As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/10/06  Novell Inc                        10-K       10/31/05   13:1.8M                                   RR Donnelley

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For the Fiscal Year Ended October 31, 2005

OR

For the transition period from                                         to                                          .

404 Wyman Street, Suite 500

(781) 464-8000

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

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

Common Stock, par value $.10 per share

TABLE OF CONTENTS

FORM 10-K

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

The Company

      Novell designs, develops, maintains, implements, and supports proprietary and open source software for use in business solutions. With approximately 5,100 employees globally, we help our worldwide customers manage, simplify, secure and integrate their technology environments by leveraging best-of-breed, open source and open standards-based software. With over 20 years of experience, our employees, partners and support centers around the world help customers gain control over their information technology (“IT”) operating environment while reducing the cost, complexity, and vulnerabilities of those environments. We provide security and identity management, resource management, desktop, workgroup, and data center solutions on several operating systems, including Linux, NetWare^®, Windows, and Unix. All of our solutions are supported by our global services and support, including consulting, training and technical support services.

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

      Identity-driven computing solutions. Our identity-driven computing products include applications that offer a broad set of capabilities that manage resources, assets, and people through the assignment of digital identities, including the following:

      We believe that customers have recognized the need to manage the access, utilization and optimization of assets through information systems that can help them understand, implement and administer business policies, not only within organizations, but also between organizations and their customers and trading partners. Our software solutions enable organizations to balance growing user demands for services and

      These identity-based technologies not only regulate user access to data and applications, but are increasingly becoming the basis for securing and managing other information assets, including devices such as mobile phones and the components that make up today’s modern data centers. We believe that the combination of identity and business policy will increasingly become the preferred means by which businesses will manage the efficient utilization of all IT assets, and we have developed our solutions in this market to help our customers take advantage of these opportunities. Our identity-driven products can be deployed across a number of systems, including Linux, Unix, NetWare, and Windows, recognizing the heterogeneous nature of IT departments today. Our development strategy with respect to identity-driven computing has been to develop security and management technologies as a set of discrete software services that can be deployed as needed, as opposed to the use of a single monolithic application that can take years to implement and deploy without any immediate business benefit.

      Linux and platform services solutions. Our platform service offerings consist of operating systems, network services, and workgroup computing software solutions. We offer two major operating system platforms, SUSE^® Linux and NetWare. These operating systems provide the foundation for value added network and workgroup computing solutions deployed on both servers and desktops. Our workgroup server product, Open Enterprise Server (“OES”) consists of enterprise-ready, scalable networking and collaboration services — including file, print, messaging, scheduling and directory-based management modules that allow customers to manage their computing environment from a single, central console deployed on either of our major operating systems platforms. Our workgroup software category also includes our collaboration technologies, including GroupWise^® and NetMail^® (which we have open-sourced key components of and donated to the Hula^tm Project, an internet-based collaboration server), as well as our user desktop environments, including Novell^® Linux Desktop. Our products are designed to operate within existing heterogeneous computing environments as well as to provide tools and strategies to allow easy migration between platforms to fit better with our customers’ technology plans.

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

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

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

      Identity-driven computing solutions.

      Linux and platform services solutions.

      Global services and support.

        Programs are delivered directly to customers and through our global channel of authorized Novell training partners. Our courses provide customers with a thorough understanding of the implementation, configuration, and administration of our products and solutions. Additionally, we offer performance consulting services that provide clients and partners with an evaluation of their proficiencies and their knowledge gaps. We also deliver Advanced Technical Training at an engineer level to customers and partners on a global basis. Our key certification programs include the following:

Strategy

      We offer enterprise class infrastructure software and services in a flexible combination of open source and proprietary technologies. Our strategy is to create products that enable our customers to manage, simplify, and

      Our strategy is to develop role-based, policy-driven identity management technologies as a set of standards-based, discrete services, as opposed to a monolithic application dependent upon the use of proprietary software. We use our identity services offerings as a foundation for establishing long-term strategic relationships with key customers.

      Our strategy is to make our innovative, open standards-based products easy to deploy, simple to operate, reliable and scalable, enabling IT executives to create more robust computing environments at a lower cost of operation. We have embraced the open source movement, specifically through the distribution of SUSE Linux and other open source infrastructure software, and the provision of services. We provide these products and services from the desktop to the server to the mainframe. Our plan is to continue to use our significant engineering and support resources to encourage customers to adopt Linux, as well as other proven open source infrastructure software. One way we will accomplish this is to ensure all of our key product functions operate on the Linux platform.

      Our professional services strategy is to focus our consulting and training expertise on identity-driven solutions and open source software adoption, and to provide a full range of support services for all proprietary and open source products offered by us.

      Our strategy for our Celerant consulting business is to remain focused on delivering measurable and sustainable value to clients with a unique value-based pricing proposition. On November 2, 2005, we announced that our Board of Directors authorized management and our financial advisor, Citigroup Corporate and Investment Banking, to explore strategic alternatives for Celerant.

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

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

      Our employees are our most significant asset. We work continuously to update their skills, providing education and training to improve our productivity. We regularly assess our development progress and focus on key areas as appropriate.

      Where appropriate, we also intend to augment our offerings and delivery capabilities through acquisitions. Taken together, we believe the success of these key strategies will provide lasting benefits to our customers and stockholders alike.

      We partner with industry leaders in the software, hardware, consulting, and system integration industries to bring to market our solution offerings. We believe that a well-managed and supported partnership portfolio is critical to our success in today’s competitive solutions market and helps increase our revenue and customer reach. Our business partner strategy is based on having a single partner program with a goal of providing consistent interactions with Novell focused on technology enablement, certification, joint marketing, and sales initiatives.

      To ensure partner efficiency, we have developed a partner ecosystem that combines our knowledge, services and solutions with that of our partners’ to provide customers the ability to adapt to, and profit from, the opportunities open source and identity brings to businesses. We become the foundation for the ecosystem, providing technology, programs, resources, and skills to create solutions and ensure that customers get the functionality and business value required to improve the bottom line results of their businesses.

      A list of our partners includes: IBM, HP, Dell, Inc., Intel Corporation, Oracle Corporation, SAP AG, Advanced Micro Devices, Inc., Veritas, Computer Associates International, Inc., EMC, and Adobe Systems, Inc. These partners are all members of the Novell PartnerNet^® Program and gain value through participating in different partner tracks. Solution providers gain access to various marketing programs that help drive sales volumes. Technology partners receive solution developer toolkits and services that ensure successful enablement of their technology with our technology. Our training partners have opportunities to increase their skill levels and provide training services to our customers.

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

      During fiscal years 2003, 2004, and 2005, our Chief Executive Officer and Worldwide Management Committee managed the overall growth and performance of the company in terms of the following segments:

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

      Segment disclosures and geographical information for fiscal years 2005, 2004, and 2003 are presented in Part II, Item 8, Note W of the notes to the consolidated financial statements of this report, which is incorporated by reference into this Part I, Item 1. As our strategy continues to evolve, the way in which management views financial information to best evaluate performance and operating results may also change.

      On August 11, 2005, we signed a definitive agreement to acquire the remaining 50% ownership of our joint venture in India from our joint venture partner for approximately $7.5 million in cash and other consideration. This acquisition gives us 100% ownership of this entity. The acquisition closed in the first quarter of fiscal 2006.

      On April 1, 2005, we acquired a 100% interest in Tally Systems Corp. (“Tally”), a privately-held company headquartered in Lebanon, New Hampshire. Tally provides automated PC hardware and software recognition products and services used by customers to manage hardware and software assets. These products and services are now part of our ZENworks product line.

      On April 27, 2005, we acquired a 100% interest in Immunix, Inc. (“Immunix”), a privately-held company headquartered in Portland, Oregon, which provides enterprise class, host intrusion prevention solutions for the Linux platform. This acquisition enables us to expand security offerings on the Linux platform.

      Product development activities are conducted throughout the world so that we may better meet the needs of our worldwide customer base. Our commitment to deliver world-class products that manage, simplify, secure, and accelerate business solutions means continued investment in product development. Our major product development sites include Provo, Utah; Waltham and Cambridge, Massachusetts; Nuremberg, Germany; Bangalore, India; and Prague, Czech Republic.

      In addition to technology developed in-house, our products also include technology developed by the open source community. Some of our product development engineers work as a part of open source development teams across the world. This involvement ensures our role in leading technical advances, developing new features and having input over timing of releases, as well as other information related to the development of the Linux kernel and other open source projects.

      Product development expenses for the fiscal years 2005, 2004, and 2003 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 go to market strategy targets customers who are looking for solutions in the following five technology areas: data center, security and identity management, resource management, desktop and workgroup. We sell our business solutions via a multi-channel go to market model, with value added partners such as demand agents, vertical markets resellers, systems integrator distributors, and OEMs who meet our criteria, as well as selling directly to named enterprise customers. In addition, we conduct sales and marketing activities and provide technical support, training, and field service to our customers from our 21 U.S. and 99 international sales offices.

      Distributors. We have established a network of independent distributors who sell our products to resellers, dealers, VARs (value added resellers), and computer retail outlets. As of October 31, 2005, there were 14 U.S. distributors and approximately 114 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/Independent Hardware Vendors (“IHVs”)/ Independent Software Vendors (“ISVs”). We license subsets of products to domestic and international OEMs/ IHVs/ ISVs for integration with their products and/or solutions. As of October 31, 2005, we had agreements with approximately 140 IHVs and ISVs.

      End-User Customers. We have assembled worldwide field resources to work directly with enterprise end users and have entered into license agreements with over 7,600 customers to date. Additionally, product upgrades and software maintenance are sold directly to end-users. Customers can also purchase products and services under license agreements through partners or resellers in or near their geographic locations.

      Marketing Strategy. Our marketing strategy is to employ multiple channels of communications to raise awareness, generate demand and provide tools for our multi-channel field sales and services organizations. To achieve this, we examine and select market opportunities that best fit our current product portfolio. This includes researching geographic and industry markets, determining product life cycle maturity, and assessing competitive strategies. Our strategy is driven by a key set of metrics that include the measurement of awareness across geographies, specific lead generation metrics and deliverables to support the sales process. Our marketing strategy will be successful if we raise the average selling price of our products based on clear market differentiation, improve the win ratio of our sales force by providing quality training and tools, and shorten the sales cycle by providing convincing evidence of our capabilities to prospective customers. Our target marketing audience is the CIO and other senior IT executives responsible for key IT functions across the enterprise.

      Marketing Initiatives. Our marketing activities are varied but tightly focused. To more closely align our offerings with customers needs, we have developed a series of strategic campaigns based on the five key technology areas listed above. Our marketing campaigns are based on our positioning of “Software for the Open Enterprise^tm”. We offer enterprise-class infrastructure software and services with a flexible combination of open source and proprietary technologies. As a result, customers can reduce costs and complexity while increasing the return on their IT investment. Unlike other vendors, we also help customers migrate from proprietary to open source technology at a pace that suits them. We believe this positioning best serves us in increasing our relevance to our customers. These campaigns are fully integrated to deliver awareness through public relations, analyst relations, and trade shows; to generate demand through direct mail, calling campaigns, events and lead management activities; and to build infrastructure services including market research, competitive intelligence and development of our customer communities. As an example, we conduct BrainShare^® user conferences throughout the year to inform and educate customers, partners, developers, and the press and analyst community about our product and solution strategies and offerings. In addition, we have other ongoing activities such as distribution of sales literature, press releases, periodic product announcements, support of Novell user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. These activities are all designed to educate the market and generate demand for our products and services.

      International Revenue. In fiscal years 2005, 2004, and 2003, approximately 58%, 56%, and 54%, respectively, of our revenue was generated from customers outside the U.S. Approximately 51% of our total revenue in fiscal 2005 was invoiced by us in U.S. dollars outside of the U.S. Local currency invoicing includes a significant portion of invoices generated in our Irish shared service center, as well as other international local office billings. In fiscal 2005, revenue in the United Kingdom accounted for approximately 13% of revenue based on revenue classified by location of the end-user customers. There were no foreign countries who

      None of our customers accounted for more than 10% of our revenue in fiscal year 2005, 2004, or 2003.

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

      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.

Geographic segments

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

      Primary competitors of our identity-driven computing solutions include Microsoft, IBM, Sun, Oracle, HP, Altiris, Inc., LANDesk, Inc., and Computer Associates. Primary competitors for our Linux and platform services solutions include Microsoft, and Red Hat. Primary competitors of our global services and support group include IBM, Accenture, HP, Computer Services Corporation (“CSC”) and Capgemini Group.

      One pervasive factor facing us and all companies doing business in our industry is the presence — and dominance — of Microsoft. In a decision upheld by a federal appellate court, Microsoft was found to have violated Section 2 of the Sherman Act by unlawfully acting to maintain its monopoly over desktop operating systems. In a decision by the European Commission (“EC”) in 2004, now on appeal, the EC found Microsoft in violation of Article 82 of the EC Treaty for refusal to supply critical interoperability information to its competitors, including Novell. We remain concerned that Microsoft may continue to engage in business practices that unfairly inhibit the growth of its competitors, including Novell, and that the settlement of the

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

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

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

      In November 2005, Open Invention Network LLC (“OIN”) was established by us, IBM, Philips, Red Hat and Sony. OIN is a privately held company that has and will acquire patents to promote Linux and open source by offering its patents on a royalty-free basis to any company, institution or individual that agrees not to assert its patents against the Linux operating system or certain Linux-related applications. In addition, OIN, in its discretion, will enforce its patents to the extent it believes such action will serve to further protect and promote Linux and open source.

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

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

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

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

      As of December 31, 2005, we had 5,066 permanent and temporary employees. The functional distribution of our employees was: sales and marketing — 1,162; product development — 1,404; general and administrative — 729; and service, consulting, training, and operations — 1,771. Of these, 2,566 employees are in locations outside the U.S. All of our U.S. personnel are based at our facilities in Utah, Massachusetts, California, and various U.S. field offices. None of our employees are represented by a labor union, and we consider our employee relations to be good.

      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.

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

      Jack L. Messman became Chief Executive Officer and President of Novell in July 2001 in connection with Novell’s acquisition of Cambridge Technology Partners, Inc. (“Cambridge”) and held the title of President until October 2005. Mr. Messman has been a director of Novell since 1985 and was appointed Chairman of the Board of Directors in November 2001. From August 1999 to July 2001, Mr. Messman was President and Chief Executive Officer of Cambridge. Mr. Messman was the Chief Executive Officer of Union Pacific Resources Group Inc. (“UPR”), an oil and gas company, from 1991 to August 1999 and its Chairman

      Ronald W. Hovsepian, Novell’s President and Chief Operating Officer since November 2005, joined Novell in June 2003 as President, Novell North America. From May 2005 to November 2005, Mr. Hovsepian served as Executive Vice President and President, Worldwide Field Operations. Before coming to Novell, Mr. Hovsepian was a Managing Director with Bear Stearns Asset Management, a technology venture capital fund, from February to December 2002. From March 2000 to February 2002, Mr. Hovsepian served as Managing Director for Internet Capital Group, a venture capital firm. Prior to that, Mr. Hovsepian served in a number of executive positions with IBM over a 17-year period. Mr. Hovsepian is also the non-executive chairman of the board of directors of Ann Taylor Corporation.

      Dr. Jeffrey Jaffe, Novell’s Executive Vice President and Chief Technology Officer, joined Novell in November 2005. From October 2001 until October 2005 Dr. Jaffe served as president of Bell Labs Research and Advanced Technologies. Prior to that, Dr. Jaffe held a variety of technical and management positions with IBM, most recently serving as general manager of IBM’s SecureWay business unit, where he was responsible for IBM’s security, directory, and networking software business.

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

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

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

      Susan Heystee has served as President, Novell Americas since July 2005. Ms. Heystee joined Novell in March 2004 as vice president and area general manager for the Midwest area of North America. Prior to joining Novell, Ms. Heystee served as President, Baan Americas, a software company providing supply chain management applications, from October 2000 to October 2002. After the acquisition of Baan by SSA Global, also a software company providing supply chain management applications, Ms. Heystee served as SSA’s Executive Vice President, Worldwide Sales and Delivery from October 2002 to March 2004.

      Tom Francese joined Novell in October 2005 as Senior Vice President and President of Novell EMEA Operations. Prior to joining Novell, Mr. Francese held numerous executive sales positions with IBM over a 30-year period, except for February 2000 to June 2000 during which he served as a Managing Director of Deutsche Bank with responsibilities in information technology.

      We have been selling and upgrading NetWare for many years, sales of which have been declining. Our strategy is to offset these declines by sales of our next generation of NetWare enterprise-ready operating system and services, Open Enterprise Server, which gives customers the opportunity to choose between a NetWare operating system and a Linux operating system, providing NetWare customers a means to migrate to Linux and open source solutions. However, NetWare and OES combined license and maintenance revenue of our business declined by $21.4 million in fiscal 2005, excluding the impact of favorable foreign exchange rates. If our strategy is unsuccessful, our NetWare and OES revenue stream will deteriorate faster than the growth of revenue streams from our other products.

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

      The industries we compete in are highly competitive. We expect competition to continue to increase both from existing competitors and new market entrants. Competitors of our identity-driven computing solutions and Linux and platform services solutions include Microsoft, IBM, Sun, HP, Altiris, Oracle, LANDesk, and

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

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

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

      In January 2004, SCO filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. We removed the claim to the U.S. District Court, District of Utah. SCO’s original complaint alleged that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’s business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. The District Court dismissed the original complaint, but allowed SCO an opportunity to file an amended complaint, which SCO did in July 2004. As with the original complaint, SCO is again seeking to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights and to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights and to pay actual, special and punitive damages in an amount to be proven at trial. Our revenue and business plan could be adversely affected if SCO is ultimately successful.

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

      Our open source offerings depend to a large extent on the efforts of developers not employed by us for the creation and update of open source technologies. Also, we and many other corporations contribute software into the open source movement. If key members, or a significant percentage, of this group of developers or

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

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

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

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

      We currently provide estimates of our revenue and earnings per share for only the upcoming quarter, and the first quarter of fiscal 2006 is the first time where we have provided such guidance in several years. Our operating results may fluctuate from quarter to quarter due to a variety of factors including, but not limited to:

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

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

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

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

      Our investment portfolio includes investments in public equity securities, small capitalization stocks in the high-technology industry sector, private companies, and funds managed by venture capitalists. Many of these investments might become other-than-temporarily impaired. During our fiscal years ended October 31, 2005, 2004 and 2003, we recorded impairment charges of $3.4 million, $5.4 million and $34.7 million, respectively, related to some of the investments in our portfolio that experienced an other-than-temporary decline in market value. If the funds in which we have invested suffer poor financial performance, or if the private companies in which we have invested are not successfully acquired or undertake initial public offerings, the value of our investments may decrease further.

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

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

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

      None.

      In the U.S., we own approximately 887,000 (and occupy approximately 831,000) square feet of office space on 46 acres in Provo, Utah, which is used for administrative offices and product development center. We also occupy 85,000 square feet of warehouse space in and around Provo for operational support. We lease 105,000 square-feet of office space in Waltham, Massachusetts, and occupy 96,000 square-feet as our corporate headquarters and principal executive offices. This facility is also used for product development. We lease approximately 177,000 square-feet of an office building in Cambridge, Massachusetts, of which we occupy approximately 22,000 square feet for product development activities and sublease approximately 155,000 square-feet. We lease a 100,000 square-foot facility in Billerica, Massachusetts, which is currently unoccupied. With the acquisition of Tally Systems, Inc., we assumed a lease of a 64,000 square-foot facility in Lebanon, New Hampshire, of which 17,000 square feet is used for product development and 42,000 square feet is subleased. With the acquisition of Immunix, we assumed a lease of a 4,000 square foot facility in Portland, Oregon, which is used for product development. In addition, we lease sales and support offices in California, Connecticut, Florida, Georgia, Illinois, Michigan, Minnesota, Missouri, New York, Texas, Utah, Virginia, and Washington.

      Internationally, we own an 85,000 square-foot office building in Bracknell, United Kingdom, a 39,000 square-foot building in Capelle, Netherlands, and an 18,000 square-foot building in Johannesburg, South Africa, all of which are used for sales and administrative offices. With the acquisition of the remaining interest in Onward Novell in the first quarter of fiscal 2006, we acquired sole ownership interest in a 29,000 square foot building in Mumbai, India, which is used for sales and support activities. We lease and occupy a 20,000 square-foot facility in Dublin, Ireland, which is used as a shared services center and for product localization, a 29,000 square-foot facility in Richmond, United Kingdom, 10,000 square feet of which is used as headquarters and administrative offices for our Celerant subsidiary, and an 80,000 square-foot facility in Bangalore, India, which is used as a product development center. We also lease a 64,000 square foot facility in Nuremberg, Germany, primarily used for product development activities.

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

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

      In November 2004, we filed suit against Microsoft in the U.S. District Court, District of Utah. We are seeking treble damages under the Clayton Act, plus interest, in an amount to be determined at trial based on claims that Microsoft eliminated competition in the office productivity software market during the time that we owned the WordPerfect word-processing application and the Quattro Pro spreadsheet application. Among other claims, we allege that Microsoft withheld certain critical technical information about Windows from us, thereby impairing our ability to develop new versions of WordPerfect and other office productivity applications, and that Microsoft integrated certain technologies into Windows designed to exclude WordPerfect and other Novell applications from relevant markets. In addition, we allege that Microsoft used its monopoly power to prevent OEMs from offering WordPerfect and other applications to customers. On June 10, 2005, Microsoft’s motion to dismiss the complaint was granted in part and denied in part. Thereafter, Microsoft asked that the Court’s decision be certified for interlocutory appeal to the United States Fourth Circuit Court of Appeals. The Court granted this request on August 19, 2005 and it is now up to the Fourth Circuit Court whether it will consider an appeal at this time. While there can be no assurance as to the ultimate disposition

      In January 2004, the SCO Group, Inc. (“SCO”) filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. We removed the claim to the U.S. District Court, District of Utah. SCO’s original complaint alleged that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO’s business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. The District Court dismissed the original complaint, but allowed SCO an opportunity to file an amended complaint, which SCO did in July 2004. As with the original complaint, SCO is again seeking to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights, to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights and to cause us to pay actual, special and punitive damages in an amount to be proven at trial. On June 27, 2005, our motion to dismiss SCO’s amended complaint was denied. On July 29, 2005, we filed an answer to the complaint setting forth numerous affirmative defenses and counterclaims alleging slander of title and breach of contract, and seeking declaratory actions and actual, special and punitive damages in an amount to be proven at trial. We believe that we have meritorious defenses to SCO’s claims and meritorious support for our counterclaims. Accordingly, we intend to vigorously pursue our claims while defending against the allegations in SCO’s complaint. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

      SilverStream, which we acquired in July 2002, and several of its former officers and directors, as well as the underwriters who handled SilverStream’s two public offerings, were named as defendants in several class action complaints that were filed on behalf of certain former stockholders of SilverStream who purchased shares of SilverStream common stock between August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs have brought against other issuers and underwriters. These complaints all allege violations of the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, they allege, among other things, that there was undisclosed compensation received by the underwriters of the public offerings of all of the issuers, including SilverStream. A Consolidated Amended Complaint with respect to all of these companies was filed in the U.S. District Court, Southern District of New York, on April 19, 2002. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the Court. While we believe that SilverStream and its former officers and directors have meritorious defenses to the claims, a tentative settlement has been reached between many of the defendants and the plaintiffs, which contemplates a settlement of the claims, including the ones against SilverStream and its former directors and officers. The settlement agreement, however, has not been finally approved by the Court. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

      In February 1998, a suit was filed in the U.S. District Court, District of Utah, against us and certain of our officers and directors, alleging violation of federal securities laws by concealing the true nature of our financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of our common stock from November 1, 1996 through April 22, 1997 (the “class members”). After a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court dismissed the amended complaint with prejudice for failure to state a claim. Much of the District Court’s Order of Dismissal was affirmed by the Tenth Circuit Court of Appeals while certain claims were remanded for the District Court’s further review. We and our directors’ and officers’ liability insurance carriers agreed to a proposed settlement that includes a settlement payment of $13.9 million to a settlement fund for the class members. Of this amount, we

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

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

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

      No dividends have been declared on our common stock. We have no current plans to pay dividends on our common stock, and intend to retain our earnings for use in our business. There were 8,055 stockholders of record at December 31, 2005.

      On September 22, 2005, our board of directors approved a share repurchase program for up to $200 million of our stock through September 21, 2006. As of October 31, 2005, no shares of common stock had been repurchased under this program.

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

      With respect to the U.S. economy, spending continues to improve in many of the areas of information technology (“IT”) that we target. These areas include enterprise and other critical application development, enterprise storage and enterprise integration projects, compliance resulting from Sarbanes-Oxley regulations, and standardization of application systems. Enterprises are also consolidating their IT environments to lower their costs. Sales cycles of our products and services are still relatively long, with customers frequently requiring a product pilot before a larger purchase will occur. In our EMEA segment, the European economy is flat, and market spending is still below expectations with long sales cycles and a clear focus on IT cost savings. Consolidation of platforms and security remain high priority items for our customers, and initiatives on auditing in the health and public sector are increasing on a small enterprise and local government scale. Our EMEA segment remains a focus for our management and we expect to face continued financial challenges here. The economy in Asia Pacific, including Japan, is mixed as some regions continue to struggle with core economic issues and others are growing at or above global rates.

      As a result, our strategic focus is to provide enterprise-class infrastructure software and services with a flexible combination of open source and proprietary technologies. By implementing our solutions, customers can reduce costs and complexity while increasing the return on their IT investment. Unlike other providers, we help customers migrate from proprietary solutions to open source technology at a pace that best suits them.

      In support of this strategy, we have identified several key initiatives. These initiatives include:

      Our initiatives and their implementation involve opportunities, risks and challenges. The following discusses our progress regarding these initiatives and their implementation during fiscal 2005, as well as the risks and challenges we believe we face over the next year.

      In addition to our strategic initiatives, we have made a number of operational improvements in our business:

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

      Revenue Recognition and Related Reserves. Our revenue is derived primarily from the sale of software licenses, software maintenance, upgrade protection, subscriptions of SUSE Linux Enterprise Server (“SLES”), technical support, training, and consulting services. Our customers include: distributors, who sell our products to resellers, dealers, and VARs; OEMs, who integrate our products with their products or solutions; VARs, who provide solutions across multiple vertical market segments which usually includes services; and end users, who may purchase our products and services directly from Novell or from other partners or resellers. Except for our SUSE Linux product, distributors do not order to stock and only order products when they have an end customer order, which they present to us. With respect to our SUSE Linux product, distributors place orders and the product is then sold through to end customers principally through the retail channel. OEMs report the number of copies duplicated and sold via an activity or royalty report. Software maintenance, upgrade protection, technical support, and subscriptions of SLES typically involve one to three year contract terms. Our standard contracts offer a 90-day right of return.

      Revenue is recognized in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and Staff Accounting Bulletin No. 104, “Revenue Recognition,” and related interpretations. When an arrangement does not require significant production, modification or customization of software or does not contain services considered to be essential to the functionality of the software, revenue is recognized when the following four criteria are met:

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

      Many of our software arrangements include multiple elements. Such elements typically include any or all of the following: software licenses, rights to additional software products, software maintenance, upgrade protection, technical support, training and consulting services. For multiple-element arrangements that do not involve significant modification or customization of the software and do not involve services that are considered essential to the functionality of the software, we allocate value to each element based on its relative fair value, if sufficient Novell-specific objective evidence of fair value exists for each element of the arrangement. Novell-specific objective evidence of fair value is determined based on the price charged when each element is sold separately. If sufficient Novell-specific objective evidence exists for all undelivered elements, but does not exist for the delivered element, typically the software, then the residual method is used to allocate value to each element. Under the residual method, each undelivered element is allocated value based on Novell-specific objective evidence of fair value for that element, as described above, and the remainder of the total arrangement fee is allocated to the delivered element, typically the software. If sufficient Novell-specific objective evidence does not exist for all undelivered elements and the arrangement involves rights to unspecified additional software products, all revenue is recognized ratably over the term of the arrangement. If the arrangement does not involve rights to unspecified additional software products, all revenue is initially deferred until typically the only remaining undelivered element is software maintenance or technical support, at which time the entire fee is recognized ratably over the remaining maintenance or support term.

      In the case of multiple-element arrangements that involve significant modification or customization of the software or involve services that are considered essential to the functionality of the software, contract accounting is applied. When Novell-specific objective evidence exists for software maintenance or technical support in arrangements requiring contract accounting, the consulting and license fees are combined and revenue is recognized on the percentage of completion basis. The percentage of completion is generally calculated using estimated hours incurred to date relative to the total expected hours for the entire project. The cumulative impact of any revision in estimates to complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known. The maintenance or support fee is unbundled from the other elements and revenue is recognized ratably over the maintenance or support term.

      Consulting project contracts are either time-and-materials or fixed-price contracts. Revenue from time-and-materials contracts is recognized as the services are performed. Revenue from fixed-price contracts is recognized based on the proportional performance method, generally using estimated time to complete to measure the completed effort. The cumulative impact of any revision in estimates to complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known. Consulting revenue includes reimbursable expenses charged to our clients.

      Celerant recognizes consulting revenue on base fees, milestone fees and success fees. Base fees are the element of total fees that are recognized based on expected efforts to be expended on a project. Milestone fees are the element of total fees for the project that are not billed in accordance with the resources used, but are linked directly to the achievement of specified criteria, which release the milestone payments. Success fees are incremental fees based on results that exceed base deliverables on the project. Revenue derived from the achievement of criteria relating to project milestones or project results is recognized only when they have been accepted and approved by the customer. Base fees are recognized according to the proportional performance to date, which is measured by applying the completed effort to date to the total fees (less project milestones and success fees) of each project. The completed effort to date is calculated as the proportion of man-weeks incurred to date relative to the total expected man-weeks for the entire project. The cumulative impact of any revision in estimates to complete or the recognition of losses on contracts is reflected in the period in which the changes or losses become known. Celerant consulting revenue includes reimbursable expenses charged to our clients.

      Long-lived Assets. Our long-lived assets include net fixed assets, long-term investments, goodwill, and other intangible assets. At October 31, 2005, our long-lived assets included $212 million of net fixed assets, $54 million of long-term investments, $395 million of goodwill, and $56 million of identifiable intangible assets.

      Deferred Tax Assets. We perform quarterly and annual assessments of the realization of our deferred tax assets considering all available evidence, both positive and negative. Assessments of the realization of deferred tax assets require that management make significant judgments about many factors, including the amount and likelihood of future taxable income. As a result of these assessments, we previously established valuation allowances on our deferred tax assets that were considered to be at risk due to their unique characteristics and limitations, such as capital loss carryovers and acquired tax attributes. Through the third quarter of fiscal 2003, we concluded that it was more likely than not that the remaining recognized deferred tax assets would be realized. The valuation allowance established in the fourth quarter of fiscal 2003 was

      During fiscal 2004, we generated U.S. pre-tax income. At October 31, 2004, we had been in a cumulative pre-tax loss position for each of the last three years. As a result, we continued to provide a full valuation allowance on our deferred tax assets. We generated U.S. pre-tax income for fiscal 2005. However, most of the U.S. earnings were attributable to the one-time, discrete income from the Microsoft settlement. Income from U.S. operations, excluding income from the Microsoft settlement, was slightly profitable. Substantial cumulative prior year U.S. losses remain, and we accordingly continue to provide a full valuation allowance on our net U.S. deferred tax assets at October 31, 2005.

      Loss Contingency Accruals and Restructurings. We are required to make accruals for certain loss contingencies related to litigation and taxes. We accrue these items in accordance with SFAS No. 5, “Accounting for Contingencies,” which requires us to accrue for losses we believe are probable and can be reasonably estimated however, the estimation of the amount to accrue requires significant judgment. Litigation accruals require we make assumptions about the future outcome of each case based on current information. Tax accruals require we make assumptions based on the results of tax audits, past experience and interpretations of tax law. When our restructurings include leased facilities, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we are required to make assumptions about future sublease income, which would offset our costs and decrease our accrual. From time to time, we are subjected to tax audits and must make assumptions about the outcome of the audit. If any of the estimates or their related assumptions change in the future, or if actual outcomes are different than our estimates, we may be required to record additional charges or reduce our accruals. During fiscal 2005, we recorded a $1.2 million adjustment to reduce previous restructuring accruals and a $5.3 million adjustment to increase merger liabilities primarily due to changes in estimates we originally made regarding future subleases. In fiscal 2004, we recorded a $4.9 million adjustment to a previous restructuring accrual due to changes in estimates we originally made regarding future sublease income, a $9.0 million reduction of our litigation accrual due to changes in the estimated outcome of certain ongoing legal cases and $6.0 million reduction to our income tax accrual to reflect current estimated tax exposures.

Acquisitions

      On April 1, 2005, we acquired a 100% interest in Tally Systems Corp., a privately-held company headquartered in Lebanon, New Hampshire. Tally provides automated PC hardware and software recognition products and services used by customers to manage hardware and software assets. These products and services are now part of our ZENworks product line. The purchase price was approximately $17.3 million in cash, plus transaction costs of $0.4 million and excess facility costs of $4.5 million recorded as an acquisition liability. Tally’s results of operations have been included in our statement of operations beginning on the acquisition date.

      On April 27, 2005, we acquired a 100% interest in Immunix, Inc., a privately-held company headquartered in Portland, Oregon, which provides enterprise class, host intrusion prevention solutions for the Linux platform. This acquisition enables us to expand security offerings on the Linux platform. The purchase price

      On July 19, 2004, we purchased all of the outstanding stock of Salmon Ltd, a privately-held information technology services and consulting firm headquartered in Watford, England, for approximately $8.2 million in cash, plus merger and transaction costs of $0.6 million. Salmon’s results of operations have been included in our statement of operations beginning on the acquisition date.

      The purchase agreement provides for contingent payments of up to an additional $10.6 million based upon the future revenue and profitability of both Salmon and Novell in the United Kingdom over a period of two years. Approximately $3.2 million of contingent earnouts were recorded to goodwill in fiscal 2005. Any future earnout payments are expected to be capitalized as goodwill when and if paid.

      On January 12, 2004, we purchased substantially all of the outstanding stock of SUSE LINUX AG, a privately-held company and a leading provider of Linux-based products, for approximately $210.0 million in cash, plus merger and transaction costs of $9.0 million. SUSE’s results of operations have been included in our statement of operations beginning on the acquisition date.

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

      We sell our products, services, and solutions primarily to corporations, government entities, educational institutions, resellers and distributors both domestically and internationally. In the statement of operations, we categorize revenue as software licenses or maintenance and services. Software license revenue includes new and upgrade license revenue only. Maintenance and services includes SLES subscriptions, upgrade protection contracts, and all other revenue deferred due to contract terms.

      Overall, favorable foreign currency exchange rates increased revenue in fiscal 2005 by approximately $22.5 million compared to fiscal 2004. During fiscal 2005, we recognized Linux platform revenue of $148.1 million, including $85.3 million from sales of Open Enterprise Server (“OES”) subscriptions and $62.8 million from other Linux products. Linux platform revenue includes products and services, such as SLES, OES, Novell Linux Desktop, ZENworks Linux Management, SUSE Linux, technical support and other Linux product and service revenue.

      Software licenses revenue decreased in fiscal 2005 compared to fiscal 2004 primarily due to declines in license sales of workgroup products such as NetWare/OES and GroupWise. In addition, the decrease is due

      Maintenance and services revenue increased during fiscal 2005 compared to fiscal 2004 due primarily to higher IT consulting and services revenue of $28.4 million resulting from the acquisition of Salmon and increased revenue in all geographic regions, and $27.2 million due to higher maintenance revenue, offset slightly by $3.6 million of lower revenue from Celerant. The change in the mix of our revenue towards more maintenance and subscription contracts has also driven the increase in revenue in the maintenance and services category.

      Software license revenue decreased in fiscal 2004 compared to fiscal 2003 primarily as a result of lower NetWare, GroupWise and ZENworks license sales. Revenue from NetWare licenses decreased by $21 million or 20% from fiscal 2003 to fiscal 2004, revenue from GroupWise licenses decreased $3.3 million or 9% from fiscal 2003 to fiscal 2004, and revenue from ZENworks licenses decreased by $1.4 million or 3% from fiscal 2003 to fiscal 2004. These decreases were offset somewhat by favorable foreign exchange rates, particularly in Europe.

      Maintenance and services revenue increased in fiscal 2004 compared to fiscal 2003 primarily due to increased global services and support revenue, which increased $8.5 million or 3%, the recognition of $13.5 million of royalty revenue related to a favorable legal judgment against The Canopy Group, Inc. (“Canopy”) wherein we recovered a royalty payment due under a licensing agreement, the addition of $36.2 million in SUSE services revenue, and the benefit of favorable foreign exchange rates, primarily in Europe. These increases were offset somewhat by lower NetWare maintenance revenue, which decreased by $9.0 million or 5%. In total, NetWare revenue decreased by 10% from fiscal 2003 to 2004.

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

      Identity-driven computing solutions revenue increased in fiscal 2005 compared to fiscal 2004 due primarily to $14.5 million of revenue recognized from a large transaction in EMEA during the fourth quarter of fiscal 2005, which included ZENworks and Identity Manager products. In addition, revenue from sales of Identity Manager products increased by approximately $10.3 million during the same period. Linux and

      Identity-driven computing solutions revenue increased in fiscal 2004 compared to fiscal 2003 due primarily to increased ZENworks revenue. Linux and platform services solutions revenue increased in fiscal 2004 compared to fiscal 2003 due primarily to the $13.5 million legal settlement from Canopy recorded in fiscal 2004. Global services and support revenue increased in fiscal 2004 compared to fiscal 2003 primarily due to the acquisition of Salmon during fiscal 2004 and favorable foreign currency rates. Celerant revenue for fiscal 2004 increased compared to fiscal 2003 due to a combination of underlying growth in the business and favorable currency exchange rates. Excluding the impact of the foreign currency exchange rates, Celerant revenue increased by 8% for fiscal 2004 compared to fiscal 2003 due to improved revenue growth in our European businesses.

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

      Revenue by reporting segment was as follows:

      Revenue by solution category in North America was as follows:

      Revenue from North America decreased slightly in fiscal 2005 compared to fiscal 2004 primarily due to the $13.5 million Canopy royalty revenue recognized in fiscal 2004. Excluding the Canopy revenue in fiscal 2004, revenue was up $12.5 million, primarily due to increases in consulting and services revenue of $8.7 million, SLES revenue of $8.4 million, ZENworks related revenue of $5.9 million, and security and identity product revenue of $6.4 million. These increases were offset somewhat by lower NetWare/ OES revenue of $9.8 million and lower GroupWise revenue of $3.4 million. Overall, favorable foreign currency exchange rates increased revenue in the North America segment by approximately $3.1 million during fiscal 2005.

      The overall increase in the North America segment revenue for fiscal 2004 compared to fiscal 2003 is primarily due to increased revenue in our Linux and platform services solution category. This increase is due primarily to the recognition of $13.5 million of royalty revenue related to the legal judgment against Canopy. Excluding the Canopy revenue, North America revenue for fiscal 2004 decreased by $7 million or 1% compared to the fiscal 2003. These declines are primarily due to an $18.2 million or 11% decline in fiscal 2004 in NetWare revenue and a $3.5 million or 2% decrease in global services and support revenue. These declines are offset somewhat by increases in ZENworks revenue, included in identity-driven computing solutions. ZENworks revenue increased $8 million or 13% for fiscal 2004 compared to fiscal 2003, principally related to our successful release of ZENworks 6.5 during the third quarter of fiscal 2004 and the addition of $11 million in revenue from SUSE in fiscal 2004.

      Revenue by solution category in EMEA was as follows:

      Revenue from EMEA increased in fiscal 2005 primarily due to additional revenue from favorable foreign currency rates of $12.5 million. In addition, after adjusting for foreign currency impacts, revenue increased due to higher ZENworks revenue of $12.6 million, increased IT consulting revenue of $7.9 million, primarily from the acquisition of Salmon, and increased SUSE revenue of $4.3 million. These increases were offset somewhat by decreases in NetWare/ OES revenue of $8.6 million.

      The overall increase in the EMEA segment revenue for fiscal 2004 compared to fiscal 2003 was due primarily to favorable foreign currency exchange rates, which increased revenue by approximately $18 million for fiscal 2004. This increase is also due to the inclusion of SUSE revenue in the Linux and platform services solution category of $21 million for fiscal 2004 compared to no SUSE revenue in fiscal 2003. Also, revenue for fiscal 2004 increased by approximately $7 million due to the inclusion of Salmon revenue.

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

      Revenue by solution category in Asia Pacific was as follows:

      Revenue in the Asia Pacific segment remained relatively flat in fiscal 2005 compared to fiscal 2004. Decreases in NetWare/ OES revenue of $5.8 million were offset by increases in consulting and services revenue of $4.5 million and favorable foreign currency exchange rates of $2.0 million.

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

      Revenue by solution category in Latin America was as follows:

      The overall increase in Latin America segment revenue during fiscal 2005 compared to fiscal 2004 is primarily due to increased revenue in all categories except NetWare/OES, which declined by approximately $0.5 million.

      The overall decline in Latin America segment revenue for fiscal 2004 compared to fiscal 2003 is primarily due to a 19% decrease in NetWare revenue, a 14% decrease in collaboration products, a 26% decrease in identity-driven computing revenue, and a 10% decrease in services revenue. These decreases were somewhat offset by a 15% increase in ZENworks revenue due primarily to our successful release of ZENworks 6.5 during the third quarter.

      Revenue by solution category in Japan was as follows:

      The overall increase in Japan segment revenue during fiscal 2005 compared fiscal 2004 is primarily due to higher royalty revenue of approximately $1.5 million and increased consulting revenue of approximately $2.3 million.

      The overall increase in Japan segment revenue for fiscal 2004 is primarily due to increased royalty revenue, offset somewhat by declining services revenue.

      Deferred revenue represents revenue that is expected to be recognized in future periods. The majority of deferred revenue relates to maintenance contracts and subscriptions and is recognized ratably over the related service periods, typically one to three years. The increase in the deferred revenue at October 31, 2005 compared to October 31, 2004 of $31.6 million is primarily attributable to a $2.3 million increase due to favorable foreign currency exchange rates, approximately $9.0 million due to advanced invoicing of maintenance contract renewals and approximately $19.9 million due to increases in maintenance and subscription contracts. As more of our revenue contracts shift to multiple product, multiple year subscription arrangements, we will expect that a greater proportion of our revenue will initially be deferred and recognized over the contractual service term as maintenance and subscription revenue.

      We expect our newer product offerings of open source, identity and resource management to grow during fiscal 2006. However, it is still too early to predict the longer-term impact of OES on our traditional revenue, principally NetWare and GroupWise, which are still a significant component of our overall revenue. OES has been shipping for only two quarters, and the customer adoption cycles are typically long, and we therefore continue to plan for declines in those legacy revenue streams. In addition, the restructuring actions we took in fiscal 2005 involved the elimination or cutback of certain product and service offerings, resulting in the elimination or reduction of certain lower margin revenue. We also expect it to have some revenue reduction shorter-term, reducing revenue by approximately $40 to $50 million in fiscal 2006, exclusive of the continued expected declines in our traditional business revenue, as described above.

      On November 2, 2005, we announced that our Board of Directors authorized management and our financial advisor, Citigroup Corporate and Investment Banking, to explore strategic alternatives for Celerant, which could affect revenue in fiscal 2006.

      We expect revenue in the first fiscal quarter ended January 31, 2006 to be in the range of $260 to $270 million.

      The decrease in gross profit from software licenses for fiscal 2005 compared to fiscal 2004 is primarily due to decreased sales volume of software licenses.

      The increase in gross profit from maintenance and services for fiscal 2005 compared to fiscal 2004 is primarily due to increased sales volume in the related sales category. The decrease in gross profit from maintenance and services as a percentage of related revenue for fiscal 2005 compared to fiscal 2004 is primarily due to the impact of the Canopy royalty revenue recognized in fiscal 2004, which did not have any costs associated with it, and a shift in the mix of revenue in this category to lower margin consulting services revenue, increased royalty costs and increased amortization of intangible assets associated with recent acquisitions.

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

      The increase in gross profit from maintenance and services as a percentage of related revenue from fiscal 2003 to fiscal 2004 is primarily due to the recognition of $13.5 million of revenue in connection with the Canopy legal judgment during fiscal 2004, which had relatively little corresponding cost of sales. In addition, our margins were positively impacted by increased consulting billing rates, which increased from $135 per hour in fiscal 2003 to $144 per hour in fiscal 2004 and from cost savings related to workforce reductions we implemented during fiscal 2003 and 2004, mainly in the North America and EMEA segments.

      We expect gross margin percentages will decrease in fiscal 2006 as our revenue mix continues to shift from higher margin software licenses to lower margin services revenue as a result of continued growth in our Linux and worldwide services businesses. We expect gross margins to decrease shorter term due to the anticipated decrease in revenue discussed above. We expect to realize savings from our annualized fourth quarter fiscal 2005 adjusted run rate of approximately $40 million in fiscal 2006.

      Sales and marketing expenses for fiscal 2005, in total and as a percentage of revenue, increased compared to fiscal 2004 due primarily to increased marketing activities in North America and Asia Pacific. Sales and marketing expenses were approximately $14.2 million higher in North America in fiscal 2005 compared to fiscal 2004, mainly related to planned spending increases. Sales and marketing expenses in Asia Pacific increased primarily due to our investments in China of approximately $2.8 million. In addition sales and marketing increased due to inclusion of SUSE and Salmon for the full year in fiscal 2005. Unfavorable foreign currency exchange rates increased sales and marketing expenses by approximately $7.3 million in fiscal 2005.

      Sales and marketing expenses in total and as a percentage of revenue, decreased in fiscal 2004 compared to fiscal 2003 due primarily to lower marketing spending, mainly in corporate advertising and the effect of fiscal 2003 and 2004 restructurings, offset somewhat by additional expenses related to the SUSE and Salmon acquisitions in fiscal 2004. This decline is offset somewhat by changes in foreign currency exchange rates.

      Product development expenses in fiscal 2005 increased compared to fiscal 2004 due primarily to the acquisitions of Tally and Immunix, which added $2.5 million, and salary increases granted in fiscal 2005, which added $3.4 million. These increases were offset somewhat by realized savings in fiscal 2005 from prior year headcount reductions.

      Product development costs in fiscal 2004 increased compared to fiscal 2003 due to increased research and development activity from the acquisitions of Ximian and SUSE. Product development headcount increased

      General and administrative expenses increased in fiscal 2005 compared to fiscal 2004 primarily due to $10.7 million in one-time adjustments for changes in estimates in the prior year, higher expenses related to Celerant of $7.5 million, and salary increases granted in fiscal 2005 of approximately $3.0 million, offset somewhat by an adjustment of bad debt allowances and other accruals of $3.6 million during fiscal 2005.

      General and administrative expenses in fiscal 2004 decreased compared to fiscal 2003 primarily due to favorable legal developments that allowed us to reduce our legal reserves by $5 million during our second quarter of fiscal 2004, adjustments for changes in estimates to our medical liabilities, accounts payable accruals, and legal reserves of $7.9 million during our fourth quarter of fiscal 2004, and an adjustment for changes in estimates to decrease bad debt expense by $1.8 million compared to fiscal 2003, offset somewhat by increased expenses related to the addition of SUSE and Salmon general and administrative costs.

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

      During fiscal 2005, we recognized a $1.6 million gain on the sale of a facility in Lindon, Utah. During fiscal 2004, we recognized a gain of $2.0 million on the sale of one of our facilities. In the third quarter of fiscal 2003, we sold our facility in San Jose, California, for $125 million, which resulted in a realized gain of $25 million.

      On November 8, 2004, we entered into an agreement with Microsoft Corporation (“Microsoft”) to settle potential antitrust litigation related to our NetWare operating system in exchange for $536 million in cash. On November 18, 2004, we received $536 million in cash from Microsoft. The financial terms of the NetWare settlement agreement, net of related legal fees of $88 million, resulted in a pre-tax gain of approximately $447.6 million in the first quarter of fiscal 2005.

      In fiscal 2006, we expect to realize savings from our annualized fourth quarter fiscal 2005 run rate, adjusting for non-recurring expenses, of approximately $20 million in sales and marketing, $40 million in product development and $10 million in general and administrative expenses.

      During fiscal 2005, we recorded net restructuring expenses of $59.1 million, of which $55.0 million related to restructuring activity recognized during fiscal 2005 and $5.3 million related to adjustments to previously recorded merger liabilities to adjust lease accruals, less a net release of $1.2 million related to an adjustment of prior period restructuring liabilities. The adjustments to the merger liabilities have been recorded in the statement of operations since the changes have occurred outside the relevant purchase price allocation period. These restructuring expenses related to our continuing efforts to restructure our business to improve profitability, focus on Linux and identity-driven computing and to re-align our Celerant consulting business in response to changing market conditions. Specific actions taken included reducing our workforce by 848 employees, primarily in product development, consulting, sales, and general and administrative, though all areas were impacted. Total restructuring expenses by reporting segment were as follows: EMEA $25.7 million,

      The following table summarizes the activity during fiscal 2005 related to this restructuring:

      As of October 31, 2005, the remaining unpaid balances include accrued liabilities related to severance benefits which will be paid out over the remaining severance obligation period, lease costs for redundant facilities which will be paid over the respective remaining contract terms, and various employee-related severance costs which will be primarily paid over the next twelve months.

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

      The following table summarizes the activity related to this restructuring:

      As of October 31, 2005, the remaining balance of the fiscal 2004 restructuring expenses included accrued liabilities related to severance and benefits, which will be paid out over the remaining severance obligation period, not to exceed two years, lease costs for redundant facilities, which will be paid over the respective

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

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

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

      The following table summarizes the activity related to this restructuring:

      As of October 31, 2005, the remaining balance of the fiscal 2003 restructuring expense included accrued liabilities related to redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms.