Currency forward contracts are utilized in these hedging
programs. All forward contracts entered into by the Company 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 losses and gains 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 and expense in the same
period as when the gains and losses on remeasurement 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
condensed consolidated statement of cash flows. The
Companys hedging programs reduce, but do not always
entirely eliminate, the impact of foreign currency exchange rate
movements. If the Company 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 $10 million. This number
represents the exposure related to balance sheet remeasurement
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 the Companys
financial position at October 31, 2002. Actual results may
differ materially.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 39









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Item 8.     Financial
Statements and Supplementary Data

Novell, Inc.

|                                                               |  |      |    | 
|-------------------------------------------------------------- |  | ---- | -- | 
|                                                               |  | Page
|                                                               |  |     
|Consolidated Statements of Operations                          |  |      | 41 | 
|Consolidated Balance Sheets                                    |  |      | 42 | 
|Consolidated Statements of Stockholders
    Equity            |  |      | 43 | 
|Consolidated Statements of Cash Flows                          |  |      | 44 | 
|Notes to Consolidated Financial Statements                     |  |      | 45 | 
|Report of Ernst & Young LLP, Independent
    Auditors          |  |      | 74 | 
|Selected Consolidated Quarterly Financial
    Data  Unaudited |  |      | 75 | 



|   |                          
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|40 | Novell annual report 2002









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NOVELL, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |           |         | 
|-------------------------------------------------------- | --------------------------------------------- | -------------------------------------------------------- | --------- | ----------- | ------- | ----------- | --------- | -------- | -------- | - | --------- | --------- | ------- | 
|                                                         |                                               |                                                         
|                                                         |                                               | Fiscal Year Ended                                       
|                                                         |                                               |                                                         
|                                                         |                                               | October 31,                                              |           | October 31, |         | October 31,
|                                                         |                                               | 2002                                                     |           | 2001        |         | 2000       
|                                                         |                                               |                                                          |           |             |         |            
|                                                         |                                               |                                                         
|                                                         |                                               | (Amounts in thousands, except per share data)           
|Net revenue:                                             |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         | Product                                       |                                                          | $         | 833,706     |         |             | $         | 887,190  |          |   | $         | 1,109,603 |        
|                                                         | Consulting                                    |                                                          |           | 300,614     |         |             |           | 163,606  |          |   |           | 52,132    |        
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Total net revenue                                        |                                               |                                                          | 1,134,320 |             |         |             | 1,050,796 |          |          |   | 1,161,735 |          
|Cost of revenue:                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         | Product                                       |                                                          |           | 162,168     |         |             |           | 191,389  |          |   |           | 268,049   |        
|                                                         | Consulting                                    |                                                          |           | 287,250     |         |             |           | 147,245  |          |   |           | 59,349    |        
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Total cost of revenue                                    |                                               |                                                          | 449,418   |             |         |             | 338,634   |          |          |   | 327,398   |          
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Gross profit                                             |                                               |                                                          | 684,902   |             |         |             | 712,162   |          |          |   | 834,337   |          
|Operating expenses:                                      |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         | Sales and marketing                           |                                                          |           | 358,742     |         |             |           | 443,828  |          |   |           | 495,245   |        
|                                                         | Product development                           |                                                          |           | 169,247     |         |             |           | 191,709  |          |   |           | 228,002   |        
|                                                         | General and administrative                    |                                                          |           | 122,588     |         |             |           | 117,261  |          |   |           | 94,780    |        
|                                                         | Restructuring charges                         |                                                          |           | 19,100      |         |             |           | 80,177   |          |   |           | 47,892    |        
|                                                         | Purchased in-process research and development |                                                          |           | 3,000       |         |             |           |         |          |   |           |          |        
|                                                         | Long-lived asset impairments                  |                                                          |           | 80,350      |         |             |           |         |          |   |           |          |        
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         |                                               | Total operating expenses                                 |           |             | 753,027 |             |           |          | 832,975  |   |           |           | 865,919 | 
|Loss from operations                                     |                                               |                                                          | (68,125   | )           |         |             | (120,813  | )        |          |   | (31,582   | )        
|Other income (expense):                                  |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         | Investment income (loss)                      |                                                          |           | (32,918     | )       |             |           | (154,572 | )        |   |           | 109,390   |        
|                                                         | Other, net                                    |                                                          |           | 8,818       |         |             |           | (1,381   | )        |   |           | (7,136    | )      
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         |                                               | Other income (expense), net                              |           |             | (24,100 | )           |           |          | (155,953 | ) |           |           | 102,254 | 
|Income (loss) before taxes                               |                                               |                                                          | (92,225   | )           |         |             | (276,766  | )        |          |   | 70,672    |          
|Income tax expense (benefit)                             |                                               |                                                          | 10,896    |             |         |             | (14,944   | )        |          |   | 21,202    |          
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Income (loss) before accounting change                   |                                               |                                                          | (103,121  | )           |         |             | (261,822  | )        |          |   | 49,470    |          
|Cumulative effect of accounting change, net of
    taxes |                                               |                                                          | (143,702  | )           |         |             | (11,048   | )        |          |   |          |          
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Net income (loss)                                        |                                               | $                                                        | (246,823  | )           |         | $           | (272,870  | )        |          | $ | 49,470    |          
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|Weighted average shares outstanding:                     |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         | Basic                                         |                                                          |           | 363,569     |         |             |           | 332,582  |          |   |           | 326,621   |        
|                                                         | Diluted                                       |                                                          |           | 363,569     |         |             |           | 332,582  |          |   |           | 335,034   |        
|Net income (loss) per share, basic and
    diluted:      |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         |                                               | Before cumulative effect of accounting change            |           | $           | (0.28   | )           |           | $        | (0.79    | ) |           | $         | 0.15    | 
|                                                         |                                               | Cumulative effect of accounting change, net of
    taxes |           |             | (0.40   | )           |           |          | (0.03    | ) |           |           |        | 
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          
|                                                         |                                               | $                                                        | (0.68     | )           |         | $           | (0.82     | )        |          | $ | 0.15      |          
|                                                         |                                               |                                                          |           |             |         |             |           |          |          |   |           |          

See notes to consolidated financial statements.



|                          |   
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|Novell annual report 2002 | 41









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NOVELL, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                   |                                                                   |                                            |             |        |           |         |         |        |           | 
|------------------------------------ | ----------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------ | ----------- | ------ | --------- | ------- | ------- | ------ | --------- | 
|                                     |                                                                   | October 31,                                                       |                                            | October 31,
|                                     |                                                                   | 2002                                                              |                                            | 2001       
|                                     |                                                                   |                                                                   |                                            |            
|                                     |                                                                   |                                                                  
|                                     |                                                                   | (Amounts in thousands, except                                    
|                                     |                                                                   | share and per share data)                                        
|Current assets:                      |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     | Cash and short-term investments                                   |                                                                   | $                                          | 635,858     |        |           | $       | 705,243 |       
|                                     | Receivables, less allowances ($39,676 
    2002, $47,249  2001) |                                                                   |                                            | 214,827     |        |           |         | 227,044 |       
|                                     | Inventories                                                       |                                                                   |                                            | 137         |        |           |         | 947     |       
|                                     | Prepaid expenses                                                  |                                                                   |                                            | 24,077      |        |           |         | 29,808  |       
|                                     | Deferred income taxes                                             |                                                                   |                                            | 21,204      |        |           |         | 34,595  |       
|                                     | Other current assets                                              |                                                                   |                                            | 23,435      |        |           |         | 29,729  |       
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total current assets                       |             |        | 919,538   |         |         |        | 1,027,366 | 
|Property, plant, and equipment, net  |                                                                   |                                                                   | 369,189                                    |             |        |           | 496,620 |        
|Long-term investments                |                                                                   |                                                                   | 73,452                                     |             |        |           | 114,971 |        
|Goodwill                             |                                                                   |                                                                   | 179,534                                    |             |        |           | 187,795 |        
|Intangible assets                    |                                                                   |                                                                   | 36,351                                     |             |        |           | 4,221   |        
|Other assets                         |                                                                   |                                                                   | 87,001                                     |             |        |           | 73,033  |        
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total assets                               |             | $      | 1,665,065 |         |         | $      | 1,904,006 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     | Accounts payable                                                  |                                                                   | $                                          | 57,241      |        |           | $       | 77,571  |       
|                                     | Accrued compensation                                              |                                                                   |                                            | 87,778      |        |           |         | 87,382  |       
|                                     | Accrued marketing liabilities                                     |                                                                   |                                            | 10,158      |        |           |         | 13,672  |       
|                                     | Other accrued liabilities                                         |                                                                   |                                            | 124,692     |        |           |         | 150,842 |       
|                                     | Income taxes payable                                              |                                                                   |                                            | 36,294      |        |           |         | 38,175  |       
|                                     | Deferred revenue                                                  |                                                                   |                                            | 275,344     |        |           |         | 243,261 |       
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total current liabilities                  |             |        | 591,507   |         |         |        | 610,903   | 
|Minority interests                   |                                                                   |                                                                   | 8,016                                      |             |        |           | 22,436  |        
|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  367,537,926 shares  2002;
    362,341,403 shares  2001 |                                            |             | 36,753 |           |         |         | 36,234 |          
|                                     | Additional paid-in capital                                        |                                                                   |                                            | 297,139     |        |           |         | 256,332 |       
|                                     | Retained earnings                                                 |                                                                   |                                            | 738,663     |        |           |         | 985,486 |       
|                                     | Accumulated other comprehensive income                            |                                                                   |                                            | 57          |        |           |         | 2,455   |       
|                                     | Other                                                             |                                                                   |                                            | (7,070      | )      |           |         | (9,840  | )     
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total stockholders equity                 |             |        | 1,065,542 |         |         |        | 1,270,667 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        
|                                     |                                                                   |                                                                   | Total liabilities and stockholders equity |             | $      | 1,665,065 |         |         | $      | 1,904,006 | 
|                                     |                                                                   |                                                                   |                                            |             |        |           |         |        

See notes to consolidated financial statements.



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|42 | Novell annual report 2002









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NOVELL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                            |  |                                               |         |        |  |            |        |          |  |               |          |       |  |       |           |   |  |   |          |   |  |   |         |   |  |   |           |  
|------------------------------------------- |  | --------------------------------------------- | ------- | ------ |  | ---------- | ------ | -------- |  | ------------- | -------- | ----- |  | ----- | --------- | - |  | - | -------- | - |  | - | ------- | - |  | - | --------- | -
|                                            |  |                                               |         |        |  |            |        |          |  | Accumulated   |          |       |  |      
|                                            |  | Common                                        |         | Common |  | Additional |        |          |  | Other         |          |       |  |      
|                                            |  | Stock                                         |         | Stock  |  | Paid-In    |        | Retained |  | Comprehensive |          |       |  |      
|                                            |  | No. of Shares                                 |         | Amount |  | Capital    |        | Earnings |  | Income (Loss) |          | Other |  | Total
|                                            |  |                                               |         |        |  |            |        |          |  |               |          |       |  |      
|                                            |  |                                              
|                                            |  | (Amounts in thousands, except for share data)
|Balance  October 31, 1999                  |  |                                               | 326,594 |        |  | $          | 32,659 |          |  | $             |         |       |  | $     | 1,432,624 |   |  | $ | 35,189   |   |  | $ | (8,231  | ) |  | $ | 1,492,241 |  
|                                           
|Stock issued from stock plans               |  |                                               | 12,997  |        |  |            | 1,300  |          |  |               | 119,469  |       |  |       |          |   |  |   |         |   |  |   | (29,848 | ) |  |   | 90,921    |  
|Stock plans income tax benefits            |  |                                               |        |        |  |            |       |          |  |               | 22,918   |       |  |       |          |   |  |   |         |   |  |   |        |   |  |   | 22,918    |  
|Stock issued for acquisitions               |  |                                               | 645     |        |  |            | 65     |          |  |               | 17,301   |       |  |       |          |   |  |   |         |   |  |   |        |   |  |   | 17,366    |  
|Shares cancelled                            |  |                                               | (265    | )      |  |            | (27    | )        |  |               | (4,690   | )     |  |       |          |   |  |   |         |   |  |   | 2,156   |   |  |   | (2,561    | )
|Shares repurchased and retired              |  |                                               | (12,353 | )      |  |            | (1,235 | )        |  |               | (154,998 | )     |  |       | (162,241  | ) |  |   |         |   |  |   |        |   |  |   | (318,474  | )
|Amortization of unearned stock compensation |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   |         |   |  |   | 12,820  |   |  |   | 12,820    |  
|Change in unrealized gain on investments    |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | (118,956 | ) |  |   |        |   |  |   | (118,956  | )
|Cumulative translation adjustment           |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | (660     | ) |  |   |        |   |  |   | (660      | )
|Net income                                  |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       | 49,470    |   |  |   |         |   |  |   |        |   |  |   | 49,470    |  
|                                            |  |                                               |         |        |  |            |        |          |  |               |          |       |  |       |           |   |  |   |          |   |  |   |         |   |  |   |           |  
|Comprehensive loss                          |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   |         |   |  |   |        |   |  |   | (70,146   | )
|                                            |  |                                               |         |        |  |            |        |          |  |               |          |       |  |       |           |   |  |   |          |   |  |   |         |   |  |   |           |  
|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    |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | 86,226   |   |  |   |        |   |  |   | 86,226    |  
|Cumulative translation adjustment           |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | 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    |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | (2,828   | ) |  |   |        |   |  |   | (2,828    | )
|Cumulative translation adjustment           |  |                                               |        |        |  |            |       |          |  |               |         |       |  |       |          |   |  |   | 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 |  
|                                            |  |                                               |         |        |  |            |        |          |  |               |          |       |  |       |           |   |  |   |          |   |  |   |         |   |  |   |           |  

See notes to consolidated financial statements.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 43









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##### Table of Contents



NOVELL, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |          |          |  
|----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | -------- | ----------- | ------ | ----------- | -------- | -------- | ------- | - | ------- | -------- | -------- | -
|                                                                                                                              |                                                              |                                                     
|                                                                                                                              |                                                              | Fiscal Year Ended                                   
|                                                                                                                              |                                                              |                                                     
|                                                                                                                              |                                                              | October 31,                                          |          | October 31, |        | October 31,
|                                                                                                                              |                                                              | 2002                                                 |          | 2001        |        | 2000       
|                                                                                                                              |                                                              |                                                      |          |             |        |            
|                                                                                                                              |                                                              |                                                     
|                                                                                                                              |                                                              | (Amounts in thousands)                              
|Cash flows from operating activities                                                                                          |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|Net income (loss)                                                                                                             |                                                              | $                                                    | (246,823 | )           |        | $           | (272,870 | )        |         | $ | 49,470  |         
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities
    Depreciation and amortization |                                                              |                                                      | 68,785   |             |        |             | 86,708   |          |         |   | 81,909  |         
|                                                                                                                              | Gain on sale of fixed assets                                 |                                                      |          | (8,762      | )      |             |          |         |         |   |         |         |         
|                                                                                                                              | Stock plans income tax benefits                             |                                                      |          |            |        |             |          |         |         |   |         | 22,918   |         
|                                                                                                                              | Loss on impaired goodwill                                    |                                                      |          | 143,702     |        |             |          |         |         |   |         |         |         
|                                                                                                                              | Loss on impaired investments and fixed assets                |                                                      |          | 137,922     |        |             |          | 215,472  |         |   |         |         |         
|                                                                                                                              | Restructuring charges                                        |                                                      |          | 16,426      |        |             |          | 67,646   |         |   |         | 22,635   |         
|                                                                                                                              | Purchased in-process research and development                |                                                      |          | 3,000       |        |             |          |         |         |   |         |         |         
|                                                                                                                              | Decrease in receivables                                      |                                                      |          | 18,599      |        |             |          | 47,682   |         |   |         | 87,838   |         
|                                                                                                                              | Decrease in inventories                                      |                                                      |          | 810         |        |             |          | 1,674    |         |   |         | 1,132    |         
|                                                                                                                              | Decrease in prepaid expenses                                 |                                                      |          | 7,580       |        |             |          | 317      |         |   |         | 21,618   |         
|                                                                                                                              | (Increase) decrease in deferred income taxes                 |                                                      |          | (14,035     | )      |             |          | (18,691  | )       |   |         | 18,610   |         
|                                                                                                                              | Decrease in other current assets                             |                                                      |          | 6,931       |        |             |          | 8,786    |         |   |         | 20,301   |         
|                                                                                                                              | Increase in deferred revenue                                 |                                                      |          | 32,083      |        |             |          | 33,683   |         |   |         | 30,013   |         
|                                                                                                                              | (Decrease) increase in accounts payable                      |                                                      |          | (23,386     | )      |             |          | (25,335  | )       |   |         | 13       |         
|                                                                                                                              | (Decrease) in accrued liabilities                            |                                                      |          | (91,358     | )      |             |          | (53,095  | )       |   |         | (14,580  | )       
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|                                                                                                                              |                                                              | Net cash provided by operating activities            |          |             | 51,474 |             |          |          | 91,977  |   |         |          | 341,877  |  
|Cash flows from financing activities                                                                                          |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|                                                                                                                              | Issuance of common stock, net                                |                                                      |          | 13,186      |        |             |          | 11,228   |         |   |         | 88,360   |         
|                                                                                                                              | Repurchases of common stock                                  |                                                      |          |            |        |             |          | (71,885  | )       |   |         | (318,474 | )       
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|                                                                                                                              |                                                              | Net cash provided (used) by financing
    activities |          |             | 13,186 |             |          |          | (60,657 | ) |         |          | (230,114 | )
|Cash flows from investing activities                                                                                          |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|                                                                                                                              | Expenditures for property, plant, and equipment              |                                                      |          | (27,610     | )      |             |          | (33,289  | )       |   |         | (57,811  | )       
|                                                                                                                              | Proceeds from the sale of property, plant, and
    equipment |                                                      |          | 16,050      |        |             |          |         |         |   |         | 53,579   |         
|                                                                                                                              | Purchases of short-term investments                          |                                                      |          | (549,008    | )      |             |          | (752,833 | )       |   |         | (839,645 | )       
|                                                                                                                              | Maturities of short-term investments                         |                                                      |          | 262,974     |        |             |          | 639,507  |         |   |         | 644,655  |         
|                                                                                                                              | Sales of short-term investments                              |                                                      |          | 477,313     |        |             |          | 114,047  |         |   |         | 348,519  |         
|                                                                                                                              | Proceeds from investment by Volera minority
    stockholders |                                                      |          |            |        |             |          | 25,975   |         |   |         |         |         
|                                                                                                                              | Cash acquired from acquisitions                              |                                                      |          | 108,286     |        |             |          | 72,358   |         |   |         |         |         
|                                                                                                                              | Cash paid for acquisition of SilverStream                    |                                                      |          | (211,261    | )      |             |          |         |         |   |         |         |         
|                                                                                                                              | Cash paid for acquisition of Volera minority
    interest    |                                                      |          | (3,500      | )      |             |          |         |         |   |         |         |         
|                                                                                                                              | Increase in restricted cash                                  |                                                      |          |            |        |             |          |         |         |   |         | (36,881  | )       
|                                                                                                                              | Purchases of long-term investments                           |                                                      |          | (26,143     | )      |             |          | (36,461  | )       |   |         | (206,272 | )       
|                                                                                                                              | Other                                                        |                                                      |          | 14,299      |        |             |          | (12,234  | )       |   |         | (2,639   | )       
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|                                                                                                                              |                                                              | Net cash provided (used) by investing
    activities |          |             | 61,400 |             |          |          | 17,070  |   |         |          | (96,495  | )
|Total increase in cash and cash equivalents                                                                                   |                                                              |                                                      | 126,060  |             |        |             | 48,390   |          |         |   | 15,268  |         
|Cash and cash equivalents  beginning
    of period                                                                           |                                                              |                                                      | 337,927  |             |        |             | 289,537  |          |         |   | 274,269 |         
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|Cash and cash equivalents  end of
    period                                                                                 |                                                              |                                                      | 463,987  |             |        |             | 337,927  |          |         |   | 289,537 |         
|Short-term investments  end of period                                                                                        |                                                              |                                                      | 171,871  |             |        |             | 367,316  |          |         |   | 408,656 |         
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|Cash and short-term investments  end
    of period                                                                           |                                                              | $                                                    | 635,858  |             |        | $           | 705,243  |          |         | $ | 698,193 |         
|                                                                                                                              |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|Supplemental disclosures of non-cash financing
    and investing activities:                                                  |                                                              |                                                      |          |             |        |             |          |          |         |   |         |         
|Issuance of stock for acquisitions                                                                                            |                                                              | $                                                    |         |             |        | $           | 250,565  |          |         | $ | 17,366  |         
|Property, plant, and equipment acquired with
    restricted cash                                                              |                                                              | $                                                    |         |             |        | $           | 223,027  |          |         | $ |        |         

See notes to consolidated financial statements.



|   |                          
|-- | -------------------------
|44 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

A. Summary of Significant Accounting
Policies

Novell, Inc. has been a pioneer in the field of
computer networking since its development and release of NetWare
in the mid 1980s. As a result of the Companys
20 years of expertise as a leader in the field of computer
networking, we have over a thousand of the best networking
engineers in the world. These engineers work closely with
Novells highly-qualified consulting force to create
world-class solutions. Novell is extraordinarily proud of its
people, the skills they have and the dedication that they bring
to the company. This is a tremendous strategic asset upon which
Novell intends to continue to capitalize. Leveraging this
expertise, Novell expects to become the leading company in
providing secure Web services and secure identity management.
Novells solutions leverage the Companys network
expertise and the Web to help to create a world without
information boundaries.

Today Novell provides Net business solutions
designed to secure and power the networked world, helping
organizations solve complex business challenges, simplify their
systems and processes, and capture new opportunities. Net
business solutions, include software applications and consulting
services, developed using open Internet standards and our own
eDirectory network infrastructure products, that support
highly distributed network solutions and capitalize on the
growth of the Internet. With both software and services
offerings, Novell can determine how Net business solutions can
be used by an organization and the requirements necessary to
ensure proper security and access, which can then be turned into
a Net solutions approach that helps the customer deliver the
right information, to the right individual, at the right time,
and on the right device.

The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated.

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

The following summarizes the significant
accounting policies of the Company:



| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company considers 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:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Money market preferreds, included in short-term
    investments, have contractual maturities of less than
    180 days.                                                                                                                                                                   
|
| |  | Fixed income securities, which have contractual
    maturities ranging from zero to seven years. These securities
    are anticipated 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 market value. The
    unrealized gains and losses related to these securities are
    included in Other Comprehensive Income (Loss), net of tax, after
    any applicable tax valuation allowances. Fair market values are
    based on quoted market prices where available; if quoted market
    prices are not available, the fair market values are based on
    quoted market prices of similar instruments of companies that
    are comparable in size, product offerings, and market sector.
    When securities are sold, their cost is determined based on the
    specific identification method.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 45









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accounts receivable include amounts owed by
    geographically dispersed end users, distributors, resellers, and
    OEM customers. No collateral is required. Provisions are
    provided for sales returns, product exchanges, and bad debts.
    There were no customers with outstanding receivables balances
    greater than 10% in fiscal 2002 or 2001.                                                                                                                                                                                                                                                    
|
| |  | 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 $58 million, $57 million, and $57
    million, in fiscal 2002, 2001, and 2000, respectively.
    Depreciation and amortization is computed on the straight-line
    method over the estimated useful lives of the assets, or lease
    term, if shorter, and are as follows:

Asset classification

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Assets and liabilities of the Companys
    wholly-owned subsidiaries, except its Japan, India, Cambridge
    international, and SilverStream international subsidiaries, are
    denominated in the local currency of the subsidiary and are
    remeasured into U.S. dollars (the functional currency) at
    year-end exchange rates, except for equipment and leasehold
    improvements, which are remeasured at the historical rates of
    exchange prevailing when acquired. Income and expense items are
    remeasured at average rates of exchange prevailing during the
    year, except that depreciation is remeasured at historical
    rates. Remeasurement gains and losses are included in net income
    (loss) in the period incurred and were not material for
    fiscal 2002, 2001, or 2000.
|
| |  | For the Companys Japan, India, Cambridge
    international, and SilverStream international subsidiaries, the
    functional currency has been determined to be the local
    currency, and therefore assets and liabilities are translated at
    year-end exchange rates, and income statement items are
    translated at average exchange rates prevailing during the year.
    Such translation adjustments are recorded in accumulated
    comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                      
|
| |  | Revenue from product sales, including 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.                                                                                                                                                                                                                                                                                                                               

Revenue on services, including maintenance
contracts and support, is recognized as services are performed.
Certain sales require continuing service, support, and
performance by the Company, and accordingly a portion of the
revenue is deferred until the future service, support, and
performance are provided. Allowances for estimated sales returns
and allowances are recorded in the same period as the related
revenues.



|   |                          
|-- | -------------------------
|46 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue recognized on multiple-element sales
orders is allocated to each element of the arrangement based on
the relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer
support, installation, and training.

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 percentage of completion
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
loss contracts is generally reflected in the period in which the
changes or losses become known. To date, the Company has not
recorded a significant adjustment caused by the failure to
accurately estimate the costs, scope, or duration of a
fixed-price contract. Revenue includes reimbursable expenses
charged to clients.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product development costs are expensed as
    incurred. Due to use of the working model approach, capitalized
    development costs have not been material.                                                                                                                                                                                                                                                     
|
| |  | Advertising costs are expensed as incurred.
    Advertising expenses totaled $20 million, $52 million,
    and $50 million, in fiscal 2002, 2001, and 2000,
    respectively.                                                                                                                                                                                                                                   
|
| |  | Basic earnings (loss) per share exclude any
    dilutive effects of stock options, warrants, and convertible
    securities. Diluted 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
    2002 and 2001 diluted loss per share, as their effect would have
    been anti-dilutive.

In June 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. This statement
eliminates the definition and requirements for recognition of
exit costs in the FASBs Emerging Issues Task Force
(EITF) Issue No. 94-3, which defined the
requirements for recognition of a liability at the date an
entity commits to a restructuring plan. This statement also
establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS
No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, with early
application encouraged. The Company adopted this statement in
the fourth quarter of fiscal 2002.

At the beginning of the second quarter of fiscal
2002, the Company adopted EITF Issue No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred.
EITF Issue No. 01-14 requires companies to account for
reimbursements received for incurred out-of-pocket expenses as
revenue and the related expenses as cost of revenue.
EITF 01-14 also requires companies to reclassify prior
period financial statements to conform to the current year
presentation for comparative purposes. Previously these expenses
were not included in the statement of operations. The adoption
of EITF 01-14 did not have an impact on net earnings in any
reported period. The Company restated the prior periods, thereby
increasing revenue and cost of revenue sold by $11 million
in fiscal 2001. Prior to fiscal 2001, reimbursed out-of-pocket
expenses were immaterial and included in revenue and cost of
revenue.

Amounts reported in prior years may have been
adjusted from what was previously reported to reflect certain
reclassifications to conform to the current years
presentation. None of these adjustments have affected net income
for the prior periods.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 47









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

B. Acquisitions



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

Pursuant to the terms of an Agreement and Plan of
Merger, dated as of June 9, 2002 by and among Novell,
Delaware Planet, Inc., a wholly owned subsidiary of Novell
(Delaware Planet), and SilverStream, Delaware Planet
commenced a cash tender offer on June 18, 2002 to acquire
all of the outstanding shares of SilverStream common stock at a
price of $9.00 per share. On July 17, 2002, Delaware Planet
announced the completion of its cash tender offer, pursuant to
which it purchased almost all of the outstanding shares of
SilverStream common stock at a price of $9.00 per share. On
July 19, 2002, Novell completed its acquisition of
SilverStream by merging Delaware Planet into SilverStream.

SilverStream provides software products that
leverage the power of internet standards, such as Java and XML,
to unify and repurpose existing applications and information by
harnessing the value of customers prior technology
investments and to help customers rapidly deliver secure
Web-based applications that are scalable, reliable, and secure.
The Company acquired SilverStream to further its development of
Web services and to enhance its current Net business solutions.

At the closing date of the merger, there were
23,473,205 shares of SilverStream common stock outstanding,
resulting in a total cash acquisition price of
$211 million. Direct transaction costs were estimated to be
$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 FASB Interpretation
No. 44 (FIN 44). 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 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 life of 2-5 years.                                                                                                                                                                     
|
| |  | Expected volatility of 80%.                                                                                                                                                                     
|
| |  | Risk free interest rate of 5%.                                                                                                                                                                  
|
| |  | Expected dividend rate of 0%.                                                                                                                                                                   



|   |                          
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|48 | Novell annual report 2002









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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)
|                                      |                                               |                  |         |                      
|                                      |                                               | (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 life        
|Goodwill                              |                                               |                  | 127,935 |                       |  | N/A    
|                                      |                                               |                  |         |                       |  |        
|                                      |                                               | $                | 243,844 |                       |  |        
|                                      |                                               |                  |         |                       |  |        

The allocation will be adjusted over the next
three quarters 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 affect
the allocation.

Goodwill from the acquisition resulted from the
Companys belief that the technology SilverStream had
developed is valuable to the Companys secure Web services
product offerings. The Company also believes it was more
beneficial to acquire such technology rather than develop it
in-house. The goodwill from the SilverStream acquisition has
been allocated to the Companys product segment as the
exteNd product suite will be included with the Net directory
services group of products. In accordance with SFAS 142,
the Company does not amortize goodwill or intangibles with
indefinite lives resulting from this acquisition, and reviews
these assets periodically for potential impairment issues.
Goodwill is not deductible for tax purposes.

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 Novell as determined under the
guidance of FIN 44.

The $3 million of in-process research and
development pertains to replacement and enhancement technology
that will be included in the next versions of the exteNd product
suite, and is not currently technologically feasible, meaning it
has not reached the working model stage, does not contain all of
the major functions planned for the product, and is not ready
for initial customer testing. Shortly before the acquisition,
SilverStream released its latest version of each of its 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 Company delivering its secure Web services
products and successfully integrating SilverStream. The
in-process research and development does not have any
alternative future use and did not otherwise qualify for
capitalization.

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



|                          |   
|------------------------- | --
|Novell annual report 2002 | 49









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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. The pre-tax
royalty rates of 0.5 percent were applied to the product
revenues and discounted to a present value, resulting in a
valuation of approximately $2 million.

The Companys statement of operations
includes SilverStream results for the period July 20, 2002
through October 31, 2002. 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)
|Revenue                                           |  | $                      | 1,162,176 |             |  | $ | 1,135,072 |  
|Net income (loss) before accounting change        |  |                        | (189,909  | )           |  |   | (326,538  | )
|Net income (loss)                                 |  |                        | (333,645  | )           |  |   | (337,620  | )
|Earnings (loss) per share  basic
    and diluted |  | $                      | (0.92     | )           |  | $ | (1.02     | )



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

On July 10, 2001, the stockholders of
Cambridge approved the acquisition of Cambridge by Novell and
beginning July 11, 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 includes 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.



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|50 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, Goodwill and Other
Intangible Assets. 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 fiscals 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 includes 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.

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



|   |                                
|-- | -------------------------------
|C. | Cash and Short-Term Investments

|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |         |         | 
|-------------------------- | ------------------------------------- | ------------------------------------- | - | ---------- | ------- | ---------- | - | ----------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                           |                                       |                                       |   |            |         |            |   | 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 | 
|                           |                                       |                                       |   |            |         |            |   |             |       |  |   |      |      |   |   |        





|                          |   
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|Novell annual report 2002 | 51









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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,
|                           |                                 | 2001                                  |   | Gains      |         | Losses     |   | 2001       
|                           |                                 |                                       |   |            |         |            |   |            
|                           |                                 |                                      
|                           |                                 | (Amounts in thousands)               
|Cash and cash equivalents: |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        
|                           | Cash                            |                                       | $ | 156,088    |         |            | $ |            |       |  | $ |       |        |   | $ | 156,088 |        
|                           | Corporate debt                  |                                       |   | 3,995      |         |            |   |            |       |  |   |       |        |   |   | 3,995   |        
|                           | Money market funds              |                                       |   | 177,844    |         |            |   |            |       |  |   |       |        |   |   | 177,844 |        
|                           |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        
|                           |                                 | Total cash and cash equivalents       |   |            | 337,927 |            |   |             |      |  |   |        |       |   |   |         | 337,927 | 
|Short-term investments:    |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        
|                           | State and local government debt |                                       |   | 151,459    |         |            |   | 5,074       |       |  |   |       |        |   |   | 156,533 |        
|                           | Corporate debt                  |                                       |   | 138,679    |         |            |   | 2,255       |       |  |   | (9     | )      |   |   | 140,925 |        
|                           | Money market preferreds         |                                       |   | 17,034     |         |            |   |            |       |  |   | (34    | )      |   |   | 17,000  |        
|                           | Mutual funds                    |                                       |   | 41,014     |         |            |   |            |       |  |   |       |        |   |   | 41,014  |        
|                           | Equity securities               |                                       |   | 12,336     |         |            |   | 538         |       |  |   | (1,030 | )      |   |   | 11,844  |        
|                           |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        
|                           |                                 | Total short-term investments          |   |            | 360,522 |            |   |             | 7,867 |  |   |        | (1,073 | ) |   |         | 367,316 | 
|                           |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        
|                           |                                 | Total cash and short-term investments |   | $          | 698,449 |            |   | $           | 7,867 |  |   | $      | (1,073 | ) |   | $       | 705,243 | 
|                           |                                 |                                       |   |            |         |            |   |             |       |  |   |        |        |   |   |        

The Company had net unrealized gains related to
short-term investments, net of deferred taxes, of
$2 million and $5 million at October 31, 2002 and
2001, respectively. The Company realized gains on the sales of
securities of $8 million, $11 million, and
$60 million, in fiscal 2002, 2001, and 2000, respectively,
while realizing losses on sales of securities of
$1 million, $2 million, and $2 million, during
those same periods, respectively. In addition, during fiscal
2002 the Company recognized a $3 million loss on short-term
investments due to other-than-temporary impairment.

D. Property, Plant, and
Equipment

|                                       |  |                        |          |             |  |   |          |  
|-------------------------------------- |  | ---------------------- | -------- | ----------- |  | - | -------- | -
|                                       |  | October 31,            |          | October 31,
|                                       |  | 2002                   |          | 2001       
|                                       |  |                        |          |            
|                                       |  |                       
|                                       |  | (Amounts in thousands)
|Buildings and land                     |  | $                      | 317,456  |             |  | $ | 406,902  |  
|Furniture and equipment                |  |                        | 251,939  |             |  |   | 333,658  |  
|Leasehold improvements and other       |  |                        | 95,108   |             |  |   | 97,628   |  
|                                       |  |                        |          |             |  |   |          |  
|Property, plant, and equipment at cost |  |                        | 664,503  |             |  |   | 838,188  |  
|Accumulated depreciation               |  |                        | (295,314 | )           |  |   | (341,568 | )
|                                       |  |                        |          |             |  |   |          |  
|Property, plant, and equipment, net    |  | $                      | 369,189  |             |  | $ | 496,620  |  
|                                       |  |                        |          |             |  |   |          |  

In December 2001, the Company completed the sale
of its 100,000 square foot office building in Herndon, Virginia
for $16 million cash resulting in a net gain of
approximately $9 million. Novell currently occupies
approximately 20,000 square feet for sales offices and leases
this space from the new owners of the building.

At the beginning of fiscal 2002, the Company
adopted 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, the Company determined
that there were indicators of impairment related to its facility
in San Jose, California



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|52 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. The
Company then performed an analysis of the propertys
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, the Company obtained independent appraisals to
determine the fair values of these locations. Based on the
independent appraisals, the Company recorded a non-cash
impairment charge of $80 million in operating expenses on
the statement of operations. Both of the impaired facilities are
classified as held and used as the Company does not have
immediate plans to sell them.

E. Long-Term Investments

The primary components of long-term investments
as of October 31, 2002 and 2001 were investments made
through the Novell Venture account, Cambridge Technology Capital
Fund I L.P. (CTC I), or directly by the Company
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.

The Company routinely reviews its investments in
private securities and venture funds for impairment. During
fiscal 2002 and 2001, the Company recognized impairment losses
on long-term investments totaling $54 million and
$177 million, respectively. As of October 31, 2002 and
2001, there were no unrealized losses on public long-term equity
securities.

On December 21, 2001, Novell formed a
venture capital fund, Novell Technology Capital Fund I,
L.P. (the Fund), and related entities that include
Novell Technology GPLP I, L.P. (GPLP), the
general partner of the Fund. During the third quarter of fiscal
2002, Novell decided to dissolve the Fund largely due to the
difficulty of raising funds in the current market conditions.
Novell had committed to an aggregate investment of
$15 million in the Fund and in GPLP, from which it was
released. Mr. Messman, Chairman of the Board of Directors
of Novell and Novells Chief Executive Officer and
President, had committed to an investment in the Fund as a
limited partner, from which he was released. Mr. Linsalata,
Novells Senior Vice President, Planning, had committed to
an investment in the Fund as a limited partner, and to a limited
partnership investment in GPLP, from which he was released.
Additionally, Mr. Linsalata would have been entitled to a
portion of the amounts allocable to GPLP by the Fund. No amounts
were distributed by the Fund or GPLP.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 53









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

F. Goodwill and Other Intangible
Assets

The following is a summary of goodwill by
reporting unit:

|                               |                |                        |         |             |  |   |         |         | 
|------------------------------ | -------------- | ---------------------- | ------- | ----------- |  | - | ------- | ------- | 
|                               |                | October 31,            |         | October 31,
|                               |                | 2002                   |         | 2001       
|                               |                |                        |         |            
|                               |                |                       
|                               |                | (Amounts in thousands)
|IT consulting-related goodwill |                | $                      |        |             |  | $ | 138,211 |        
|Celerant-related goodwill      |                |                        | 42,500  |             |  |   | 42,500  |        
|Product-related goodwill       |                |                        | 137,034 |             |  |   | 7,084   |        
|                               |                |                        |         |             |  |   |         |        
|                               | Total goodwill |                        | $       | 179,534     |  |   | $       | 187,795 | 
|                               |                |                        |         |             |  |   |         |        

Total goodwill at October 31, 2002 includes
$128 million from the SilverStream acquisition, which is
included in the product reporting unit.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 142 supersedes APB Opinion No. 17,
Intangible Assets, and states that goodwill and
other intangible assets with indefinite lives are no longer
amortized but are reviewed for impairment annually, or more
frequently if impairment indicators arise. Separable intangible
assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The provisions
of SFAS No. 142 relating to the discontinuance of
amortization of goodwill and indefinite lived intangible assets
are effective for assets acquired after June 30, 2001, and
for assets acquired prior to June 30, 2001, upon adoption
of the statement. Novell elected to adopt this statement
beginning in the first quarter of fiscal 2002, and discontinued
amortization of goodwill acquired prior to July 1, 2001.
The Company reviews goodwill and intangibles for impairment on a
periodic basis.

The following table shows what net income would
have been had SFAS No. 142 been applied at the beginning of
fiscal 2001:

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

SFAS No. 142 also requires companies to
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 is below carrying value, Step 2 
determining the impairment amount  is performed. The
Company completed this test during the second quarter of fiscal
2002. Through Step 1, the Company reviewed its three operating
segments, product, consulting, and Volera, and determined its
four reporting units; product, Volera, IT consulting, and
Celerant



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|54 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

management consulting. The Companys
consulting segment was broken down into two reporting units, IT
consulting and Celerant management consulting, based on the
reporting structure within the Company and the fact 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, the Company 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 loss of $144 million as of
November 1, 2001, which was recorded as a cumulative effect
of an accounting change in the Companys 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 2002, the Company
performed its required annual goodwill impairment test under
SFAS 142. This test was performed as of August 1, 2002
on goodwill related to the Celerant management consulting
reporting unit and product reporting unit resulting from the
SilverStream acquisition. To estimate the fair value of the
Companys reporting units, management made estimates and
judgments about future cash flows based on assumptions that are
consistent with the Companys fiscal 2003 budget and
long-range plans used to manage the business. The Company also
considered its market capitalization as of August 1, 2002, the
date of our testing. Based on the results of its Step 1
analysis, the Company determined that there was no goodwill
impairment in any of its reporting units.

The changes in the carrying amount of goodwill
during fiscal 2002 are as follows:

|                               |  |                        |         |        |  |               |   |            |  |       |          |   |  |   |        |  |  |   |          |  
|------------------------------ |  | ---------------------- | ------- | ------ |  | ------------- | - | ---------- |  | ----- | -------- | - |  | - | ------ |  |  | - | -------- | -
|                               |  |                        |         |        |  |               |   | Celerant   |  |      
|                               |  |                        |         |        |  |               |   | Management |  |      
|                               |  | Product                |         | Volera |  | IT Consulting |   | Consulting |  | Total
|                               |  |                        |         |        |  |               |   |            |  |      
|                               |  |                       
|                               |  | (Amounts in thousands)
|Balance as of November 1, 2001 |  | $                      | 7,084   |        |  | $             |  |            |  | $     | 138,211  |   |  | $ | 42,500 |  |  | $ | 187,795  |  
|Adjustments to purchase price  |  |                        |        |        |  |               |  |            |  |       | 5,491    |   |  |   |       |  |  |   | 5,491    |  
|Acquisitions during the year   |  |                        | 129,950 |        |  |               |  |            |  |       |         |   |  |   |       |  |  |   | 129,950  |  
|Impairment of goodwill         |  |                        |        |        |  |               |  |            |  |       | (143,702 | ) |  |   |       |  |  |   | (143,702 | )
|                               |  |                        |         |        |  |               |   |            |  |       |          |   |  |   |        |  |  |   |          |  
|Balance as of October 31, 2002 |  | $                      | 137,034 |        |  | $             |  |            |  | $     |         |   |  | $ | 42,500 |  |  | $ | 179,534  |  
|                               |  |                        |         |        |  |               |   |            |  |       |          |   |  |   |        |  |  |   |          |  

Goodwill from acquisitions pertains to the
SilverStream acquisition ($128 million) and an acquisition
of a small product-related start-up company in the first quarter
of fiscal 2002 ($2 million).

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 $180 million,
depending on the estimated value of the segments and the value
of the net assets attributable to those reporting units at that
time.

The following is a summary of intangible assets:

|                        |  |                        |        |             |  |   |       | 
|----------------------- |  | ---------------------- | ------ | ----------- |  | - | ----- | 
|                        |  | October 31,            |        | October 31,
|                        |  | 2002                   |        | 2001       
|                        |  |                        |        |            
|                        |  |                       
|                        |  | (Amounts in thousands)
|Developed technology    |  | $                      | 32,769 |             |  | $ | 4,221 | 
|Trade names             |  |                        | 3,582  |             |  |   |      | 
|                        |  |                        |        |             |  |   |       | 
|Total intangible assets |  | $                      | 36,351 |             |  | $ | 4,221 | 
|                        |  |                        |        |             |  |   |       | 



|                          |   
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|Novell annual report 2002 | 55









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Developed technology relates primarily to
technology acquired as a part of the acquisition of
SilverStreams exteNd product line of shipping products.
Also included are several other small product-related
acquisitions. Developed technology is amortized over three
years. Trade names relate to the SilverStream individual product
names, which Novell continues to use. This asset has an
indefinite life and therefore is not amortized but will be
reviewed for impairment at least annually. Intangible assets are
shown net of accumulated amortization of $6 million in
fiscal 2002 and $2 million in fiscal 2001. Amortization of
intangibles is estimated to be approximately $13 million in
fiscal 2003, $12 million in fiscal 2004, and
$8 million in 2005.

SFAS No. 109, Accounting for Income
Taxes, requires that a deferred tax liability be
established for identifiable intangible assets. FAS 109
also prohibits the recognition of a deferred tax liability for
non-deductible goodwill.

G. Income Taxes

|                              |           |                        |                                    |             |         |             |   |   |         |         |   |   |        |        |  
|----------------------------- | --------- | ---------------------- | ---------------------------------- | ----------- | ------- | ----------- | - | - | ------- | ------- | - | - | ------ | ------ | -
|                              |           |                       
|                              |           | Fiscal Year Ended     
|                              |           |                       
|                              |           | October 31,            |                                    | October 31, |         | October 31,
|                              |           | 2002                   |                                    | 2001        |         | 2000       
|                              |           |                        |                                    |             |         |            
|                              |           |                       
|                              |           | (Amounts in thousands)
|Income tax expense (benefit): |           |                        |                                    |             |         |             |   |   |         |         |   |  
|                              | Current:  |                        |                                    |             |         |             |   |   |         |         |   |   |       
|                              |           | Federal                |                                    | $           |        |             |   | $ |        |         |   | $ | 8,512  |       
|                              |           | State                  |                                    |             | 1,488   |             |   |   | 555     |         |   |   | 2,682  |       
|                              |           | Foreign                |                                    |             | 19,625  |             |   |   | 16,851  |         |   |   | 16,452 |       
|                              |           |                        |                                    |             |         |             |   |   |         |         |   |  
|                              |           |                        | Total current income tax expense   |             |         | 21,113      |   |   |         | 17,406  |   |   |        | 27,646 |  
|                              | Deferred: |                        |                                    |             |         |             |   |   |         |         |   |   |       
|                              |           | Federal                |                                    |             | (14,696 | )           |   |   | (35,475 | )       |   |   | (8,267 | )     
|                              |           | State                  |                                    |             | (5,093  | )           |   |   | (4,412  | )       |   |   | 887    |       
|                              |           | Foreign                |                                    |             | 9,572   |             |   |   | 7,537   |         |   |   | 936    |       
|                              |           |                        |                                    |             |         |             |   |   |         |         |   |  
|                              |           |                        | Total deferred income tax benefit  |             |         | (10,217     | ) |   |         | (32,350 | ) |   |        | (6,444 | )
|                              |           |                        |                                    |             |         |             |   |   |         |         |   |  
|                              |           |                        | Total income tax expense (benefit) |             | $       | 10,896      |   |   | $       | (14,944 | ) |   | $      | 21,202 |  
|                              |           |                        |                                    |             |         |             |   |   |         |         |   |  



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|56 | Novell annual report 2002









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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,
|                                                                     |  | 2002              |       | 2001        |  | 2000       
|                                                                     |  |                   |       |             |  |            
|U.S. statutory rate                                                  |  |                   | (35.0 | )%          |  |             | (35.0 | )% |  |  | 35.0 | %
|State income taxes, net of federal tax effect                        |  |                   | (2.5  | )           |  |             | (0.9  | )  |  |  | 3.3  |  
|Research and development tax credits                                 |  |                   | (4.2  | )           |  |             | (1.9  | )  |  |  | (9.3 | )
|Tax exempt income                                                    |  |                   | (0.9  | )           |  |             | (1.2  | )  |  |  | (6.4 | )
|Foreign income taxed at different rates than U.S.
    statutory rate |  |                   | (8.0  | )           |  |             |      |    |  |  | (2.8 | )
|Foreign losses not deductible in the U.S.                            |  |                   | 5.9   |             |  |             | 2.1   |    |  |  |     |  
|Non-deductible goodwill                                              |  |                   |      |             |  |             |      |    |  |  | 5.6  |  
|Valuation allowance on foreign tax credits                           |  |                   | 33.3  |             |  |             | 4.8   |    |  |  |     |  
|Valuation allowance on net operating losses                          |  |                   |      |             |  |             |      |    |  |  | 2.0  |  
|Valuation allowance on asset impairments                             |  |                   | 19.8  |             |  |             | 26.0  |    |  |  |     |  
|Other, net                                                           |  |                   | 3.4   |             |  |             | 0.7   |    |  |  | 2.6  |  
|                                                                     |  |                   |       |             |  |             |       |    |  |  |      |  
|Effective tax (benefit) rate                                         |  |                   | 11.8  | %           |  |             | (5.4  | )% |  |  | 30.0 | %
|                                                                     |  |                   |       |             |  |             |       |    |  |  |      |  

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

|                                 |  |                        |          |             |  |             |          |   |  |   |        | 
|-------------------------------- |  | ---------------------- | -------- | ----------- |  | ----------- | -------- | - |  | - | ------ | 
|                                 |  |                       
|                                 |  | Fiscal Year Ended     
|                                 |  |                       
|                                 |  | October 31,            |          | October 31, |  | October 31,
|                                 |  | 2002                   |          | 2001        |  | 2000       
|                                 |  |                        |          |             |  |            
|                                 |  |                       
|                                 |  | (Amounts in thousands)
|Domestic                         |  | $                      | (168,341 | )           |  | $           | (309,864 | ) |  | $ | 24,070 | 
|Foreign                          |  |                        | 76,116   |             |  |             | 33,098   |   |  |   | 46,602 | 
|                                 |  |                        |          |             |  |             |          |   |  |   |        | 
|Total income (loss) before taxes |  | $                      | (92,225  | )           |  | $           | (276,766 | ) |  | $ | 70,672 | 
|                                 |  |                        |          |             |  |             |          |   |  |   |        | 
|Cash paid for income taxes       |  | $                      | 20,514   |             |  | $           | 13,710   |   |  | $ | 32,105 | 
|                                 |  |                        |          |             |  |             |          |   |  |   |        | 



|                          |   
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|Novell annual report 2002 | 57









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of deferred tax assets at
October 31, 2002 and 2001 are as follows:

|                          |                               |                                     |                           |                                |         |          |         |         |         |          |         |  
|------------------------- | ----------------------------- | ----------------------------------- | ------------------------- | ------------------------------ | ------- | -------- | ------- | ------- | ------- | -------- | ------- | -
|                          |                               | October 31,                         |                           | October 31,                   
|                          |                               | 2002                                |                           | 2001                          
|                          |                               |                                     |                           |                               
|                          |                               |                                    
|                          |                               | (Amounts in thousands)             
|Deferred income taxes:    |                               |                                     |                           |                                |         |          |         |        
|                          | Deferred tax assets:          |                                     |                           |                                |         |          |         |         |        
|                          |                               | Accruals                            |                           | $                              | 25,692  |          |         | $       | 41,229  |         
|                          |                               | Capital loss carryforward           |                           |                                | 39,538  |          |         |         | 27,955  |         
|                          |                               | Credit carryforwards                |                           |                                | 121,065 |          |         |         | 107,863 |         
|                          |                               | Depreciation                        |                           |                                | 11,815  |          |         |         |        |         
|                          |                               | Net operating loss carryforwards    |                           |                                | 179,033 |          |         |         | 112,189 |         
|                          |                               | Intangibles from acquisitions       |                           |                                |        |          |         |         | 8,836   |         
|                          |                               | Investment impairments              |                           |                                | 46,105  |          |         |         | 32,933  |         
|                          |                               | Receivable valuation accounts       |                           |                                | 15,973  |          |         |         | 19,882  |         
|                          |                               | Unrealized loss on investments      |                           |                                | 44,269  |          |         |         | 42,930  |         
|                          |                               | Other individually immaterial items |                           |                                | 1,392   |          |         |         | 3,239   |         
|                          |                               |                                     |                           |                                |         |          |         |        
|                          |                               |                                     | Gross deferred tax assets |                                |         | 484,882  |         |         |         | 397,056  |        
|                          |                               |                                     | Valuation allowance       |                                |         | (346,032 | )       |         |         | (247,759 | )      
|                          |                               |                                     |                           |                                |         |          |         |        
|                          |                               |                                     |                           | Total deferred tax assets      |         |          | 138,850 |         |         |          | 149,297 |  
|Deferred tax liabilities: |                               |                                     |                           |                                |         |          |         |        
|                          | Depreciation                  |                                     |                           |                               |         |          |         | (14,177 | )      
|                          | Foreign earnings              |                                     |                           | (39,302                        | )       |          |         | (41,147 | )      
|                          | Intangibles from acquisitions |                                     |                           | (4,021                         | )       |          |         |        |        
|                          |                               |                                     |                           |                                |         |          |         |        
|                          |                               |                                     |                           | Total deferred tax liabilities |         |          | (43,323 | )       |         |          | (55,324 | )
|                          |                               |                                     |                           |                                |         |          |         |        
|Net deferred tax assets   |                               | $                                   | 95,527                    |                                |         | $        | 93,973  |        
|                          |                               |                                     |                           |                                |         |          |         |        

Realization of the Companys net deferred
tax assets is dependent upon the Company generating sufficient
taxable income in future years in appropriate tax jurisdictions
to obtain a benefit from the reversal of temporary differences
and from tax credit carryforwards. The amount of deferred tax
assets considered realizable is subject to adjustment in future
periods if estimates of future taxable income are reduced.

As of October 31, 2002, the Company has U.S.
net operating loss carryforwards for federal tax purposes of
approximately $289 million that will expire in 2020, 2021,
and 2022. These amounts do not include an additional $230
million net operating losses from acquired companies that will
expire in years 2010 through 2021. Subject to certain annual
limitations and increases in taxable income, these losses will
be utilized to offset future taxable income. The Company has
$102 million in capital loss carryforwards, which expire in
2006 and 2007. In addition, the Company has approximately
$22 million of foreign loss carryforwards, of which
$10 million, $1 million, $7 million, and
$2 million are subject to expire in 2003, 2004, 2006, and
2007, respectively. The remaining losses do not expire. The
Company has foreign tax credit carryforwards of $35 million
that expire between 2003 and 2007, and general business credits
carryforwards of $77 million that expire between 2018 and
2022. The remaining credits do not expire.



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|58 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has provided valuation allowances on
certain of its deferred tax assets. The valuation allowance on
deferred tax assets increased by $98 million during 2002. Of
this, $52 million related to deferred tax assets from the
SilverStream acquisition. This acquired deferred tax asset is
subject to limitation under the change of ownership rules of the
Internal Revenue Code, and was fully valued.

As of October 31, 2002, 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 $129 million relate to
acquired entities. These acquired deferred tax assets are
subject to limitation under the change of ownership rules of the
Internal Revenue Code and have been fully valued. Any future
benefit relating to these deferred tax assets will, first reduce
goodwill relating to the acquisition; second reduce other
non-current intangible assets relating to the acquisition and
third reduce income tax expense.

Unremitted earnings of certain foreign
subsidiaries in the amount of $15 million is considered by
the Company to be permanently invested outside the U.S. and,
accordingly, U.S. income taxes have not been provided on this
amount.

H. Restructuring Charges

During the second quarter of fiscal 2002, the
Company recorded a pre-tax restructuring charge of approximately
$20 million. The charge was a result of the Companys
continued move towards its business strategy of improving the
Companys status as a net business solutions provider,
addressing changes in the market due to technology changes, and
becoming more customer focused. Specific actions taken included
reducing the Companys workforce worldwide by approximately
50 employees (less than 1%), consolidating facilities, closing
offices in unprofitable locations, and disposing of excess
property and equipment. The following table summarizes the
activity during fiscal 2002 related to the second quarter fiscal
2002 restructuring.

|                                             |  |                        |        |          |  |          |         |             |  |   |        |   |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ------ | -------- |  | -------- | ------- | ----------- |  | - | ------ | - |  | - | ----- | 
|                                             |  | Total                  |        |          |  |          |         | Balance at 
|                                             |  | Restructuring          |        | Cash     |  | Non-Cash |         | October 31,
|                                             |  | Charge                 |        | Payments |  | Charges  |         | 2002       
|                                             |  |                        |        |          |  |          |         |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Severance and benefits                       |  | $                      | 14,748 |          |  | $        | (9,172  | )           |  | $ | (1,318 | ) |  | $ | 4,258 | 
|Excess facilities and property and equipment |  |                        | 5,146  |          |  |          | (925    | )           |  |   |       |   |  |   | 4,221 | 
|Other restructuring-related costs            |  |                        | 492    |          |  |          | (42     | )           |  |   | (150   | ) |  |   | 300   | 
|                                             |  |                        |        |          |  |          |         |             |  |   |        |   |  |   |       | 
|                                             |  | $                      | 20,386 |          |  | $        | (10,139 | )           |  | $ | (1,468 | ) |  | $ | 8,779 | 
|                                             |  |                        |        |          |  |          |         |             |  |   |        |   |  |   |       | 

As of October 31, 2002, 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.

During the second quarter of fiscal 2002, the
Company 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 nine months ended July 31, 2002. These excess
accruals relate to facilities and legal costs that were not
required.



|                          |   
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|Novell annual report 2002 | 59









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At the end of the fourth quarter of fiscal 2001,
the Company recorded $51 million of pre-tax restructuring
charges resulting from changes in general market conditions,
changing customer demands, and the Companys evolution of
its business strategy, all of which required the Company to
restructure its operations. This business strategy focuses on
Net business solutions designed to secure and power the
networked world across leading operating systems. The execution
of this strategy included refining the Companys 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 the Companys direction.

Specific actions included reducing the
Companys 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 the
Companys strategic focus, and abandoning and writing off
technologies that no longer fit within the Companys new
strategy. The Company also realigned its remaining resources to
better manage and control its business.

The following table summarizes the costs and
activities during fiscal 2002 related to the fourth quarter 2001
restructuring.

|                                             |  |                        |        |          |  |             |         |             |  |   |        |   |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ------ | -------- |  | ----------- | ------- | ----------- |  | - | ------ | - |  | - | ----- | 
|                                             |  | Balance at             |        |          |  | Non-Cash    |         | Balance at 
|                                             |  | October 31,            |        | Cash     |  | Charges/    |         | October 31,
|                                             |  | 2001                   |        | Payments |  | Adjustments |         | 2002       
|                                             |  |                        |        |          |  |             |         |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Severance and benefits                       |  | $                      | 32,793 |          |  | $           | (27,676 | )           |  | $ | (4,000 | ) |  | $ | 1,117 | 
|Excess facilities and property and equipment |  |                        | 10,896 |          |  |             | (8,215  | )           |  |   | 1,970  |   |  |   | 4,651 | 
|Other restructuring-related costs            |  |                        | 911    |          |  |             | (287    | )           |  |   |       |   |  |   | 624   | 
|                                             |  |                        |        |          |  |             |         |             |  |   |        |   |  |   |       | 
|                                             |  | $                      | 44,600 |          |  | $           | (36,178 | )           |  | $ | (2,030 | ) |  | $ | 6,392 | 
|                                             |  |                        |        |          |  |             |         |             |  |   |        |   |  |   |       | 

As of October 31, 2002, the remaining
balance of the fourth quarter 2001 restructuring charge included
accrued liabilities largely related to severance and benefits,
which will be paid out during fiscal 2003, and redundant
facilities costs, which will be paid over the respective
remaining lease terms.

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



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|60 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Specific actions included reducing the
Companys 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
integrated Companys new strategy, and discontinuing
unprofitable product lines. The following table summarizes the
activity during fiscal 2002 related to the third quarter 2001
restructuring costs.

|                                             |  |                        |        |          |  |          |         |             |  |   |   |  |  |   |       | 
|-------------------------------------------- |  | ---------------------- | ------ | -------- |  | -------- | ------- | ----------- |  | - | - |  |  | - | ----- | 
|                                             |  | Balance at             |        |          |  |          |         | Balance at 
|                                             |  | October 31,            |        | Cash     |  | Non-Cash |         | October 31,
|                                             |  | 2001                   |        | Payments |  | Charges  |         | 2002       
|                                             |  |                        |        |          |  |          |         |            
|                                             |  |                       
|                                             |  | (Amounts in thousands)
|Severance and benefits                       |  | $                      | 3,377  |          |  | $        | (3,377  | )           |  | $ |  |  |  | $ |      | 
|Abandoned technology                         |  |                        | 211    |          |  |          | (211    | )           |  |   |  |  |  |   |      | 
|Excess facilities and property and equipment |  |                        | 9,736  |          |  |          | (5,847  | )           |  |   |  |  |  |   | 3,889 | 
|Exit unprofitable product lines              |  |                        | 486    |          |  |          | (486    | )           |  |   |  |  |  |   |      | 
|Other restructuring-related costs            |  |                        | 527    |          |  |          | (390    | )           |  |   |  |  |  |   | 137   | 
|                                             |  |                        |        |          |  |          |         |             |  |   |   |  |  |   |       | 
|                                             |  | $                      | 14,337 |          |  | $        | (10,311 | )           |  | $ |  |  |  | $ | 4,026 | 
|                                             |  |                        |        |          |  |          |         |             |  |   |   |  |  |   |       | 

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

I. Line of Credit

The Company currently has a $10 million
unsecured revolving bank line of credit. The line of credit
expires on March 3, 2003. The line can be used for either
letter of credit or working capital purposes and is subject to
the terms of a loan agreement containing financial covenants and
restrictions, none of which are expected to significantly affect
the Companys operations. At October 31, 2002, there
were standby letters of credit of $7 million outstanding
under this agreement.

In addition, at October 31, 2002, the
Company had outstanding letters of credit totaling
$3 million, primarily related to lease guarantees, which
have largely been collateralized.

J. Commitments and
Contingencies

The Board of Directors has established the Novell
Venture account within Novells investment portfolio for
the purpose of 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 the Companys business and strategic
objectives. As of October 31, 2002, the Company had a
balance of $49 million related to investments in various
venture capital funds and had commitments to contribute an
additional $72 million to these funds, of which
approximately $20 million will be contributed in fiscal
2003, approximately $20 million in 2004 and approximately
$16 million in fiscal 2005, as requested by the fund
managers. Novell, through its acquisition of Cambridge, also
owns both limited and general partnership interests in the
Cambridge Technology Capital Fund I
(CTC I) of approximately 24%. As of
October 31, 2002, the Company had an investment balance of
$0.6 million in CTC I and had commitments to
contribute an additional $300,000 through 2007.

As of October 31, 2002, the Company has
various operating leases related to the Companys
facilities with remaining terms of more than one year. These
leases have minimum annual lease commitments of $30 million
in fiscal 2003, $27 million in fiscal 2004,
$22 million in fiscal 2005, $16 million in fiscal 2006,



|                          |   
|------------------------- | --
|Novell annual report 2002 | 61









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$13 million in fiscal 2007, and
$39 million thereafter. Furthermore, the Company has
$62 million of minimum rentals to be received in the future
from subleases.

Rent expense for operating and month-to-month
leases was $29 million, $35 million, and
$34 million in fiscal 2002, 2001, and 2000, respectively.

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. Novell
intends to vigorously defend itself in this suit. This
litigation is in its early stages. Although there can be no
assurance as to the ultimate disposition of the suit, Novell
does not believe that the resolution of this litigation will
have a material adverse effect on its 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, are named as
defendants in several class action complaints that have been
filed on behalf of certain of 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 plaintiffs have brought against other issuers
and underwriters. These complaints all allege violations of the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. In particular, they allege, among other
things, that there was undisclosed compensation received by the
underwriters of the public offerings of all of these issuers,
including SilverStreams. The plaintiffs are seeking
monetary damages, statutory compensation and other relief that
may be deemed appropriate by the court. A Consolidated Amended
Complaint with respect to all of these complaints was filed in
the U.S. District Court, Southern District of New York, on
April 19, 2002. All issuers, including SilverStream, filed
a Motion to Dismiss on July 15, 2002. Novell believes that
SilverStream and its former officers and directors have
meritorious defenses to the claims made in the complaints and
intends to contest the lawsuits vigorously. While there can be
no assurance as to the ultimate disposition of the lawsuit,
Novell does not believe that the resolution of this litigation
will have a material adverse effect on its financial position,
results of operations, or cash flows.

In February 1998, a suit was filed in the
U.S. District Court, District of Utah, against Novell and
certain of its officers and directors, alleging violation of
federal securities laws by concealing the true nature of
Novells financial condition and seeking unspecified
damages. The lawsuit was brought as a purported class action on
behalf of purchasers of Novell 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
US District Court Judge dismissed the amended complaint
with prejudice for failure to state a claim. The Order of
Dismissal was entered on April 16, 2002 and the plaintiffs
have filed a Notice of Appeal to the Tenth Circuit Court of
Appeals. Novell intends to vigorously defend the upholding of
the U.S. District Courts ruling. While there can be
no assurance as to the ultimate disposition of the lawsuit,
Novell does not believe that the resolution of this litigation
will have a material adverse effect on its financial position,
results of operations, or cash flows.

The Company is a party to a number of additional
legal claims arising in the ordinary course of its business. The
Company believes that the ultimate resolution of these claims
will not have a material adverse effect on its financial
position, results of operations, or cash flows.



|   |                          
|-- | -------------------------
|62 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

K. 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 preferred stock of the Company. Each
stockholder of record has one right for each share of common
stock owned. This plan was adopted to ensure that all
stockholders of the Company receive fair value for their common
stock in the event a third party proposes to acquire Novell and
to guard against coercive tactics to gain control of the Company
without offering fair value to the Companys stockholders.

The Company has 500,000 authorized shares of
preferred stock with a par value of $0.10 per share, none of
which were outstanding at October 31, 2002 or
October 31, 2001.

In June 2000, the Board of Directors
authorized a stock repurchase program. During the fourth quarter
of 2001, the Board of Directors extended the stock repurchase
program through June 30, 2003 and authorized the use of up
to $500 million for the repurchase of additional
outstanding shares of the Companys common stock. As of
October 31, 2002, $89 million had been spent to
repurchase 14 million shares under this plan at an average
price of $6.19 per share. There were no shares repurchased in
fiscal 2002.

Stock Option Plans

The Company currently has 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. Novell typically
grants nonstatutory options at fair market value. In addition,
the Company grants restricted stock purchase rights to upper
management. During fiscal 2000, restricted stock purchase rights
were also used to retain key employees. Prior to 2002, Novell
granted options to virtually all employees at their time of
hire. Novells current practice is to grant options to
mid-management and above at time of hire. Novell also maintains
an on-going annual grant program under which all employees are
eligible for consideration for additional grants. These plans
are discussed in more details below.



| |                                                
| | -----------------------------------------------
| | 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 and was approved by
stockholders in April 2000. A total of
5,329,139 shares of common stock remain 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. A
total of 10,902,582 shares of common stock remain available
for issuance pursuant to the 1991 Plan. Under both plans,
options are granted at the fair market value of Novells
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 Novell common stock to upper
management and certain key employees at a purchase price of $.10
per share. Shares of restricted common stock are subject to
repurchase by Novell until they have vested. Grants of
restricted stock generally vest over a three year period,
although some restricted stock grants made during fiscal 2000
and 2001 became fully vested in either 9 or 12 months from
grant date. There were 1,104,108 shares of outstanding
restricted common stock that remained unvested and subject to
repurchase at the Companys fiscal year end.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 63









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the 2000 Plan, common stock equivalents
(CSEs) may be issued to non-employee members
of Novells Board of Directors, who elect to have all or a
portion of their annual board retainers deferred through the
purchase of CSEs. The purchase price for CSEs is
equal to the fair market value of Novells 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 Novell 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. A total of
14,262,205 shares of common stock remain available for
issuance pursuant to the 2000 NQ Plan. Under the 2000 NQ Plan,
nonstatutory options are granted at the fair market value of
Novells 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.



| |                                                    
| | ---------------------------------------------------
| | 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 the
stockholders of Silverstream in May of 2002, and was assumed by
Novell in July 2002 in connection with the acquisition of
SilverStream. A total of 9,471,020 shares of common stock
remains available for issuance pursuant to the SilverStream 1997
Plan. Under the SilverStream 1997 Plan, options are granted at
the fair market value of Novells common stock at the date
of grant. Options that had been granted prior to Novells
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 Novell common stock
based on the terms of the acquisition. Options generally vest
over 48 months (although options had been granted before
Novells 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
2,426,484 shares of common stock reserved for issuance,
provides for the grant of nonstatutory stock options and was
assumed by Novell in July 2002 in connection with the
acquisition of SilverStream. A total of 269,580 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 Novells
common stock at the date of grant. Options that had been granted
prior to Novells 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
Novell common stock based on the terms of the acquisition.
Options generally vest over 48 months (although options had
been granted before Novells 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 Novells Board of Directors: an
initial grant of 30,000 options at



|   |                          
|-- | -------------------------
|64 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Novells
common stock at the date of grant. The Director Plan was
approved by the stockholders in April 1996. A total of
645,000 shares of common stock remain available for
issuance pursuant to the Director Plan. Options expire ten years
from the date of grant.



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

The Novell 1986 Stock Option Plan, the Novell
1997 Stock Plan and miscellaneous plans assumed due to
acquisitions (including two additional SilverStream plans not
mentioned above that were also assumed in connection with the
SilverStream acquisition) have terminated, and no further
options may be granted under these plans. Options previously
granted under these plans that have not yet expired or otherwise
become unexercisable continue to be administered under such
plans, and any portions that expire or become unexercisable for
any reason shall be cancelled and be unavailable for future
issuance.

A summary of the status of the Companys
stock option plans as of October 31, 2002, 2001 and 2000
and changes during the years ended on those dates is presented
below.

|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |       | 
|-------------------------------- | -------------------------------- | -------------------------------- | ------ | -------------- | - | ----------- | ---- | -------------- |  | --------- | ------ | -------------- | - | - | ----- | ----- |  |  | ------- | ------- | - | - | ----- | ----- | 
|                                 |                                  |                                  |        |                |   |            
|                                 |                                  | Fiscal 2002                      |        | Fiscal 2001    |   | Fiscal 2000
|                                 |                                  |                                  |        |                |   |            
|                                 |                                  |                                  |        | 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 |                                  |                                  | 74,510 |                |   | $           | 8.79 |                |  |           | 67,108 |                |   | $ | 15.38 |       |  |  | 55,277  |         |   | $ | 14.21 |      
|Granted:                         |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      
|                                 | Price at fair value              |                                  |        | 5,053          |   |             |      | 3.96           |  |           |        | 33,720         |   |   |       | 4.89  |  |  |         | 35,314  |   |   |       | 16.99 | 
|                                 | Price at greater than fair value |                                  |        |               |   |             |      |               |  |           |        | 134            |   |   |       | 19.30 |  |  |         |        |   |   |       |      | 
|                                 | Price at less than fair value    |                                  |        | 400            |   |             |      | .10            |  |           |        | 2,114          |   |   |       | 0.37  |  |  |         | 2,804   |   |   |       | 0.10  | 
|Assumed:                         |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      
|                                 | Price at greater than fair value |                                  |        | 6,857          |   |             |      | 11.10          |  |           |        |               |   |   |       |      |  |  |         |        |   |   |       |      | 
|                                 | Price at less than fair value    |                                  |        | 8,163          |   |             |      | 1.11           |  |           |        |               |   |   |       |      |  |  |         |        |   |   |       |      | 
|Exercised                        |                                  |                                  | (1,369 | )              |   |             | 2.00 |                |  |           | (2,718 | )              |   |   | 2.30  |       |  |  | (11,453 | )       |   |   | 6.82  |      
|Cancelled:                       |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      
|                                 | Forfeited                        |                                  |        | (17,694        | ) |             |      | 9.70           |  |           |        | (25,793        | ) |   |       | 20.91 |  |  |         | (14,832 | ) |   |       | 18.62 | 
|                                 | Expired                          |                                  |        | (106           | ) |             |      | 23.92          |  |           |        | (55            | ) |   |       | 6.99  |  |  |         | (2      | ) |   |       | 20.88 | 
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      
|Outstanding at end of year       |                                  |                                  | 75,814 |                |   | $           | 7.75 |                |  |           | 74,510 |                |   | $ | 8.79  |       |  |  | 67,108  |         |   | $ | 15.38 |      
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      
|Options exercisable at year end  |                                  |                                  | 48,349 |                |   | $           | 8.92 |                |  |           | 29,879 |                |   | $ | 11.12 |       |  |  | 21,660  |         |   | $ | 12.55 |      
|                                 |                                  |                                  |        |                |   |             |      |                |  |           |        |                |   |   |       |       |  |  |         |         |   |   |       |      



|                          |   
|------------------------- | --
|Novell annual report 2002 | 65









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at October 31, 2002.

|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 
|--------------- |  | -------------------------------- | ------ | ------------------- |  | ------------------- | -------- | ----------- |  | -------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|                |  |                                  |        |                     |  |                     |          |            
|                |  |                                  |        | 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  $ 3.92 |  |                                  | 14,222 |                     |  |                     | 8.70 yrs |             |  | $              | 2.66  |  |  |  | 3,815  |  |  | $ | 2.52  | 
|$ 3.93  $ 4.68 |  |                                  | 13,183 |                     |  |                     | 8.69 yrs |             |  | $              | 4.56  |  |  |  | 8,142  |  |  | $ | 4.67  | 
|$ 4.70  $ 6.91 |  |                                  | 14,166 |                     |  |                     | 7.27 yrs |             |  | $              | 5.60  |  |  |  | 8,404  |  |  | $ | 5.91  | 
|$ 7.00  $ 9.22 |  |                                  | 15,140 |                     |  |                     | 6.57 yrs |             |  | $              | 8.76  |  |  |  | 12,858 |  |  | $ | 8.80  | 
|$ 9.38  $14.67 |  |                                  | 13,952 |                     |  |                     | 6.71 yrs |             |  | $              | 11.06 |  |  |  | 10,785 |  |  | $ | 10.97 | 
|$14.88  $39.00 |  |                                  | 5,151  |                     |  |                     | 6.76 yrs |             |  | $              | 23.95 |  |  |  | 4,345  |  |  | $ | 23.60 | 
|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 
|$ 0.10  $39.00 |  |                                  | 75,814 |                     |  |                     | 7.51 yrs |             |  | $              | 7.75  |  |  |  | 48,349 |  |  | $ | 8.92  | 
|                |  |                                  |        |                     |  |                     |          |             |  |                |       |  |  |  |        |  |  |   |       | 

|                                                                                      |  |                       |         |             |  |  |         |    
|------------------------------------------------------------------------------------- |  | --------------------- | ------- | ----------- |  |  | ------- | ---
|Other information:                                                                    |  | Fiscal 2002           |         | Fiscal 2001
|                                                                                      |  |                       |         |            
|                                                                                      |  |                      
|                                                                                      |  | (Number of shares and
|                                                                                      |  | options in thousands)
|Options available for future grants                                                   |  |                       | 40,880  |             |  |  | 19,895  |    
|Shares of common stock outstanding at year end                                        |  |                       | 367,538 |             |  |  | 362,341 |    
|Option reserve increase                                                               |  |                       | 9,741   | (1)         |  |  | 12,000  |    
|Options granted as a percentage of outstanding
    common stock                       |  |                       | 6%      | (2)         |  |  | 10%     | (3)
|Options granted as a percentage of outstanding
    common stock, net of cancellations |  |                       | 1%      |             |  |  | 3%      |    
|Option holders as a percentage of total employees                                     |  |                       | 92%     |             |  |  | 100%    |    



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(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        
|   
|(3) | Includes 12 million options issued in the
    exchange program                                             

Employee Stock
Purchase Plan

Under the Companys 1989 Employee Stock
Purchase Plan (the Purchase Plan), as amended, the
Company is authorized to issue up to 24 million shares of
Novell common stock to its employees who work at least
20 hours a week and more than five months a year. Under the
terms of the Purchase Plan, there are two six-month offerings
per year, and employees can choose to have up to 10% of their
salary withheld to purchase the Companys 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 34% of the eligible employees
participated in the Purchase Plan in fiscal 2002, 43% in fiscal
2001, and 53% in fiscal 2000. Under the Purchase Plan, the
Company issued 4 million, 3 million, and
2 million shares to employees in fiscal 2002, 2001, and
2000, respectively. This plan has approximately 3 million
shares available for future issuance.



|   |                          
|-- | -------------------------
|66 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-based Compensation

At October 31, 2002, the Company had
authorized stock-based compensation plans under which options to
purchase shares of Novell common stock could be granted to
employees, consultants, and outside directors. The Company
applies the intrinsic value method and related interpretations
in accounting for its plans. 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 the Companys
stock-based plans. If compensation expense for the
Companys stock-based compensation plans had been
determined based on the fair value of the stock grants, the
Companys net income (loss) and net income (loss) per share
would have been the pro forma amounts indicated below.

|                             |                     |                           |   |             |   |             |   |          |   |  |   |         |  
|---------------------------- | ------------------- | ------------------------- | - | ----------- | - | ----------- | - | -------- | - |  | - | ------- | -
|                             |                     |                          
|                             |                     | Fiscal Year Ended        
|                             |                     |                          
|                             |                     | October 31,               |   | October 31, |   | October 31,
|                             |                     | 2002                      |   | 2001        |   | 2000       
|                             |                     |                           |   |             |   |            
|                             |                     |                          
|                             |                     | (Amounts in thousands,   
|                             |                     | except per share amounts)
|Net income (loss):           |                     |                           |   |             |   |             |   |          |   |  |   |        
|                             | As reported         |                           | $ | (246,823    | ) |             | $ | (272,870 | ) |  | $ | 49,470  |  
|                             | Pro forma           |                           | $ | (347,962    | ) |             | $ | (374,864 | ) |  | $ | (49,823 | )
|Net income (loss) per share: |                     |                           |   |             |   |             |   |          |   |  |   |        
|                             | As reported basic   |                           | $ | (0.68       | ) |             | $ | (0.82    | ) |  | $ | 0.15    |  
|                             | Pro forma basic     |                           | $ | (0.96       | ) |             | $ | (1.13    | ) |  | $ | (0.15   | )
|                             | As reported diluted |                           | $ | (0.68       | ) |             | $ | (0.82    | ) |  | $ | 0.15    |  
|                             | Pro forma diluted   |                           | $ | (0.96       | ) |             | $ | (1.13    | ) |  | $ | (0.15   | )

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 2002,
2001 and 2000: a risk-free interest rate of approximately 3.6%
for fiscal 2002, 4.8% for fiscal 2001, and 6.3% for fiscal 2000;
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 the Companys common
stock of 0.87 for fiscal 2002, 0.82 for fiscal 2001, and 0.75
for fiscal 2000. The weighted average fair value of options
granted in fiscal 2002, 2001, and 2000 was $1.70, $3.52, and
$11.09, respectively.

The Company does not recognize compensation
expense related to employee purchase rights under the 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 these
rights granted in fiscal 2002, 2001, and 2000: a dividend yield
of 0.0% for all years; an expected life of six months for all
years; an expected volatility factor of 87% for fiscal 2002,
0.82 for fiscal 2001, and 0.75 for fiscal 2000; and a risk-free
interest rate of approximately 1.5% for fiscal 2002, 4.4% for
fiscal 2001, and 5.9% for fiscal 2000. The weighted average fair
value of the purchase rights granted on April 22 2002,
October 22 2001, April 23, 2001, October 23,
2000, April 21, 2000, and October 26, 1999 was $1.50,
$1.52, $1.78, $3.10, $6.07, and $7.20, respectively.

Because the fair value method of accounting has
not been applied to options and employee purchase rights granted
prior to October 28, 1995, the resulting pro forma
compensation expense may not be representative of that to be
expected in future years. Furthermore, fair value compensation
is applicable only to options and purchase rights granted
subsequent to October 28, 1995; therefore, the pro forma
effect was not fully reflected until fiscal 2000.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 67









---



##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

L. Employee Savings and Retirement
Plan

The Company 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. The Companys 401(k)
retirement and savings plan allows the Company 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.

Cambridge established a 401(k) savings and
profit-sharing plan in 1992 covering substantially all of
Cambridges employees. Under the plan, Cambridge was able
to elect to make contributions, which it did, based on a
percentage of employees contributions, subject to
limitations as defined in the 401(k) plan. Beginning
January 1, 2002, the Cambridge 401(k) savings plan was
rolled into the Novell 401(k) retirement and savings plan.

Silverstream established a 401(k) savings plan,
whereby eligible employees may 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.
Beginning January 1, 2003, the SilverStream 401(k) savings
plan has been rolled into the Novell 401(k) retirement and
savings plan.

The Company also has other retirement plans in
certain countries outside of the U.S. in which the Company
employs personnel. Each plan is consistent with local laws and
business practices.

Company matching contributions on its 401(k)
savings and retirement plan and other retirement plans were
$19 million, $15 million, and $15 million, in
fiscal 2002, 2001, and 2000, respectively.

M. Comprehensive Income

The Companys other comprehensive income
(loss) is comprised of:

|                                                                                                                                                 |  |                        |         |             |  |             |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | ----------- |  | ----------- | ------- | - |  | - | -------- | -
|                                                                                                                                                 |  |                       
|                                                                                                                                                 |  | Fiscal Year Ended     
|                                                                                                                                                 |  |                       
|                                                                                                                                                 |  | October 31,            |         | October 31, |  | October 31,
|                                                                                                                                                 |  | 2002                   |         | 2001        |  | 2000       
|                                                                                                                                                 |  |                        |         |             |  |            
|                                                                                                                                                 |  |                       
|                                                                                                                                                 |  | (Amounts in thousands)
|Total gross unrealized loss on investments during
    the year, net of tax benefit of $6,408, $33,634, and $92,552,
    respectively             |  | $                      | (10,203 | )           |  | $           | (53,546 | ) |  | $ | (147,344 | )
|Add: adjustment for unrealized loss on
    investments written off due to impairment                                                             |  |                        | 3,130   |             |  |             | 136,851 |   |  |   |         |  
|Adjustment for net realized gains on investments
    included in net income, net of tax expense of $2,666, $1,835,
    and $17,832, respectively |  |                        | 4,245   |             |  |             | 2,921   |   |  |   | 28,388   |  
|                                                                                                                                                 |  |                        |         |             |  |             |         |   |  |   |          |  
|Net unrealized gain (loss) on investments                                                                                                        |  |                        | (2,828  | )           |  |             | 86,226  |   |  |   | (118,956 | )
|Cumulative translation adjustments, net of tax
    (expense) benefit of ($270), ($412), and $415, respectively                                   |  |                        | 430     |             |  |             | 656     |   |  |   | (660     | )
|                                                                                                                                                 |  |                        |         |             |  |             |         |   |  |   |          |  
|Other comprehensive income (loss)                                                                                                                |  | $                      | (2,398  | )           |  | $           | 86,882  |   |  | $ | (119,616 | )
|                                                                                                                                                 |  |                        |         |             |  |             |         |   |  |   |          |  



|   |                          
|-- | -------------------------
|68 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

N. Related Party Transactions

In fiscal 2002, 2001, and 2000 legal fees of
approximately $3 million, $3 million, and
$1 million, respectively, were paid to Wilson, Sonsini,
Goodrich & Rosati, a law firm in which a former
director of the Company is a senior partner. Mr. Sonsini
resigned as a board member in the third quarter of fiscal 2002.

During 2002 and 2001, Novell received consulting
services from J.D. Robinson Incorporated. The agreement
provides for payments of $200,000 per year for these services.
Mr. Robinson, a director of Novell, is Chairman and Chief
Executive Officer and the sole shareholder of J.D. Robinson
Incorporated.

O. Segment Information

The Company is organized and operates as three
business segments: product, consulting, and Volera. The
Companys products and services are sold throughout the
world. The Companys offerings within the product segment
are sold domestically via direct, OEM, reseller, and distributor
channels, and are sold internationally directly and through
distributors who sell to dealers and end users. The following is
a description of each of the three segments:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product  includes Net management
    services products, Net directory services products and
    product-related service support and training.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net management services products include products
    that provide networking capabilities, products that allow
    management of networks by protecting their integrity, products
    that allow collaboration or communication inside and outside a
    network, and products that enable customers to network securely
    allowing insiders access to the Internet and outsiders access to
    internal intranets.        
|
| |  | Net directory services products include products
    that allow customers to manage users and resources, simply and
    centrally, products that enable automatic distribution or new or
    updated information across a network, products that allow
    customers to control access to application, Web and network
    resources using policy-based management, and products that
    enable simplify password management.
|
| |  | Product-related services, support and training
    includes networking certifications, technical services and
    customer support.                                                                                                                                                                                                                                                                                           



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Products in this segment are packaged under the
    names NetWare, ZENworks, GroupWise, eDirectory, DirXML, iChain,
    Single Sign On, exteNd (SilverStream product suite).



| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consulting  is comprised of worldwide
    consulting services, including information technology
    (IT) consulting, which provide consulting and
    support services that apply Net business solutions, and Celerant
    management consulting, which provides operational strategy and
    implementation consulting services.
|
| |  | Volera  provides networking solutions
    that reduce the complexity and cost of deploying content and
    applications electronically, while improving scalability,
    management and security. Voleras content management
    software products are packaged under the name Velocity.                                          

Beginning November 1, 2001, due to changes
resulting from restructurings and the acquisition of Cambridge,
the performance of the Company is evaluated by the Chief
Executive Officer and members of the Worldwide Management
Committee, the Companys chief decision makers, based on
the review of revenue, segment gross margin, and segment income
(loss) from operations for each of the segments above.
Performance is also evaluated based on revenue results by
geographic region. Separate financial information is



|                          |   
|------------------------- | --
|Novell annual report 2002 | 69









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

not evaluated by business segment in regards to
asset allocation. Except for revenue, operating results by
segment are not available prior to fiscal 2002. Prior to the
acquisition of Cambridge, the Company operated in one segment
and did not maintain operating results for the current segments.
Operating results, other than revenue, were available on a total
company basis only. As the Company continues to consolidate its
operations, it will evaluate how it should most appropriately
manage its business and may make changes to its operating
segments accordingly.

Operating Results by Segment

|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |         |  
|--------------------------------- | ------------------------------------- | ---------------------- | ------- | ---------- |  | ------ | ------- | ------------ | - | - | ------ | ------- | - | - | --------- | ------- | -
|                                  |                                       | Product                |         | Consulting |  | Volera |         | Total Novell
|                                  |                                       |                        |         |            |  |        |         |             
|                                  |                                       |                       
|                                  |                                       | (Amounts in thousands)
|Fiscal 2002                       |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|Revenue                           |                                       | $                      | 826,186 |            |  | $      | 300,614 |              |   | $ | 7,520  |         |   | $ | 1,134,320 |        
|Direct consulting cost of revenue |                                       |                        |         |            |  |        | 240,966 |              |   |   |        |         |   |   | 240,966   |        
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|                                  | Consulting contribution margin        |                        |         |            |  |        |         | 59,648       |   |   |        |         |   |   |           |         |  
|Other cost of revenue             |                                       |                        | 158,431 |            |  |        | 46,284  |              |   |   | 3,737  |         |   |   | 208,452   |        
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|                                  | Gross profit                          |                        |         | 667,755    |  |        |         | 13,364       |   |   |        | 3,783   |   |   |           | 684,902 |  
|Segment operating expenses        |                                       |                        | 522,406 |            |  |        | 99,201  |              |   |   | 25,495 |         |   |   | 647,102   |        
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|                                  | Segment income (loss) from operations |                        | $       | 145,349    |  |        | $       | (85,837      | ) |   | $      | (21,712 | ) |   |           | 37,800  |  
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|Unallocated operating expenses    |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   | 105,925   |        
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        
|                                  | Loss from operations                  |                        |         |            |  |        |         |              |   |   |        |         |   |   | $         | (68,125 | )
|                                  |                                       |                        |         |            |  |        |         |              |   |   |        |         |   |   |           |        

|            |  |                        |         |            |  |        |         |              |  |   |       |  |  |   |           | 
|----------- |  | ---------------------- | ------- | ---------- |  | ------ | ------- | ------------ |  | - | ----- |  |  | - | --------- | 
|            |  | Product                |         | Consulting |  | Volera |         | Total Novell
|            |  |                        |         |            |  |        |         |             
|            |  |                       
|            |  | (Amounts in thousands)
|Fiscal 2001 |  |                        |         |            |  |        |         |              |  |   |       |  |  |   |           | 
|Revenue     |  | $                      | 879,070 |            |  | $      | 163,606 |              |  | $ | 8,120 |  |  | $ | 1,050,796 | 

|            |  |                        |           |            |  |        |        |              |  |   |       |  |  |   |           | 
|----------- |  | ---------------------- | --------- | ---------- |  | ------ | ------ | ------------ |  | - | ----- |  |  | - | --------- | 
|            |  | Product                |           | Consulting |  | Volera |        | Total Novell
|            |  |                        |           |            |  |        |        |             
|            |  |                       
|            |  | (Amounts in thousands)
|Fiscal 2000 |  |                        |           |            |  |        |        |              |  |   |       |  |  |   |           | 
|Revenue     |  | $                      | 1,102,966 |            |  | $      | 51,760 |              |  | $ | 7,009 |  |  | $ | 1,161,735 | 

Direct consulting cost of revenue includes
salaries, benefits, and project related travel expenses for
consultants (reimbursable and non-reimbursable), fees paid to
subcontractors for work performed on projects, and other
expenses incurred specifically for consulting projects. Other
cost of revenue for consulting includes consulting costs not
directly attributable to a project, including allocations for
facilities and information systems and technology. Segment
operating expenses include direct segment costs along with
managements allocation of certain common sales, marketing,
and general and administrative costs to each business unit.
Segment operating expenses also includes depreciation and
amortization of approximately $45 million for product,
$11 million for consulting, and $2 million for Volera.
Unallocated operating expenses include purchased in-process
research and development, restructuring, impairments, and
integration expenses.

Prior to fiscal 2002, the Company operated in one
segment. The Companys decision makers evaluated the
Company based on total Company results. Revenue was evaluated
based on geographic location and product category. Other than
revenue, separate financial information was not available by
product category



|   |                          
|-- | -------------------------
|70 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and geographic location. The following table
shows fiscal 2002, 2001, and 2000 revenue under the previous
product and services categories.

Revenue by product category

|                                          |               |                        |         |             |  |             |         |           |  |   |         |           | 
|----------------------------------------- | ------------- | ---------------------- | ------- | ----------- |  | ----------- | ------- | --------- |  | - | ------- | --------- | 
|                                          |               |                       
|                                          |               | Fiscal Year Ended     
|                                          |               |                       
|                                          |               | October 31,            |         | October 31, |  | October 31,
|                                          |               | 2002                   |         | 2001        |  | 2000       
|                                          |               |                        |         |             |  |            
|                                          |               |                       
|                                          |               | (Amounts in thousands)
|Net management services                   |               | $                      | 627,210 |             |  | $           | 707,498 |           |  | $ | 914,277 |          
|Net directory services                    |               |                        | 59,704  |             |  |             | 31,251  |           |  |   | 27,686  |          
|Net content services                      |               |                        | 7,520   |             |  |             | 8,120   |           |  |   | 7,009   |          
|Consulting, support services and training |               |                        | 439,886 |             |  |             | 303,927 |           |  |   | 212,763 |          
|                                          |               |                        |         |             |  |             |         |           |  |   |         |          
|                                          | Total revenue |                        | $       | 1,134,320   |  |             | $       | 1,050,796 |  |   | $       | 1,161,735 | 
|                                          |               |                        |         |             |  |             |         |           |  |   |         |          

Geographic information

Sales outside the U.S. are comprised of sales to
international 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. Intercompany
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 in 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 the
Companys 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 intercompany 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,
|                               |                                | 2002                                |   | 2001        |           | 2000       
|                               |                                |                                     |   |             |           |            
|                               |                                |                                    
|                               |                                | (Amounts in thousands)             
|Revenue:                       |                                |                                     |   |             |           |             |   |           |           |  |   |         
|                               | U.S. operations                |                                     | $ | 711,320     |           |             | $ | 740,836   |           |  | $ | 837,399  |          
|                               | Irish operations               |                                     |   | 270,126     |           |             |   | 278,085   |           |  |   | 328,991  |          
|                               | Other international operations |                                     |   | 211,001     |           |             |   | 83,987    |           |  |   | 70,820   |          
|                               | Eliminations                   |                                     |   | (58,127     | )         |             |   | (62,811   | )         |  |   | (75,475  | )        
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |         
|                               |                                | Total revenue                       |   | $           | 1,134,320 |             |   | $         | 1,040,097 |  |   | $        | 1,161,735 | 
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |         
|Long-lived assets at year end: |                                |                                     |   |             |           |             |   |           |           |  |   |         
|                               | U.S. operations                |                                     | $ | 1,007,391   |           |             | $ | 1,176,378 |           |  | $ | 695,506  |          
|                               | Irish operations               |                                     |   | 109,250     |           |             |   | 109,554   |           |  |   | 110,327  |          
|                               | Other international operations |                                     |   | 75,476      |           |             |   | 74,290    |           |  |   | 75,480   |          
|                               | Eliminations                   |                                     |   | (520,913    | )         |             |   | (542,960  | )         |  |   | (192,368 | )        
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |         
|                               |                                | Total long-lived assets at year end |   | $           | 671,204   |             |   | $         | 817,262   |  |   | $        | 688,945   | 
|                               |                                |                                     |   |             |           |             |   |           |           |  |   |         



|                          |   
|------------------------- | --
|Novell annual report 2002 | 71









---



##### 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,
|                       |              | 2002                   |         | 2001        |  | 2000       
|                       |              |                        |         |             |  |            
|                       |              |                       
|                       |              | (Amounts in thousands)
|Long-lived assets      |              | $                      | 671,204 |             |  | $           | 817,262   |           |  | $ | 688,945   |          
|Other long-term assets |              |                        | 74,323  |             |  |             | 59,378    |           |  |   | 16,042    |          
|Current assets         |              |                        | 919,538 |             |  |             | 1,027,366 |           |  |   | 1,007,359 |          
|                       |              |                        |         |             |  |             |           |           |  |   |           |          
|                       | Total assets |                        | $       | 1,665,065   |  |             | $         | 1,904,006 |  |   | $         | 1,712,346 | 
|                       |              |                        |         |             |  |             |           |           |  |   |           |          

In fiscal 2002, 2001, and 2000, sales to
international customers were approximately $552 million,
$460 million, and $504 million, respectively. In
fiscal 2002, 2001, and 2000, international sales to European
countries were 73%, 68%, and 64% 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.

P. Net Income (Loss) Per Share

|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |         |         | 
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | --------------------------------------------- | - | ----------- | ------- | ----------- | - | -------- | ------- |  | - | ------- | ------- | 
|                                               |                                                                                                            |                                              
|                                               |                                                                                                            | Fiscal Year Ended                            
|                                               |                                                                                                            |                                              
|                                               |                                                                                                            | October 31,                                   |   | October 31, |         | October 31,
|                                               |                                                                                                            | 2002                                          |   | 2001        |         | 2000       
|                                               |                                                                                                            |                                               |   |             |         |            
|                                               |                                                                                                            |                                              
|                                               |                                                                                                            | (Amounts in thousands, except per share data)
|Basic net income (loss) per share computation: |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|                                               | Net income (loss)                                                                                          |                                               | $ | (246,823    | )       |             | $ | (272,870 | )       |  | $ | 49,470  |        
|                                               | Weighted average shares outstanding                                                                        |                                               |   | 363,569     |         |             |   | 332,582  |         |  |   | 326,621 |        
|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|                                               | Basic net income (loss) per share                                                                          |                                               | $ | (0.68       | )       |             | $ | (0.82    | )       |  | $ | 0.15    |        
|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|Diluted net income per share computation:      |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|                                               | Net income (loss)                                                                                          |                                               | $ | (246,823    | )       |             | $ | (272,870 | )       |  | $ | 49,470  |        
|                                               | Weighted average shares outstanding                                                                        |                                               |   | 363,569     |         |             |   | 332,582  |         |  |   | 326,621 |        
|                                               | Incremental shares attributable to the assumed
    exercise of outstanding options (treasury stock method) |                                               |   |            |         |             |   |         |         |  |   | 8,413   |        
|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|                                               |                                                                                                            | Total                                         |   | $           | 363,569 |             |   | $        | 332,582 |  |   | $       | 335,034 | 
|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        
|                                               | Diluted net income (loss) per share                                                                        |                                               | $ | (0.68       | )       |             | $ | (0.82    | )       |  | $ | 0.15    |        
|                                               |                                                                                                            |                                               |   |             |         |             |   |          |         |  |   |        

Had the Company recognized net income in fiscal
2002 and 2001, incremental shares attributable to the assumed
exercise of outstanding options would have increased diluted
shares outstanding by 249,000 and 29,000 shares,
respectively.

Q. Change In Accounting
Principle

Adoption
of SFAS No. 142

On November 1, 2001, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets, resulting in a transitional goodwill impairment
loss recorded as a change in accounting principle. See
Note F for further details regarding the impairment loss.



|   |                          
|-- | -------------------------
|72 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue
Recognition

Prior to fiscal 2001, the Company 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, the Company changed its method
of accounting for revenue related to these product sales to
recognize such revenues upon the sell-through of the respective
product from the distribution channel partner to the reseller or
end user. The Company believes this change in accounting
principle is preferable based on guidance provided in
SAB 101. 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, the Company 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 the Company reported under its 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.

R. Derivative Instruments

A large portion of Novells revenue,
expense, and capital purchasing activities are transacted in
U.S. dollars. However, Novell does enter into transactions
in other currencies, primarily 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, Novell has established balance sheet and
intercompany hedging programs. The Company hedges currency risks
of some assets and liabilities denominated in foreign currencies
through the use of one-month foreign currency forward contracts.

The Company enters into these one-month hedging
contracts two business days before the end of each month and
settles 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, 2002 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 the Company.
During fiscal 2002, the Company recognized a $7 million
loss on hedging contracts, which were offset by changes in the
value of foreign denominated asset and liability balances.

The Company does not currently hedge currency
risks related to revenue or expenses denominated in foreign
currencies.

S. Joint Venture

In April 2001, Novell completed the formation of
Volera, Inc., a majority owned joint venture among Novell,
Nortel Networks Corp., and Accenture Ltd. The Company
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, the Company
acquired the outstanding shares of Volera held by Nortel for
$3.5 million, and subsequent to year end it acquired the
outstanding shares of Volera held by Accenture for
$1 million.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 73









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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. as of October 31, 2002 and
October 31, 2001, and the related consolidated statements
of operations, stockholders equity, and cash flows for
each of the three years in the period ended October 31,
2002. 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. at
October 31, 2002 and October 31, 2001, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended October 31,
2002, 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 15, 2002




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|74 | Novell annual report 2002









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##### Table of Contents



NOVELL, INC.

SELECTED CONSOLIDATED QUARTERLY FINANCIAL
DATA 

Unaudited


|                                                          |         |                                               |         |                |   |               |          |                |   |             |         |       |   |   |          |       |   |   |           |       |  
|--------------------------------------------------------- | ------- | --------------------------------------------- | ------- | -------------- | - | ------------- | -------- | -------------- | - | ----------- | ------- | ----- | - | - | -------- | ----- | - | - | --------- | ----- | -
|                                                          |         |                                               |         |                |   |               |          |                |   | Fiscal Year
|                                                          |         |                                               |         |                |   |               |          |                |   | Ended      
|                                                          |         | First Quarter                                 |         | Second Quarter |   | Third Quarter |          | Fourth Quarter |   | October 31 
|                                                          |         |                                               |         |                |   |               |          |                |   |            
|                                                          |         |                                              
|                                                          |         | (Amounts in thousands, except per share data)
|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 | )
|Fiscal 2000                                               |         |                                               |         |                |   |               |          |                |   |             |         |       |   |   |          |       |   |   |           |      
|Revenue                                                   |         | $                                             | 316,043 |                |   | $             | 302,349  |                |   | $           | 270,019 |       |   | $ | 273,324  |       |   | $ | 1,161,735 |      
|Gross profit                                              |         |                                               | 237,316 |                |   |               | 218,607  |                |   |             | 184,996 |       |   |   | 193,418  |       |   |   | 834,337   |      
|Income (loss) before taxes                                |         |                                               | 62,271  |                |   |               | 43,084   |                |   |             | 11,904  |       |   |   | (46,587  | )     |   |   | 70,672    |      
|Net income (loss)                                         |         |                                               | 44,835  |                |   |               | 31,020   |                |   |             | 8,572   |       |   |   | (34,957  | )     |   |   | 49,470    |      
|Net income (loss) per share:                              |         |                                               |         |                |   |               |          |                |   |             |         |       |   |   |          |       |   |   |           |      
|                                                          | Basic   |                                               | $       | 0.14           |   |               | $        | 0.09           |   |             | $       | 0.03  |   |   | $        | (0.11 | ) |   | $         | 0.15  |  
|                                                          | Diluted |                                               |         | 0.13           |   |               |          | 0.09           |   |             |         | 0.03  |   |   |          | (0.11 | ) |   |           | 0.15  |  



---



|  |                                                                                                                                                                                                                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Revenue in the third and fourth quarters of
    fiscal 2001 were restated to reflect the Companys adoption
    of EITF Issue No. 01-14, Income Statement
    Characterization of Reimbursements Received for
    Out-of-Pocket Expenses Incurred. Prior to the
    third quarter of fiscal 2001, out-of-pocket expenses were
    immaterial and included in revenue.



|                          |   
|------------------------- | --
|Novell annual report 2002 | 75









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##### Table of Contents






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

Not applicable.




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 the Companys definitive proxy statement
(the Proxy Statement) for the Annual Meeting of
Stockholders to be held April 8, 2003, 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). Information
regarding the Companys executive officers is set forth
above in Item 1 in Part I hereof under the heading
entitled Employees 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

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 and Equity
Compensation Plan Information of the Proxy Statement.




Item 13. Certain Relationships and
Related Transactions

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




Item 14. Controls and
Procedures

An evaluation of the effectiveness of the design
and operation of Novells disclosure controls and
procedures as of January 27, 2002 was carried out by the
Company under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer. Based on
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Novells disclosure controls and
procedures have been designed and are being operated in a manner
that provides reasonable assurance that the information required
to be disclosed by Novell in reports filed under the Exchange
Act is recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms. 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.
Subsequent to the date of the most recent evaluation of
Novells internal controls, there were no significant
changes in internal controls or in other factors that could
significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and
material weaknesses.



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|-- | -------------------------
|76 | Novell annual report 2002









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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, 2002, October 31, 2001, and
    October 31, 2000.          
|
| | Consolidated Balance Sheets at October 31,
    2002 and October 31, 2001.                                                                   
|
| | Consolidated Statements of Stockholders
    Equity for the fiscal years ended October 31, 2002,
    October 31, 2001, and October 31, 2000.
|
| | Consolidated Statements of Cash Flows for the
    fiscal years ended October 31, 2002, October 31, 2001,
    and October 31, 2000.          
|
| | 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 82 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 83 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, 2002:



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 22, 2002,
    filed on August 5, 2002 under Item 5.
|
| | Report on Form 8-K providing historical and
    pro forma financial information for the acquisition of
    SilverStream, Inc. under Item 7, filed on
    September 23, 2002.                          

(c) Exhibits



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

(d) Financial Statement Schedules



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



|                          |   
|------------------------- | --
|Novell annual report 2002 | 77









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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, 2003

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

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



|   |                          
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|78 | Novell annual report 2002









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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, 2003
|                                                                           
|/s/  Ronald
    C. Foster              (Ronald
    C. Foster)               |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer)          |  | January 28, 2003
|                                                                           
|/s/  Albert
    Aiello              (Albert
    Aiello)                     |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Elaine
    R. Bond              (Elaine
    R. Bond)                   |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Fred
    Corrado              (Fred
    Corrado)                       |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Richard
    L. Nolan              (Richard
    L. Nolan)               |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Thomas
    G. Plaskett              (Thomas
    G. Plaskett)           |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  John
    W. Poduska, Sr.              (John
    W. Poduska, Sr.)       |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  James
    D. Robinson, III              (James
    D. Robinson, III)   |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Joseph
    S. Tibbetts, Jr.              (Joseph
    S. Tibbetts, Jr.) |  | Director                                                                                                 |  | January 28, 2003
|                                                                           
|/s/  Carl
    J. Yankowski              (Carl
    J. Yankowski)             |  | Director                                                                                                 |  | January 28, 2003



|                          |   
|------------------------- | --
|Novell annual report 2002 | 79









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##### Table of Contents



CERTIFICATIONS

I, Jack L. Messman, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Novell, Inc;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.

Date: January 28, 2003



| |                                           
| | ------------------------------------------
| | /s/ JACK L. MESSMAN                       
| |                                           
| | Jack L. Messman                           
| | President, and Chief Executive
    Officer



|   |                          
|-- | -------------------------
|80 | Novell annual report 2002









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##### Table of Contents



I, Ronald C. Foster, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Novell, Inc;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.

Date: January 28, 2003



| |                        
| | -----------------------
| | /s/ RONALD C. FOSTER   
| |                        
| | Ronald C. Foster       
| | Chief Financial Officer



|                          |   
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|Novell annual report 2002 | 81









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##### Table of Contents



NOVELL, INC.

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Accounts Receivable Allowance


(In thousands)


|                                   |  |            |        |            |  |            |        |             |  |            |       |            |  |           |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ----------- |  | ---------- | ----- | ---------- |  | --------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                   |  |            |        | 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
|                                   |  |            |        |            |  |            |        |             |  |            |       |            |  |          
|Fiscal year ended October 31, 2000 |  | $          | 36,318 |            |  | $          | 78,010 |             |  | $          | 6,508 |            |  | $         |       |  |  | $ | 81,578 |  |  | $ | 5,789  |  |  | $ | 33,469 | 
|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 | 



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|82 | Novell annual report 2002









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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).                                                                                                                                                                   
|        | 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. Novell/ WordPerfect Stock Plan.(12)
    (Exhibit 10.1)                                                                                                                                                           
|        | 10.8*  |             |  | Novell, Inc. Stock Option Plan for Non-Employee
    Directors.(13) (Exhibit 4.1)                                                                                                                                              
|        | 10.9*  |             |  | Novell, Inc. 1997 Non-Statutory Stock Option
    Plan.(14) (Exhibit 4.1)                                                                                                                                                      
|        | 10.10* |             |  | Novell, Inc./ SilverStream Software, Inc. 1997
    Stock Incentive Plan.(15) (Exhibit 4.2)                                                                                                                                    
|        | 10.11* |             |  | Novell, Inc./ SilverStream Software, Inc. 2001
    Stock Incentive Plan.(15) (Exhibit 4.3)                                                                                                                                    
|        | 10.12* |             |  | Novell, Inc./ SilverStream Software,
    Inc./eObject, Inc. 2000 Stock Plan.(15) (Exhibit 4.4)                                                                                                                                
|        | 10.13* |             |  | Novell, Inc./ SilverStream Software, Inc./ Bondi
    Software, Inc. Employee Stock Option Plan.(15) (Exhibit 4.5)                                                                                                             
|        | 10.14* |             |  | Novell, Inc. Senior Management Severance Plan
    dated April 11, 2000.(16) (Exhibit 10.10)                                                                                                                                   
|        | 10.15* |             |  | Employment Agreement dated November 1, 2000
    between Novell, Inc. and Stewart G. Nelson.(16) (Exhibit 10.12)                                                                                                               
|        | 10.16* |             |  | Letter Agreement dated January 30, 2002
    between Novell, Inc. and Chris Stone.(17) (Exhibit 10.1)                                                                                                                          
|        | 10.17* |             |  | Letter Agreement dated as of July 19, 2002
    between Novell, Inc. and David Litwack.(18) (Exhibit (d)(4))                                                                                                                   
|        | 10.18* |             |  | Letter Agreement dated December 15, 1995
    between Novell, Inc. and RRE Advisors, LLC.(19)
    (Exhibit 10.2)                                                                                                               



|                          |   
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|Novell annual report 2002 | 83









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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                           
|------- | ------ | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.19  |             |  | Common stock and warrant agreement between
    Novell, Inc. and marchFIRST (formerly Whittman Hart, Inc.),
    dated September 29, 1999.(20) (Exhibit 1).                                                 
|        | 10.20* |             |  | Key Employment Agreement dated as of May 22,
    2001 between Novell, Inc. and Jack L. Messman.(2)
    (Exhibit C to Annex A)                                                                             
|        | 10.21* |             |  | Agreement dated August 13, 2001 between
    Novell, Inc. and Eric E. Schmidt.(21) (Exhibit 10.14)                                                                                                         
|        | 10.22* |             |  | Letter Agreement dated July 14, 2001 between
    Novell, Inc. and Dennis R. Raney.(21) (Exhibit 10.15)                                                                                                    
|        | 10.23* |             |  | Separation agreement between Novell, Inc. and
    Rich Nortz, dated July 12, 2001.(19) (Exhibit 10.1)                                                                                                     
|        | 10.24* |             |  | Loan Agreement dated April 4, 2001 between
    Novell, Inc. and Ronald C. Foster and Collateral Note dated
    April 4, 2001 executed by Ronald C. Foster in favor of
    Novell, Inc.(21) (Exhibit 10.16)
|        | 21     |             |  | Subsidiaries of the Registrant.(4)                                                                                                                                                                        
|        | 23.1   |             |  | Consent of Ernst & Young LLP, Independent
    Auditors.(4)                                                                                                                                                
|        | 99.1   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(4)                                                                         
|        | 99.2   |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(4)                                                                         




| |   |                                                         
| | - | --------------------------------------------------------
| | * | 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) | Filed herewith.                                                                                                                                                                                                                                                                                                
|   
|(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).                                                                                                       
|   
|(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).



|   |                          
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|     |                                                                                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    July 8, 1994 (File No. 33-55483).                               
|    
|(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
    May 30, 1996 (File No. 333-04823).                              
|    
|(14) | 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 24, 1998 (File No. 333-62103).                           
|    
|(15) | 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).                            
|    
|(16) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Annual Report on Form 10-K, filed for the
    fiscal year ended October 31, 2000 (File No. 0-13351).          
|    
|(17) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Registrants Quarterly Report on Form 10-Q, filed for
    the fiscal quarter ended April 30, 2002 (File
    No. 0-13351).  
|    
|(18) | Incorporated by reference to the Exhibit
    identified in parentheses, filed as an exhibit to the
    Schedule TO filed by the Registrant with the SEC on
    June 18, 2002.                                                     
|    
|(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 Statement on Schedule 13D, filed October
    12, 1999.                                                        
|    
|(21) | 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).          



|                          |   
|------------------------- | --
|Novell annual report 2002 | 85