NOVELL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO ________________ .

COMMISSION FILE NUMBER 0-13351

NOVELL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 87-0393339
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1800 SOUTH NOVELL PLACE
PROVO, UTAH 84606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

(801) 861-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.10 PER SHARE
(TITLE OF CLASS)

PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)

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

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

The aggregate market value of the registrant's common stock held by
non-affiliates on January 22, 2002 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date) was
$1,675,013,958. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding common stock and common stock
held by executive officers and directors of the registrant have been excluded in
that such persons may be deemed to be "affiliates" as that term is defined under
the rules and regulations promulgated under the Securities Act of 1933. This
determination is not necessarily conclusive for other purposes.

As of January 22, 2002 there were 362,590,822 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 17, 2002, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.

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NOVELL, INC.

TABLE OF CONTENTS

i

NOVELL, INC.

FORM 10-K

PART I

In addition to historical information, this Annual Report on Form 10-K
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts included in this Annual Report on Form 10-K, regarding our
strategy, future operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements. As contained herein, the words "expects," "anticipates," "believes,"
"intends," "will," and similar types of expressions identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. These statements are based on information that is currently
available to the Company, speak only as of the date hereof, and are subject to
certain risks and uncertainties. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or to reflect any change in events,
conditions, or circumstances on which any such forward-looking statement is
based, in whole or in part. The Company's actual results may differ materially
from the results discussed in such forward-looking statements. Factors that may
cause such a difference include, but are certainly not limited to, those
discussed in the sections in Item 1 entitled "Competition", "Copyrights,
Licenses, Patents and Trademarks" and "Additional Factors Affecting Financial
Results and Stock Price" and the section in Item 7 entitled "Risk Factors
Affecting Future Results of Operations." Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Quarterly Reports on
Form 10-Q to be filed by the Company in 2002. All period references are to the
Company's fiscal years ended October 31, 2001, 2000, and 1999, unless otherwise
indicated.

ITEM 1. BUSINESS

THE COMPANY

Novell, Inc. ("Novell" or the "Company") provides eBusiness solutions and
Net services software designed to secure and power the networked world. Novell
and its services division, Cambridge Technology Partners, help organizations
solve complex business challenges, simplify their systems and processes, and
capture new opportunities. Novell provides worldwide channel, consulting,
education and developer programs to support its offerings.

The Company was incorporated in Delaware on January 25, 1983. Novell's
headquarters are located at 1800 South Novell Place, Provo, Utah 84606. Its
telephone number at that address is (801) 861-7000.

The Company markets its products and services through 50 U.S. and 85
international sales offices. The Company licenses its products through
site-license agreements that are either sold directly by Novell, or service
providers and software distribution channel partners. The Company also
distributes licenses as packaged software products that are resold by systems
integrators and other value-added resellers ("VARs"). In addition, Novell
products are licensed to original equipment manufacturers ("OEMs").

The Company primarily conducts product development activities in San Jose,
California; Provo, Utah; Ireland; and India. It also contracts out some product
development activities to third-party developers.

Changes in the economic and business environment for network software and
consulting services have occurred in the last several years, which have led to
strategic and operational changes at Novell. The Company has evolved its
business to focus on eBusiness solutions and Net services software applications,
which support highly distributed network solutions and capitalize on the growth
of the Internet. Novell has expanded its Net

Novell annual report 2001 1
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services offerings around open Internet standards and its own eDirectory(TM)
network infrastructure products. The Company's education and training, service
and support, and consulting business have also been refocused and expanded to
provide support for new eBusiness and Net services based solutions.

On July 10, 2001, the Company acquired Cambridge Technology Partners
(Massachusetts), Inc. ("Cambridge"), a technology consulting company focused on
helping its customers develop and accelerate their transition to eBusiness
solutions and processes. The acquisition of Cambridge helped support the
Company's strategy of providing a foundation for e-business with Novell(R) Net
services software and eDirectory products.

BUSINESS STRATEGY

Novell provides eBusiness solutions and Net services software designed to
secure and power the networked world -- the Internet, intranets, and extranets;
wired to wireless; corporate and public -- across leading operating systems.
Novell and its services division, Cambridge Technology Partners, help
organizations solve complex business challenges, simplify their systems and
processes, and capture new opportunities with one Net solutions. Novell provides
worldwide channel, consulting, education and developer programs to support its
offerings. With both software and services offerings, Novell can determine how
Net services can be used by an organization and the requirements of Net services
to ensure proper security and access, which can then be turned into an
e-business solutions approach to help the customer deliver the right
information, to the right individual, at the right time, and on the right
device.

Novell's network solutions provide essential network management, messaging
and groupware capabilities integrated through Novell's directory services.
Networks are inherently a varied mix of infrastructure, computer systems,
applications and other devices. Novell software provides the framework and
applications for managing, maintaining and accessing the information and
services of these networks.

Today, businesses are rapidly developing corporate intranets that leverage
the broad range of capabilities of the Internet. Novell has oriented all of its
products and services to Internet standards and offers the expertise to make
them work in various environments, enabling customers to increase the
performance of traditional local and wide area networks.

PRINCIPAL MARKETS AND SEGMENT AND GEOGRAPHIC INFORMATION

Novell sells its products, technologies and solutions primarily to
large-scale corporations, government entities, educational institutions,
resellers and distributors both domestically and internationally. The Company
has traditionally operated in one business segment, directory-enabled networking
software and services. All products, technologies and solutions were evaluated
as a single unit. Segment disclosures and geographical information for fiscal
years 2001, 2000, and 1999 are presented in Part II, Item 8, Footnote O to the
notes to the consolidated financial statements of this report, which is
incorporated by reference into this Part I, Item 1. As the Company integrates
Cambridge and completes its restructuring, it is analyzing its business to
determine how to best evaluate performance and operating results. This may lead
to changes in segment disclosures during fiscal 2002.

PRODUCTS, TECHNOLOGIES AND SOLUTIONS

Net Directory Services. Novell's Net Directory business includes all of
Novell's eDirectory solutions as well as DirXML(TM), iChain(R), SecureLogin and
Novell Modular Authentication Service (NMAS(TM)).

Novell eDirectory 8.5 is a full-service, platform-independent directory
that serves as the foundation for a myriad of directory-enabled services. The
number of directory-based applications is rapidly increasing, many of which
provide crucial e-business functionality such as automated business-relationship
management, supply-chain management, and electronic storefronts. Other services
that directory-enabled products can

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provide include automated provisioning, enhanced security, customer profiling,
electronic wallets, automated notification systems, customized Web interfaces
and virtual private networks (VPNs). Many application service providers (ASPs),
Internet service providers (ISPs), software developers, and other companies that
aggressively compete in the Internet economy have made eDirectory their
directory of choice. Novell's eDirectory product significantly simplifies the
complexities of managing users and resources in a mixed Win2000, NT, NetWare(R),
UNIX* and Linux* environment. It is a secure, scalable, cross-platform directory
service, allowing organizations to centrally store and manage information across
all networks and operating systems, and leverage existing IT investments.

DirXML 1.0, Novell's powerful data-sharing and synchronization solution,
automatically distributes new and updated information across every designated
application and directory on a network ensuring that trusted e-business
customers, partners, and suppliers are accessing consistent information,
regardless of the applications and directories to which they have access. DirXML
significantly reduces costs while leveraging the existing network
infrastructure. No modification or consolidation of existing applications,
directories, or databases is necessary. Information is entered into any
designated directory and DirXML updates it across the entire network. For
companies with hundreds of directories spread across multiple applications, this
can mean a potential savings of thousands of hours and significant cost
reductions.

Novell iChain is an identity-based security solution that controls access
to application, Web and network resources across technical and organizational
boundaries. iChain separates security from individual applications and Web
servers, enabling single-point, policy-based management of authentication and
access privileges throughout the Net. This optimizes productivity in the
development of eBusiness applications by leveraging fine-grained security that
transcends firewalls. As a result, businesses can simplify the management of Net
access security, based on identities and control the use of digital assets
across the extended enterprise.

Novell SecureLogin is a directory-integrated authentication solution that
delivers reliable, single sign-on access across multi-platform networks. Novell
SecureLogin simplifies password management by eliminating the need for users to
remember more than one password. Once a user has officially logged into the
network, Novell SecureLogin automatically authenticates that user to the
applications and data used during a network session. Novell SecureLogin delivers
single sign-on functionality to virtually every application and environment,
which simplifies administration and substantially reduces costs.

Novell Modular Authentication Service 2.0 is an extensible security product
that offers an easy way to centrally manage multiple authentication methods
across a network. With Novell Modular Authentication Service, stronger forms of
authentication and authorization can be implemented to secure critical corporate
resources. Novell Modular Authentication Service also helps remove the
administrative overhead involved with maintaining password information
throughout an organization. By supporting the leading smart card, token,
biometric and digital-certificate vendor's authentication products, Novell
Modular Authentication Service provides a way to centrally and easily manage
authentication methods.

Net Management Services. Novell's Net Management Services business
includes all NetWare products, collaboration products (GroupWise(R) and Novell
Internet Messaging System(TM) (NIMS(TM))), Novell Portal Services,
BorderManager(R), and ZENworks(R).

Novell NetWare 6 is the Net services software solution that offers secure
non-stop access to core network resources. With NetWare 6, access to files,
printers, directories, e-mail and databases across all types of networks,
storage platforms and client desktops is seamless. NetWare 6 leverages the
powerful Novell eDirectory product, allowing easy management of networks from
virtually any Web-enabled wireless device or traditional desktop computer.
NetWare 6 also supports open Internet standards and includes innovative,
browser-based Net services. NetWare 6 revolutionizes file access and management
by incorporating Novell iFolder(TM), a unique Net services solution that enables
access to files -- from anywhere, at anytime -- through virtually any
Web-enabled device. NetWare 6 also includes Novell iPrint, a printing solution
that provides

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global access to print resources through a standard Web browser, which helps
simplify, secure and accelerate document printing processes.

GroupWise 6 is a secure, dynamic collaboration solution that offers
traditional and deskless users support for any communication over intranets,
extranets and the Internet. GroupWise 6 utilizes industry-leading technology to
accelerate corporate productivity. GroupWise 6 includes the only bundled
wireless solution in the industry, Novell GroupWise Wireless, which runs on any
device that supports Wireless Access Protocol (WAP). The addition of this
wireless solution increases the scope of how and where collaboration takes
place. With GroupWise 6 and a supported wireless device -- including a wireless
telephone, a personal digital assistant (PDA) or a wireless laptop
computer -- even deskless workers can take advantage of the collaboration
services provided by GroupWise 6.

Novell Internet Messaging System (NIMS) 3.0 is a scalable, high-performance
e-mail and calendaring system that is based on Internet-standard messaging and
security protocols. An essential component of Novell's one Net vision, NIMS
simplifies the complexities of eBusiness communication and provides the power
and flexibility organizations need to succeed in the Net economy. NIMS allows
users to connect to a scalable, secure e-mail and calendaring system -- from
anywhere, at anytime -- while driving down the costs associated with
incorporating a high-performance messaging system. In addition, NIMS
dramatically simplifies e-mail administration: administrators use it to
streamline internal communications and optimize the use of hardware resources.

Novell Portal Services reduces the time and complexity of deploying secure,
personalized portals to every member of an organization. These portal solutions
give each user access to the most up-to-date information, news, applications,
and Net services, regardless of the user's location or Web-enabled device. As a
result, users and work groups always have the latest information at their
fingertips, allowing them to make better decisions, to act sooner, and to
increase their productivity. Novell Portal Services offers a simple way to
consolidate and present data that has, traditionally, been difficult and
expensive to integrate and share.

BorderManager Enterprise Edition 3.6 is a suite of network services used to
connect a network securely to the Internet or any other network. It improves
network performance and security at the borders between networks. BorderManager
controls outside access to intranets and user access to the Internet. It allows
remote access to intranets and the Internet and can establish a VPN using the
Internet. It also accelerates access to content on both intranets and the
Internet. BorderManager supports VPNs over Network Address Translation (NAT)
devices, enabling cable modem and DSL customers with NAT to work from home. It
also supports cookie-based session identifiers for customers with NAT and
Citrix* servers. This means that organizations running a thin-client environment
have control over which Web sites their employees can access.

The ZENworks (Zero Effort Networking) product family consists of two
revolutionary products that protect the integrity of networks. Built to leverage
Novell eDirectory, ZENworks products centralize, automate, and simplify every
aspect of network management from distributing vital information across the
enterprise to maintaining consistent policies on desktops, servers, and devices.
ZENworks capacity is not limited to the internal corporate network; customers
can also exercise centralized control of network elements behind the firewalls
of their business partners or on the Internet. ZENworks for Desktops 3 is
powerful, directory-enabled software that automates workstation management and
application deployment which saves administrators countless hours of work.
ZENworks for Servers 2 eliminates the need for network administrators to
configure each server manually, especially servers at remote sites. Using the
eDirectory structure, it enforces consistent server policies across a network
and corrects policies when they are inadvertently altered.

Volera(TM) Net Content Services. Volera, a majority-owned subsidiary of
Novell, provides content networking products and services that improve the web
experience through high-speed delivery and intelligent management of rich web
content.

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Volera's Excelerator product is a robust software platform that accelerates
the delivery of web content. Internet-enabled organizations that deploy Volera
Excelerator can gain customer loyalty and increase employee productivity by
significantly decreasing Internet wait times. Volera Excelerator-based
appliances demonstrate superior performance at independent caching benchmark
events.

Media Excelerator is an add-on to Volera Excelerator product that allows
customers to cache and split streaming media files. Supported protocols include
Real*, Quicktime*, and Windows Media*. Volera's Secure Excelerator provides
customers with the ability to cache and accelerate the delivery of secure
content.

The Velocity Management Suite allows users to manage an entire Volera
Excelerator-powered network, and the content it delivers, from a single
interface. The suite consists of three products: System Controller, for
managing, configuring, and controlling the customer's internet infrastructure;
Content Controller, which allows users to control and automate the delivery of
content; and Content Accountant, which when integrated with leading billing
software provides customers with the data needed for bill-backs and usage
charges.

Velocity CDN(TM) aggregates the above product suite into a comprehensive,
end-to-end software solution that comprises all of the delivery, management and
services capabilities needed for intelligent content networking.

Finally, Volera's services organization delivers the knowledge and
expertise customers require in order to architect, integrate, and operate
content networking solutions.

Novell Consulting(SM) Services. The acquisition of Cambridge Technology
Partners in July 2001 resulted in a significant expansion of Novell's Consulting
Services. The combined Consulting Services group helps organizations solve
complex business challenges, simplify their systems and processes, and capture
new opportunities.

Novell consultants deliver advanced consulting expertise to Novell's
customers and partners throughout the world. Using proven methodologies, Novell
consultants design and deliver technology-based business solutions focusing on
Internet, intranet, extranet, and e-Business. Novell Consulting also delivers
expertise in design, planning, and implementation of Novell's Net Directory, Net
Management, and Net Content products, allowing all types of networks to work
together as one Net.

Cambridge consultants perform technology and consulting services to help
clients develop and accelerate their transition to Internet-based e-business
solutions and processes. Cambridge consultants also provide systems integration
services as well as operations management consulting to help transform clients
into eBusinesses. Working in collaboration with large corporations and middle
market companies, Cambridge combines a deep understanding of New Economy issues
with integrated, end-to-end services, and a proven track record of shared risk
and rapid delivery.

Cambridge's service offerings generally include Digital Business Strategy,
eCommerce, eCustomer Relationship Management, supply Chain Management,
eEnterprise Resource Management, User Experience Design, and Technology.

Novell Customer Services. Novell Customer Services is composed of Technical
Services and Education. Novell Technical Services has an established
infrastructure worldwide with support centers in the United States, Europe and
Asia. Novell Technical Services(SM) offers a wide variety of flexible support
offerings, bringing critical network issues to a quick and efficient resolution.
Premium Services includes around-the-clock direct access to Novell's most
experienced engineers. Dedicated Support Engineer, Primary Support Engineer, and
Account Management programs allow customers to build an ongoing support
relationship with Novell.

Novell Education is a pioneer in the networking certification arena. Novell
Education has issued over 700,000 certifications to IT professionals around the
world. Novell Education continues to demonstrate innovative leadership in the IT
certification and training industry with new programs focused on Novell's

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Directory and on the Internet. In addition to the Certified Novell Engineer(SM)
(CNE(R)) certification program, Novell Education offers a Certified Directory
Engineer(R) (CDE(SM)) certification program. Both CNE and CDE students receive
advanced technical telephone support (Level II) from Novell. Resellers,
independent support organizations, or Novell Support Organizations (NSOs) may
employ CNE and CDE certification holders.

Novell Education also offers education to end users through nearly 700
independent Novell Authorized Education Centers(SM) (NAEC(SM)) and 600 Novell
Education Academic Partners(SM) (NEAP(SM)) worldwide, which use Novell-developed
courses to instruct students in the use and maintenance of Novell products.

Information regarding revenues for various product categories is
incorporated by reference from Note O to the Notes to Consolidated Financial
Statements in Part II into this Part I, Item 1.

PROGRAMS

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

Certified Novell Engineer Program. Through the Certified Novell Engineer
(CNE) program, Novell is strengthening the networking industry's Level I support
self-sufficiency. CNE certificate holders are individuals who receive high-level
training, information, and high-level skills to administer Novell and other
networks.

Certified Directory Engineer Program. Through the Certified Directory
Engineer (CDE) program, Novell is strengthening the directory industry's Level
II support self-sufficiency. CDE certificate holders are individuals who receive
high-level directory training and skills to administer eBusinesses and
eDirectories in the Net economy.

Professional Education Program (PEP). PEP offers both instructor led and
e-Learning solutions to customers directly and through Novell's Authorized
Education Channel. PEP delivers courses that provide a thorough understanding of
the implementation, configuration, and administration of the subject matter
being presented. In addition, PEP offers Advanced Technical Training(TM) (ATT)
at an engineering level and customized training solutions. The ATT course
subject matter will cover support issues, in-depth architectural reviews, and
advanced enterprise solutions.

STRATEGIC RELATIONSHIPS

Development Partners. When customers request that Novell add a new service
or function to its products, Novell investigates the most effective way to
deliver that functionality to the user. In certain situations, Novell will
determine that the best way to add a new service or function to its products is
to form a strategic relationship with a company that has expertise in that area.
By forming strategic relationships, the combination of Novell's core expertise
in Net services solutions and the strategic partner's expertise in the given
product area combine to deliver a better solution faster than if Novell
attempted to develop it alone.

Systems Partners. Novell forms strategic relationships with companies who
have complementary software and hardware. The resulting solution is a powerful
combination of products that deliver enterprise-wide connectivity solutions.
These strategic partners include system suppliers like IBM, Compaq and HP, as
well as system integration experts like Deloitte & Touche, Cap Gemini Ernst &
Young, and Perot Systems.

Application Partners. Novell works closely with application developers to
provide integrated software products and support for end users. As Net services
and directory solutions grow in importance, this program is designed to help
assure broad availability of well integrated, multi-vendor applications.

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

Worldwide Service and Support. The Company is a global corporation,
servicing its customers from offices located throughout the world. It is
committed to providing service and support on a worldwide basis to its resellers
and to their end-user customers. The Company has established agreements with
third-party service vendors to expand and complement the service provided
directly by the Company's service personnel and the Company's resellers.

Multiple Channel Distribution Network. The Company markets and delivers its
products through a broad range of distributors, dealers, value-added resellers,
systems integrators, and OEMs as well as to major end users.

PRODUCT DEVELOPMENT

Due to the rapid pace of technological change in its industry, Novell
believes that its future success will depend, in part, on its ability to enhance
and develop its software products and deliver solutions that satisfactorily meet
dynamic market needs. Product development expenses for the fiscal years 2001,
2000, and 1999, are discussed in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this report,
which is incorporated by reference into this Part I, Item 1.

Novell's move to a business unit environment has resulted in the product
development groups having greater direct interaction with customers. Novell's
acquisition of Cambridge provided the consulting groups the potential to better
integrate Novell's products within the customer's business and to provide
solutions our customers require. It has also led to increased interaction
between business groups within Novell, resulting in better solutions for
customers. Business unit developers work with consulting and support to solve
specific customer problems and in the process generate integrated solutions that
can be used more broadly.

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

SALES AND MARKETING

Novell markets its networking and Net Services products through
distributors, dealers, vertical market resellers, systems integrators, and OEMs
who meet the Company's criteria, as well as to major end users. In addition, the
Company conducts sales and marketing activities and provides technical support,
training, and field service to its customers from its offices in San Jose,
California; Boston, Massachusetts; Provo, Utah; and from its 50 U.S. and 85
international sales offices.

Distributors. Novell has established a network of independent distributors,
which resell the Company's products to dealers, VARs, and computer retail
outlets. As of December 31, 2001, there were two U.S. distributors and
approximately 40 international distributors.

Dealers. The Company also markets its products to large-volume dealers and
regional and national computer retail chains.

VARs and Systems Integrators. Novell also sells directly to VARs and
systems integrators who market data processing systems to vertical markets, and
whose volume of purchases warrants buying directly from the Company.

OEMs. The Company licenses its systems software to domestic and
international OEMs for integration with their products.

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End Users. Generally, the Company refers prospective end-user customers to
its resellers. However, the Company has the internal resources to work directly
with major end users and has developed U.S. and international master license
agreements with approximately 2,000 customers to date. Additionally, some
upgrade products are sold directly to end users. Customers can also purchase
some products and services through Novell's commercial website, ShopNovell(SM),
or be directed to a Dealer or Reseller near their geographic location.

International Sales. In fiscal 2001, 2000, and 1999, approximately 44%,
43%, and 45%, respectively, of the Company's net sales were to customers outside
the U.S. Approximately 45% of all international sales have been invoiced by the
Company in U.S. dollars. The exceptions to the U.S. dollar invoicing are
Japanese Yen sales through the Company's joint venture in Japan, Indian Rupee
sales through the Company's joint venture in India, certain sales from its
distribution center in Dublin, Ireland and certain local office billings. No one
foreign country accounted for more than 10% of net sales in any period. For
information regarding risk related to foreign operations, see Part II, Item 7,
"Risk Factors Affecting Future Results of Operations," which information is
incorporated by reference into this Part I, Item 1.

Major Customers. In fiscal 1999, the Company had one multinational
distributor, which accounted for 11% of net sales; otherwise, no customer
accounted for more than 10% of revenue in any of the last three fiscal years.

Marketing. The Company's marketing activities include distribution of sales
literature, press releases, advertising, periodic product announcements, support
of NetWare user groups, publication of technical and other articles in the trade
press, and participation in industry seminars, conferences, and trade shows. The
marketing department of the Company employs technical laboratories, which test
and evaluate networked computer equipment and individual devices. The knowledge
derived from these laboratories is the basis for the technical literature
published by the Company. These activities are designed to educate the market
about Net services solutions in general, as well as to promote the Company's
products. Through the Professional Developers Program, the Company strongly
supports independent software and hardware vendors in developing products that
work with Novell Net services solutions. Thousands of multiuser application
software packages are now compatible with Net services. In March 2001, the
sixteenth annual BrainShare(R) Conference was held to inform and educate
developers about Novell product strategy, Novell open architecture programming
interfaces, and Novell third-party product certification programs.

MANUFACTURING SUPPLIERS

The Company's products, which consist primarily of software diskettes and
manuals, are duplicated by outside vendors. This allows the Company to minimize
the need for expensive capital equipment in an industry in which multiple
high-volume manufacturers are available. The Company does not rely on a single
provider for its raw materials, nor has it encountered problems with its
existing suppliers.

BACKLOG

Lead times for the Company's products are typically short. Consequently,
the Company does not believe that backlog is a reliable indicator of future
sales or earnings. The Company's practice is to ship its products promptly upon
the receipt of purchase orders from its customers and, therefore, backlog is not
significant.

COMPETITION

Novell competes in a highly challenging market for computer software. One
pervasive factor underlying all of the Company's business endeavors is the
presence of Microsoft in all sectors of the software business, and Microsoft's
dominance in many of those sectors.

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In a finding upheld by the Circuit Court for the District of Columbia, the
United States District Court found that Microsoft violated Section 2 of the
Sherman Act by unlawfully acting to maintain its monopoly over desktop operating
systems. The Company believes that Microsoft is exploiting its desktop operating
monopoly in a way that is designed to extend its market power into the market
for server operating systems, and to claim control of network and web services
such as authentication, using many of the same anti-competitive practices found
by the United States District Court to be in violation of the nation's
anti-trust laws. The Company is concerned that the Revised Proposed Final
Judgment of the litigation between the Department of Justice and Microsoft will
not benefit competition or consumers in a meaningful way and, if approved, could
result in continued harm to the Company.

Additionally, the Company does not have the product breadth and market
power of Microsoft. Microsoft's ability to ship networking products with
features and functionality that compete with Novell's, together with its ability
to offer incentives to customers to purchase certain products in order to obtain
favorable sales terms or necessary compatibility or information with respect to
other products, may significantly inhibit Novell's ability to grow its business.
Microsoft has significant financial resources, which could allow it to
aggressively price its products and services for long periods of time to the
potential detriment of competitors. Microsoft in the past has also employed
tactics that limit or block effective and efficient interoperability with
Novell's products. Microsoft frequently bundles software features into its
operating system for free which compete directly with stand-alone products from
Novell. As Microsoft creates new operating systems and applications, there can
be no assurance that Novell will be able to ensure that its products will be
compatible with those of Microsoft.

Although these market conditions and the judgments reached in litigation
concerning Microsoft may affect overall Novell performance, the Company believes
its strong product offering and "One Net" business strategy will be competitive
in the marketplace. Additionally, if the more meaningful relief being sought by
the nine litigating states is imposed on Microsoft, there could be a restoration
of competition in the marketplace that would benefit Novell.

The market for consulting services is highly competitive due to such
factors as the existence of several large consulting firms specializing in the
information systems area such as Compaq Computer Corporation, Hewlett-Packard
Company, IBM, Accenture, Cap Gemini and the three remaining consulting arms of
the "Big Five" accounting firms. Many of these companies have greater financial,
technical and marketing resources and greater name recognition in the consulting
area, which could inhibit the Company's ability to grow its consulting business.

COPYRIGHT, LICENSES, PATENTS AND TRADEMARKS

The Company relies on copyright, patent, trade secret and trademark law, as
well as provisions in its license, distribution and other agreements in order to
protect its intellectual property rights. The Company's portfolio of patents,
copyrights and trademarks as a whole are material to the Company's business; no
one piece of intellectual property is critical to the Company's business, so no
individual piece is discussed on its own. The Company has been issued what it
considers to be valuable patents and has numerous other patents pending. No
assurance can be given that the patents pending will be issued or, if issued,
will provide protection for the Company's competitive position. The Company has
an increasing concern that computer industry companies that have huge financial
resources and patent portfolios such as Lucent, AT&T, Microsoft, and IBM, will
increasingly assert patent infringement claims against smaller companies such as
Novell. While Novell has no reason to think it would not have defensible claims,
the cost and time of defending such claims can be significant. Although Novell
intends to protect its patent rights vigorously, there can be no assurance that
these measures will be successful or that the claims on any patents held by the
Company will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The loss of
patent protection on the

Novell annual report 2001 9
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Company's technology or the circumvention of its patent protection by
competitors could have a material adverse effect on the Company's ability to
compete successfully in its business.

The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. The Company has from
time to time had infringement claims asserted by third parties against it and
its products. While there are no known or pending threatened claims against the
Company that are expected to result in unsatisfactory resolution that would have
a material adverse effect on the Company's results of operations and financial
condition, there can be no assurance that such third party claims will not be
asserted, or if asserted, will be resolved in a satisfactory manner. In
addition, there can be no assurance that third parties will not assert other
claims against the Company 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 the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company.

In the event of an adverse result in any such litigation, the Company could
be required to expend significant resources to develop non-infringing technology
or to obtain licenses to the technology, which is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available. In addition, the laws
of certain countries in which Novell's products are or may be developed,
manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.

Although the Company does incorporate software it licenses from third
parties into its products and its solutions, no one license is critical to the
Company's business, so no individual license is discussed on its own.

SEASONALITY

The Company often experiences a higher volume of sales at the end of each
quarter and during the fourth quarter.

EMPLOYEES

As of December 31, 2001, the Company had 6,521 permanent and temporary
employees. The functional distribution of its employees was: sales and
marketing -- 1,446; product development -- 1,293; general and
administrative -- 913; service, consulting, education, and operations -- 2,869.
Of these, 3,376 employees are in locations outside the U.S. All other Company
personnel are based at the Company's facilities in Utah, California,
Massachusetts, and various U.S. field offices. None of the employees is
represented by a labor union, and the Company considers its employee relations
to be good.

Competition for qualified personnel in the computer industry is intense. To
make a long-term relationship with the Company rewarding, Novell endeavors to
give its employees challenging work, educational opportunities, competitive
wages, sales commission plans, bonuses, and opportunities to participate
financially in the ownership and success of the Company through stock option and
stock purchase plans.

ADDITIONAL FACTORS AFFECTING FINANCIAL RESULTS AND STOCK PRICE

In addition to factors described above under "Competition" and "Copyrights,
Licenses, Patents, and Trademarks" that may adversely affect the Company's
results of operations and stock price, other factors may also adversely affect
the Company's results of operations and stock price, including but not limited
to:

- competition for qualified employees

- delays in the introduction of new products

- success of new products or technologies

10 Novell annual report 2001
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- successful integration of Cambridge and Novell

- stock market fluctuations unrelated to Company performance

For further discussion of risks the Company faces, please refer to the
section entitled "Risk Factors Affecting Future Results of Operations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this filing, which information is incorporated
by reference to Part I, Item 1.

ITEM 2. PROPERTIES

The Company owns and occupies approximately 872,000 square feet of office
space on 46 acres in Provo, Utah, which is the Company's corporate headquarters
and is also used as a product development center. Additionally, the Company owns
approximately 48 acres of land in San Jose, California on which it owns a
545,000 square-foot office complex, which is used as an administrative office,
of which approximately 258,000 rentable square-feet is subleased to various
tenants.

The Company also owns 218,873 square feet of office space and leases an
additional 235,274 square feet of office space in a business complex in Orem,
Utah. The Company leases 120,407 square feet of the owned space in Orem to
various subtenants. Volera, a majority-owned subsidiary of Novell, occupies
approximately 27,000 square feet of the leased space in Orem. The balance of the
owned and leased space in Orem is unoccupied.

The Company has the ability to build on its land in San Jose, California,
and in Provo and Orem, Utah.

The Company leases a 177,000 square-foot office building in Cambridge,
Massachusetts of which it occupies approximately 100,000 square feet, which is
used as administrative offices, and subleases approximately 21,000 square feet.
The balance of space in Cambridge is unoccupied.

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

Internationally, the Company owns a 84,650 square-foot office building in
the United Kingdom, a 42,000 square-foot building in the Netherlands and a
18,000 square-foot building in Johannesburg, South Africa, all of which are used
for administrative offices.

The Company leases sales and support offices in Arizona, California,
Colorado, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan,
Minnesota, Missouri, New York, Ohio, Oregon, Pennsylvania, Tennessee, Texas,
Utah, Virginia, and Washington. The Company also leases an office in Berkeley
Heights, New Jersey, which is used for certain product development efforts by
Volera.

The Company has subsidiaries in Argentina, Australia, Austria, Belgium,
Brazil, Canada, Columbia, Czech Republic, Denmark, Finland, France, Germany,
Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Puerto Rico,
Russia, Singapore, Spain, Sweden, Switzerland, Thailand, Taiwan, United Kingdom,
and Venezuela -- each of which leases its facilities.

The terms of the above leases vary from month-to-month to up to 23 years.
The Company believes that its existing facilities are adequate to meet its
current requirements and it anticipates that suitable additional or substitute
space will be available, as necessary, pursuant to terms that are favorable to
the Company.

ITEM 3. LEGAL PROCEEDINGS

In February 1998, a suit was filed in the U.S. District Court, District of
Utah, against Novell and certain of its officers and directors, alleging
violation of federal securities laws by concealing the true nature of Novell's
financial condition and seeking unspecified damages. The lawsuit was brought as
a purported class

Novell annual report 2001 11
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action on behalf of purchasers of Novell common stock from November 1, 1996,
through April 22, 1997. The Federal District Court dismissed the original
complaint November 2, 2000; however, the plaintiffs filed an amended complaint
November 22, 2000 in an effort to remedy inadequacies in the original complaint.
Novell has moved the court to dismiss the amended complaint on the same grounds
relied on in the court's dismissal of the original complaint. If the case
continues, Novell intends to vigorously defend against the allegations. While
there can be no assurance as to the ultimate disposition of the lawsuit, Novell
does not believe that the resolution of this litigation will have a material
adverse effect on its financial position, results of operations, or cash flows.

In January 2001, Novell began a jury trial in a suit filed against Novell
by Lantec, Inc. in January 1995 in the U.S. District Court, the District of
Utah, for alleged anti-trust violations arising from Novell's acquisition of the
GroupWise technology. The plaintiffs were seeking to demonstrate damages of $300
million. On April 19, 2001, the judge ruled in favor of Novell and dismissed the
original complaint; however, on June 8, 2001 the plaintiffs filed a Notice of
Appeal. Novell intends to vigorously defend against the claims. While there can
be no assurance as to the ultimate disposition of the lawsuit, Novell does not
believe that the resolution of this litigation will have a material adverse
effect on its financial position, results of operations, or cash flows.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

Jack L. Messman

Jack L. Messman became President and Chief Executive Officer of Novell in
July 2001 in connection with the Cambridge acquisition, and was appointed
Chairman of the Board of Directors in November 2001. He has been a director of
Novell since 1985. From August 1999 to July 2001, Mr. Messman was President and
Chief Executive Officer of Cambridge. Mr. Messman was the Chief Executive
Officer of Union Pacific Resources Group Inc., an energy company, from 1991 to
August 1999 and its Chairman from 1996 to August 1999. Mr. Messman is also a
director of Metallurg Inc., Safeguard Scientifics, Inc., RadioShack Corporation,
and USDATA Corporation.

12 Novell annual report 2001
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Stewart G. Nelson

Stewart G. Nelson joined Novell in June 1994 and has served in various
product development positions. From October 1996 to September 1997 he served as
Vice President of Applications. In October 1997, he was elected a corporate
officer as Senior Vice President of Application. In June 1998 he became Senior
Vice President of Product Development. In November 1999 he was named Senior Vice
President, Marketing and Products and in November 2000 he was appointed
Executive Vice President and Chief Operating Officer.

Ronald C. Foster

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

Alan J. Friedman

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

Joseph A. LaSala, Jr.

Joseph A. LaSala, Jr. become Senior Vice President, General Counsel and
Secretary of Novell in July 2001 in connection with the Cambridge acquisition.
From March 2000 to July 2001, Mr. LaSala served as Senior Vice President,
General Counsel and Secretary of Cambridge. Prior to joining Cambridge, Mr.
LaSala served as Vice President, General Counsel and Secretary of Union Pacific
Resources Group Inc. from January 1996 to March 2000.

Carl S. Ledbetter, Ph.D.

Carl S. Ledbetter, Ph.D. has served as Senior Vice President and Chief
Technology Officer of Novell since May 2000. Dr. Ledbetter joined Novell in
October 1999 as Senior Vice President, Business and Corporate Development. From
January 1996 to October 1999, Dr. Ledbetter served as Chairman of the Board of
Directors and Chief Executive Officer of Hybrid Networks, Inc., a manufacturer
and supplier of broadband access products for wireless systems. From April 1993
to January 1996, Dr. Ledbetter served as president of the consumer products
division of AT&T, and from October 1991 to April 1993, Dr. Ledbetter served as
the head of the PC networking division of Sun Microsystems, a computer
manufacturer. In July 2000, Dr. Ledbetter entered into a settlement agreement in
the form of a consent decree with the Securities and Exchange Commission (the
"SEC") in connection with the SEC's investigation of Hybrid Networks, Inc. of
which Dr. Ledbetter served as Chairman, President and Chief Executive Officer,
generally concerning alleged violations of the federal securities laws. Without
admitting or denying any violations of the federal securities laws, Dr.
Ledbetter agreed to pay a civil fine and entered into a permanent injunction
prohibiting him from knowingly circumventing or failing to implement a system of
internal accounting controls and from engaging in violations of certain
specified reporting provisions and accounting control provisions of the federal
securities laws.

Ralph T. Linsalata

Ralph T. Linsalata joined Novell as Senior Vice President, Venture
Investments in July 2001 in connection with the Cambridge acquisition. Prior to
that, Mr. Linsalata joined Cambridge in December 1999

Novell annual report 2001 13
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and served as Executive Vice President, NEWCO Investments. Before joining
Cambridge, Mr. Linsalata served as a senior vice president of Hill Holliday
Advertising, Inc., an advertising agency, holding positions as a Strategic
Consultant and Managing Director of that company's interactive group since March
1997. From 1994 to 1997, Mr. Linsalata served as Chief Executive Officer of
Weston Corporate Development, Inc.

Gary F. Schuster

Gary F. Schuster became Senior Vice President, Communications in July 2001
in connection with the Cambridge acquisition. From August 2000 to July 2001, Mr.
Schuster was Senior Vice President, Communications for Cambridge. Prior to
joining Cambridge, Mr. Schuster served as Vice President for Corporate Relations
at Union Pacific Corporation, a transportation company, from October 1987 to
August 2000.

14 Novell annual report 2001
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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Novell's common stock trades in the Nasdaq National Market under the NASDAQ
symbol "NOVL." The following chart sets forth the high and low closing prices of
the Company's Common Stock during each quarter of the last two fiscal years:

No dividends have been declared on the Company's Common Stock. The Company
has no current plans to pay cash dividends and intends to retain its earnings
for use in its business. There were 10,744 shareholders of record at January 22,
2002.

Novell annual report 2001 15
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]ITEM 6. SELECTED FINANCIAL DATA

See the Management's Discussion and Analysis of Financial Condition and
Results of Operations section for discussion of data comparisons.
- ---------------
(1) Excludes restructuring charges of $80.2 million and integration charges of
$8.7 million in fiscal 2001, restructuring charges of $47.9 million in
fiscal 2000, and restructuring charges of $55.3 million in fiscal 1997.

(2) Excludes items noted in footnote (1) and investment impairment charges of
$208.4 million in fiscal 2001.

(3) Excludes items noted in footnotes (1) and (2), the tax adjustments related
to each item, and the cumulative effect of an accounting change of $11.0
million in fiscal 2001.

16 Novell annual report 2001
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") and other parts of this Form 10-K contain
forward-looking statements that involve risks and uncertainties. All
forward-looking statements are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results may differ materially
from the results discussed in such forward-looking statements as a result of a
number of factors, which include, but are certainly not limited to, those set
forth below in the MD&A sections entitled "Risk Factors Affecting Future Results
of Operations," "Euro Conversion," "Financial Market Risks," and those factors
set forth in sections of Item 1 of this Form 10-K entitled "Competition,"
"Copyrights, Licenses, Patents and Trademarks" and "Additional Factors Affecting
Earnings and Stock Price."

INTRODUCTION

Novell Inc., ("Novell" or the "Company") provides eBusiness solutions and
Net services software designed to secure and power the networked world. Novell
and its services division, Cambridge Technology Partners, help organizations
solve complex business challenges, simplify their systems and processes, and
capture new opportunities. Novell provides worldwide channel, consulting,
education and developer programs to support its offerings.

The Company markets its products and services through 50 U.S. and 85
international sales offices. The Company licenses its products through
site-license agreements that are either sold directly by Novell, or service
providers and software distribution channel partners. The Company also
distributes licenses as packaged software products that are resold by systems
integrators and other value-added resellers. In addition, Novell products are
licensed to original equipment manufacturers.

Changes in the economic and business environment for network software and
consulting services have occurred in the last several years, which have led to
strategic and operational changes at Novell. The Company has evolved its
business to focus on eBusiness solutions and Net services software applications,
which support highly distributed network solutions and capitalize on the growth
of the Internet. Novell has expanded its Net services offerings around open
Internet standards and its own eDirectory(TM) network infrastructure products.
The Company's education and training, service and support, and consulting
business have also been refocused and expanded to provide support for new
eBusiness and Net services based solutions.

On July 10, 2001, the Company acquired Cambridge Technology Partners
(Massachusetts), Inc. ("Cambridge"), a technology consulting company focused on
helping its customers develop and accelerate their transition to eBusiness
solutions and processes. The acquisition of Cambridge helped support the
Company's strategy of providing a foundation for e-business with Novell Net
services software and eDirectory products.

CRITICAL ACCOUNTING POLICIES

The Company considers certain accounting policies related to revenue
recognition and impairment of long-lived assets and valuation of deferred tax
assets to be critical policies due to the estimation processes involved in each.

Revenue recognition. The Company's IT consulting services business derives
a significant portion of its revenue from fixed-price, fixed-time contracts,
which require the accurate estimation of the cost, scope and duration of each
engagement. Revenue and the related costs for these projects are recognized on
percentage of completion, using the time-to-completion method to measure the
percent complete with revisions to estimates reflected in the period in which
changes become known. If the Company does not accurately estimate the resources
required or the scope of work to be performed, or does not manage its projects
properly within the

Novell annual report 2001 17
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planned periods of time or satisfy its obligations under the contracts, then
future consulting margins may be significantly and negatively affected or losses
on existing contracts may need to be recognized. Any such resulting reductions
in margins or contract losses could be material to the Company's results of
operations.

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

Impairment of long-lived assets and valuation of deferred tax assets. The
Company's long-lived assets include long-term investments, goodwill and other
intangible assets. At October 31, 2001, the Company had $115 million of
long-term investments, $188 million of goodwill and other intangible assets, and
$94 million of net deferred tax assets, current and non-current, accounting for
approximately 21% of the Company's total assets. The fair value of the long-term
investments is dependant on the performance of the companies or venture funds in
which the Company has invested, as well as volatility inherent in the external
markets for these investments. In assessing potential impairment for these
investments the Company will consider these factors as well as forecasted
financial performance of its investees. If these forecasts are not met the
Company may have to record additional impairment charges not previously
recognized. During the year ended October 31, 2001, the Company recognized $177
million of impairment losses related to its long-term investments.

In assessing the recoverability of the Company's goodwill and other
intangibles the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. On November 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and will
be required to analyze its goodwill for impairment issues during the first six
months of fiscal 2002, and then on a periodic basis thereafter. During the year
ended October 31, 2001, the Company did not record any impairment losses related
to goodwill and other intangible assets.

Carrying value of the Company's net deferred tax assets assumes that the
Company will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets resulting in
additional income tax expense in the Company's consolidated statement of
operations. Management evaluates the realizability of the deferred tax assets
quarterly and assesses the need for additional valuation allowances quarterly.
During the year ended October 31, 2001, the Company recorded $174 million of
valuation allowances related to its net deferred tax assets.

RESULTS OF OPERATIONS

Acquisition

On July 10, 2001, the shareholders of Cambridge approved the acquisition of
Cambridge by Novell. The Company issued 0.668 shares of its common stock for
each share of Cambridge common stock outstanding on July 10, 2001. The
transaction was accounted for as a purchase and the fair value of the
consideration was approximately $261.0 million, of which $250.6 million related
to the number of shares exchanged at a per share value of $5.907 (the average
closing price of a share of Novell common stock for the seven trading day

18 Novell annual report 2001
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period beginning three days before the announcement date of the acquisition),
and $10.5 million related to direct transaction costs. The value of the
acquisition was preliminarily allocated as follows (in millions):

Adjusted net assets acquired.......................... $ 81
Goodwill.............................................. 180
----
$261
====

Results of operations for Cambridge are included in Novell's results of
operations beginning July 10, 2001. In accordance with Statements of Financial
Accounting Standards ("SFAS") No. 142, "Business Combinations," issued by the
Financial Accounting Standards Board ("FASB") in June 2001, the Company will not
amortize the goodwill associated with this acquisition. Beginning in fiscal year
2002, the Company will review the goodwill periodically for potential impairment
issues.

Net sales

The Company operates in one business segment, directory-enabled networking
software and services. The Company's products are sold throughout the world. In
the United States, products are sold through direct, OEM, reseller, and
distributor channels. Internationally, products are marketed through
distributors who sell to dealers and end users. The Company's chief
decision-makers, the President and Chief Executive Officer and Executive
Management Committee, evaluate performance of the Company based on total Company
results. Revenue is evaluated based on geographic region and product category.
Separate financial information is not available by product category in regards
to asset allocation, expense allocation, or profitability.

Novell categorizes its products into the following four areas, all within
the directory-enabled networking software and services segment.

- Net Management Services, which includes directory-enabled operating
systems such as NetWare, management and collaboration products, and UNIX
or other royalties

- Net Directory Services, which include NDS(R) eDirectory, DirXML, iChain,
and Single Sign On products

- Volera Net Content Services

- Consulting, Support Services, and Education, which is generated from
customer service, educational products and courses, and consulting,
including Cambridge and Celerant, a subsidiary of Cambridge primarily
focused on management consulting

Net management services revenue was $707 million in fiscal 2001, compared
to $914 million in fiscal 2000 and $1,077 million in fiscal 1999. The decrease
from fiscal 2000 to fiscal 2001 was primarily the result of the decline in sales
of the older NetWare versions 4 and 5 products, partially offset by sales of
NetWare version 6, lower management and collaboration product sales, and lower
UNIX and other royalties. The decrease from fiscal 1999 to fiscal 2000 was due
to the decline in sales of older NetWare versions 3 and 4 and the $36 million
one-time settlement with Caldera in fiscal 1999, partially offset by sales of
Netware version 5 and an increase in management and collaboration product sales.
NetWare sales have been affected by lower sales of boxed product through the
Company's distribution channel, which decreased significantly year over year,
from 27% of total revenue in fiscal 1999 to 8% of total revenue in fiscal 2000
and only 3% of total revenue in fiscal 2001. NetWare licensing revenue has
increased slightly to offset some of this decline. The net management software
product line represented 68% of total revenue in fiscal 2001 compared to 79% of
total revenue in fiscal 2000 and 85% of total revenue in fiscal 1999.

Novell annual report 2001 19
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Revenue from net directory services products was $31 million in fiscal 2001
compared to $28 million in fiscal 2000 and $19 million in fiscal 1999. The
increase in fiscal 2001 revenue compared to fiscal 2000 is primarily the result
of a full year of DirXML and iChain sales. The increase in fiscal 2000 revenue
compared to fiscal 1999 was the result of increased NDS eDirectory sales and a
full year of Single Sign-On sales. Net directory services revenue represented 3%
of total revenue in fiscal 2001 compared to 2% of total revenue in fiscal 2000
and 2% of total revenue in fiscal 1999.

Revenue from Volera net content products was $8 million in fiscal 2001
compared to $7 million in fiscal 2000 and $1 million in 1999. The increase in
fiscal 2001 revenue was due primarily to improved sales and marketing efforts.
During fiscal 2001, Novell completed the formation of Volera, Inc. a majority
owned joint venture among Novell, Inc., Nortel Networks Corp., and Accenture
Ltd. The increase in fiscal 2000 revenue compared to fiscal 1999 was primarily
due to a full year's revenue in fiscal 2000 compared to only one quarter in
fiscal 1999. Volera net content revenues were less than 1% of total revenues in
fiscal 2001, 2000, and 1999.

Consulting, support services, and education revenue was $293 million in
fiscal 2001 compared to $213 million in fiscal 2000 and $175 million in fiscal
1999. The increase in fiscal 2001 revenue compared to fiscal 2000 is primarily
the result of the acquisition of Cambridge, which contributed $62 million from
Cambridge consulting and $33 million from Celerant, and increases in Novell
consulting and services. These increases were offset somewhat by lower Novell
education revenue. The increase in fiscal 2000 revenue compared to fiscal 1999
was primarily the result of the Company's continued focus on expanding the
consulting, support services, and education business. Consulting, support
services, and education revenues were 28% of total revenue in fiscal 2001
compared to 18% of total revenue in fiscal 2000 and 14% of total revenue in
fiscal 1999.

The Company previously recognized revenue related to product sales to
distribution channel partners upon shipment to the partner and provided a
reserve for contractual return obligations and other estimated product returns.
Effective November 1, 2000, the Company changed its method of accounting for
revenue related to these product sales to recognize such revenues upon the
sell-through of the respective product from the distribution channel partner to
the reseller or end user. The Company believes the change in accounting
principle is preferable based on guidance provided in the SEC's Staff Accounting
Bulletin 101. The $11 million ($0.03 per share) cumulative effect of the change
(after reduction for income taxes of $6 million) was included in income in the
first quarter of fiscal 2001. Also, during the three months ended January 31,
2001, the Company recognized $7 million in revenue that was included in the
cumulative effect adjustment at November 1, 2000. The effect of that revenue on
the first quarter was to increase net income by $5 million ($0.01 per share).

Had the Company reported under its previous method of accounting for
revenue recognition, the effect on earnings without consideration of the
cumulative effect of the change would be a decrease in earnings of approximately
$10 million, or $0.03 per share, during fiscal 2001. The pro forma amounts
presented in the consolidated statements of operations were calculated assuming
the accounting change was made retroactively to prior periods.

Sales outside the U.S., comprised of sales to international customers in
Europe, the Middle East, Africa, Canada, South America, Australia, and Asia
Pacific, represented 44% of total revenue in fiscal 2001 compared to 43% of
total revenue in fiscal 2000 and 45% of total revenue in fiscal 1999. Sales
outside the U.S. increased in fiscal 2001 due primarily to the addition of
Cambridge. Sales outside the U.S. decreased in fiscal 2000 from fiscal 1999
primarily due to weak sales in Europe and to the declining value of the Euro and
other European currencies.

Gross profit

20 Novell annual report 2001
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The decrease in gross profit dollars and as a percentage of sales from
fiscal 2000 to fiscal 2001 and from fiscal 1999 to fiscal 2000 is due primarily
to the addition of Cambridge consulting in fiscal 2001, which carries lower
margins, and a change in the mix of sales as software sales decreased and
services and consulting revenues increased, which also typically carry lower
margins.

Operating expenses

Operating expenses decreased in fiscal 2001 compared to fiscal 2000 due
primarily to lower salary costs resulting from the fiscal 2000 and 2001
restructurings and decreased advertising costs, offset somewhat by $37 million
of additional operating expenses related to the addition of Cambridge, $80
million in restructuring charges compared to $48 million in fiscal 2000 and $9
million of integration expense related to the acquisition of Cambridge.
Operating expenses increased in fiscal 2000 compared to fiscal 1999 due
primarily to a $48 million restructuring charge and increased advertising and
promotional spending to promote Novell brand recognition. Operating expenses
also increased as a percentage of net sales in fiscal 2001 and 2000 due to
decreased revenue.

Sales and marketing expenses decreased 10% in fiscal 2001 compared to
fiscal 2000 due primarily to decreased headcount from restructurings and lower
advertising and marketing promotions offset somewhat by Cambridge sales and
marketing costs of approximately $16 million. Sales and marketing expenses
increased 14% in fiscal 2000 compared to fiscal 1999 due primarily to costs
related to sales force training and development and increased spending for
advertising and promotion. In fiscal 2000, the Company ran a large-scale
marketing promotion, including print and television advertising, which it
traditionally had not done. Sales and marketing expenses as a percentage of
sales were higher in fiscal 2001 and 2000 compared to fiscal 1999 primarily due
to lower revenue. Sales and marketing expenses can fluctuate as a percentage of
net sales in any given period due to product promotions, advertising, and other
discretionary expenses.

Product development expenses decreased in total and as a percentage of
sales in fiscal 2001 compared to fiscal 2000 due primarily to lower headcount
resulting from the fiscal 2000 and 2001 restructurings. Product development
expenses decreased slightly in fiscal 2000 from fiscal 1999 due primarily to
decreased headcount. The increase as a percentage of sales from fiscal 1999 to
fiscal 2000 is primarily due to lower sales levels.

General and administrative expenses increased in total and as a percentage
of sales during fiscal 2001 compared to fiscal 2000 primarily due to Cambridge
integration costs, $19 million related to the addition of Cambridge general and
administrative costs during the last four months of fiscal 2001, costs related
to the formation of Volera, and lower revenue. General and administrative
expenses increased in total and as a percentage of sales from fiscal 1999 to
fiscal 2000 primarily due to higher bad debt expense, increased consulting fees,
and lower revenue.

At the end of the fourth quarter of fiscal 2001, the Company incurred $51
million of pre-tax, restructuring charges resulting from general market
conditions, customer demands and the Company's evolution of its

Novell annual report 2001 21
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business strategy. The new business strategy focuses on eBusiness solutions
along with Net services software designed to secure and power the networked
world across leading operating systems. This included refining the Company's
consulting initiatives, refocusing research and development efforts, defining
sales and marketing efforts to be more customer and solutions oriented, and
adjusting the overall cost structure given current revenue levels and company
direction. The charge included $33 million of severance and employee related
costs for a reduction in workforce of approximately 1,100 personnel, $11 million
for excess facilities and related property and equipment disposals, $5 million
for future committed payments related to abandonment of a management consulting
contract that no longer fits with the Company's strategic focus, and $2 million
for other related charges. The Company also realigned its remaining resources to
better manage and control its business.

Of the total $51 million charge, cash payments of $11 thousand were paid
out during the year. After writing off certain non-cash charges, accruals of $45
million remain as of October 31, 2001, primarily related to severance and
benefits to be paid out during fiscal 2002 and excess facility charges, which
will be paid over the respective lease terms.

During the third quarter of fiscal 2001, the Company recorded a
restructuring charge of approximately $30 million as a result of the Company's
acquisition of Cambridge and changes in the Company's business to move towards
the Company's eBusiness strategy. Specific actions and the related charges taken
included $16 million to reduce the Company's workforce worldwide by
approximately 280 employees across all functional areas (approximately 5% before
the addition of Cambridge), $11 million to consolidate facilities and dispose of
excess property and equipment, $1 million to abandon and write off technologies
that no longer fit within the Company's new strategy, $2 million to discontinue
unprofitable product lines, and $1 million for other related restructuring
costs.

Of the total $30 million charge, cash payments of $15 million were paid out
during the year. After writing off certain non-cash charges, accruals of $14
million remain as of October 31, 2001, primarily related to severance and
benefits to be paid out during fiscal 2002 and excess facility charges, which
will be paid over the respective lease terms.

As a result of two fiscal 2001 reorganizations, the Company estimates that
its operating expenses will be reduced by approximately $150 million annually
compared to fourth quarter fiscal 2001 levels, before increased strategic
expenditures.

During the fourth quarter of fiscal 2000, the Company incurred $48 million
of pre-tax, restructuring charges resulting from the Company's plan to change
its business strategy to address changes in the market due to technology
changes, customer demands, and methods of distribution. The new business
strategy focuses on a Net services business model and on electronic or
e-solutions. This included a reorganization of the Company into new business
units, refocusing research and development efforts, analyzing profitability of
products and discontinuing unprofitable ones, defining sales and marketing
efforts to be more customer-oriented and market driven, and adjusting the
overall cost structure given current revenue levels. The charge included $17
million of severance for a reduction in workforce of approximately 700
personnel, $5 million for redundant facilities, $23 million for abandonment of
technologies that no longer fit with the Company's strategic focus, and $3
million for other related charges.

Of the total $48 million charge, cash payments of $21 million have been
paid out in cash. After writing off certain non-cash charges, accruals of $3
million remain as of October 31, 2001, primarily related to excess facility and
long-term contract charges to be paid out over the contract terms.

The Company could incur additional restructuring charges in the future as
it continues to develop its eBusiness strategy.

22 Novell annual report 2001
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Employees

Fiscal 2001 headcount increased compared to fiscal 2000 and 1999 due to the
acquisition of Cambridge, offset somewhat by employee reductions. The
acquisition of Cambridge increased headcount by approximately 2,500 employees.
The Company continues to monitor headcount to ensure the Company's resources are
aligned with expected business levels and its new business strategy, as well as
in line with leading industry benchmarks.

Other income (expense), net

The primary component of other income (expense), net, is net investment
income (loss), which was a loss of $155 million in fiscal 2001 and income of
$109 million and $41 million, in fiscal 2000 and 1999, respectively. In fiscal
2001, the Company recognized impairment losses on several of its short and
long-term investments totaling $208 million and realized net gains on
investments totaling $9 million. In fiscal 2000, the Company realized higher
gains on the sale of equity securities and lower investment write-offs compared
to fiscal 2001 and 1999. Other income, net, excluding investment income,
increased slightly in fiscal 2001 compared to fiscal 2000 primarily due to the
impact of decreased minority interest profits in the Company's Japanese and
Volera subsidiaries. Other income, net, excluding investment income, increased
in fiscal 2000 compared to fiscal 1999 primarily due to decreased legal
settlements, other asset writeoffs, and increased foreign currency translation
gains.

Income tax expense (benefit)

Absent the restructuring charges and the valuation allowance on the
investment impairment in 2001, the effective tax benefit rate would have been
21% in fiscal 2001. Absent restructuring charges in 2000 and the Internal
Revenue Service settlement in 1999, the effective tax rate for 2000 and 1999
would have been 28%. The fiscal 2001 benefit rate is lower than the effective
tax rate for 2000 and 1999 and the statutory rate of 35% primarily due to
non-deductible capital losses resulting from the investment impairment. The
Company cannot be assured at this time that it can generate sufficient capital
gains during the five year carry-over period to recognize the tax benefit of the
capital losses. Accordingly, a valuation allowance has been established. In
addition the Company established a valuation allowance in 2001 against other tax
attributes. The effective tax rate for 2000 and 1999 is lower than the federal
statutory rate of 35% primarily due to research credits, tax exempt income and
low taxed foreign earnings.

At October 31, 2001, the Company had deferred tax assets of $149 million,
net of a valuation allowance. A portion of these assets is realizable based on
the Company's ability to offset existing deferred tax liabilities of $55
million. Realization of the remaining portion of these assets is dependent on
the Company's ability to generate approximately $480 million of future taxable
income. Management believes that sufficient taxable income will be earned in the
future to realize these assets net of the valuation allowances. Management will

Novell annual report 2001 23
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evaluate the realizability of the deferred tax assets quarterly and assess the
need for additional valuation allowances.

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

Net income (loss) per share decreased in fiscal 2001 compared to fiscal
2000 due primarily to lower revenue, $80 million (pre-tax) restructuring charges
(compared to $48 million in fiscal 2000), $208 million (pre-tax) impairment
charges and $9 million (pre-tax) integration costs related to the acquisition of
Cambridge, as discussed above. In addition, shares outstanding increased during
fiscal 2001 due to the issuance of shares for the acquisition of Cambridge. Net
income (loss) per share decreased in fiscal 2000 compared to fiscal 1999 due
primarily to decreased revenue, a $48 million (pre-tax) restructuring charge,
and increased sales and marketing expenses, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments increased to $705 million at October 31,
2001 from $698 million at October 31, 2000. The fiscal 2001 increase can be
attributed to $92 million cash provided from operations, $26 million received as
an investment in Volera by minority shareholders, $72 million cash acquired from
Cambridge and the sale of Excell, a division of Cambridge, and $11 million from
stock issuances, offset by $72 million expended for the repurchase of common
stock, $33 million related to expenditures for fixed assets, and $89 million
related to purchases of long-term investments, venture capital funds, and other
investing activities.

The Company's investment portfolio is diversified among security types,
industry groups, and individual issuers. To achieve potentially higher returns,
a portion of the Company's investment portfolio is invested in equity securities
and mutual funds, which incur market risk.

The Company's combined short and long-term investment portfolio includes
securities with net unrealized gains of $7 million, before effects of deferred
taxes, as of October 31, 2001.

The Company's principal source of liquidity continues to be from operations
and on-hand cash and investments. At October 31, 2001, the Company's principal
unused sources of liquidity consisted of cash and short-term investments and
available borrowing capacity of approximately $7 million under its lines of
credit and additional capacity under two outstanding credit facilities. The
Company's liquidity needs are principally

24 Novell annual report 2001
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for financing of accounts receivable, capital assets, strategic investments,
product development, and flexibility in a dynamic and competitive operating
environment.

The Company anticipates being able to fund its current operations and
capital expenditures planned for the foreseeable future with existing cash and
short-term investments together with internally generated funds. The Company
believes that borrowings under the Company's credit facilities or public
offerings of equity or debt securities are available if the need arises,
although public offerings may not be acceptable to the Company. Investments will
continue in product development and in new and existing areas of technology.
Cash may also be used to acquire technology through purchases and strategic
acquisitions. Capital expenditures in fiscal 2002 are anticipated to be
approximately $50 million, but could be reduced if the growth of the Company is
less than presently anticipated. The Company also intends to commit an
additional $60 million during fiscal 2002 to external and internal venture
capital funds.

During the fourth quarter of 2001, the Board of Directors extended the
stock repurchase program through June 30, 2003 and authorized the use of up to
$400 million for the repurchase of additional outstanding shares of the
Company's common stock. As of October 31, 2001, $89 million had been spent to
repurchase 14 million shares under this plan during fiscals 2000 and 2001 at an
average price of $6.19 per share.

Euro Conversion

On January 1, 2002, 12 of the 15 members of the European Union established
fixed conversion rates among their existing sovereign currencies and adopted the
Euro as their common legal currency and eliminated their legacy currencies. The
Company is currently conducting transactions in the Euro and expects to have all
affected information systems fully converted by January 31, 2002. Novell does
not expect the Euro conversion to have a material effect on its competitive
position or financial results.

SUBSEQUENT EVENTS

On December 21, 2001, the Company completed the sale of its 100,000 square
foot office building in Herndon, Virginia for $16 million cash resulting in a
net gain of approximately $8 million. Novell currently occupies approximately
20,000 square feet for sales offices and leases this space from the new owners
of the building.

On December 21, 2001, the Company formed a venture capital fund, Novell
Technology Capital Fund I, L.P. ("NTC I") and related entities that include
Novell Technology CGP, Inc. ("CGP") and Novell Technology GPLP I, LP ("GPLP").
GPLP is the General Partner of NTC I, which has limited partners including
Novell, directly, and several Novell employees including two executive officers
of Novell, and Co-Managing Directors of NTC I, who are directly involved in the
management and operation of both NTC I and Cambridge Technology Capital Fund I
L.P., Novell's venture capital fund acquired with Cambridge. Novell has
committed up to $30 million in capital to NTC I, with an initial commitment of
$15 and funding of $14 million as part of the first closing on December 21,
2001. NTC I is in the process of seeking additional outside institutional
investors. Financial and operating results of NTC I and related entities will be
consolidated in Novell's financial statements beginning in the first quarter of
fiscal 2002.

RISK FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS

The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially from historical results are the following: business conditions and
the general economy; competitive factors, such as rival operating systems,
directories and applications; acceptance of new products and services and price
pressures; availability of third-party compatible products at below market
prices; risk of nonpayment of accounts or notes receivable; risks associated
with foreign operations; risk of product line or inventory obsolescence due to
shifts in technologies

Novell annual report 2001 25
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or market demand; timing of software product introductions; market fluctuations
of investment securities; and litigation.

Other factors may also adversely affect the Company's earnings and stock
price, including but not limited to:

- competition for qualified employees

- competition from other product and service companies

- delays in the introduction of new products

- success of new products or technologies

- stock market fluctuations unrelated to Company performance

- failure to properly estimate costs of fixed fee engagements

- failure to properly manage consulting engagements within fees agreed to
by customers

The Current Economic Climate and Outlook in the Technology and Information
Technology Services Sector Is Very Weak

The weakened economic climate, particularly in the technology sector, has
had an adverse effect on Novell's stock price and operations. Future economic
projections for this sector do not anticipate a quick recovery. A continuation
of the weakened economy could have further negative effects on the Company's
stock price and operations in the future.

Our Financial Results May Vary

The Company often experiences a higher volume of sales at the end of each
quarter and during the Company's fourth quarter. Because of this, fixed costs
that are out of line with sales levels may not be detected until late in any
given quarter and results of operations could be adversely affected.

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

- timing of orders from customers and shipments to customers

- product mix, including a shift from higher margin to lower margin
products or services

- delays or problems with our fulfillment agents

- impact of foreign currency exchange rates on the price of our products in
international locations

- inability to respond to the decline in sales through the distribution
channel

- inability to derive benefits from the restructuring and new corporate
strategy

- inability to deliver solutions as expected by our consulting customers

- differences in estimates versus actual results

We Compete in a Challenging Market for Computer Software and Consulting
Services

Novell competes in a highly challenging market for computer software. One
pervasive factor underlying all of the Company's business endeavors is the
presence of Microsoft in all sectors of the software business, and Microsoft's
dominance in many of those sectors.

In a finding upheld by the Circuit Court for the District of Columbia, the
United States District Court found that Microsoft violated Section 2 of the
Sherman Act by unlawfully acting to maintain its monopoly

26 Novell annual report 2001
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over desktop operating systems. The Company believes that Microsoft is
exploiting its desktop operating monopoly in a way that is designed to extend
its market power into the market for server operating systems, and to claim
control of network and web services such as authentication, using many of the
same anti-competitive practices found by the United States District Court to be
in violation of the nation's anti-trust laws. The Company is concerned that the
Revised Proposed Final Judgment of the litigation between the Department of
Justice and Microsoft will not benefit competition or consumers in a meaningful
way and, if approved, could result in continued harm to the Company.

Additionally, the Company does not have the product breadth and market
power of Microsoft. Microsoft's ability to ship networking products with
features and functionality that compete with Novell's, together with its ability
to offer incentives to customers to purchase certain products in order to obtain
favorable sales terms or necessary compatibility or information with respect to
other products, may significantly inhibit Novell's ability to grow its business.
Microsoft has significant financial resources, which could allow it to
aggressively price its products and services for long periods of time to the
potential detriment of competitors. Microsoft in the past has also employed
tactics that limit or block effective and efficient interoperability with
Novell's products. Microsoft frequently bundles software features into its
operating system for free which compete directly with stand-alone products from
Novell. As Microsoft creates new operating systems and applications, there can
be no assurance that Novell will be able to ensure that its products will be
compatible with those of Microsoft.

Although these market conditions and the judgments reached in litigation
concerning Microsoft may affect overall Novell performance, the Company believes
its strong product offering and "One Net" business strategy will be competitive
in the marketplace. Additionally, if the more meaningful relief being sought by
the nine litigating states is imposed on Microsoft, there could be a restoration
of competition in the marketplace that would benefit Novell.

The market for consulting services is highly competitive due to such
factors as the existence of several large consulting firms specializing in the
information systems area such as Compaq Computer Corporation, Hewlett-Packard
Company, IBM, Accenture, Cap Gemini and the three remaining consulting arms of
the "Big Five" accounting firms. Many of these companies have greater financial,
technical and marketing resources and greater name recognition in the consulting
area, which could inhibit the Company's ability to grow its consulting business.

Additionally, the Company may face competition from other industry
companies, which could introduce competitive products and/or services. If any of
these competing products or services achieves market acceptance, Novell's
business and results of operations could be materially adversely affected.
Novell believes that additional factors that affect success in the marketplace
include technical innovation to meet dynamic market needs, marketing strength,
system performance, customer service and support, reliability, ease of use,
security, and price compared to performance. Novell seeks to address all of
these factors with its marketing and product development. However, these factors
are also addressed by competitors, including Microsoft, in ways that may cause
Novell's chances of success to be diminished.

We Face Intense Competition for Qualified Personnel in the Computer and
Consulting Industries

The ability of the Company to maintain its competitive technological
position will depend, in large part, on its ability to attract and retain highly
qualified development, consulting, and managerial personnel. Competition for
such personnel is intense and there is a risk of departure due to the
competitive environment in the software and consulting industries. The loss of a
significant group of key personnel would adversely affect the Company's
performance. The failure to successfully promote and hire suitable replacements
in a timely manner could have a material adverse effect on the Company's
business.

Novell annual report 2001 27
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We Depend on a Number of Key Executives Who Have Recently Joined Us and Whom
We May Not Be Able To Retain

Most members of our senior management have recently joined us. Many of
these individuals have not previously worked with one another, and it will take
time for the management team to become integrated and work effectively together.
It may also take time for these individuals to effect change within the
organizations that lie within their respective areas of responsibility. Due to
the competitive nature of our industry, we may not be able to retain all of our
senior managers.

Although Our Acquisition of Cambridge Was Intended to Result in Benefits to
the Combined Company, Those Benefits May Not be Realized. Additionally, Neither
Novell nor Cambridge is Experienced in Organizing an Integration of Businesses
of This Complexity and Scale

Achieving the benefits of the Cambridge acquisition will depend in part on
the successful integration of personnel, operations and technology. The
integration of the two companies has been and will be a complex, time consuming
and expensive process and may continue to disrupt Novell's business if not
completed in a timely and efficient manner. The challenges involved in this
integration include the following:

- Obtaining synergies from the companies' professional services
organizations;

- Obtaining synergies from the companies' service and product offerings
effectively and quickly;

- Coordinating sales efforts so that customers can do business easily with
the combined company;

- Integrating technology, back office, human resources, accounting and
financial systems;

- Bringing together marketing efforts so that the market receives useful
information about the combined company;

- Assimilating our employees into a common business culture; and

- Retaining key officers and employees who possess the necessary skills and
experience to quickly and effectively transition and integrate the
businesses.

Neither Novell nor Cambridge has experience in integrating operations on
the complexity and scale presented by the merger. The integration process has
been and will continue to be complicated and has been and will continue to
involve a number of special risks and challenges, including the possibility that
management may be distracted from regular business operations. It is not certain
that Novell and Cambridge can be successfully integrated in a timely manner or
that the anticipated benefits will be realized. Failure to effectively complete
the integration could mate