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Form 10-K

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

For the Fiscal Year Ended October 31, 2002

OR

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

For the transition period from                      to                      .

Commission File Number 0-13351

NOVELL, INC.

1800 South Novell Place

(801) 861-7000

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

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

Common Stock, par value $.10 per share

Preferred Share Purchase Rights

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

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

     The aggregate market value of the registrant’s common stock held by non-affiliates on January 17, 2003 (based on the last reported price of the common stock on the NASDAQ National Market System on such date) was $1,282,678,383. The aggregate market value of the registrant’s common stock held by non-affiliates as of April 30, 2002 (based on the last reported price of the Common Stock on the NASDAQ National Market System on such date) was $1,341,256,619. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding common stock and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination is not necessarily conclusive for other purposes.

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

     As of January 17, 2003 there were 368,248,694 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 8, 2003, are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

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NOVELL, INC.

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NOVELL, INC.

FORM 10-K

      In addition to historical information, this Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this Annual Report on Form 10-K, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. As contained herein, the words “expects,” “anticipates,” “believes,” “intends,” “will,” and similar types of expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are based on information that is currently available to the Company, speak only as of the date hereof, and are subject to certain risks and uncertainties. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statement is based, in whole or in part. The Company’s actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in the section in Item 7 entitled “Factors Affecting Future Results of Operations.” Readers should carefully review the risk factors described in this document and in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in 2003.

PART I

Item 1. Business

The Company

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

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

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

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

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

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

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

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

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

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

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Principal Markets and Segment and Geographic Information

      We sell our products, technologies, and solutions primarily to large-scale corporations, government entities, educational institutions, resellers, and distributors both domestically and internationally. Prior to fiscal 2002, we operated in one business segment: directory-enabled networking software and services. All products, technologies and solutions were evaluated as a single unit. With the acquisition of Cambridge Technology Partners (Massachusetts), Inc. (“Cambridge”) in July 2001 and the formation of Volera, Inc. (“Volera”), in May 2001, we organized our business into three segments: product, consulting, and Volera. Financial information was available for these three segments beginning November 1, 2001. Segment disclosures and geographical information for fiscal years 2002, 2001, and 2000 are presented in Part II, Item 8, Footnote O to the notes to the consolidated financial statements of this report, which is incorporated by reference into this Part I, Item 1. As our strategy continues to evolve, the way in which we view financial information to best evaluate performance and operating results will also change. For instance, at the beginning of fiscal 2003, Volera was integrated with the products segment. Further changes in segment disclosures could occur during fiscal 2003.

Components of Net Business Solutions

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

          Products segment

	The following Net management services products perform the core of our NterpriseTM solutions set;

	•	NetWare is a product that offers secure continuous access to core network resources such as files, printers, directories, e-mail and databases seamlessly across all types of networks, storage platforms and client desktops. NetWare accounted for 32% of our total revenue during fiscal 2002.
	•	ZENworks® (Zero Effort Networking) management products protect the integrity of networks by centralizing, automating, and simplifying every aspect of network management from distributing vital information across the enterprise to maintaining consistent policies on desktops, servers, and devices. ZENworks products accounted for 10% of our total revenue in fiscal 2002.
	•	GroupWise® collaboration products offer traditional and mobile users support for any communication over intranets, extranets and the Internet. GroupWise products accounted for 9% of total revenue in fiscal 2002.
	•	BorderManager® collaboration products are a suite of network services used to connect a network securely to the Internet or any other network, allowing outside access to intranets and user access to the Internet.

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

	•	eDirectory is a full-service, platform-independent directory, which significantly simplifies the complexities of managing users and resources in a mixed Win2000, NT, NetWare, UNIX and Linux environment. It is a secure, scalable, cross-platform directory service that allows organizations to centrally store and manage information across all networks and operating systems, and leverage existing IT investments.

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	•	DirXML® is a powerful data-sharing and synchronization solution, often referred to as a meta-directory solution, which automatically distributes new and updated information across every designated application and directory on a network ensuring that trusted e-business customers, partners, and suppliers are accessing consistent information, regardless of the applications and directories to which they have access.
	•	iChain® is an identity-based security solution that controls access, across technical and organizational boundaries, to applications, the Web, and network resources. iChain separates security from individual applications and Web servers, enabling single-point, policy-based management of authentication and access privileges throughout the Net.
	•	Single Sign-On — SecureLogin is a directory-integrated authentication solution that delivers reliable, single sign-on access across multi-platform networks, simplifying password management by eliminating the need for users to remember more than one password.

	The following net directory services products make up our secure identity management solutions set known as exteNdTM:

	•	exteNd DirectorTM, which provides interaction and portal services applications for the Web.
	•	exteNd ComposerTM, which provides business process management XML integration services.
	•	exteNd WorkbenchTM, which simplifies and accelerates the development of customer applications and increases developer productivity with automatic code completion, fast editing tools, conversion tools for updating projects to new standards, and support for source control.
	•	exteNd Application Server, which provides a complete foundation for building and deploying cross-platform, high-performance, Web-based applications using J2EE.

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

	•	Novell training services include networking certification such as Certified Novell EngineerSM (CNE®) and Certified Directory Engineer® (CDESM). Training also offers education to end users through nearly 700 independent Novell Authorized Education CentersSM (NAECSM) and 600 Novell Education Academic PartnersSM (NEAPSM) worldwide.
	•	Novell Technical ServicesTM offers a wide variety of flexible support offerings, bringing critical network issues to a quick and efficient resolution. Premium Services includes around-the-clock direct access to Novell’s most experienced engineers. The Dedicated Support Engineer, Primary Support Engineer, and Account Management programs allow customers to build an ongoing support relationship with Novell. Technical Services accounted for 11% of total revenue in fiscal 2002.

	Consulting Segment

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

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

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      Volera

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

Acquisition

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

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

Strategy

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

	•	exteNd — solutions that make the process of developing open-standards, Web-based applications fast, simple, and cost effective. exteNd uses the technology we acquired with the SilverStream acquisition.
	•	Nsure — solutions that help customers with their identity management and security issues. These include services that allow people access to the tools and resources they need, whether they are inside or outside of the customer’s organization. Nsure, which uses our Net directory services products, ensures that the right people have access to the right applications and information, and that companies can securely manage their employees, customers, and devices.
	•	Nterprise — solutions that offer an effective and open approach to networking and collaboration services, including file, print, messaging, scheduling, workspace, etc. while using a cross-platform approach. Nterprise uses our Net management services products such as NetWare, GroupWise and Novell iFolder®.
	•	Ngage — comprehensive worldwide consulting and support services that apply Net business solutions to our customers’ business situations. Ngage provides the business knowledge and technical expertise to help our customers implement exteNd, Nsure, and Nterprise.

Training and Support Programs

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

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

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

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

Strategic Relationships

      We partner with industry leaders in the software, hardware, consulting, and system integration industries to bring to market our solution sets. We believe that a well-managed and supported alliance portfolio is critical to our success in today’s competitive solutions market. Alliance engagements help increase our revenues, and enhance our exposure to customers around the world. A partial list of our strategic alliances includes: BearingPoint (formerly KPMG Consulting), CapGemini, Computer Science Corporation, Dell Corporation, Deloitte and Touche, EMC, Hewlett-Packard, IBM, Intel, Nortel Networks, PricewaterhouseCoopers, SAP and Siebel Systems. The combination of powerful technology and solutions delivery capability from Novell, with the carefully integrated skills and competencies of our partners, allows us to go to market with enhanced capability and completeness of vision.

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

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

      Worldwide Service and Support. Novell is a global corporation, and we serve our customers from offices located throughout the world. We are committed to providing service and support on a worldwide basis to our resellers and to our end-user customers. We have established agreements with third-party service vendors to expand and complement the service provided directly by our service personnel and our resellers.

      Multiple Channel Distribution Network. We market and deliver our products through a broad range of distributors, dealers, VARs, systems integrators, and OEMs, as well as to major end users.

Product Development

      Due to the rapid pace of technological change in our industry, we believe that our future success will depend, in part, on our ability to enhance and develop our Net business solutions that satisfactorily meet dynamic market needs. Product development expenses for the fiscal years 2002, 2001, and 2000 are discussed in Part II, Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated by reference into this Part I, Item 1.

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

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

Sales and Marketing

      We sell Net business solutions that deliver secure identity management (Nsure), Web application development (exteNd) and cross-platform networking services (Nterprise), all supported by strategic consulting and professional services (Ngage). This is accomplished via our Clear Channel go to market model with value add partners such as demand agents, vertical markets resellers, systems integrator distributors, and OEMs who meet our criteria, as well as selling directly to named enterprise customers. In addition, we conduct sales and marketing activities and provide technical support, training, and field service to our customers from our offices in Waltham, Massachusetts, Provo, Utah, and from our 45 U.S. and 83 international sales offices.

      Distributors. We have established a network of independent distributors, who sell our products to resellers, dealers, VARs, and computer retail outlets. As of December 31, 2002, there were two U.S. distributors and approximately 40 international distributors.

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

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

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

      International Revenue. In fiscal 2002, 2001, and 2000, approximately 49%, 44%, and 43%, respectively, of our revenue were to customers outside the U.S. Approximately 26% of all international revenue have been invoiced by us in U.S. dollars. Local currency invoicing includes a significant portion of invoices generated in our Irish shared service center, as well as other international local office billings. No one foreign country accounted for more than 10% of revenue in any period based on revenue classified by location of the end-user customers. For information regarding risk related to foreign operations, see Part II, Item 7, “Factors Affecting Future Results of Operations,” which information is incorporated by reference into this Part I, Item 1.

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

      Marketing Initiatives. Our marketing activities are varied and tightly focused. To more closely align our offerings with customer needs, we have created a customer council and have more closely integrated the operations of marketing and product management. We have enhanced our Internet site to improve communication of our value strategy. We will be conducting a global advertising campaign that will build market awareness. The events that we sponsor will be tightly focused and will leverage our resources. We have improved our support materials that we provide to our channel partners and distributors. In March 2002, the seventeenth annual BrainShare® Conference was held to inform and educate developers about our product

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Major Customers

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

Manufacturing Suppliers

      Our physical products, which consist primarily of compact diskettes and manuals, are duplicated by outside vendors. This allows us to minimize the need for expensive capital equipment. Multiple high-volume manufacturers are available and we do not rely on a single provider for our raw materials, nor have we encountered problems with our existing suppliers.

Backlog

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

Competition

      The market for networking applications and solutions as well as IT consulting is highly competitive and subject to rapid technological change. We expect competition to continue to increase both from existing competitors and new market entrants. We believe that competitive factors common to all of our operating segments include: our ability to sell both products and services as part of an overall solution; the breadth of our offerings; the pricing of our products and services; and the timing and market acceptance of new solutions developed by us and our competitors.

Product and Volera segments

      In addition to the factors listed above, key competitive factors in the product and Volera segments include brand and product awareness; the performance, reliability and security of our products; the ability to preserve our legacy customer base; the completeness of our suite of product and solutions offerings; our ability to establish and maintain key strategic relationships with distributors, resellers and other partners; and the pricing strategies of our competitors. Our key competitors in the product and Volera segments include Microsoft, IBM, BEA Systems, Sun Microsystems, Altiris, Netegrity, and Computer Associates.

Consulting segment

      The key competitive factors faced by the consulting segment are attracting and retaining the highest quality consultants; the depth of our skills and expertise; the breadth of consulting capabilities; and having expertise in key functional areas. The market for consulting services is highly competitive due to the existence of several large consulting firms specializing in the information systems area, such as IBM, Accenture, EDS and Microsoft. Many of these companies have greater financial, technical and marketing resources and greater name recognition in the consulting area, which could inhibit our ability to grow our consulting business. Additionally, the worldwide marketplace for consulting services is highly fragmented. In different regions of the world, there may be multiple competitors, many with niche consultancies.

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General

      One pervasive factor facing all companies doing business in our industry is the presence — and dominance — of Microsoft. In a decision upheld by a federal appellate court, Microsoft was found to have violated Section 2 of the Sherman Act by unlawfully acting to maintain its monopoly over desktop operating systems. We are concerned, however, that the settlement of that litigation between the Department of Justice and Microsoft will not significantly affect Microsoft’s practices, and that Microsoft may continue to engage in business practices that unfairly inhibit the growth of its competitors, including Novell. For example, in the past, Microsoft has employed tactics that limit or block effective and efficient interoperability between its products and Novell’s. We will ensure, to the best of our ability, that our products will interoperate with those of Microsoft as they enhance new operating systems and applications.

Copyright, Licenses, Patents and Trademarks

      We rely on copyright, patent, trade secret and trademark law, as well as provisions in our license, distribution and other agreements, to protect our intellectual property rights. Our portfolio of patents, copyrights and trademarks as a whole are material to our business; no one piece of intellectual property is critical to our business, so no individual piece is discussed on its own. We have been issued what we consider to be valuable patents and have numerous other patents pending. No assurance can be given that the pending patents will be issued or, if issued, will provide protection for our competitive position. We also have a concern that computer industry companies that have huge financial resources and patent portfolios, such as Lucent, AT&T, Microsoft, Sun Microsystems and IBM, will assert patent infringement claims against smaller companies such as ours. We also have a concern that we will face more frequent patent infringement claims from patent licensing agencies because it has become more common for such agencies to be able to find attorneys who are willing to represent them or their clients on a contingency basis. While we have no reason to think we would not have strong defenses to such claims, the cost and time of defending any such claims could be significant. Although we intend to protect our patent rights vigorously, there can be no assurance that these measures will be successful or that the claims in any patents held by us will be sufficiently broad to protect our technology. In addition, no assurance can be given that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with competitive advantages. The loss of patent protection on our technology or the circumvention of our patent protection by competitors could have a material adverse effect on our ability to compete successfully.

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

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

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

Seasonality

      All three segments of our business often experience a higher volume of revenue at the end of each quarter and during the fourth quarter of our fiscal year due to the spending cycles of our customers and the negotiation patterns in the software industry.

Employees

      As of December 31, 2002, we had 6,524 permanent and temporary employees. The functional distribution of our employees was: sales and marketing — 1,542; product development — 1,548; general and administrative — 912; and service, consulting, training, and operations — 2,522. Of these, 2,926 employees are in locations outside the U.S. All our other personnel are based at our facilities in Utah, California, Massachusetts, and various U.S. field offices. None of our employees are represented by a labor union, and we consider our employee relations to be good.

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

Executive Officers of the Registrant

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

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

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

      Carl S. Ledbetter, Ph.D. has served as Senior Vice President, Engineering, Research and Development of Novell since May 2002. Prior to that, Dr. Ledbetter had served as Senior Vice and Chief Technology Officer from May 2000 to May 2002. Dr. Ledbetter joined Novell in October 1999 as Senior Vice President, Business and Corporate Development. From January 1996 to October 1999, Dr. Ledbetter served as Chairman of the Board of Directors, President, and Chief Executive Officer of Hybrid Networks, Inc., a manufacturer and supplier of broadband access products for wireless systems. From April 1993 to January 1996, Dr. Ledbetter served as president of the consumer products division of AT&T, and from October 1991 to April 1993, Dr. Ledbetter served as the head of the PC networking division of Sun Microsystems, a computer manufacturer. In July 2000, Dr. Ledbetter entered into a settlement agreement in the form of a consent decree with the Securities and Exchange Commission (the “SEC”) in connection with the SEC’s investigation of Hybrid Networks, Inc. of which Dr. Ledbetter served as Chairman, President and Chief Executive Officer, generally concerning alleged violations of the federal securities laws. Without admitting or denying any violations of the federal securities laws, Dr. Ledbetter agreed to pay a civil fine and entered into a permanent injunction prohibiting him from knowingly circumventing or failing to implement a system of internal accounting controls and from engaging in violations of certain specified reporting provisions and accounting control provisions of the federal securities laws.

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

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      Christopher Stone joined Novell in March 2002 as Vice Chairman, Office of the CEO. From January 2000 until March 2002, Mr. Stone served as President ad Chief Executive Officer of Tilion, Inc., a software company providing event management solutions for logistics and supply chain managers that he founded. Prior to founding Tilion, Mr. Stone served as Novell’s Vice President for Strategy and Development from September 1997 to October 1999. Prior to joining Novell, from September 1989 to September 1997, Mr. Stone served as the Chief Executive Officer of Object Management Group, a software development standardization group that he founded that established the software standard CORBA. Prior to that, Mr. Stone was in various engineering and product roles at Data General from 1980 to 1989.

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

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

      We also own 218,873 square feet of office space and lease an additional 235,274 square feet of office space in a business complex in Orem, Utah. We lease 112,244 square feet of the owned space in Orem, Utah to various tenants. We have the ability to build on our land in San Jose, California, and in Provo and Orem, Utah.

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

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

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

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

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

      We lease and occupy a 21,057 square-foot facility in Dublin, Ireland, which is used as a shared services center and for product localization, a 28,000 square-foot facility in Richmond, UK, which is used as administrative offices, and an 80,000 square-foot facility in Bangalore, India, which is used as a product development center.

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

      The terms of the above leases vary from month-to-month to up to 21 years. We believe that our existing facilities are adequate to meet our current requirements and we anticipate that suitable additional or substitute space will be available, as necessary, upon favorable terms.

      In May 2002, France Telecom SA and U.S. Philips Corporation, alleged co-owners of a U.S. patent, filed suit in the U.S. District Court, District of Delaware, against Novell. The plaintiffs allege that our NetWare client software infringes the patent. In the suit, the plaintiffs seek unspecified monetary damages and an injunction prohibiting infringement of the patent. We intend to vigorously defend ourselves in this suit. This litigation is in its early stages. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations, or cash flows.

      SilverStream and several of its former officers and directors, as well as the underwriters who handled SilverStream’s two public offerings, are named as defendants in several class action complaints that have been filed on behalf of certain of former stockholders of SilverStream who purchased shares of SilverStream common stock between August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the plaintiffs have brought against other issuers and underwriters. These complaints all allege violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. In particular, they allege, among other things, that there was undisclosed compensation received by the underwriters of the public offerings of all of these issuers, including SilverStream’s. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the court. A Consolidated Amended Complaint was filed with respect to all of these complaints in the U.S. District Court, Southern District of New York, on April 19, 2002. All issuers, including SilverStream, filed a Motion to Dismiss on July 15, 2002. We believe that SilverStream and its former officers and directors have meritorious defenses to the claims made in the complaints and intends to contest the lawsuits vigorously. While there can be no assurance as to the ultimate disposition of the lawsuit, we do not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows.

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      In February 1998, a suit was filed in the U.S. District Court, District of Utah, against Novell and certain of its officers and directors, alleging violation of federal securities laws by concealing the true nature of Novell’s financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of our common stock from November 1, 1996 through April 22, 1997. After a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court Judge dismissed the amended complaint with prejudice for failure to state a claim. The Order of Dismissal was entered on April 16, 2002 and the plaintiffs have filed a Notice of Appeal to the Tenth Circuit Court of Appeals. We intend to vigorously defend to uphold the U.S. District Court’s ruling. While there can be no assurance as to the ultimate disposition of the lawsuit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations, or cash flows.

      We are a party to a number of additional legal claims arising in the ordinary course of our business. We believe the ultimate resolution of these claims will not have a material adverse effect on our financial position, results of operations, or cash flows.

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

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PART II

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

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

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