##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q





(Mark One)



|þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended April 30, 2008

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 incorporation or organization) |  | (I.R.S. Employer Identification No.)

404 Wyman Street, Waltham, MA 02451

(Address of principal executive offices and zip code)

(781) 464-8000

(Registrants telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since
last report)





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  þ    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule

12b-2 of the Exchange Act.



|                        |  |   |  |                                             |  |                           |  |  
|----------------------- |  | - |  | ------------------------------------------- |  | ------------------------- |  | -
|Large accelerated filer |  | þ |  |                                             |  | Accelerated filer         |  |  ̈
|Non-accelerated filer   |  |  ̈ |  | (Do not check if smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act)    Yes   ̈    No  þ

As of May 30, 2008 there were 353,868,380 shares of the registrants common stock outstanding.









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##### Table of Contents

NOVELL, INC.

TABLE OF CONTENTS



|                                                                                                             |  |   
|------------------------------------------------------------------------------------------------------------ |  | --
|Part I  Financial Information                                                                               |  | 3 
|Item 1:
Financial Statements                                                                                 |  | 3 
|Consolidated Balance Sheets at April 30, 2008 (unaudited) and October 31, 2007                               |  | 3 
|Consolidated Statements of Operations for the three and six months ended April 30, 2008 and 2007 (unaudited) |  | 4 
|Consolidated Statements of Cash Flows for the six months ended April 30, 2008 and 2007 (unaudited)           |  | 6 
|Notes to Unaudited Consolidated Financial Statements                                                         |  | 7 
|Item 2:
Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 24
|Item 3:
Quantitative and Qualitative Disclosures about Market Risk                                           |  | 38
|Item 4:
Controls and Procedures                                                                              |  | 39
|Part II  Other Information:                                                                                 |  | 40
|Item 1:
Legal Proceedings                                                                                    |  | 40
|Item 1A:
Risk Factors                                                                                        |  | 40
|Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 40
|Item 4:
Submission of Matters to a Vote of Security Holders                                                  |  | 41
|Item 6:
Exhibits                                                                                             |  | 41



2



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##### Table of Contents

Part I. Financial Information



|Item 1. | Financial Statements
|------- | --------------------

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | --------------- | - | --------- | -
|                                                                                                                                                                                                                                                                                  |  | April 30,2008 |           |   | October 31,2007 |  
|                                                                                                                                                                                                                                                                                  |  | (unaudited)   |           |   |                 |  
|ASSETS                                                                                                                                                                                                                                                                            |  |               |           |   |                 |   |           |  
|Current assets:                                                                                                                                                                                                                                                                   |  |               |           |   |                 |   |           |  
|Cash and cash equivalents                                                                                                                                                                                                                                                         |  | $             | 1,003,398 |   |                 | $ | 1,079,819 |  
|Short-term investments                                                                                                                                                                                                                                                            |  |               | 427,322   |   |                 |   | 777,818   |  
|Restricted cash                                                                                                                                                                                                                                                                   |  |               | 52,124    |   |                 |   |          |  
|Receivables (net of allowances of $4,611 and $3,897 at April 30, 2008 and October 31, 2007, respectively)                                                                                                                                                                         |  |               | 176,676   |   |                 |   | 208,318   |  
|Prepaid expenses                                                                                                                                                                                                                                                                  |  |               | 54,910    |   |                 |   | 53,316    |  
|Other current assets                                                                                                                                                                                                                                                              |  |               | 29,260    |   |                 |   | 35,065    |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total current assets                                                                                                                                                                                                                                                              |  |               | 1,743,690 |   |                 |   | 2,154,336 |  
|Property, plant and equipment, net                                                                                                                                                                                                                                                |  |               | 183,743   |   |                 |   | 180,537   |  
|Long-term investments                                                                                                                                                                                                                                                             |  |               | 42,088    |   |                 |   | 37,304    |  
|Goodwill                                                                                                                                                                                                                                                                          |  |               | 596,978   |   |                 |   | 404,612   |  
|Intangible assets, net                                                                                                                                                                                                                                                            |  |               | 58,033    |   |                 |   | 33,572    |  
|Deferred income taxes                                                                                                                                                                                                                                                             |  |               | 27,321    |   |                 |   | 14,518    |  
|Other assets                                                                                                                                                                                                                                                                      |  |               | 27,470    |   |                 |   | 29,515    |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total assets                                                                                                                                                                                                                                                                      |  | $             | 2,679,323 |   |                 | $ | 2,854,394 |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                              |  |               |           |   |                 |   |           |  
|Current liabilities:                                                                                                                                                                                                                                                              |  |               |           |   |                 |   |           |  
|Accounts payable                                                                                                                                                                                                                                                                  |  | $             | 40,841    |   |                 | $ | 45,135    |  
|Accrued compensation                                                                                                                                                                                                                                                              |  |               | 88,348    |   |                 |   | 112,794   |  
|Other accrued liabilities                                                                                                                                                                                                                                                         |  |               | 98,849    |   |                 |   | 122,850   |  
|Income taxes payable                                                                                                                                                                                                                                                              |  |               | 7,244     |   |                 |   | 46,724    |  
|Deferred revenue                                                                                                                                                                                                                                                                  |  |               | 450,945   |   |                 |   | 494,615   |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total current liabilities                                                                                                                                                                                                                                                         |  |               | 686,227   |   |                 |   | 822,118   |  
|Deferred income taxes                                                                                                                                                                                                                                                             |  |               | 1,361     |   |                 |   | 884       |  
|Other long-term liabilities                                                                                                                                                                                                                                                       |  |               | 40,502    |   |                 |   |          |  
|Long-term deferred revenue                                                                                                                                                                                                                                                        |  |               | 250,629   |   |                 |   | 273,066   |  
|Senior convertible debentures                                                                                                                                                                                                                                                     |  |               | 479,394   |   |                 |   | 600,000   |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total liabilities                                                                                                                                                                                                                                                                 |  |               | 1,458,113 |   |                 |   | 1,696,068 |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Stockholders equity:                                                                                                                                                                                                                                                             |  |               |           |   |                 |   |           |  
|Common stock, par value $0.10 per share, Authorized  600,000,000 shares; Issued  368,798,786 and 365,739,499 shares at
April 30, 2008 and October 31, 2007, respectively; Outstanding  353,680,465 and 350,610,468 shares at April 30, 2008 and October 31, 2007, respectively |  |               | 36,880    |   |                 |   | 36,574    |  
|Additional paid-in capital                                                                                                                                                                                                                                                        |  |               | 461,232   |   |                 |   | 413,182   |  
|Treasury stock, at cost  15,118,321 and 15,129,031 shares at April 30, 2008 and October 31, 2007, respectively                                                                                                                                                                   |  |               | (124,424  | ) |                 |   | (124,512  | )
|Retained earnings                                                                                                                                                                                                                                                                 |  |               | 817,263   |   |                 |   | 795,984   |  
|Accumulated other comprehensive income                                                                                                                                                                                                                                            |  |               | 30,259    |   |                 |   | 37,098    |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total stockholders equity                                                                                                                                                                                                                                                        |  |               | 1,221,210 |   |                 |   | 1,158,326 |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                        |  | $             | 2,679,323 |   |                 | $ | 2,854,394 |  
|                                                                                                                                                                                                                                                                                  |  |               |           |   |                 |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



3



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##### Table of Contents

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share
data)



|                                                 |  |                    |         |   |               |   |         |  
|------------------------------------------------ |  | ------------------ | ------- | - | ------------- | - | ------- | -
|                                                 |  | Three months ended |        
|                                                 |  | April 30,2008      |         |   | April 30,2007 |  
|                                                 |  | (unaudited)        |        
|Net revenue:                                     |  |                    |         |   |               |   |         |  
|Software licenses                                |  | $                  | 44,454  |   |               | $ | 41,779  |  
|Maintenance and subscriptions                    |  |                    | 150,122 |   |               |   | 139,742 |  
|Services                                         |  |                    | 41,090  |   |               |   | 50,866  |  
|                                                 |  |                    |         |   |               |   |         |  
|Total net revenue                                |  |                    | 235,666 |   |               |   | 232,387 |  
|                                                 |  |                    |         |   |               |   |         |  
|Cost of revenue:                                 |  |                    |         |   |               |   |         |  
|Software licenses                                |  |                    | 4,194   |   |               |   | 4,260   |  
|Maintenance and subscriptions                    |  |                    | 12,646  |   |               |   | 11,270  |  
|Services                                         |  |                    | 44,228  |   |               |   | 49,040  |  
|                                                 |  |                    |         |   |               |   |         |  
|Total cost of revenue                            |  |                    | 61,068  |   |               |   | 64,570  |  
|                                                 |  |                    |         |   |               |   |         |  
|Gross profit                                     |  |                    | 174,598 |   |               |   | 167,817 |  
|                                                 |  |                    |         |   |               |   |         |  
|Operating expenses:                              |  |                    |         |   |               |   |         |  
|Sales and marketing                              |  |                    | 92,076  |   |               |   | 88,173  |  
|Product development                              |  |                    | 48,029  |   |               |   | 52,562  |  
|General and administrative                       |  |                    | 29,734  |   |               |   | 34,305  |  
|Restructuring expenses                           |  |                    | 392     |   |               |   | 4,523   |  
|Purchased in-process research and development    |  |                    | 2,700   |   |               |   |        |  
|                                                 |  |                    |         |   |               |   |         |  
|Total operating expenses                         |  |                    | 172,931 |   |               |   | 179,563 |  
|                                                 |  |                    |         |   |               |   |         |  
|Income (loss) from operations                    |  |                    | 1,667   |   |               |   | (11,746 | )
|                                                 |  |                    |         |   |               |   |         |  
|Other income (expense):                          |  |                    |         |   |               |   |         |  
|Investment income                                |  |                    | 24,871  |   |               |   | 20,666  |  
|Interest expense and other, net                  |  |                    | (7,019  | ) |               |   | (6,906  | )
|                                                 |  |                    |         |   |               |   |         |  
|Total other income, net                          |  |                    | 17,852  |   |               |   | 13,760  |  
|                                                 |  |                    |         |   |               |   |         |  
|Income from continuing operations before taxes   |  |                    | 19,519  |   |               |   | 2,014   |  
|Income tax expense                               |  |                    | 13,653  |   |               |   | 3,326   |  
|                                                 |  |                    |         |   |               |   |         |  
|Income (loss) from continuing operations         |  |                    | 5,866   |   |               |   | (1,312  | )
|                                                 |  |                    |         |   |               |   |         |  
|Income from discontinued operations before taxes |  |                    |        |   |               |   | 1,269   |  
|Income tax expense on discontinued operations    |  |                    |        |   |               |   | 2,845   |  
|                                                 |  |                    |         |   |               |   |         |  
|Loss from discontinued operations                |  |                    |        |   |               |   | (1,576  | )
|                                                 |  |                    |         |   |               |   |         |  
|Net income (loss)                                |  | $                  | 5,866   |   |               | $ | (2,888  | )
|                                                 |  |                    |         |   |               |   |         |  
|Basic earnings per share:                        |  |                    |         |   |               |   |         |  
|Income from continuing operations                |  | $                  | 0.02    |   |               | $ | (0.00   | )
|                                                 |  |                    |         |   |               |   |         |  
|Net income (loss) per share                      |  | $                  | 0.02    |   |               | $ | (0.01   | )
|                                                 |  |                    |         |   |               |   |         |  
|Diluted earnings per share:                      |  |                    |         |   |               |   |         |  
|Income from continuing operations                |  | $                  | 0.02    |   |               | $ | (0.00   | )
|                                                 |  |                    |         |   |               |   |         |  
|Net income (loss) per share                      |  | $                  | 0.02    |   |               | $ | (0.01   | )
|                                                 |  |                    |         |   |               |   |         |  
|Weighted-average shares outstanding  basic      |  |                    | 352,785 |   |               |   | 346,492 |  
|Weighted-average shares outstanding  diluted    |  |                    | 354,287 |   |               |   | 346,492 |  

The accompanying notes are an integral part of these consolidated financial statements.



4



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NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)



|                                                        |  |                  |         |   |               |   |         |  
|------------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | ------- | -
|                                                        |  | Six months ended |        
|                                                        |  | April 30,2008    |         |   | April 30,2007 |  
|                                                        |  | (unaudited)      |        
|Net revenue:                                            |  |                  |         |   |               |   |         |  
|Software licenses                                       |  | $                | 84,885  |   |               | $ | 80,332  |  
|Maintenance and subscriptions                           |  |                  | 299,305 |   |               |   | 274,413 |  
|Services                                                |  |                  | 82,402  |   |               |   | 96,028  |  
|                                                        |  |                  |         |   |               |   |         |  
|Total net revenue                                       |  |                  | 466,592 |   |               |   | 450,773 |  
|                                                        |  |                  |         |   |               |   |         |  
|Cost of revenue:                                        |  |                  |         |   |               |   |         |  
|Software licenses                                       |  |                  | 7,459   |   |               |   | 8,487   |  
|Maintenance and subscriptions                           |  |                  | 24,286  |   |               |   | 22,925  |  
|Services                                                |  |                  | 87,862  |   |               |   | 97,605  |  
|                                                        |  |                  |         |   |               |   |         |  
|Total cost of revenue                                   |  |                  | 119,607 |   |               |   | 129,017 |  
|                                                        |  |                  |         |   |               |   |         |  
|Gross profit                                            |  |                  | 346,985 |   |               |   | 321,756 |  
|                                                        |  |                  |         |   |               |   |         |  
|Operating expenses:                                     |  |                  |         |   |               |   |         |  
|Sales and marketing                                     |  |                  | 178,681 |   |               |   | 178,274 |  
|Product development                                     |  |                  | 94,087  |   |               |   | 99,029  |  
|General and administrative                              |  |                  | 56,610  |   |               |   | 64,948  |  
|Restructuring expenses                                  |  |                  | 4,759   |   |               |   | 11,867  |  
|Purchased in-process research and development           |  |                  | 2,700   |   |               |   |        |  
|                                                        |  |                  |         |   |               |   |         |  
|Total operating expenses                                |  |                  | 336,837 |   |               |   | 354,118 |  
|                                                        |  |                  |         |   |               |   |         |  
|Income (loss) from operations                           |  |                  | 10,148  |   |               |   | (32,362 | )
|                                                        |  |                  |         |   |               |   |         |  
|Other income (expense):                                 |  |                  |         |   |               |   |         |  
|Investment income                                       |  |                  | 47,777  |   |               |   | 41,358  |  
|Gain on sale of venture capital funds                   |  |                  |        |   |               |   | 3,591   |  
|Interest expense and other, net                         |  |                  | (12,769 | ) |               |   | (13,156 | )
|                                                        |  |                  |         |   |               |   |         |  
|Total other income, net                                 |  |                  | 35,008  |   |               |   | 31,793  |  
|                                                        |  |                  |         |   |               |   |         |  
|Income (loss) from continuing operations before taxes   |  |                  | 45,156  |   |               |   | (569    | )
|Income tax expense                                      |  |                  | 24,606  |   |               |   | 12,912  |  
|                                                        |  |                  |         |   |               |   |         |  
|Income (loss) from continuing operations                |  |                  | 20,550  |   |               |   | (13,481 | )
|                                                        |  |                  |         |   |               |   |         |  
|Income (loss) from discontinued operations before taxes |  |                  | 1,285   |   |               |   | (9,421  | )
|Income tax benefit on discontinued operations           |  |                  | (836    | ) |               |   | (69     | )
|                                                        |  |                  |         |   |               |   |         |  
|Income (loss) from discontinued operations              |  |                  | 2,121   |   |               |   | (9,352  | )
|                                                        |  |                  |         |   |               |   |         |  
|Net income (loss)                                       |  | $                | 22,671  |   |               | $ | (22,833 | )
|                                                        |  |                  |         |   |               |   |         |  
|Basic earnings per share:                               |  |                  |         |   |               |   |         |  
|Income (loss) from continuing operations                |  | $                | 0.06    |   |               | $ | (0.04   | )
|                                                        |  |                  |         |   |               |   |         |  
|Net income (loss) per share                             |  | $                | 0.06    |   |               | $ | (0.07   | )
|                                                        |  |                  |         |   |               |   |         |  
|Diluted earnings per share:                             |  |                  |         |   |               |   |         |  
|Income (loss) from continuing operations                |  | $                | 0.06    |   |               | $ | (0.04   | )
|                                                        |  |                  |         |   |               |   |         |  
|Net income (loss) per share                             |  | $                | 0.06    |   |               | $ | (0.07   | )
|                                                        |  |                  |         |   |               |   |         |  
|Weighted-average shares outstanding  basic             |  |                  | 351,957 |   |               |   | 346,007 |  
|Weighted-average shares outstanding  diluted           |  |                  | 353,660 |   |               |   | 346,007 |  

The accompanying notes are an integral part of these consolidated financial statements.



5



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NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)



|                                                                                                   |  |                  |           |   |               |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ------------- | - | -------- | -
|                                                                                                   |  | Six months ended |          
|                                                                                                   |  | April 30,2008    |           |   | April 30,2007 |  
|                                                                                                   |  | (unaudited)      |          
|Cash flows from operating activities                                                               |  |                  |           |   |               |   |          |  
|Net income (loss)                                                                                  |  | $                | 22,671    |   |               | $ | (22,833  | )
|Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |  |                  |           |   |               |   |          |  
|Stock-based compensation expense                                                                   |  |                  | 17,777    |   |               |   | 16,432   |  
|Depreciation and amortization                                                                      |  |                  | 18,847    |   |               |   | 21,473   |  
|Change in accounts receivable allowances                                                           |  |                  | 671       |   |               |   | (451     | )
|Utilization of previously reserved acquired net operating losses                                   |  |                  | 5,025     |   |               |   | 4,825    |  
|(Gain) loss on discontinued operations, before taxes                                               |  |                  | (1,180    | ) |               |   | 10,220   |  
|Gain on sale of venture capital funds                                                              |  |                  |          |   |               |   | (3,591   | )
|Gain on long-term investments                                                                      |  |                  | (250      | ) |               |   | (1,738   | )
|Gain on debenture repurchases                                                                      |  |                  | (405      | ) |               |   |         |  
|Purchased in-process research and development                                                      |  |                  | 2,700     |   |               |   |         |  
|Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:  |  |                  |           |   |               |   |          |  
|Receivables                                                                                        |  |                  | 33,983    |   |               |   | 52,990   |  
|Prepaid expenses                                                                                   |  |                  | (2,055    | ) |               |   | (5,078   | )
|Other current assets                                                                               |  |                  | 4,846     |   |               |   | (3,291   | )
|Deferred income taxes                                                                              |  |                  | (12,326   | ) |               |   | 783      |  
|Accounts payable                                                                                   |  |                  | (5,874    | ) |               |   | 224      |  
|Accrued liabilities                                                                                |  |                  | (53,663   | ) |               |   | (25,598  | )
|Deferred revenue                                                                                   |  |                  | (74,734   | ) |               |   | 273,906  |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Net cash (used in) provided by operating activities                                                |  |                  | (43,967   | ) |               |   | 318,273  |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Cash flows from financing activities                                                               |  |                  |           |   |               |   |          |  
|Debenture repurchases                                                                              |  |                  | (115,589  | ) |               |   |         |  
|Issuance of common stock, net                                                                      |  |                  | 6,778     |   |               |   | 8,122    |  
|Excess tax benefits from stock-based compensation                                                  |  |                  | 23,995    |   |               |   | 4,723    |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Net cash (used in) provided by financing activities                                                |  |                  | (84,816   | ) |               |   | 12,845   |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Cash flows from investing activities                                                               |  |                  |           |   |               |   |          |  
|Purchases of property, plant and equipment                                                         |  |                  | (16,322   | ) |               |   | (12,508  | )
|Purchases of short-term investments                                                                |  |                  | (282,003  | ) |               |   | (238,237 | )
|Maturities of short-term investments                                                               |  |                  | 99,274    |   |               |   | 73,213   |  
|Sales of short-term investments                                                                    |  |                  | 508,169   |   |               |   | 117,604  |  
|Proceeds from sale of venture capital funds                                                        |  |                  |          |   |               |   | 4,964    |  
|Net cash paid for acquisitions                                                                     |  |                  | (220,473  | ) |               |   | (9,727   | )
|Net (distributions) proceeds from the sale of discontinued operations                              |  |                  | (909      | ) |               |   | 2,749    |  
|Cash restricted due to litigation                                                                  |  |                  | (52,124   | ) |               |   |         |  
|Proceeds from sales of and distributions from long-term investments                                |  |                  | 14,523    |   |               |   | 1,738    |  
|Purchases of intangible assets                                                                     |  |                  |          |   |               |   | (875     | )
|Other                                                                                              |  |                  | 2,227     |   |               |   | 5,166    |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Net cash provided by (used in) investing activities                                                |  |                  | 52,362    |   |               |   | (55,913  | )
|                                                                                                   |  |                  |           |   |               |   |          |  
|(Decrease) increase in cash and cash equivalents                                                   |  |                  | (76,421   | ) |               |   | 275,205  |  
|Cash and cash equivalents  beginning of period                                                    |  |                  | 1,079,819 |   |               |   | 675,787  |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Cash and cash equivalents  end of period                                                          |  | $                | 1,003,398 |   |               | $ | 950,992  |  
|                                                                                                   |  |                  |           |   |               |   |          |  
|Supplemental disclosure of non-cash activities:                                                    |  |                  |           |   |               |   |          |  
|Conversion of Series B Preferred Stock to Common Stock                                             |  | $                |          |   |               | $ | 9,350    |  

The accompanying notes are an integral part of these consolidated financial statements.



6



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A. Quarterly Financial Statements

The interim
consolidated financial statements as of April 30, 2008 and for the three and six months ended April 30, 2008 and 2007 were prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for
interim financial reporting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ materially from those estimates. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and notes required by accounting principles generally accepted in the United States and should, therefore, be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended October 31, 2007. The
accompanying financial statements are unaudited and include all normal recurring adjustments that we believe are necessary for a fair statement of our financial condition and results of operations as of and for the interim periods presented. The
interim operating results are not necessarily indicative of the results for a full year.

Reclassifications

On January 31, 2008, we sold our wholly-owned subsidiary, Cambridge Technology Partners (CTP) Switzerland. The results of operations for
CTP Switzerland have been classified as discontinued operations for all periods presented (see note C, Divestitures). Certain other amounts reported in prior periods have been reclassified from what was previously reported to conform to
the current years presentation. These reclassifications did not have any impact on net income (loss) per share.

B. Acquisitions

SiteScape

On February 13,
2008, we acquired all of the outstanding shares of SiteScape, Inc. (SiteScape), a provider of open collaboration software, including Teaming + Conferencing products. The purchase price, consisting of $18.5 million in cash, plus merger
and transaction costs of $0.4 million, was allocated as follows:



|                                      |  |                     |        |   |                      |           
|------------------------------------- |  | ------------------- | ------ | - | -------------------- | ----------
|(In thousands)                        |  | EstimatedFair Value |        |   | EstimatedUseful Life
|Fair value of net liabilities assumed |  | $                   | (3,792 | ) |                      | N/A       
|Identifiable intangible assets:       |  |                     |        |   |                      |           
|Developed technology                  |  |                     | 1,800  |   |                      | 3 years   
|Customer relationships                |  |                     | 1,200  |   |                      | 3 years   
|Goodwill                              |  |                     | 19,741 |   |                      | Indefinite
|                                      |  |                     |        |   |                      |           
|Total net assets acquired             |  | $                   | 18,949 |   |                      |           
|                                      |  |                     |        |   |                      |           

The assumed net liabilities of SiteScape consisted primarily of accounts payable and other current
liabilities, partially offset by acquired cash and cash equivalents and accounts receivable.

Developed technology relates to SiteScape
products that were commercially available and could be combined with our products and services. Discounted expected future cash flows attributable to the products were used to determine the fair value of developed technology. This resulted in a
valuation of $1.8 million related to developed technology that has reached technological feasibility.

Customer relationships of $1.2
million relate primarily to customers under maintenance agreements. The fair value of these relationships was determined based on discounted expected future cash flows to be received as a result of the agreements and assumptions about their renewal
rates.

Goodwill from the acquisition resulted from our belief that the open collaboration products developed by SiteScape are a valuable
addition to our Workgroup product offerings. We believe they will help us remain competitive in the Workgroup market and increase our Workgroup revenue. The goodwill from the SiteScape acquisition was allocated to our Workgroup product business unit
and is not tax deductible.



7



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



B. Acquisitions (Continued)

PlateSpin

On March 26, 2008, we acquired all of the outstanding shares of PlateSpin Ltd.
(PlateSpin), a leader in support solutions for complete workload lifecycle management and optimization for Windows, UNIX and Linux operating systems in the physical and virtual data center. The purchase price, consisting of $205.0
million in cash, plus merger and transaction costs of $4.0 million, was allocated as follows:



|                                              |  |                     |         |                      |           
|--------------------------------------------- |  | ------------------- | ------- | -------------------- | ----------
|(In thousands)                                |  | EstimatedFair Value |         | EstimatedUseful Life
|Fair value of net tangible assets acquired    |  | $                   | 3,844   |                      | N/A       
|Purchased in-process research and development |  |                     | 2,700   |                      | N/A       
|Identifiable intangible assets:               |  |                     |         |                      |           
|Developed technology                          |  |                     | 12,600  |                      | 3 years   
|Customer relationships                        |  |                     | 11,900  |                      | 3 years   
|Trade name                                    |  |                     | 900     |                      | 3 years   
|Goodwill                                      |  |                     | 177,063 |                      | Indefinite
|                                              |  |                     |         |                      |           
|Total net assets acquired                     |  | $                   | 209,007 |                      |           
|                                              |  |                     |         |                      |           

The acquired net tangible assets of PlateSpin consisted primarily of cash and cash equivalents,
accounts receivable, prepaid expenses and fixed assets, partially offset by accounts payable, and other current liabilities that we assumed. The valuation of items such as fixed assets and deferred income taxes has not yet been completed; therefore,
there could be future purchase price valuation adjustments, the impact of which is not expected to be material.

Purchased in-process
research and development, valued at $2.7 million, pertained to technology that was not technologically feasible at the date of the acquisition, meaning it had not reached the working model stage, did not contain all of the major functions planned
for the product, and was not ready for initial customer testing. At the acquisition date, PlateSpin was working on the next releases of its three major products: PowerConvert, PowerRecon, and Forge, all of which are planned for release at various
dates in the latter part of calendar year 2008. These releases had not yet reached technological feasibility at the time of the acquisition. The purchased in-process research and development was valued based on discounting estimated future cash
flows from the related products. The purchased in-process research and development does not have any alternative future use and did not otherwise qualify for capitalization. As a result, this amount was expensed upon acquisition.

Developed technology relates to PlateSpin products that were commercially available and could be combined with our products and services. Discounted
expected future cash flows attributable to the products were used to determine the fair value of developed technology. This resulted in a valuation of $12.6 million related to developed technology that has reached technological feasibility.

Customer relationships of $11.9 million relate primarily to customers under maintenance agreements. The fair value of these relationships
was determined based on discounted expected future cash flows to be received as a result of the agreements and assumptions about their renewal rates.

PlateSpins trade name, with a fair value of $0.9 million, was determined using the relief-from-royalty method, which assigns a royalty rate to the revenue streams that were expected from the products using the
trade name. The royalty rate was determined based on the history of PlateSpins trade name, the expected life, and information from comparable market transactions, applied to the product revenue and discounted to a present value.

Goodwill from the acquisition resulted from our belief that the workload lifecycle management products developed by PlateSpin are a valuable addition to
our Systems and Resource Management offerings. We believe they will help us remain competitive in the Systems and Resource Management market and increase our Systems and Resource Management revenue. The goodwill from the PlateSpin acquisition was
allocated to our Systems and Resource Management product business unit and is tax deductible.



8



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



B. Acquisitions (Continued)

If the PlateSpin and SiteScape acquisitions had occurred on November 1, 2007 and 2006, the unaudited pro forma results of operations would have been as follows:



|                                    |  |                    |         |               |                  |         |               |  |               |         |  |   |         |  
|----------------------------------- |  | ------------------ | ------- | ------------- | ---------------- | ------- | ------------- |  | ------------- | ------- |  | - | ------- | -
|                                    |  | Three months ended |         |               | Six months ended |        
|(In thousands)                      |  | April 30,2008      |         | April 30,2007 |                  |         | April 30,2008 |  | April 30,2007 |        
|Net revenue                         |  | $                  | 238,720 |               | $                | 240,076 |               |  | $             | 477,846 |  | $ | 466,805 |  
|Net income (loss)                   |  |                    | 3,360   |               |                  | (7,524  | )             |  |               | 11,581  |  |   | (32,284 | )
|Net income (loss) per diluted share |  | $                  | 0.01    |               | $                | (0.02   | )             |  | $             | 0.03    |  | $ | (0.09   | )

The pro forma net income (loss) for the six months ended April 30, 2008 and 2007 includes
$2.7 million of non-recurring purchased in-process research and development costs.

C. Divestitures

CTP Switzerland

On October 31,
2007, we signed an agreement to sell our CTP Switzerland subsidiary to a management-led buyout group for $0.5 million at close, plus an additional contingent payment of up to approximately $0.3 million. The contingent payment will be
received over the next year based on an earn-out model that is tied to CTP Switzerlands management bonuses. The $0.5 million was placed into an escrow account as of October 31, 2007 and was held until close. Final closing of the sale
occurred on January 31, 2008. The cash was received by us in February 2008. There will be no further shareholder or operational relationship between us and CTP Switzerland.

When we signed the agreement, we began classifying CTP Switzerlands results as a discontinued operation in our consolidated statements of
operations and reclassified our results of operations for the prior comparable period. In the fourth quarter of fiscal 2007, we recognized an estimated loss on disposal of $8.9 million resulting from the expected sale. During the first quarter of
fiscal 2008, we recognized a gain on final liquidation of CTP Switzerland of $1.2 million, for a net loss of $7.7 million.

The net loss on
the sale of CTP Switzerland was calculated as follows:



|                                                                         |  |   |        |  
|------------------------------------------------------------------------ |  | - | ------ | -
|(In thousands)                                                           |  |   |       
|Sales price                                                              |  | $ | 500    |  
|Costs to sell                                                            |  |   | (304   | )
|                                                                         |  |   |        |  
|                                                                         |  |   | 196    |  
|                                                                         |  |   |        |  
|Net book value of CTP Switzerland:                                       |  |   |        |  
|Cash                                                                     |  |   | 3,417  |  
|Accounts receivable, net                                                 |  |   | 3,508  |  
|Other current assets                                                     |  |   | 1,718  |  
|Other long-term assets                                                   |  |   | 315    |  
|Current liabilities                                                      |  |   | (3,322 | )
|Foreign exchange and other                                               |  |   | (1,668 | )
|Impairment of goodwill                                                   |  |   | 3,903  |  
|                                                                         |  |   |        |  
|                                                                         |  |   | 7,871  |  
|                                                                         |  |   |        |  
|Net loss on sale of CTP Switzerland before income taxes                  |  | $ | (7,675 | )
|                                                                         |  |   |        |  
|Loss before income taxes recognized in the fourth quarter of fiscal 2007 |  | $ | (8,855 | )
|Gain before income taxes recognized in the first quarter of fiscal 2008  |  | $ | 1,180  |  



9



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



C. Divestitures (Continued)

Salmon

On March 12, 2007, we sold Salmon Ltd. (Salmon) for $4.9 million, plus an
additional contingent payment of approximately $3.9 million to be received if Salmon meets certain cumulative future revenue targets by the end of our fiscal 2009. During the second quarter of fiscal 2008, we received $2.0 million from Salmon that
was part of the original $4.9 million contingent consideration and was included in the calculation of the gain recorded in the second quarter of fiscal 2007. As of the date of sale, we ceased further shareholder or operational relationships with
Salmon. Salmons sale has been recorded as a component of discontinued operations in our consolidated statements of operations.

The
results of discontinued operations (CTP Switzerland and Salmon) are as follows:



|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|------------------------------------------ |  | ------------------ | - | ------------- | ---------------- | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                           |  | Three months ended |   |               | Six months ended |       
|(In thousands)                             |  | April 30,2008      |   | April 30,2007 |                  |        | April 30,2008 |  |   | April 30,2007 |  
|CTP Switzerland net revenue                |  | $                  |  |               | $                | 6,769  |               |  | $ | 6,566         |   |  | $ | 12,979  |  
|Salmon net revenue                         |  |                    |  |               |                  | 2,371  |               |  |   |              |   |  |   | 7,351   |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|                                           |  | $                  |  |               | $                | 9,140  |               |  | $ | 6,566         |   |  | $ | 20,330  |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|CTP Switzerland income before taxes        |  | $                  |  |               | $                | 695    |               |  | $ | 105           |   |  | $ | 716     |  
|Salmon (loss) income before taxes          |  |                    |  |               |                  | (54    | )             |  |   |              |   |  |   | 83      |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Income before taxes                        |  |                    |  |               |                  | 641    |               |  |   | 105           |   |  |   | 799     |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Salmon gain (loss) on sale                 |  |                    |  |               |                  | 628    |               |  |   |              |   |  |   | (10,220 | )
|CTP Switzerland gain on sale               |  |                    |  |               |                  |       |               |  |   | 1,180         |   |  |   |        |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Gain (loss) on discontinued operations     |  |                    |  |               |                  | 1,269  |               |  |   | 1,285         |   |  |   | (9,421  | )
|Income tax expense (benefit)               |  |                    |  |               |                  | 2,845  |               |  |   | (836          | ) |  |   | (69     | )
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Income (loss) from discontinued operations |  | $                  |  |               | $                | (1,576 | )             |  | $ | 2,121         |   |  | $ | (9,352  | )
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  

D. Cash, Cash Equivalents, and Short-Term Investments

We consider all investments with an initial term to maturity of three months or less at the date of purchase to be cash equivalents. Short-term
investments are diversified and primarily consist of investment grade securities that: 1) mature within the next 12 months; 2) have characteristics of short-term investments; or 3) are available to be used for current operating
activities even if some maturities may extend beyond one year.

All marketable debt and equity securities that are included in short-term
investments are considered available-for-sale and are carried at fair value. Temporary increases or decreases in fair value are recorded as unrealized gains or losses in accumulated other comprehensive income in the consolidated balance sheets.
Other-than-temporary declines in fair value are recorded in the consolidated statements of operations. Fair values are based on quoted market prices.

As of April 30, 2008, $7.6 million of our short-term investments are invested in equity securities designated for deferred compensation payments. These funds are paid out as requested by participants of the
Novell, Inc. Deferred Compensation Plan.

As of April 30, 2008, contractual maturities of our short-term investments were:



|                             |  |      |         |                  |   |        
|---------------------------- |  | ---- | ------- | ---------------- | - | -------
|(In thousands)               |  | Cost |         | Fair MarketValue
|Less than one year           |  | $    | 89,429  |                  | $ | 89,748 
|Due in one to two years      |  |      | 141,220 |                  |   | 143,219
|Due in two to three years    |  |      | 97,138  |                  |   | 98,564 
|Due in more than three years |  |      | 65,984  |                  |   | 66,887 
|No contractual maturity      |  |      | 29,244  |                  |   | 28,904 
|                             |  |      |         |                  |   |        
|Total short-term investments |  | $    | 423,015 |                  | $ | 427,322
|                             |  |      |         |                  |   |        



10



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



D. Cash, Cash Equivalents, and Short-Term Investments (Continued)

When securities are sold, their cost is determined based on the first-in first-out method. The realized gains and losses related to these securities are
included in investment income in the consolidated statements of operations. Realized gains and losses on short-term investments were as follows:



|                |  |                    |       |                  |   |               |  |               |        |  |   |    
|--------------- |  | ------------------ | ----- | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ---
|                |  | Three months ended |       | Six months ended
|(In thousands)  |  | April 30,2008      |       | April 30,2007    |   | April 30,2008 |  | April 30,2007
|Realized gains  |  | $                  | 9,373 |                  | $ | 62            |  | $             | 10,504 |  | $ | 167
|Realized losses |  | $                  | 193   |                  | $ | 306           |  | $             | 307    |  | $ | 643

We had net unrealized gains related to short-term investments of $4.3 million as of April 30,
2008 compared to net unrealized gains of $3.3 million at October 31, 2007. Our short-term investment portfolio includes gross unrealized gains and losses of $5.4 million and $1.1 million, respectively, as of April 30, 2008. We did not
record any impairment losses on short-term investments during the second quarters and first six months of fiscal 2008 and 2007, as we considered the unrealized losses to be temporary.

All of our investments in auction-rate securities are classified as long-term investments (See note F, Long-Term Investments). As of
April 30, 2008, we have also classified $11.8 million of investments related to an enhanced liquidity fund to long-term investments (See note F, Long-Term Investments).

E. Restricted Cash

In relation to the appeal we filed in the Amer Jneid legal matter, we were
required by the court to post in the first quarter of fiscal 2008 a $51.5 million bond (See note L, Legal Proceedings). The amount of the bond was determined by statutory regulations and has no connection to the amount we believe may
ultimately be paid in this matter. The bond is held in an interest-bearing account in our name, but is restricted and classified as such on our consolidated balance sheets. The restriction will continue until the resolution of this legal matter.
During the second quarter of fiscal 2008, the bond earned $0.6 million of interest, which increased restricted cash to $52.1 million.

F. Long-Term
Investments

During the fourth quarter of fiscal 2007, we reclassified $39.8 million in auction-rate securities from short-term
investments to long-term investments. These auction-rate securities were reclassified as long-term investments due to the failure of these securities to settle at auction. The failure resulted in the interest rate on these investments resetting at
the maximum rate allowed per the security (LIBOR + 100, 125, or 150 bps) on the regular auction date every 28 days. While we now earn premium interest rates on the investments, until the auctions are successful the investments are not
considered liquid.

As of April 30, 2008, we estimated that our auction-rate securities had a fair value of $30.3 million. During the
second quarter and first six months of fiscal 2008, we recorded unrealized losses on these securities of $1.6 million and $7.0 million, respectively. This unrealized loss is in addition to the $2.5 million unrealized loss that was recorded during
the fourth quarter of fiscal 2007. These unrealized losses were recorded in accumulated other comprehensive income in our consolidated balance sheets. We concluded that this unrealized loss is temporary because: 1) we have the intent and ability to
hold these investments until a recovery of par value; 2) the securities have maintained AAA or AA credit ratings, and the overall credit situation is substantially unchanged from the prior quarter; and 3) the underlying collateral is sound. As these
securities are no longer in a liquid market, their fair value was estimated by utilizing valuation models.

As a result of the failure of
the auctions for these investments, we will not be able to access these funds without realizing a loss of principal unless a future auction on these investments is successful. If the issuers are unable to successfully close future auctions and their
credit ratings significantly deteriorate, we may be required to further adjust the carrying value of these investments and realize an impairment charge for an other-than-temporary decline in fair value. Based on our ability to access our cash and
other short-term investments, our expected operating cash flows, and our other potential sources of cash, we do not anticipate that the lack of liquidity on these investments will affect our ability to operate our business as usual.



11



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



F. Long-Term Investments (Continued)

During the first quarter of fiscal 2008, our holdings in an enhanced liquidity fund were frozen due to liquidity issues. We believe that the underlying
securities are not impaired if held to maturity. As the underlying securities mature, the fund manager is distributing the cash on a pro rata basis to the funds shareholders. During the second quarter and first six months of fiscal 2008, we
received $14.3 million and $44.1 million in fund distributions, respectively. As of April 30, 2008, the balance of this investment is $33.0 million. As of April 30, 2008, we anticipate that $21.2 million of this balance will be distributed
during the next twelve months. The remaining $11.8 million is anticipated to be distributed more than one year after April 30, 2008, and is classified as a long-term investment on our consolidated balance sheets. At present, the funds
cash is being distributed faster than originally scheduled. The fund continues to accrue interest income and, as there are no other-than-temporary impairment or valuation issues with these securities, no impairment charges were recorded.

G. Goodwill and Intangible Assets

Goodwill

Goodwill allocated to our reporting segments as of April 30, 2008 is as follows:



|                               |  |                        |        |   |                                |   |        |                               |  |   |           |   |  |       |         |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------ | - | ------------------------------ | - | ------ | ----------------------------- |  | - | --------- | - |  | ----- | ------- | - |  | - | ------- | -
|(In thousands)                 |  | Open PlatformSolutions |        |   | Identity andSecurityManagement |   |        | Systems andResourceManagement |  |   | Workgroup |   |  | Total |        
|Balance as of October 31, 2007 |  | $                      | 70,599 |   |                                | $ | 81,142 |                               |  | $ | 120,802   |   |  | $     | 132,069 |   |  | $ | 404,612 |  
|PlateSpin acquisition          |  |                        |       |   |                                |   |       |                               |  |   | 177,063   |   |  |       |        |   |  |   | 177,063 |  
|SiteScape acquisition          |  |                        |       |   |                                |   |       |                               |  |   |          |   |  |       | 19,741  |   |  |   | 19,741  |  
|Adjustments                    |  |                        | (873   | ) |                                |   | (1,021 | )                             |  |   | (822      | ) |  |       | (1,722  | ) |  |   | (4,438  | )
|                               |  |                        |        |   |                                |   |        |                               |  |   |           |   |  |       |         |   |  |   |         |  
|Balance as of April 30, 2008   |  | $                      | 69,726 |   |                                | $ | 80,121 |                               |  | $ | 297,043   |   |  | $     | 150,088 |   |  | $ | 596,978 |  
|                               |  |                        |        |   |                                |   |        |                               |  |   |           |   |  |       |         |   |  |   |         |  

Adjustments during the first six months of fiscal 2008 decreased goodwill by $4.4 million. The
adjustments were comprised primarily of a $5.0 million decrease from tax adjustments, partially offset by a $0.6 million increase in foreign currency exchange rate adjustments related to PlateSpin. The $5.0 million tax adjustments were attributable
to the SilverStream, Ximian, Immunix, Tally, RedMojo, Senforce and SiteScape acquisitions and related to the reversal of deferred tax asset valuation allowances for acquired net operating loss carryforwards that were utilized by income generated in
the first six months of fiscal 2008.

Intangible Assets

The following is a summary of intangible assets:



|                                   |  |                |         |                         |   |         |               |  |             |        |                         |   |        |               |   |            |   |  |   |        |  |                      
|---------------------------------- |  | -------------- | ------- | ----------------------- | - | ------- | ------------- |  | ----------- | ------ | ----------------------- | - | ------ | ------------- | - | ---------- | - |  | - | ------ |  | ---------------------
|                                   |  | April 30, 2008 |         | October 31, 2007        |   |        
|(In thousands)                     |  | GrossAmount    |         | AccumulatedAmortization |   |         | Net BookValue |  | GrossAmount |        | AccumulatedAmortization |   |        | Net BookValue |   | AssetLives
|Developed technology               |  | $              | 48,433  |                         | $ | (29,042 | )             |  | $           | 19,391 |                         | $ | 34,033 |               | $ | (26,203    | ) |  | $ | 7,830  |  | 3-4 years            
|Trademarks/trade names             |  |                | 25,631  |                         |   | (490    | )             |  |             | 25,141 |                         |   | 24,731 |               |   | (419       | ) |  |   | 24,312 |  | 3 years or Indefinite
|Customer/contractual relationships |  |                | 31,911  |                         |   | (18,410 | )             |  |             | 13,501 |                         |   | 18,811 |               |   | (17,393    | ) |  |   | 1,418  |  | 3 years              
|Internal use software              |  |                | 5,057   |                         |   | (5,057  | )             |  |             |       |                         |   | 5,057  |               |   | (5,045     | ) |  |   | 12     |  | 3 years              
|                                   |  |                |         |                         |   |         |               |  |             |        |                         |   |        |               |   |            |   |  |   |        |  |                      
|Total intangible assets            |  | $              | 111,032 |                         | $ | (52,999 | )             |  | $           | 58,033 |                         | $ | 82,632 |               | $ | (49,060    | ) |  | $ | 33,572 |  |                      
|                                   |  |                |         |                         |   |         |               |  |             |        |                         |   |        |               |   |            |   |  |   |        |  |                      

Amortization of intangible assets for the second quarters of fiscal 2008 and 2007 was $2.4 million
and $1.8 million, respectively. Amortization of intangible assets for the first six months of fiscal 2008 and 2007 was $3.9 million and $5.0 million, respectively. Amortization of existing intangibles is estimated to be approximately $7.1 million
for the remainder of fiscal 2008, $12.6 million in fiscal 2009, $10.3 million in fiscal 2010, and $3.8 million in fiscal 2011, with nothing thereafter. See note B, Acquisitions for details about the increase in intangible assets from our
SiteScape and PlateSpin acquisitions during the second quarter of fiscal 2008.



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



H. Income Taxes

We are subject to income taxes in numerous jurisdictions and the use of estimates is required in determining our provision for income taxes. For the second quarter and first six months of fiscal 2008, we provided for
income tax expense on continuing operations of $13.7 million and $24.6 million, respectively. Income tax expense was recorded based on the estimated annual effective tax rate for the year applied to ordinary income (pre-tax income
excluding unusual or infrequently occurring discrete items). Due to the utilization of a significant amount of our net operating loss carryforwards in previous years, substantially all of the future benefit received from our remaining net operating
loss carryforwards used to offset U.S. taxable income will be credited to additional paid-in capital or goodwill and not to income tax expense. In addition, the windfall tax benefits associated with stock-based compensation will be credited to
additional paid-in capital. In connection with our adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS No. 123(R)), in fiscal 2006, we elected to follow
the tax ordering laws to determine the sequence in which deductions, net operating loss carryforwards, and tax credits are utilized. Accordingly, during the second quarter and first six months of fiscal 2008, a tax benefit relating to stock options
for current year exercises and utilization of previously reserved net operating losses and tax credits of $14.3 million and $24.0 million, respectively, was credited to additional paid-in capital. During the first six months of fiscal 2008, a tax
benefit relating to the utilization of previously reserved acquired net operating losses of $5.0 million was credited to goodwill.

The
effective tax rate for the second quarter and first six months of fiscal 2008 differs from the federal statutory rate of 35% primarily due to the effects of foreign taxes, stock-based compensation plans, and differences between the book and tax
treatment of certain income items on which a valuation allowance has been recorded. The effective tax rate on continuing operations for the second quarter of fiscal 2008 was 70% compared to an effective tax rate of 165% for the same period in fiscal
2007. The effective tax rate on continuing operations for the first six months of fiscal 2008 was 54% compared to a benefit effective tax rate in excess of 100% (2,269%) for the same period in fiscal 2007. The effective tax rate for the second
quarter and first six months of fiscal 2008 differs from the effective tax rate for the same periods of fiscal 2007 because, even though we had near break-even earnings from continuing operations in the second quarter and first six months of fiscal
2007, we had income tax expense resulting primarily from the use of previously reserved U.S. net operating loss carryovers.

In accordance
with determinations made pursuant to the applicable accounting standards, we continue to believe that it is more likely than not that most of our remaining U.S. net deferred tax assets will not be realized based on all available evidence. As a
result, we have provided a valuation allowance on those U.S. net deferred tax assets. As deferred tax assets or liabilities increase or decrease in the future, or if a portion or all of the valuation allowance is no longer deemed to be necessary,
the adjustments to the valuation allowance will increase or decrease future income tax provisions, goodwill or additional paid-in capital. It is reasonably possible that we could reduce some or all of our valuation allowance in the near-term.

Prior to fiscal 2008, we evaluated our tax reserves under SFAS No. 5, Accounting for Contingencies. SFAS No. 5
required us to accrue for losses we believed were probable and could be reasonably estimated. In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the
tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are
required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The adoption of FIN 48 resulted in a $1.4 million non-cash adjustment to
increase our reserves for unrecognized tax benefits and a reduction to beginning retained earnings. Our policy for interest and penalties related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement
provisions of FIN 48. Interest and penalties on tax reserves continue to be classified as income tax expense in our consolidated statements of operations.

As of November 1, 2007, we had reserves for unrecognized tax benefits totaling $62.2 million, including the $1.4 million effect of adopting FIN 48, and related accrued interest of $7.1 million, of which $42.8
million would favorably impact our effective tax rate if recognized. At April 30, 2008, we had reserves for unrecognized tax benefits totaling $56.8 million including related accrued interest of $6.8 million, of which $40.5 million would
favorably impact the effective tax rate if recognized. The $5.4 million decrease in reserves for unrecognized tax benefits during the year relates primarily to benefits recognized as a result of the lapse of statutes of limitations. The $40.5
million is recorded in other long-term liabilities on our consolidated balance sheet. The difference between the total unrecognized tax benefits and those affecting the effective tax rate is due to certain unrecognized tax benefits that would have a
full valuation allowance if recognized. As of April 30, 2008, we do not anticipate that unrecognized tax benefits will significantly increase or decrease within the next 12 months.



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



H. Income Taxes (Continued)

We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we
are subject to examination by taxing authorities throughout the world. During January 2008, the U.S. Internal Revenue Service opened an examination for fiscal years 2005 and 2006. In addition, we are at various stages in examinations in some foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years prior to fiscal 1998 or non-U.S. income tax examinations for years prior to fiscal 2004.

I. Line of Credit

We have a $20.0 million bank line
of credit available for letter of credit purposes. As of April 30, 2008, there were standby letters of credit of $15.4 million outstanding under this line, all of which are collateralized by cash. The bank line of credit expires on
April 1, 2009. The bank line of credit is subject to the terms of a credit agreement containing financial covenants and restrictions, none of which are expected to affect our operations. As of April 30, 2008, we are in full compliance with
all the financial covenants and restrictions contained in this credit agreement. In addition, at April 30, 2008, we had outstanding letters of credit of an insignificant amount at other banks.

J. Restructuring and Merger Liabilities

Restructuring liabilities

During the first six months of fiscal 2008, we recorded net restructuring expenses of $4.8
million. This was comprised of $6.2 million in additional restructuring charges, offset in part by $1.4 million in reductions of accruals for restructuring activities recorded in prior periods.

The restructuring actions undertaken during the second quarter of fiscal 2008 are a continuation of the restructuring plan that we began during the
fourth quarter of fiscal 2006 and are anticipated to continue throughout the remainder of fiscal 2008. We previously announced plans to incur additional restructuring charges of $15 million to $25 million in fiscal 2008. The restructuring plan is
related to our two-year strategy to develop a comprehensive transformation of our business and to achieve competitive operating margins. This strategy currently has four main initiatives: 1) improving our sales model and sales staff specialization;
2) integrating our product development approach and balancing between on and offshore development locations; 3) improving our administrative and support functions; and 4) transforming our services business to be more efficient and product focused.
Specific actions taken during the first six months of fiscal 2008 included reducing our workforce by 46 employees in technical support, sales and marketing, and general and administrative. We also vacated several facilities.



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



J. Restructuring and Merger Liabilities (Continued)

Our restructuring activities in previous periods are disclosed in detail in our Annual Report on Form 10-K for fiscal 2007. The following table summarizes
the restructuring reserve balance as of April 30, 2008 and activity during the first six months of fiscal 2008:



|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|----------------------------------------- |  | ---------- | ------ | - | ---------- | - | ------- | ---------- |  | ---------- | -- |  | ------------------ | ------ | - | ----- | - | ----- | - |  | - | ------- | -
|(In thousands)                            |  | Fiscal2008 |        |   | Fiscal2007 |   |         | Fiscal2006 |  | Fiscal2005 |    |  | Prior toFiscal2005 |        |   | Total |  
|Balance as of October 31, 2007:           |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Workforce reductions                      |  | $          |       |   |            | $ | 21,310  |            |  | $          |   |  | $                  | 1,234  |   |       | $ |      |   |  | $ | 22,544  |  
|Excess facilities, property and equipment |  |            |       |   |            |   | 2,101   |            |  |            |   |  |                    | 3,407  |   |       |   | 2,484 |   |  |   | 7,992   |  
|Other restructuring-related costs         |  |            |       |   |            |   | 14      |            |  |            | 40 |  |                    | 95     |   |       |   |      |   |  |   | 149     |  
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Total restructuring reserve balance       |  |            |       |   |            |   | 23,425  |            |  |            | 40 |  |                    | 4,736  |   |       |   | 2,484 |   |  |   | 30,685  |  
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Original charge/adjustments:              |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Workforce reductions                      |  |            | 4,247  |   |            |   | (150    | )          |  |            |   |  |                    | (1,210 | ) |       |   |      |   |  |   | 2,887   |  
|Excess facilities, property and equipment |  |            | 1,928  |   |            |   | 77      |            |  |            |   |  |                    | 123    |   |       |   | (195  | ) |  |   | 1,933   |  
|Other restructuring-related costs         |  |            | 32     |   |            |   |        |            |  |            | 2  |  |                    | (95    | ) |       |   |      |   |  |   | (61     | )
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Total original charge/adjustments         |  |            | 6,207  |   |            |   | (73     | )          |  |            | 2  |  |                    | (1,182 | ) |       |   | (195  | ) |  |   | 4,759   |  
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Payments:                                 |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Workforce reductions                      |  |            | (2,004 | ) |            |   | (18,820 | )          |  |            |   |  |                    | (16    | ) |       |   |      |   |  |   | (20,840 | )
|Excess facilities, property and equipment |  |            | (962   | ) |            |   | (548    | )          |  |            |   |  |                    | (403   | ) |       |   | (629  | ) |  |   | (2,542  | )
|Other restructuring-related costs         |  |            | (32    | ) |            |   | (14     | )          |  |            |   |  |                    |       |   |       |   |      |   |  |   | (46     | )
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Total payments                            |  |            | (2,998 | ) |            |   | (19,382 | )          |  |            |   |  |                    | (419   | ) |       |   | (629  | ) |  |   | (23,428 | )
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Balance as of April 30, 2008:             |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Workforce reductions                      |  |            | 2,243  |   |            |   | 2,340   |            |  |            |   |  |                    | 8      |   |       |   |      |   |  |   | 4,591   |  
|Excess facilities, property and equipment |  |            | 966    |   |            |   | 1,630   |            |  |            |   |  |                    | 3,127  |   |       |   | 1,660 |   |  |   | 7,383   |  
|Other restructuring-related costs         |  |            |       |   |            |   |        |            |  |            | 42 |  |                    |       |   |       |   |      |   |  |   | 42      |  
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  
|Total restructuring reserve balance       |  | $          | 3,209  |   |            | $ | 3,970   |            |  | $          | 42 |  | $                  | 3,135  |   |       | $ | 1,660 |   |  | $ | 12,016  |  
|                                          |  |            |        |   |            |   |         |            |  |            |    |  |                    |        |   |       |   |       |   |  |   |         |  

Net adjustments reduced the restructuring reserves during the first six months of fiscal 2008 by
$1.4 million for changes in estimates related to various severance and related benefits and facility reserves. These adjustments are reflected in the table above for the respective fiscal year.

As of April 30, 2008, the remaining unpaid restructuring balances include accrued liabilities related to lease costs for redundant facilities, which
will be paid over the respective remaining contract terms, the longest of which extends to 2012, and severance and other benefits, which will primarily be paid over the next twelve months.

Merger liabilities

The following
table summarizes the merger liabilities balance and activity associated with our acquisitions, including transaction costs, during the first six months of fiscal 2008:



|                         |  |                            |        |                            |   |                      |  |   |                          |   |  |   |       
|------------------------ |  | -------------------------- | ------ | -------------------------- | - | -------------------- |  | - | ------------------------ | - |  | - | ------
|(In thousands)           |  | Balance atOctober 31, 2007 |        | Additions fromAcquisitions |   | Payments/Adjustments |  |   | Balance atApril 30, 2008
|Facilities related       |  | $                          | 12,725 |                            | $ | 168                  |  | $ | (667                     | ) |  | $ | 12,226
|Employee related         |  |                            |       |                            |   | 196                  |  |   |                         |   |  |   | 196   
|Other                    |  |                            | 325    |                            |   | 4,092                |  |   | (2,071                   | ) |  |   | 2,346 
|                         |  |                            |        |                            |   |                      |  |   |                          |   |  |   |       
|Total merger liabilities |  | $                          | 13,050 |                            | $ | 4,456                |  | $ | (2,738                   | ) |  | $ | 14,768
|                         |  |                            |        |                            |   |                      |  |   |                          |   |  |   |       

As of April 30, 2008, the remaining unpaid merger liability balances include accrued
liabilities related to lease costs for redundant facilities, which will be paid over the respective remaining contract terms, the longest of which extends to 2014, severance and related benefits, and professional fees, which will be paid over the
next twelve months.



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



K. Senior Convertible Debentures

Under the terms of the consent solicitation that was entered into as of November 9, 2006, we were required to make special interest payments of $44.0 million over three periods. During the first six months of
fiscal 2008, we made total cash payments for interest of $15.6 million, of which $13.9 million was for the final special interest payment. During the second quarter and first six months of fiscal 2008, we incurred interest expense related to the
Debentures of $5.5 million and $11.1 million, respectively.

During the second quarter of fiscal 2008, we received authorization from our
Board of Directors to repurchase, from time to time, up to $600 million face value of the Debentures in such quantities, at such prices, and in such manner as may be directed by our management. During the second quarter of fiscal 2008, we purchased
and retired $120.6 million face value of the Debentures for total cash consideration of $115.6 million, including $0.2 million of accrued interest. As part of this transaction, the portions of the unamortized debt issuance costs and prepaid interest
related to the bonds that were repurchased were written off, resulting in a $0.4 million gain. This gain is shown as a component of interest expense and other in our consolidated statements of operations.

Holders of the Debentures may require us to repurchase all or a portion of their Debentures on July 15, 2009. As a result, the outstanding balance
of the Debentures and related deferred financing costs will be classified as a current liability and asset, respectively, beginning in the third quarter of fiscal 2008.

L. Legal Proceedings

Between September and November of 2006, seven separate derivative complaints
were filed in Massachusetts state and federal courts against us and many of our current and former officers and directors asserting various claims related to alleged options backdating. We are also named as a nominal defendant in these complaints,
although the actions are derivative in nature and purportedly asserted on our behalf. These actions arose out of our announcement of a voluntary review of our historical stock-based compensation practices. The complaints essentially allege that
since 1999, we materially understated our compensation expenses and, as a result, overstated actual income. The five actions filed in federal court have been consolidated, and the parties to that action stipulated that the defendants answer or
motion to dismiss is due 45 days after the filing of an amended complaint. Although the parties filed the stipulation with the Court setting forth a schedule for the filing of an amended complaint and the briefing on our motion to dismiss, the
Court has not yet taken action on that proposed stipulation. The two state court cases have been consolidated before the Business Litigation Session of the Massachusetts Suffolk County Superior Court. On or about February 13, 2008, plaintiffs
filed and served a First Amended Shareholder Derivative Complaint. On May 2, 2008, we filed a motion to dismiss. Per the scheduling order entered by the court, the plaintiffs opposition brief is due June 20, 2008; we will serve our
reply brief and file all papers by July 18, 2008. The court has scheduled a hearing on the motion to dismiss for July 28, 2008. While we are still in the process of evaluating these claims, based on the results of our own findings and
rulings in similar cases, we believe there are strong defenses to the claims asserted in both consolidated cases. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a
material adverse effect on our financial position, results of operations or cash flows.

On January 20, 2004, the SCO Group, Inc.
filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. Upon our motion, the action was removed to the U.S. District Court, District of Utah. SCOs original complaint alleged that our public
statements and filings regarding the ownership of the copyrights in UNIX and UnixWare harmed SCOs business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. Our answer set forth numerous affirmative
defenses and counterclaims alleging slander of title and breach of contract, and seeking declaratory actions and actual, special and punitive damages in an amount to be proven at trial. On February 3, 2006, SCO filed a Second Amended Complaint
alleging that we had violated supposed non-competition provisions of the agreement under which we sold certain UNIX-related assets to SCO, that we infringe SCOs copyrights, and that we are engaging in unfair competition by attempting to
deprive SCO of the value of the UNIX technology. SCO sought to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare
copyrights, to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights, and to cause us to pay actual, special and punitive damages in an amount to be proven at trial. As a result of
SCOs Second Amended Complaint, SUSE filed a demand for arbitration before the International Court of Arbitration in Zurich, Switzerland, pursuant to a UnitedLinux Agreement in which SCO and SUSE were parties. On August 10,
2007, the U.S. District Court Judge issued a Memorandum Decision and Order that granted us summary judgment against SCO on significant issues in the litigation. The District Court determined that we own the UNIX copyrights and dismissed certain
of SCOs claims against us. In addition, the Court ruled that we were entitled to a share of certain royalties SCO had received from Sun Microsystems, Inc. and Microsoft through their licenses with SCO. Prior to the



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



L. Legal Proceedings (Continued)

commencement of the trial before the U.S. District Court, SCO filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. After obtaining relief from the Bankruptcy Court, the trial to determine the
amount, if any, owed to us from licensing revenues paid to SCO concluded on May 2, 2008. The trial court indicated that it would issue a ruling in the near future and we anticipate it will also consider our claim that SCO did not have authority
to enter into the licensing agreements with Microsoft and Sun Microsystems, Inc. Hearings before the International Court Tribunal in connection with the SUSE Arbitration matter have been stayed by the Court in the SCO bankruptcy case. 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.

On July 12, 2002, Amer Jneid and other related plaintiffs filed a complaint in the Superior Court of California, Orange County, alleging claims for
breach of contract, fraud in the inducement, misrepresentation, infliction of emotional distress, rescission, slander and other claims against us in connection with our purchase of so-called DeFrame technology from the plaintiffs and two
affiliated corporations (TriPole Corporation and Novetrix), and employment agreements that we entered into with the plaintiffs in connection with the purchase. The complaint sought unspecified damages, including punitive damages. The
dispute (resulting in these claims) arises out of the plaintiffs assertion that we failed to properly account for license distributions which the plaintiffs claim would have entitled them to certain bonus payouts under the purchase and
employment agreements. After a lengthy jury trial in January 2007, the jury returned a verdict in favor of the various plaintiffs on certain contract claims and in favor of us on various remaining claims. As a result of the verdict, a judgment was
entered against us on August 27, 2007 in the amount of $19.0 million plus an additional $4.5 million in prejudgment interest. In addition, the Court has awarded plaintiffs attorneys fees and costs related to the litigation. We have filed
Notices of Appeal of the judgment and the related orders to the California Court of Appeals. We believe we have strong legal arguments that could result in reversal of the judgment and the lower courts orders; however, we believe settlement is
also a possibility. We accrued $27.0 million in prior fiscal periods for this matter. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our
financial position or results of operations. During the first quarter of fiscal 2008, we posted a $51.5 million bond in conjunction with our appeal of this judgment. The amount of the bond was determined by statutory regulations and has no
connection to the amount we believe may ultimately be paid in this matter. (See note E, Restricted Cash).

SilverStream, which
we acquired in July 2002, and several of its former officers and directors, as well as the underwriters who handled SilverStreams two public offerings, were named as defendants in several class action complaints that were filed on behalf of
certain former stockholders of SilverStream who purchased shares of SilverStream common stock between August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs
have brought against other issuers and underwriters. These complaints all allege violations of the Securities Act of 1933, as amended, 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 the issuers, including SilverStream. A Consolidated Amended Complaint with respect to all of these companies was filed in the U.S. District Court,
Southern District of New York, on April 19, 2002. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the Court. While we believe that SilverStream and its former officers and
directors have meritorious defenses to the claims, the various parties are pursuing settlement discussions that, if successful, would resolve all claims including the ones against SilverStream and its former directors and officers. Any settlement
agreement must receive final approval from the Court and efforts to pursue the same are ongoing. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse
effect on our financial position, results of operations or cash flows.

On November 12, 2004, we filed suit against Microsoft in the
U.S. District Court, District of Utah. We are seeking treble and other damages under the Clayton Act, based on claims that Microsoft eliminated competition in the office productivity software market during the time that we owned the WordPerfect
word-processing application and the Quattro Pro spreadsheet application. Among other claims, we allege that Microsoft withheld certain critical technical information about the Windows operating system (Windows) from us, thereby impairing
our ability to develop new versions of WordPerfect and other office productivity applications, and that Microsoft integrated certain technologies into Windows designed to exclude WordPerfect and other applications owned by us from relevant markets.
In addition, we allege that Microsoft used its monopoly power to prevent original equipment manufacturers from offering WordPerfect and other applications to customers. On June 10, 2005, Microsofts motion to dismiss the complaint was
granted in part and denied in part. On October 15, 2007, the U.S. Fourth Circuit Court of Appeals affirmed the District Courts ruling. On March 18, 2008, the United States Supreme Court rejected Microsofts Petition for a
Writ of Certiorari seeking to appeal the Fourth Circuits Decision. As a result of these rulings, we are now proceeding with the remaining claims against Microsoft.



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NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



L. Legal Proceedings (Continued)

We account for legal reserves under SFAS No. 5 which requires us to accrue for losses that we believe are probable and can be reasonably estimated. We evaluate the adequacy of our legal reserves based on our
assessment of many factors, including our interpretations of the law and our assumptions about the future outcome of each case based on current information. It is reasonably possible that our legal reserves could be increased or decreased in the
near term based on our assessment of these factors. We are currently party to various legal proceedings and claims involving former employees, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these
matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims will have a material adverse effect, individually or in the aggregate, on our consolidated financial position, results of operations or cash flows.

M. Net Income (Loss) Per Share From Continuing Operations

The following tables reconcile the numerators and denominators of the net income (loss) per share from continuing operations calculation for the three and six months ended April 30, 2008 and 2007:



|                                                                                                                                 |  |                    |         |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------- | - | ------- | -
|                                                                                                                                 |  | Three months ended |        
|(In thousands, except per share data)                                                                                            |  | April 30,2008      |         | April 30,2007 |  
|Basic net income (loss) per share from continuing operations computation:                                                        |  |                    |         |               |   |         |  
|Net income (loss) from continuing operations                                                                                     |  | $                  | 5,866   |               | $ | (1,312  | )
|                                                                                                                                 |  |                    |         |               |   |         |  
|Weighted-average common shares outstanding, excluding unvested restricted stock                                                  |  |                    | 352,785 |               |   | 346,492 |  
|                                                                                                                                 |  |                    |         |               |   |         |  
|Basic net income (loss) per share from continuing operations                                                                     |  | $                  | 0.02    |               | $ | (0.00   | )
|                                                                                                                                 |  |                    |         |               |   |         |  
|Diluted net income (loss) per share from continuing operations computation:                                                      |  |                    |         |               |   |         |  
|Net income (loss) from continuing operations                                                                                     |  | $                  | 5,866   |               | $ | (1,312  | )
|                                                                                                                                 |  |                    |         |               |   |         |  
|Weighted-average common shares outstanding                                                                                       |  |                    | 352,785 |               |   | 346,492 |  
|Incremental shares attributable to the assumed exercise of outstanding options, unvested restricted stock, and other stock
plans |  |                    | 1,502   |               |   |        |  
|                                                                                                                                 |  |                    |         |               |   |         |  
|Total adjusted weighted-average common shares                                                                                    |  |                    | 354,287 |               |   | 346,492 |  
|                                                                                                                                 |  |                    |         |               |   |         |  
|Diluted net income (loss) per share from continuing operations                                                                   |  | $                  | 0.02    |               | $ | (0.00   | )
|                                                                                                                                 |  |                    |         |               |   |         |  

In the calculation of diluted earnings per share, 50.8 million and 52.1 million shares
of common stock attributable to the assumed conversion of the Debentures were excluded from the calculation in the second quarters of fiscal 2008 and 2007, respectively, as their effect would have been anti-dilutive.

Incremental shares of 2,091,101 attributable to the assumed exercise of outstanding options with exercise prices less than the average market price of
our stock (in-the-money) were not included in the calculation of diluted net loss per share for the second quarter of fiscal 2007 as their effect would have been anti-dilutive due to the net loss in the period. Incremental shares
attributable to options with exercise prices that were at or greater than the average market price of our stock (out-of-the-money) were not included in the calculation of diluted net income (loss) per share for the second quarters of
fiscal 2008 and 2007 as their effect would have been anti-dilutive. Out-of-the-money options for the second quarters of fiscal 2008 and 2007 totaled 15,250,548 and 19,512,554, respectively.



18



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



M. Net Income (Loss) Per Share From Continuing Operations (Continued)



|                                                                                                                                 |  |                  |         |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------- | - | ------- | -
|                                                                                                                                 |  | Six months ended |        
|(In thousands, except per share data)                                                                                            |  | April 30,2008    |         | April 30,2007 |  
|Basic net income (loss) per share from continuing operations computation:                                                        |  |                  |         |               |   |         |  
|Net income (loss) from continuing operations                                                                                     |  | $                | 20,550  |               | $ | (13,481 | )
|                                                                                                                                 |  |                  |         |               |   |         |  
|Weighted-average common shares outstanding, excluding unvested restricted stock                                                  |  |                  | 351,957 |               |   | 346,007 |  
|                                                                                                                                 |  |                  |         |               |   |         |  
|Basic net income (loss) per share from continuing operations                                                                     |  | $                | 0.06    |               | $ | (0.04   | )
|                                                                                                                                 |  |                  |         |               |   |         |  
|Diluted net income (loss) per share from continuing operations computation:                                                      |  |                  |         |               |   |         |  
|Net income (loss) from continuing operations                                                                                     |  | $                | 20,550  |               | $ | (13,481 | )
|                                                                                                                                 |  |                  |         |               |   |         |  
|Weighted-average common shares outstanding                                                                                       |  |                  | 351,957 |               |   | 346,007 |  
|Incremental shares attributable to the assumed exercise of outstanding options, unvested restricted stock, and other stock
plans |  |                  | 1,703   |               |   |        |  
|                                                                                                                                 |  |                  |         |               |   |         |  
|Total adjusted weighted-average common shares                                                                                    |  |                  | 353,660 |               |   | 346,007 |  
|                                                                                                                                 |  |                  |         |               |   |         |  
|Diluted net income (loss) per share from continuing operations                                                                   |  | $                | 0.06    |               | $ | (0.04   | )
|                                                                                                                                 |  |                  |         |               |   |         |  

In the calculation of diluted earnings per share, 51.4 million and 52.1 million shares
of common stock attributable to the assumed conversion of the Debentures were excluded from the calculation in the first six months of fiscal 2008 and 2007, respectively, as their effect would have been anti-dilutive.

Incremental shares of 1,971,131 attributable to the assumed exercise of outstanding in-the-money options were not included in the calculation of diluted
net loss per share for the first six months of fiscal 2007 as their effect would have been anti-dilutive due to the net loss in the period. Incremental shares attributable to out-of-the-money options were not included in the calculation of diluted
net income (loss) per share for the first six months of fiscal 2008 and 2007 as their effect would have been anti-dilutive. Out-of-the-money options for the first six months of fiscal 2008 and 2007 totaled 16,154,057 and 21,461,045, respectively.

N. Comprehensive Income

The
components of comprehensive income (loss) are as follows:



|                                                    |  |                    |         |   |                  |   |        |               |  |   |               |   |  |   |         |  
|--------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                    |  | Three months ended |         |   | Six months ended |  
|(In thousands) Increase/(decrease)                  |  | April 30,2008      |         |   | April 30,2007    |   |        | April 30,2008 |  |   | April 30,2007 |  
|Net income (loss)                                   |  | $                  | 5,866   |   |                  | $ | (2,888 | )             |  | $ | 22,671        |   |  | $ | (22,833 | )
|Change in net unrealized (loss) gain on investments |  |                    | (12,826 | ) |                  |   | 3,136  |               |  |   | (5,999        | ) |  |   | 2,801   |  
|Change in cumulative translation adjustments        |  |                    | 4,025   |   |                  |   | 5,083  |               |  |   | (960          | ) |  |   | 7,026   |  
|Change in pension obligations                       |  |                    | 85      |   |                  |   |       |               |  |   | 120           |   |  |   |        |  
|                                                    |  |                    |         |   |                  |   |        |               |  |   |               |   |  |   |         |  
|Comprehensive income (loss)                         |  | $                  | (2,850  | ) |                  | $ | 5,331  |               |  | $ | 15,832        |   |  | $ | (13,006 | )
|                                                    |  |                    |         |   |                  |   |        |               |  |   |               |   |  |   |         |  

Our accumulated other comprehensive income is comprised of the following:



|                                             |  |               |        |   |                 |   |       
|-------------------------------------------- |  | ------------- | ------ | - | --------------- | - | ------
|(In thousands)                               |  | April 30,2008 |        |   | October 31,2007
|Net unrealized (loss) gain on investments    |  | $             | (5,181 | ) |                 | $ | 818   
|Cumulative translation adjustment            |  |               | 33,911 |   |                 |   | 34,871
|Pension obligation                           |  |               | 1,529  |   |                 |   | 1,409 
|                                             |  |               |        |   |                 |   |       
|Total accumulated other comprehensive income |  | $             | 30,259 |   |                 | $ | 37,098
|                                             |  |               |        |   |                 |   |       



19



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



O. Stock-Based Compensation

We currently have five stock award plans that allow us to grant stock options, restricted stock units and other equity-based awards to employees and consultants. In addition, we currently have one stock plan for
non-employee members of the Board of Directors that expired in April 2008; therefore, no additional awards can be granted under the plan. We continue to manage outstanding options under this plan. All stock-based compensation awards are issued under
one of these six stock award plans. When granting stock options, we typically grant nonstatutory options at fair market value on the grant date, defined in the plans as the closing price of our stock on the day prior to grant. We also grant
restricted stock units. These plans are discussed in more detail in our fiscal 2007 Annual Report on Form 10-K (See note U, Stockholders Equity).

Equity-based awards

We made stock option and restricted stock unit grants for the following number
of shares during the first six months of fiscal 2008 and 2007:



|                             |  |                  |  |              
|---------------------------- |  | ---------------- |  | -------------
|                             |  | Six months ended
|(In thousands)               |  | April 30,2008    |  | April 30,2007
|Stock options:               |  |                  |  |              
|Performance-based            |  | 1,583            |  | 728          
|Time-based                   |  | 1,514            |  | 2,179        
|                             |  |                  |  |              
|Total stock options          |  | 3,097            |  | 2,907        
|                             |  |                  |  |              
|Restricted stock units:      |  |                  |  |              
|Performance-based            |  | 626              |  | 1,104        
|Time-based                   |  | 1,385            |  | 744          
|                             |  |                  |  |              
|Total restricted stock units |  | 2,011            |  | 1,848        
|                             |  |                  |  |              

Stock options

Performance-based:In the first six months of fiscal 2008 and 2007, we granted stock options to executives that will vest based on the achievement of certain revenue targets set in each of the four fiscal years
beginning in the year of grant. If the targets are not met, the stock options will expire unvested.

Time-based:In the first six
months of fiscal 2008 and 2007, we granted stock options to executive and non-executive employees. Vesting of the options occurs over four years as follows: 25% of the grant vests on the first anniversary of the grant date; the remaining 75% of the
grant vests monthly thereafter. The options expire 8 years after the grant date.

Restricted stock units

Performance-based: In the first six months of fiscal 2008 and 2007, we granted restricted stock units to executives that will vest based on the
achievement of certain profit targets for each of the four fiscal years beginning in the year of grant. If the targets are not met, the restricted stock units will expire and will not be released.

Time-based:In the first six months of fiscal 2008 and 2007, we granted restricted stock units to executive and non-executive employees. Most
units vest proportionally on each grant date anniversary over three or four years.



20



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



O. Stock-Based Compensation (Continued)

Stock-based compensation expense

Our
consolidated statements of operations include the following amounts of stock-based compensation expense in the respective captions:



|                                       |  |                    |       |                  |   |               |  |               |        |  |   |       
|-------------------------------------- |  | ------------------ | ----- | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                                       |  | Three months ended |       | Six months ended
|(In thousands)                         |  | April 30,2008      |       | April 30,2007    |   | April 30,2008 |  | April 30,2007
|Cost of revenue                        |  | $                  | 535   |                  | $ | 937           |  | $             | 1,843  |  | $ | 1,984 
|                                       |  |                    |       |                  |   |               |  |               |        |  |   |       
|Sales and marketing                    |  |                    | 2,030 |                  |   | 2,400         |  |               | 5,447  |  |   | 4,260 
|Product development                    |  |                    | 2,353 |                  |   | 2,535         |  |               | 5,357  |  |   | 4,686 
|General and administrative             |  |                    | 2,092 |                  |   | 4,061         |  |               | 5,130  |  |   | 5,502 
|                                       |  |                    |       |                  |   |               |  |               |        |  |   |       
|Operating expenses                     |  |                    | 6,475 |                  |   | 8,996         |  |               | 15,934 |  |   | 14,448
|Tax benefit                            |  |                    |      |                  |   |              |  |               |       |  |   |      
|                                       |  |                    |       |                  |   |               |  |               |        |  |   |       
|Total stock-based compensation expense |  | $                  | 7,010 |                  | $ | 9,933         |  | $             | 17,777 |  | $ | 16,432
|                                       |  |                    |       |                  |   |               |  |               |        |  |   |       

Total unrecognized stock-based compensation expense expected to be recognized over an estimated
weighted-average amortization period of 2.2 years was $70.3 million at April 30, 2008.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (ESPP) is considered non-compensatory under SFAS No. 123(R) and, accordingly, no
compensation expense has been recorded for issuances under the ESPP. Issuances of stock under the ESPP during the first six months of fiscal 2008 and 2007 totaled 118,737 and 183,131 shares, respectively.

P. Segment Information

We operate and report our
financial results in four business unit segments based on information solution categories. The segments are:



| |  |  | Open Platform Solutions
| | - |  | -----------------------



| |  |  | Identity and Security Management
| | - |  | --------------------------------



| |  |  | Systems and Resource Management
| | - |  | -------------------------------



| |  |  | Workgroup
| | - |  | ---------

Our performance is
evaluated by our Chief Executive Officer and our other chief decision makers based on reviewing revenue and segment operating income (loss) information for each segment. The operating segments sell both our software and services. These offerings are
sold directly and through original equipment manufacturers, resellers, and distributors who sell to dealers and end users. Operating results by segment are as follows:



|                                   |  |                    |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  
|---------------------------------- |  | ------------------ | ------- | ----------- | -------------- | ------- | --------------------- |  | - | ---------- | - | ----------- | - | ------- | --------------------- | - | ------- | - |  | - | -------- | -
|                                   |  | Three months ended |        
|                                   |  | April 30, 2008     |         |             | April 30, 2007 |        
|(in thousands)                     |  | Netrevenue         |         | Grossprofit |                |         | Operatingincome(loss) |  |   | Netrevenue |   | Grossprofit |   |         | Operatingincome(loss) |  
|Open Platform Solutions            |  | $                  | 37,517  |             | $              | 26,568  |                       |  | $ | 11,530     |   |             | $ | 31,230  |                       | $ | 20,649  |   |  | $ | 7,043    |  
|Identity and Security Management   |  |                    | 46,299  |             |                | 24,111  |                       |  |   | 12,589     |   |             |   | 50,663  |                       |   | 26,230  |   |  |   | 10,849   |  
|Systems and Resource Management    |  |                    | 46,769  |             |                | 39,252  |                       |  |   | 29,735     |   |             |   | 42,191  |                       |   | 34,271  |   |  |   | 25,699   |  
|Workgroup                          |  |                    | 105,081 |             |                | 86,861  |                       |  |   | 77,262     |   |             |   | 108,303 |                       |   | 88,914  |   |  |   | 76,446   |  
|Common unallocated operating costs |  |                    |        |             |                | (2,194  | )                     |  |   | (129,449   | ) |             |   |        |                       |   | (2,247  | ) |  |   | (131,783 | )
|                                   |  |                    |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  
|Total per statements of operations |  | $                  | 235,666 |             | $              | 174,598 |                       |  | $ | 1,667      |   |             | $ | 232,387 |                       | $ | 167,817 |   |  | $ | (11,746  | )
|                                   |  |                    |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



P. Segment Information (Continued)



|                                   |  |                  |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  
|---------------------------------- |  | ---------------- | ------- | ----------- | -------------- | ------- | --------------------- |  | - | ---------- | - | ----------- | - | ------- | --------------------- | - | ------- | - |  | - | -------- | -
|                                   |  | Six months ended |        
|                                   |  | April 30, 2008   |         |             | April 30, 2007 |        
|(in thousands)                     |  | Netrevenue       |         | Grossprofit |                |         | Operatingincome(loss) |  |   | Netrevenue |   | Grossprofit |   |         | Operatingincome(loss) |  
|Open Platform Solutions            |  | $                | 74,316  |             | $              | 52,211  |                       |  | $ | 22,893     |   |             | $ | 54,858  |                       | $ | 36,232  |   |  | $ | 11,018   |  
|Identity and Security Management   |  |                  | 93,329  |             |                | 51,858  |                       |  |   | 28,655     |   |             |   | 98,214  |                       |   | 48,380  |   |  |   | 18,625   |  
|Systems and Resource Management    |  |                  | 90,108  |             |                | 74,642  |                       |  |   | 56,844     |   |             |   | 84,484  |                       |   | 68,184  |   |  |   | 52,646   |  
|Workgroup                          |  |                  | 208,839 |             |                | 172,968 |                       |  |   | 154,557    |   |             |   | 213,217 |                       |   | 173,501 |   |  |   | 149,810  |  
|Common unallocated operating costs |  |                  |        |             |                | (4,694  | )                     |  |   | (252,801   | ) |             |   |        |                       |   | (4,541  | ) |  |   | (264,461 | )
|                                   |  |                  |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  
|Total per statements of operations |  | $                | 466,592 |             | $              | 346,985 |                       |  | $ | 10,148     |   |             | $ | 450,773 |                       | $ | 321,756 |   |  | $ | (32,362  | )
|                                   |  |                  |         |             |                |         |                       |  |   |            |   |             |   |         |                       |   |         |   |  |   |          |  

Common unallocated operating costs include corporate services common to all segments such as sales
and marketing, general and administrative costs, stock-based compensation, acquisition-related intangible asset amortization, restructuring expenses, and litigation settlement expenses and income. Our chief decision makers monitor all common
unallocated operating costs closely but not in the context of our business unit reporting.

Geographic Information

For the second quarters of fiscal 2008 and 2007, revenue in the United States was $114.0 million and $117.5 million, respectively. Revenue from customers
outside the United States was $121.7 million and $114.9 million in the second quarters of fiscal 2008 and 2007, respectively. For the second quarters of fiscal 2008 and 2007, 68% and 66%, respectively, of our revenue outside the United States was in
Europe. No country outside of the United States accounted for more than 10% of our net revenue for either period presented. No single customer accounted for more than 10% of our total revenue for either period presented.

For the first six months of fiscal 2008 and 2007, revenue in the United States was $223.2 million and $227.3 million, respectively. Revenue from
customers outside the United States was $243.4 million and $223.5 million in the first six months of fiscal 2008 and 2007, respectively. For the first six months of fiscal 2008 and 2007, 70% and 67%, respectively, of our revenue outside the United
States was in Europe. No country outside of the United States accounted for more than 10% of our net revenue for either period presented. No single customer accounted for more than 10% of our total revenue for either period presented.

Q. Recent Accounting Pronouncements

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value and provides enhanced guidance for using fair value to measure assets and liabilities. It also expands the amount of
disclosure about the use of fair value to measure assets and liabilities. The standard applies whenever other standards require assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. In
February 2008, the FASB issued FASB Staff Position No. 157-2, which delayed by one year the effective date of SFAS No. 157 related to the valuation of nonfinancial assets and liabilities. Accordingly, SFAS No. 157 is effective
beginning the first fiscal year that begins after November 15, 2007 (our fiscal 2009) except for those portions of SFAS No. 157 related to the valuation of nonfinancial assets and liabilities which is effective for fiscal years beginning
after November 15, 2008 (our fiscal 2010). We are currently evaluating the impact of this pronouncement on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. Previously, accounting rules required different measurement attributes for different assets and
liabilities that created artificial volatility in earnings. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce
the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007 (our fiscal 2009), though early adoption
is permitted. We are currently evaluating the impact of this pronouncement on our financial position and results of operations.



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##### Table of Contents

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Q. Recent Accounting Pronouncements (Continued)

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This statement replaces SFAS No. 141, Business
Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquiring company: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, including loss
contingencies such as litigation, and any non-controlling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring on or after the beginning of the fiscal year
beginning on or after December 15, 2008 (our fiscal 2010). We are currently evaluating the impact of this pronouncement on our financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of
ARB No. 51. SFAS No. 160 requires the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but
separate from the parents equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.
SFAS No. 160 is effective for fiscal years and fiscal quarters beginning on or after December 15, 2008 (our fiscal 2010). We are currently evaluating the impact of this pronouncement on our financial position and results of
operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities 
an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a companys derivative and hedging activities, in particular: 1) how and why derivative instruments are utilized; 2) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect a companys financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (our second quarter of fiscal 2009), with early adoption encouraged. We have minimal derivative
instruments and are currently evaluating the impact of this pronouncement on our financial position and results of operations.

In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was
directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The FASB does not expect that this statement will result in a change to
current practice.

R. Subsequent Events

On May 13, 2008, we announced that our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. The manner, timing and amount of any repurchases will be determined by our management. There is
no fixed termination date for the repurchase program. No repurchases have yet been made.



23



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



|Item 2. | 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 and other parts of this Quarterly Report on Form 10-Q
contain 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 fact,
regarding our strategy, future operations, financial position, estimated revenue, projected costs, projected savings, prospects, plans, opportunities, and objectives constitute forward-looking statements. The words may,
will, expect, plan, anticipate, believe, estimate, potential, or continue and similar types of expressions identify such statements, although not all
forward-looking statements contain these identifying words. These statements are based upon information that is currently available to us and/or managements current expectations, speak only as of the date hereof, and are subject to risks and
uncertainties. We expressly disclaim any obligation, except as required by federal securities laws, or undertaking to update or revise any forward-looking statements contained herein to reflect any change or expectations with regard thereto or to
reflect any change in events, conditions, or circumstances on which any such forward-looking statement is based, in whole or in part. Our actual results may differ materially from the results discussed in or implied by such forward-looking
statements. We are subject to a number of risks, some of which may be similar to those of other companies of similar size in our industry, including pre-tax losses, rapid technological changes, competition, limited number of suppliers, customer
concentration, failure to successfully integrate acquisitions, adverse government regulations, failure to manage international activities, and loss of key individuals. Risks that may affect our operating results include, but are not limited to,
those discussed in the Risk Factors section of our Annual Report on Form 10-K for fiscal 2007 filed with the Securities and Exchange Commission (SEC) on December 21, 2007. Readers should carefully review the risk factors
described in the Annual Report on Form 10-K for fiscal 2007 and in other documents that we file from time to time with the SEC.

Introduction

Through our infrastructure software and ecosystem of partnerships, we harmoniously integrate mixed information technology (IT)
environments, allowing people and technology to work as one. We deliver an interoperable Linux platform and a portfolio of integrated IT management software that help customers worldwide reduce cost, complexity and risk. Because of our 25 years of
experience and our vision of interoperability and flexibility, we deliver powerful, next-generation business infrastructures that enable our customers to stay competitive.

Our business unit segments are Open Platform Solutions, Identity and Security Management, Systems and Resource Management, and Workgroup. They are
described below in more detail.

Open Platform Solutions. We deliver Linux solutions for the enterprise, and the SUSE Linux
Enterprise platform underpins all of these products. SUSE Linux Enterprise is a leading distribution that focuses considerable effort on interoperability and virtualization within both open source and proprietary systems and provides ease in
usability and management. Our primary Open Platform Solutions offerings are:

Linux Platform Products:



| |  |  | SUSE Linux Enterprise Server
| | - |  | ----------------------------



| |  |  | SUSE Linux Enterprise Desktop
| | - |  | -----------------------------

Other
Open Platform Products:



| |  |  | openSUSE
| | - |  | --------



| |  |  | SUSE Engineering (product development work we perform for customers)
| | - |  | --------------------------------------------------------------------



24



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Introduction (Continued)

Identity and Security Management. Our identity, security, and access management solutions help customers integrate, secure and manage information assets as well as reduce complexity and ensure compliance.
Adding intelligence to every part of a customers IT environment makes their systems more agile and secure. Our solutions leverage automated, centrally managed policies to support the enterprise. Our partners expertise, experience and
technology provide some of the most comprehensive information security solutions in the industry today. Our primary Identity and Security Management offerings are:

Identity and Access Management products:



| |  |  | Identity Manager
| | - |  | ----------------



| |  |  | Access Manager
| | - |  | --------------



| |  |  | SecureLogin
| | - |  | -----------



| |  |  | Sentinel
| | - |  | --------

Other Identity and
Security Management products:



| |  |  | Novell eDirectory
| | - |  | -----------------

Systems
and Resource Management. With our resource management solution, customers can define business and IT policies to automate the management of multiple IT resources, including the emerging challenge of managing virtual environments. As a
result, customers reduce IT effort, control IT costs, and reduce IT skill requirements to fully manage and leverage their IT investment. In addition to our existing Systems and Resource Management offerings under the ZENworks brand, during the
second quarter of fiscal 2008, we acquired PlateSpin Ltd. (PlateSpin) which resulted in the addition of three product offerings to our Systems and Resource Management business unit segment.

Systems and Resource Management products:



| |  |  | ZENworks Suite
| | - |  | --------------



| |  |  | ZENworks Patch Management
| | - |  | -------------------------



| |  |  | ZENworks Asset Management
| | - |  | -------------------------



| |  |  | ZENworks Linux Management
| | - |  | -------------------------



| |  |  | ZENworks Configuration Management
| | - |  | ---------------------------------



| |  |  | ZENworks Orchestrator
| | - |  | ---------------------



| |  |  | ZENworks Endpoint Security Management
| | - |  | -------------------------------------



| |  |  | PlateSpin PowerConvert
| | - |  | ----------------------



| |  |  | PlateSpin PowerRecon
| | - |  | --------------------



| |  |  | PlateSpin Forge
| | - |  | ---------------

Workgroup. We provide comprehensive and adaptable workgroup solutions that provide all the infrastructure, services and tools customers require to effectively and securely collaborate across a myriad of devices. We offer the
security, reliability, and manageability our customers employees need to efficiently get their jobs done at lower cost. Our primary Workgroup products are:



| |  |  | Open Enterprise Server (OES)
| | - |  | ------------------------------



| |  |  | NetWare and other NetWare-related products:
| | - |  | -------------------------------------------



| | o | NetWare
| | - | -------



| | o | Novell Cluster Services
| | - | -----------------------



| |  |  | Collaboration products:
| | - |  | -----------------------



| | o | GroupWise
| | - | ---------



| | o | Teaming + Conferencing
| | - | ----------------------



| |  |  | Other Workgroup products:
| | - |  | -------------------------



| | o | BorderManager
| | - | -------------



| | o | Novell Open Workgroup Suite (NOWs), including:
| | - | ------------------------------------------------



| | o | OES
| | - | ---



| | o | GroupWise
| | - | ---------



| | o | ZENworks Suite
| | - | --------------



| | o | SUSE Linux Enterprise Desktop  open source desktop
| | - | ---------------------------------------------------



| | o | OpenOffice.org for Linux and Windows  open source productivity suite
| | - | ---------------------------------------------------------------------



25



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Introduction (Continued)

In addition to our technology offerings, within each of our business units we offer a worldwide network of consultants, trainers, and technical support personnel to help our customers and partners best utilize our
software. We also have partnerships with application providers, hardware and software vendors, and consultants and systems integrators. In this way we can offer a full solution to our customers.

Overview

Below is a brief update on the revenue
results for each of our business units:



| |  |  | Within our Open Platform Solutions business unit segment, Linux and open source products remain an important growth business. Revenue from our Linux Platform
Products increased 31% in the second quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was partially offset by lower services revenue of 4%, such that total revenue from our Open Platform Solutions business
unit increased 20% in the second quarter of fiscal 2008 compared to the same period a year ago.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to expand our position in the market for our Identity and Security Management business unit segment by offering products that deliver a complete,
integrated solution in the areas of security, compliance, and governance issues. Within this segment, revenue from our Identity and Access Management products increased 13% in the second quarter of fiscal 2008 compared to the same period a year ago.
This product revenue increase was more than offset by lower services revenue of 28%, such that total revenue from our Identity and Security Management business unit decreased 9% in the second quarter of fiscal 2008 compared to the same period a year
ago.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Systems and Resource Management products continue to be an important part of our product offering. Our strategy is to provide a complete desktop to data
center offering, with leadership in virtualization for both Linux and mixed-source environments. Systems and Resource Management product revenue increased 15% in the second quarter of fiscal 2008 compared to the same period a year ago.
Excluding the impact of our PlateSpin acquisition on March 26, 2008, product revenue increased 7% year-over-year. Overall product revenue was partially offset by lower services revenue of 13%, such that total revenue from our Systems and
Resource Management business unit increased 11% in the second quarter of fiscal 2008 compared to the same period a year ago.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Workgroup revenue base is an important source of cash flow and provides us with the potential opportunity to sell additional products and services. We continued
efforts to stabilize the decline of revenue from our OES, NetWare and NetWare-related products. Our revenue from Workgroup products decreased 1% in the second quarter of fiscal 2008 compared to the same period a year ago. In addition, services
revenue was lower by 16%, such that total revenue from our Workgroup business unit decreased 3% in the second quarter of fiscal 2008 compared to the same period a year ago.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During fiscal 2008, in continuation of our two-year strategic plan, we will refine the improvements we have made in our sales, product development, and
back office initiatives. In addition, we will continue to realign our services business to improve its efficiency and focus. In conjunction with these initiatives, we expect to incur restructuring charges of $15 million to $25 million in
fiscal 2008. While our initiatives and their implementation involve opportunities, risks, and challenges, we believe they will result in sustainable profitability.

Our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits. This is in line with our initiatives, discussed above. This includes focusing our services business to
drive product revenue while transferring service revenue to our partners. Our results for the second quarter of fiscal 2008 are showing early signs of success in this initiative to shift to a more profitable revenue mix. Though services revenue was
down 19%, product revenue was up 7%, resulting in a net increase in total revenue of 1% in the second quarter of fiscal 2008 compared to the same period a year ago. Foreign currency exchange rate fluctuations during the second quarter of fiscal
2008, compared to the same period in fiscal 2007, favorably impacted revenue by 3%.

During the second quarter of fiscal 2008, we completed
our acquisitions of PlateSpin and SiteScape, Inc. (SiteScape) (See the acquisitions section below for more detail on these acquisitions).



26



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments occur include, but are not
limited to: revenue recognition and related reserves, long-lived assets, deferred tax assets, loss contingency accruals and restructuring, and share-based payments. Actual results could differ materially from these estimates. For a more detailed
explanation of the judgments included in these areas, refer to our Annual Report on Form 10-K for fiscal 2007.

Acquisitions

SiteScape

On February 13, 2008,
we acquired all of the outstanding shares of SiteScape, a provider of open collaboration software, including Teaming + Conferencing products. The purchase price consisted of $18.5 million in cash, plus merger and transaction costs of $0.4 million.
For more information, see Note B, Acquisitions.

PlateSpin

On March 26, 2008, we acquired all of the outstanding shares of PlateSpin, a leader in support solutions for complete workload lifecycle management
and optimization for Windows, UNIX and Linux operating systems in the physical and virtual data center. The purchase price consisted of $205.0 million in cash, plus merger and transaction costs of $4.0 million. For more information, see Note B,
Acquisitions.

Divestitures

CTP Switzerland

On October 31, 2007, we signed an agreement to sell our CTP Switzerland subsidiary to a management-led
buyout group for $0.5 million at close, plus an additional contingent payment of up to approximately $0.3 million. The contingent payment will be received over the next year based on an earn-out model that is tied to CTP Switzerlands
management bonuses. The $0.5 million was placed into an escrow account as of October 31, 2007 and was held until close. Final closing of the sale occurred on January 31, 2008. The cash was received by us in February 2008. There will
be no further shareholder or operational relationship between us and CTP Switzerland.

When we signed the agreement, we began classifying
CTP Switzerlands results as a discontinued operation in our consolidated statements of operations and reclassified our results of operations for the prior comparable period. In the fourth quarter of fiscal 2007, we recognized an estimated loss
on disposal of $8.9 million resulting from the expected sale. During the first quarter of fiscal 2008, we recognized a gain on final liquidation of CTP Switzerland of $1.2 million, for a net loss of $7.7 million. For more information, see Note C,
Divestitures.

Salmon

On March 12, 2007, we sold Salmon Ltd. (Salmon) for $4.9 million, plus an additional contingent payment of approximately $3.9 million to be received if Salmon meets certain cumulative future revenue
targets by the end of our fiscal 2009. During the second quarter of fiscal 2008, we received $2.0 million from Salmon that was part of the original $4.9 million contingent consideration and was included in the calculation of the gain recorded in the
second quarter of fiscal 2007. As of the date of sale, we ceased further shareholder or operational relationships with Salmon. Salmons sale has been recorded as a component of discontinued operations in our consolidated statements of
operations.



27



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Divestitures (Continued)

The results of discontinued operations (CTP Switzerland and Salmon) are as follows:



|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|------------------------------------------ |  | ------------------ | - | ------------- | ---------------- | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                           |  | Three months ended |   |               | Six months ended |       
|(In thousands)                             |  | April 30,2008      |   | April 30,2007 |                  |        | April 30,2008 |  |   | April 30,2007 |  
|CTP Switzerland net revenue                |  | $                  |  |               | $                | 6,769  |               |  | $ | 6,566         |   |  | $ | 12,979  |  
|Salmon net revenue                         |  |                    |  |               |                  | 2,371  |               |  |   |              |   |  |   | 7,351   |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|                                           |  | $                  |  |               | $                | 9,140  |               |  | $ | 6,566         |   |  | $ | 20,330  |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|CTP Switzerland income before taxes        |  | $                  |  |               | $                | 695    |               |  | $ | 105           |   |  | $ | 716     |  
|Salmon (loss) income before taxes          |  |                    |  |               |                  | (54    | )             |  |   |              |   |  |   | 83      |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Income before taxes                        |  |                    |  |               |                  | 641    |               |  |   | 105           |   |  |   | 799     |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Salmon gain (loss) on sale                 |  |                    |  |               |                  | 628    |               |  |   |              |   |  |   | (10,220 | )
|CTP Switzerland gain on sale               |  |                    |  |               |                  |       |               |  |   | 1,180         |   |  |   |        |  
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Gain (loss) on discontinued operations     |  |                    |  |               |                  | 1,269  |               |  |   | 1,285         |   |  |   | (9,421  | )
|Income tax expense (benefit)               |  |                    |  |               |                  | 2,845  |               |  |   | (836          | ) |  |   | (69     | )
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  
|Income (loss) from discontinued operations |  | $                  |  |               | $                | (1,576 | )             |  | $ | 2,121         |   |  | $ | (9,352  | )
|                                           |  |                    |   |               |                  |        |               |  |   |               |   |  |   |         |  

Results of Operations

Revenue

We sell our software, services, and solutions primarily to corporations, government
entities, educational institutions, independent hardware and software vendors, resellers, and distributors both domestically and internationally. In our consolidated statements of operations, we categorize revenue as software licenses, maintenance
and subscriptions, and services. During the third quarter of fiscal 2007, we began reporting our services revenue and related cost of revenue in separate lines on our consolidated statements of operations. All prior periods have been reclassified to
conform to the current periods presentation. Software licenses revenue includes sales of proprietary licenses, upgrade licenses and certain royalties. Maintenance and subscriptions revenue includes product maintenance agreements, Linux
subscriptions, upgrade protection contracts, and engineering-related revenue. Services revenue includes technical support, training, and professional services.



|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   
|----------------------------- |  | ------------------ | ------- | ------------- | - | ------- | ---------------- | --- | ------------- |  | ------------- | ------- | ------ | - | ------- |  | --- | --
|                              |  | Three months ended |         |               |   |         | Six months ended |     |               | 
|(Dollars in thousands)        |  | April 30,2008      |         | April 30,2007 |   | Change  |                  |     | April 30,2008 |  | April 30,2007 |         | Change |  
|Software licenses             |  | $                  | 44,454  |               | $ | 41,779  |                  | 6   | %             |  | $             | 84,885  |        | $ | 80,332  |  | 6   | % 
|Maintenance and subscriptions |  |                    | 150,122 |               |   | 139,742 |                  | 7   | %             |  |               | 299,305 |        |   | 274,413 |  | 9   | % 
|Services                      |  |                    | 41,090  |               |   | 50,866  |                  | (19 | )%            |  |               | 82,402  |        |   | 96,028  |  | (14 | )%
|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   
|Total net revenue             |  | $                  | 235,666 |               | $ | 232,387 |                  | 1   | %             |  | $             | 466,592 |        | $ | 450,773 |  | 4   | % 
|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   

Revenue in our software licenses category increased during the second quarter of fiscal 2008
compared to the same quarter of fiscal 2007 primarily due to increased software license revenue from our Systems and Resource Management segment, which increased $3.5 million, or 46%, over the prior year, mostly from $2.4 million in revenue from
PlateSpin, which we acquired in March 2008. Revenue from maintenance and subscriptions increased in the second quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily due to increased revenue from Linux Platform Products, which
increased $6.8 million, or 31%, over the prior year, and increased revenue from Identity and Access Management Products, which increased $2.2 million, or 15% over the prior year. Services revenue decreased as anticipated, reflecting the impact of
realigning our services business to be more efficient and product focused and the resulting change in revenue mix towards higher margin product revenue. Foreign currency exchange rate fluctuations during the second quarter of fiscal 2008, compared
to the same period in fiscal 2007, favorably impacted revenue by $7.6 million, or 3%.

Revenue in our software licenses category increased
during the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily due to increased software license revenue from Systems and Resource Management and Identity and Access Management products, including $2.4 million in
revenue from PlateSpin. The increase in maintenance and subscriptions revenue was primarily the result of increased revenue from Linux Platform Products, which increased $17.8 million, or 46%. Foreign currency

exchange rate fluctuations during the first six months of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $15.0 million, or 3%. Our
revenue by reporting segment is detailed below.



28



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations (Continued)

Net revenue in the Open Platform Solutions segment was as follows:



|                              |  |                    |        |               |   |        |                  |    |               |  |               |        |        |   |        |  |     |   
|----------------------------- |  | ------------------ | ------ | ------------- | - | ------ | ---------------- | -- | ------------- |  | ------------- | ------ | ------ | - | ------ |  | --- | --
|                              |  | Three months ended |        |               |   |        | Six months ended |    |               | 
|(Dollars in thousands)        |  | April 30,2008      |        | April 30,2007 |   | Change |                  |    | April 30,2008 |  | April 30,2007 |        | Change |  
|Software licenses             |  | $                  | 164    |               | $ |       |                  |   | %             |  | $             | 164    |        | $ | 194    |  | (16 | )%
|Maintenance and subscriptions |  |                    | 30,330 |               |   | 23,892 |                  | 27 | %             |  |               | 60,376 |        |   | 42,552 |  | 42  | % 
|Services                      |  |                    | 7,023  |               |   | 7,338  |                  | (4 | )%            |  |               | 13,776 |        |   | 12,112 |  | 14  | % 
|                              |  |                    |        |               |   |        |                  |    |               |  |               |        |        |   |        |  |     |   
|Total net revenue             |  | $                  | 37,517 |               | $ | 31,230 |                  | 20 | %             |  | $             | 74,316 |        | $ | 54,858 |  | 35  | % 
|                              |  |                    |        |               |   |        |                  |    |               |  |               |        |        |   |        |  |     |   

Revenue from our Open Platform Solutions segment increased in the second quarter of fiscal 2008
compared to the same period of fiscal 2007 primarily due to Linux Platform Products, which increased 31%. Because much of the revenue we invoice is deferred and recognized over time, we consider invoicing, or bookings, to be a key indicator of
current sales performance and future revenue performance. Invoicing for Linux Platform Products in the second quarter of fiscal 2008 was $38.0 million, a 23% increase compared to the second quarter of fiscal 2007.

Revenue from our Open Platform Solutions segment increased in the first six months of fiscal 2008 compared to the same period of fiscal 2007, primarily
due to Linux Platform Products, which increased 46%. Invoicing for Linux Platform Products in the first six months of fiscal 2008 was down 39% compared to the same period of fiscal 2007, primarily due to the high invoicing levels in the first
quarter of fiscal 2007 that followed the November 2, 2006 signing of the Microsoft agreements. These agreements are discussed in more detail in our fiscal 2007 Annual Report on Form 10-K (See note F, Microsoft Agreements).

Net revenue in the Identity and Security Management segment was as follows:



|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   
|----------------------------- |  | ------------------ | ------ | ------------- | - | ------ | ---------------- | --- | ------------- |  | ------------- | ------ | ------ | - | ------ |  | --- | --
|                              |  | Three months ended |        |               |   |        | Six months ended |     |               | 
|(Dollars in thousands)        |  | April 30,2008      |        | April 30,2007 |   | Change |                  |     | April 30,2008 |  | April 30,2007 |        | Change |  
|Software licenses             |  | $                  | 11,386 |               | $ | 11,094 |                  | 3   | %             |  | $             | 24,004 |        | $ | 22,653 |  | 6   | % 
|Maintenance and subscriptions |  |                    | 19,312 |               |   | 17,754 |                  | 9   | %             |  |               | 39,022 |        |   | 35,799 |  | 9   | % 
|Services                      |  |                    | 15,601 |               |   | 21,815 |                  | (28 | )%            |  |               | 30,303 |        |   | 39,762 |  | (24 | )%
|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   
|Total net revenue             |  | $                  | 46,299 |               | $ | 50,663 |                  | (9  | )%            |  | $             | 93,329 |        | $ | 98,214 |  | (5  | )%
|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   

Revenue from our Identity and Security Management segment decreased in the second quarter of
fiscal 2008 compared to the same quarter of fiscal 2007. This decrease resulted primarily from lower services revenue reflecting the impact of realigning our services business as discussed above, partially offset by higher Identity and Access
Management product revenue, which increased 13% compared to the second quarter of 2007. Invoicing for Identity and Access Management products increased 31% in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.

Revenue from our Identity and Security Management segment decreased in the first six months of fiscal 2008 compared to the same period of
fiscal 2007 primarily due to lower services revenue, partially offset by higher Identity and Access Management product revenue. Invoicing for Identity and Access Management products increased 24% in the first six months of fiscal 2008 compared to
the same period of fiscal 2007.

Net revenue in the Systems and Resource Management segment was as follows:



|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   
|----------------------------- |  | ------------------ | ------ | ------------- | - | ------ | ---------------- | --- | ------------- |  | ------------- | ------ | ------ | - | ------ |  | --- | --
|                              |  | Three months ended |        |               |   |        | Six months ended |     |               | 
|(Dollars in thousands)        |  | April 30,2008      |        | April 30,2007 |   | Change |                  |     | April 30,2008 |  | April 30,2007 |        | Change |  
|Software licenses             |  | $                  | 11,180 |               | $ | 7,646  |                  | 46  | %             |  | $             | 19,351 |        | $ | 15,148 |  | 28  | % 
|Maintenance and subscriptions |  |                    | 29,773 |               |   | 27,832 |                  | 7   | %             |  |               | 58,639 |        |   | 55,487 |  | 6   | % 
|Services                      |  |                    | 5,816  |               |   | 6,713  |                  | (13 | )%            |  |               | 12,118 |        |   | 13,849 |  | (12 | )%
|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   
|Total net revenue             |  | $                  | 46,769 |               | $ | 42,191 |                  | 11  | %             |  | $             | 90,108 |        | $ | 84,484 |  | 7   | % 
|                              |  |                    |        |               |   |        |                  |     |               |  |               |        |        |   |        |  |     |   



29



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations (Continued)

Revenue from our Systems and Resource Management segment increased in the second quarter of fiscal 2008 compared to the same quarter of fiscal 2007
primarily as a result of $4.1 million of total revenue from our recent PlateSpin and Senforce acquisitions. Senforce was acquired in the fourth quarter of fiscal 2007. Invoicing for Systems and Resource Management products increased 27% in the
second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.

Revenue from our Systems and Resource Management segment
increased in the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily as a result of $4.7 million of total revenue from our recent PlateSpin and Senforce acquisitions. Invoicing for Systems and Resource Management
products increased 21% in the first six months of fiscal 2008 compared to the same period of fiscal 2007.

Net revenue in the Workgroup
segment was as follows:



|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   
|----------------------------- |  | ------------------ | ------- | ------------- | - | ------- | ---------------- | --- | ------------- |  | ------------- | ------- | ------ | - | ------- |  | --- | --
|                              |  | Three months ended |         |               |   |         | Six months ended |     |               | 
|(Dollars in thousands)        |  | April 30,2008      |         | April 30,2007 |   | Change  |                  |     | April 30,2008 |  | April 30,2007 |         | Change |  
|Software licenses             |  | $                  | 21,724  |               | $ | 23,039  |                  | (6  | )%            |  | $             | 41,366  |        | $ | 42,337  |  | (2  | )%
|Maintenance and subscriptions |  |                    | 70,707  |               |   | 70,264  |                  | 1   | %             |  |               | 141,268 |        |   | 140,575 |  |    | % 
|Services                      |  |                    | 12,650  |               |   | 15,000  |                  | (16 | )%            |  |               | 26,205  |        |   | 30,305  |  | (14 | )%
|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   
|Total net revenue             |  | $                  | 105,081 |               | $ | 108,303 |                  | (3  | )%            |  | $             | 208,839 |        | $ | 213,217 |  | (2  | )%
|                              |  |                    |         |               |   |         |                  |     |               |  |               |         |        |   |         |  |     |   

Revenue from our Workgroup segment decreased in the second quarter of fiscal 2008 compared to the
same quarter of fiscal 2007 primarily from lower services revenue as well as a decrease in combined OES and NetWare-related revenue of $1.2 million, or 2%, partially offset by a $2.0 million, or 8%, increase in collaboration revenue. Invoicing for
the combined OES and NetWare-related products increased 5% in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 reflecting strong invoicing from the NOWs bundle.

Revenue from our Workgroup segment decreased in the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily as a result of
lower services revenue as well as a decrease in combined OES and NetWare-related revenue of $3.3 million, or 3%, partially offset by a $4.5 million, or 9%, increase in collaboration revenue. Invoicing for the combined OES and NetWare-related
products increased 2% in the first six months of fiscal 2008 compared to the same period of fiscal 2007 reflecting strong invoicing from the NOWs bundle.

Deferred revenue

We have total deferred revenue of $701.6 million as of April 30, 2008 compared
to $699.5 million and $767.7 million at April 30, 2007 and October 31, 2007, respectively. Deferred revenue represents revenue that is expected to be recognized in future periods under maintenance contracts and subscriptions that are
recognized ratably over the related contract periods, typically one to three years. The decrease in total deferred revenue of $66.1 million, compared to October 31, 2007, is primarily attributable to the seasonality of our invoicing, which is
generally lower in the first six months of the fiscal year.

Gross profit



|                                           |  |                    |         |    |               |   |         |                  |  |      |               |  |   |               |    |  |        |         |    |  |      |   
|------------------------------------------ |  | ------------------ | ------- | -- | ------------- | - | ------- | ---------------- |  | ---- | ------------- |  | - | ------------- | -- |  | ------ | ------- | -- |  | ---- | --
|                                           |  | Three months ended |         |    |               |   |         | Six months ended |  |      |               | 
|(Dollars in thousands)                     |  | April 30,2008      |         |    | April 30,2007 |   |         | Change           |  |      | April 30,2008 |  |   | April 30,2007 |    |  | Change |        
|Software licenses gross profit             |  | $                  | 40,260  |    |               | $ | 37,519  |                  |  | 7    | %             |  | $ | 77,426        |    |  | $      | 71,845  |    |  | 8    | % 
|percentage of related revenue              |  |                    | 91      | %  |               |   | 90      | %                |  |      |               |  |   | 91            | %  |  |        | 89      | %  |  |      |   
|Maintenance and subscriptions gross profit |  | $                  | 137,476 |    |               | $ | 128,472 |                  |  | 7    | %             |  | $ | 275,019       |    |  | $      | 251,488 |    |  | 9    | % 
|percentage of related revenue              |  |                    | 92      | %  |               |   | 92      | %                |  |      |               |  |   | 92            | %  |  |        | 92      | %  |  |      |   
|Services gross profit                      |  | $                  | (3,138  | )  |               | $ | 1,826   |                  |  | (272 | )%            |  | $ | (5,460        | )  |  | $      | (1,577  | )  |  | (246 | )%
|percentage of related revenue              |  |                    | (8      | )% |               |   | 4       | %                |  |      |               |  |   | (7            | )% |  |        | (2      | )% |  |      |   
|Total gross profit                         |  | $                  | 174,598 |    |               | $ | 167,817 |                  |  | 4    | %             |  | $ | 346,985       |    |  | $      | 321,756 |    |  | 8    | % 
|percentage of revenue                      |  |                    | 74      | %  |               |   | 72      | %                |  |      |               |  |   | 74            | %  |  |        | 71      | %  |  |      |   



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations (Continued)

Higher gross profit and gross profit percentage of revenue for the second quarter and first six months of fiscal 2008 compared to the same periods of
fiscal 2007 reflected the benefits of our prior restructuring actions and other cost reduction initiatives. Our overall gross profit improvement also reflected the benefits of realigning our services business to be more efficient and product focused
resulting in a change in revenue mix from lower-margin services revenue to higher-margin product revenue as discussed above.

Gross profit
by reporting segment was as follows:



|                                   |  |                    |         |   |               |   |         |                  |  |    |               |  |   |               |   |  |        |         |   |  |    |   
|---------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | ---------------- |  | -- | ------------- |  | - | ------------- | - |  | ------ | ------- | - |  | -- | --
|                                   |  | Three months ended |         |   |               |   |         | Six months ended |  |    |               | 
|(Dollars in thousands)             |  | April 30,2008      |         |   | April 30,2007 |   |         | Change           |  |    | April 30,2008 |  |   | April 30,2007 |   |  | Change |        
|Open Platform Solutions            |  | $                  | 26,568  |   |               | $ | 20,649  |                  |  | 29 | %             |  | $ | 52,211        |   |  | $      | 36,232  |   |  | 44 | % 
|percentage of related revenue      |  |                    | 71      | % |               |   | 66      | %                |  |    |               |  |   | 70            | % |  |        | 66      | % |  |    |   
|Identity and Security Management   |  | $                  | 24,111  |   |               | $ | 26,230  |                  |  | (8 | )%            |  | $ | 51,858        |   |  | $      | 48,380  |   |  | 7  | % 
|percentage of related revenue      |  |                    | 52      | % |               |   | 52      | %                |  |    |               |  |   | 56            | % |  |        | 49      | % |  |    |   
|Systems and Resource Management    |  | $                  | 39,252  |   |               | $ | 34,271  |                  |  | 15 | %             |  | $ | 74,642        |   |  | $      | 68,184  |   |  | 9  | % 
|percentage of related revenue      |  |                    | 84      | % |               |   | 81      | %                |  |    |               |  |   | 83            | % |  |        | 81      | % |  |    |   
|Workgroup                          |  | $                  | 86,861  |   |               | $ | 88,914  |                  |  | (2 | )%            |  | $ | 172,968       |   |  | $      | 173,501 |   |  | ( | )%
|percentage of related revenue      |  |                    | 83      | % |               |   | 82      | %                |  |    |               |  |   | 83            | % |  |        | 81      | % |  |    |   
|Common unallocated operating costs |  | $                  | (2,194  | ) |               | $ | (2,247  | )                |  | (2 | )%            |  | $ | (4,694        | ) |  | $      | (4,541  | ) |  | 3  | % 
|Total gross profit                 |  | $                  | 174,598 |   |               | $ | 167,817 |                  |  | 4  | %             |  | $ | 346,985       |   |  | $      | 321,756 |   |  | 8  | % 
|percentage of revenue              |  |                    | 74      | % |               |   | 72      | %                |  |    |               |  |   | 74            | % |  |        | 71      | % |  |    |   

Gross profit in the Open Platform Solutions and Systems and Resource Management segments increased
in the second quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily from higher maintenance and subscription revenue combined with higher maintenance and subscription gross margins on a percentage basis. Gross profit in the
Identity and Security Management and Workgroup segments decreased in the second quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily from lower services revenue combined with lower services gross margins on a percentage
basis.

Gross profit in the Open Platform Solutions segment increased in the first six months of fiscal 2008 compared to the same period of
fiscal 2007 primarily from higher maintenance and subscription revenue combined with higher maintenance and subscription gross margins on a percentage basis. Gross profit in the Systems and Resource Management segment increased in the first six
months of fiscal 2008 compared to the same period of fiscal 2007 primarily from higher software license and maintenance and subscription revenue combined with higher related gross margins on a percentage basis, partially offset by lower services
revenue and lower services gross margins on a percentage basis. Gross profit in the Identity and Security Management segment increased in the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily from lower costs
reflecting the benefits of our prior restructuring actions and continued emphasis on cost reductions, partially offset by lower services revenue and lower services gross margins on a percentage basis. Gross profit in the Workgroup segment decreased
in the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily from lower services revenue, partially offset by higher software license gross margins on a percentage basis.



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations(Continued)

Operating expenses



|                                              |  |                    |         |   |               |   |         |                  |  |     |               |  |   |               |   |  |        |         |   |  |     |   
|--------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | ---------------- |  | --- | ------------- |  | - | ------------- | - |  | ------ | ------- | - |  | --- | --
|                                              |  | Three months ended |         |   |               |   |         | Six months ended |  |     |               | 
|(Dollars in thousands)                        |  | April 30,2008      |         |   | April 30,2007 |   |         | Change           |  |     | April 30,2008 |  |   | April 30,2007 |   |  | Change |        
|Sales and marketing                           |  | $                  | 92,076  |   |               | $ | 88,173  |                  |  | 4   | %             |  | $ | 178,681       |   |  | $      | 178,274 |   |  |    | % 
|percentage of revenue                         |  |                    | 39      | % |               |   | 38      | %                |  |     |               |  |   | 38            | % |  |        | 40      | % |  |     |   
|Product development                           |  | $                  | 48,029  |   |               | $ | 52,562  |                  |  | (9  | )%            |  | $ | 94,087        |   |  | $      | 99,029  |   |  | (5  | )%
|percentage of revenue                         |  |                    | 20      | % |               |   | 23      | %                |  |     |               |  |   | 20            | % |  |        | 22      | % |  |     |   
|General and administrative                    |  | $                  | 29,734  |   |               | $ | 34,305  |                  |  | (13 | )%            |  | $ | 56,610        |   |  | $      | 64,948  |   |  | (13 | )%
|percentage of revenue                         |  |                    | 13      | % |               |   | 15      | %                |  |     |               |  |   | 12            | % |  |        | 14      | % |  |     |   
|Restructuring expenses                        |  | $                  | 392     |   |               | $ | 4,523   |                  |  | (91 | )%            |  | $ | 4,759         |   |  | $      | 11,867  |   |  | (60 | )%
|percentage of revenue                         |  |                    |        | % |               |   | 2       | %                |  |     |               |  |   | 1             | % |  |        | 3       | % |  |     |   
|Purchased in-process research and development |  | $                  | 2,700   |   |               | $ |        |                  |  |    | %             |  | $ | 2,700         |   |  | $      |        |   |  |    | % 
|percentage of revenue                         |  |                    | 1       | % |               |   |        | %                |  |     |               |  |   | 1             | % |  |        |        | % |  |     |   
|Total operating expenses                      |  | $                  | 172,931 |   |               | $ | 179,563 |                  |  | (4  | )%            |  | $ | 336,837       |   |  | $      | 354,118 |   |  | (5  | )%
|percentage of revenue                         |  |                    | 73      | % |               |   | 77      | %                |  |     |               |  |   | 72            | % |  |        | 79      | % |  |     |   

Sales and marketing expenses increased in the second quarter of fiscal 2008 compared to the same
period of fiscal 2007 primarily from $4.1 million of unfavorable foreign currency exchange rate fluctuations and an additional $1.8 million of sales and marketing expenses from PlateSpin, which was acquired in March 2008. Sales and marketing
headcount was lower by 64 employees, or 6%, at the end of the second quarter of fiscal 2008 compared to the same period in fiscal 2007.

Sales and marketing expenses in the first six months of fiscal 2008 were relatively flat compared to the same period of fiscal 2007. Unfavorable foreign currency exchange rate fluctuations of $7.4 million and an additional $1.8 million of
sales and marketing expenses from PlateSpin, which was acquired in March 2008 were mostly offset by lower headcount and other cost reductions reflecting the benefits of our strategic sales initiatives.

Product development expenses in the second quarter of fiscal 2008 decreased compared to the same period of fiscal 2007 primarily due to our strategic
initiative of integrating our product development approach and balancing between on and offshore development locations. Product development headcount decreased by five employees at the end of the second quarter of fiscal 2008 compared to the same
period of fiscal 2007. Product development expenses in the second quarter of fiscal 2008 included $0.8 million of expenses related to PlateSpin.

Product development expenses in the first six months of fiscal 2008 decreased compared to the same period of fiscal 2007 primarily due to our strategic initiative described above. Product development expenses in the first six months of
fiscal 2008 included $0.8 million of expenses related to PlateSpin.

General and administrative expenses decreased in the second quarter of
fiscal 2008 compared to the same period of fiscal 2007 primarily reflecting the completion of our historical stock-based compensation review in the third quarter of fiscal 2007, which added $4.1 million of expenses in the second quarter of fiscal
2007. Stock-based compensation expenses of $2.1 million in the second quarter of fiscal 2008 decreased $2.0 million compared to the same period in fiscal 2007. General and administrative headcount was lower by 20 employees, or 3%, at the end of the
second quarter of fiscal 2008 compared to the same period in fiscal 2007. These decreases were partially offset by $1.4 million of integration expenses and $0.5 million of general and administrative expenses related to PlateSpin.

General and administrative expenses decreased in the first six months of fiscal 2008 compared to the same period of fiscal 2007 primarily reflecting the
completion of our historical stock-based compensation review in the third quarter of fiscal 2007, which added $10.4 million of expenses in the first six months of 2007. This decrease was partially offset by the additional PlateSpin expenses
discussed above.



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations(Continued)

Foreign currency exchange rate fluctuations during the second quarter of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted
revenue by $7.6 million, unfavorably impacted operating expenses by $8.6 million and unfavorably impacted income from operations by $1.0 million. Foreign currency exchange rate fluctuations during the first six months of fiscal 2008, compared to the
same period in fiscal 2007, favorably impacted revenue by $15.0 million, unfavorably impacted operating expenses by $15.9 million and unfavorably impacted income from operations by $0.9 million.

Purchased in-process research and development of $2.7 million during the second quarter and first six months of fiscal 2008 was related to the PlateSpin
acquisition. At the acquisition date, PlateSpin was developing the next releases of its three major products. These releases had not yet reached technological feasibility at the time of the acquisition. The purchased in-process research and
development did not have any alternative future use and did not otherwise qualify for capitalization. As a result, this amount was expensed upon acquisition.

During the first six months of fiscal 2008, we recorded net restructuring expenses of $4.8 million. This was comprised of $6.2 million in additional restructuring charges, offset in part by $1.4 million in reductions
of accruals for restructuring activities recorded in prior periods.

The restructuring actions undertaken during the second quarter of
fiscal 2008 are a continuation of the restructuring plan that we began during the fourth quarter of fiscal 2006 and are anticipated to continue throughout the remainder of fiscal 2008. We previously announced plans to incur additional restructuring
charges of $15 million to $25 million in fiscal 2008. We expect our fiscal 2008 restructuring charges to be within this range. The restructuring plan is related to our two-year strategy to develop a comprehensive transformation of our business and
to achieve competitive operating margins. This strategy currently has four main initiatives: 1) improving our sales model and sales staff specialization; 2) integrating our product development approach and balancing between on and offshore
development locations; 3) improving our administrative and support functions; and 4) transforming our services business to be more efficient and product focused. Specific actions taken during the first six months of fiscal 2008 included reducing our
workforce by 46 employees in technical support, sales and marketing, and general and administrative. We also vacated several facilities.

Other income (expense)



|                                      |  |                    |        |    |               |   |        |                  |  |    |               |  |   |               |    |  |        |         |    |  |    |  
|------------------------------------- |  | ------------------ | ------ | -- | ------------- | - | ------ | ---------------- |  | -- | ------------- |  | - | ------------- | -- |  | ------ | ------- | -- |  | -- | -
|                                      |  | Three months ended |        |    |               |   |        | Six months ended |  |    |               | 
|(Dollars in thousands)                |  | April 30,2008      |        |    | April 30,2007 |   |        | Change           |  |    | April 30,2008 |  |   | April 30,2007 |    |  | Change |        
|Investment income                     |  | $                  | 24,871 |    |               | $ | 20,666 |                  |  | 20 | %             |  | $ | 47,777        |    |  | $      | 41,358  |    |  | 16 | %
|percentage of revenue                 |  |                    | 11     | %  |               |   | 9      | %                |  |    |               |  |   | 10            | %  |  |        | 9       | %  |  |    |  
|Gain on sale of venture capital funds |  | $                  |       |    |               | $ |       |                  |  |   | %             |  | $ |              |    |  | $      | 3,591   |    |  |   | %
|percentage of revenue                 |  |                    |       | %  |               |   |       | %                |  |    |               |  |   |              | %  |  |        | 1       | %  |  |    |  
|Interest expense and other, net       |  | $                  | (7,019 | )  |               | $ | (6,906 | )                |  | (2 | )%            |  | $ | (12,769       | )  |  | $      | (13,156 | )  |  | 3  | %
|percentage of revenue                 |  |                    | (3     | )% |               |   | (3     | )%               |  |    |               |  |   | (3            | )% |  |        | (3      | )% |  |    |  
|Total other income, net               |  | $                  | 17,852 |    |               | $ | 13,760 |                  |  | 30 | %             |  | $ | 35,008        |    |  | $      | 31,793  |    |  | 10 | %
|percentage of revenue                 |  |                    | 8      | %  |               |   | 6      | %                |  |    |               |  |   | 8             | %  |  |        | 7       | %  |  |    |  

Investment income includes income from short-term and long-term investments. Investment income for
the second quarter and first six months of fiscal 2008 increased compared to the same periods of fiscal 2007 due primarily to realized gains resulting from portfolio changes. During the first quarter of fiscal 2007, we sold the final portion of our
venture capital funds, resulting in a gain of $3.6 million.

Income tax expense on income (loss) from continuing operations



|                       |  |                    |        |   |               |   |       |                  |  |     |               |  |   |               |   |  |        |        |    |  |    |  
|---------------------- |  | ------------------ | ------ | - | ------------- | - | ----- | ---------------- |  | --- | ------------- |  | - | ------------- | - |  | ------ | ------ | -- |  | -- | -
|                       |  | Three months ended |        |   |               |   |       | Six months ended |  |     |               | 
|(Dollars in thousands) |  | April 30,2008      |        |   | April 30,2007 |   |       | Change           |  |     | April 30,2008 |  |   | April 30,2007 |   |  | Change |       
|Income tax expense     |  | $                  | 13,653 |   |               | $ | 3,326 |                  |  | 310 | %             |  | $ | 24,606        |   |  | $      | 12,912 |    |  | 91 | %
|Effective tax rate     |  |                    | 70     | % |               |   | 165   | %                |  |     |               |  |   | 54            | % |  |        | (2,269 | )% |  |    |  

We are subject to income taxes in numerous jurisdictions and the use of estimates is required in
determining our provision for income taxes. For the second quarter and first six months of fiscal 2008, we provided for income tax expense on continuing operations of $13.7 million and $24.6 million, respectively. Income tax expense was recorded
based on the estimated annual effective



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations (Continued)

tax rate for the year applied to ordinary income (pre-tax income excluding unusual or infrequently occurring discrete items). Due to the utilization of a significant amount of our net operating loss
carryforwards in previous years, substantially all of the future benefit received from our remaining net operating loss carryforwards used to offset U.S. taxable income will be credited to additional paid-in capital or goodwill and not to income tax
expense. In addition, the windfall tax benefits associated with stock-based compensation will be credited to additional paid-in capital. In connection with our adoption of Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment (SFAS No. 123(R)), in fiscal 2006, we elected to follow the tax ordering laws to determine the sequence in which deductions, net operating loss carryforwards, and tax credits are
utilized. Accordingly, during the second quarter and first six months of fiscal 2008, a tax benefit relating to stock options for current year exercises and utilization of previously reserved net operating losses and tax credits of $14.3 million and
$24.0 million, respectively, was credited to additional paid-in capital. During the first six months of fiscal 2008, a tax benefit relating to the utilization of previously reserved acquired net operating losses of $5.0 million was credited to
goodwill.

The effective tax rate for the second quarter and first six months of fiscal 2008 differs from the federal statutory rate of 35%
primarily due to the effects of foreign taxes, stock-based compensation plans, and differences between the book and tax treatment of certain income items on which a valuation allowance has been recorded. The effective tax rate on continuing
operations for the second quarter of fiscal 2008 was 70% compared to an effective tax rate of 165% for the same period in fiscal 2007. The effective tax rate on continuing operations for the first six months of fiscal 2008 was 54% compared to a
benefit effective tax rate in excess of 100% (2,269%) for the same period in fiscal 2007. The effective tax rate for the second quarter and first six months of fiscal 2008 differs from the effective tax rate for the same periods of fiscal 2007
because, even though we had near break-even earnings from continuing operations in the second quarter and first six months of fiscal 2007, we had income tax expense resulting primarily from the use of previously reserved U.S. net operating loss
carryovers.

In accordance with determinations made pursuant to the applicable accounting standards, we continue to believe that it is more
likely than not that most of our remaining U.S. net deferred tax assets will not be realized based on all available evidence. As a result, we have provided a valuation allowance on those U.S. net deferred tax assets. As deferred tax assets or
liabilities increase or decrease in the future, or if a portion or all of the valuation allowance is no longer deemed to be necessary, the adjustments to the valuation allowance will increase or decrease future income tax provisions, goodwill or
additional paid-in capital. It is reasonably possible that we could reduce some or all of our valuation allowance in the near-term.

Prior
to fiscal 2008, we evaluated our tax reserves under SFAS No. 5, Accounting for Contingencies. SFAS No. 5 required us to accrue for losses we believed were probable and could be reasonably estimated. In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than
50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent
with jurisdictional tax laws. The adoption of FIN 48 resulted in a $1.4 million non-cash adjustment to increase our reserves for unrecognized tax benefits and a reduction to beginning retained earnings. Our policy for interest and penalties related
to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. Interest and penalties on tax reserves continue to be classified as income tax expense in our consolidated statements of
operations.

As of November 1, 2007, we had reserves for unrecognized tax benefits totaling $62.2 million, including the $1.4 million
effect of adopting FIN 48, and related accrued interest of $7.1 million, of which $42.8 million would favorably impact our effective tax rate if recognized. At April 30, 2008, we had reserves for unrecognized tax benefits totaling $56.8 million
including related accrued interest of $6.8 million, of which $40.5 million would favorably impact the effective tax rate if recognized. The $5.4 million decrease in reserves for unrecognized tax benefits during the year relates primarily to benefits
recognized as a result of the lapse of statutes of limitations. The $40.5 million is recorded in other long-term liabilities on our consolidated balance sheet. The difference between the total unrecognized tax benefits and those affecting the
effective tax rate is due to certain unrecognized tax benefits that would have a full valuation allowance if recognized. As of April 30, 2008, we do not anticipate that unrecognized tax benefits will significantly increase or decrease within
the next 12 months.



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Results of Operations (Continued)

We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state
and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. During January 2008, the U.S. Internal Revenue Service opened an examination for fiscal years 2005 and 2006. In
addition, we are at various stages in examinations in some foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years prior to fiscal 1998 or non-U.S. income tax
examinations for years prior to fiscal 2004.

Net income (loss) components



|                                                       |  |                    |       |               |                  |        |               |  |               |        |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ----- | ------------- | ---------------- | ------ | ------------- |  | ------------- | ------ |  | - | ------- | -
|                                                       |  | Three months ended |       |               | Six months ended |       
|(In thousands)                                         |  | April 30,2008      |       | April 30,2007 |                  |        | April 30,2008 |  | April 30,2007 |       
|Income (loss) from continuing operations               |  | $                  | 5,866 |               | $                | (1,312 | )             |  | $             | 20,550 |  | $ | (13,481 | )
|Income (loss) from discontinued operations, net of tax |  |                    |      |               |                  | (1,576 | )             |  |               | 2,121  |  |   | (9,352  | )
|                                                       |  |                    |       |               |                  |        |               |  |               |        |  |   |         |  
|Net income (loss)                                      |  | $                  | 5,866 |               | $                | (2,888 | )             |  | $             | 22,671 |  | $ | (22,833 | )
|                                                       |  |                    |       |               |                  |        |               |  |               |        |  |   |         |  

Discontinued operations relates to the January 2008 disposition of CTP Switzerland and the March
2007 sale of Salmon, discussed in the Divestitures section, above.

Liquidity and Capital Resources

The decrease in cash, cash equivalents, and short-term investments and the balances as a percent of total assets are as follows:



|                                                   |  |               |           |   |                 |   |           |        |  |     |   
|-------------------------------------------------- |  | ------------- | --------- | - | --------------- | - | --------- | ------ |  | --- | --
|(Dollars in thousands)                             |  | April 30,2008 |           |   | October 31,2007 |   |           | Change | 
|Cash, cash equivalents, and short-term investments |  | $             | 1,430,720 |   |                 | $ | 1,857,637 |        |  | (23 | )%
|Percent of total assets                            |  |               | 53        | % |                 |   | 65        | %      |  |     |   

An overview of the significant cash flow activities for the first six months of fiscal 2008 and
2007 is as follows:



|                                                                      |  |                  |          |   |               |   |         |  
|--------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | ------- | -
|                                                                      |  | Six months ended |         
|(in thousands)                                                        |  | April 30,2008    |          |   | April 30,2007 |  
|Net cash (used in) provided by operating activities                   |  | $                | (43,967  | ) |               | $ | 318,273 |  
|Issuance of common stock, net                                         |  |                  | 6,778    |   |               |   | 8,122   |  
|Debenture repurchases                                                 |  |                  | (115,589 | ) |               |   |        |  
|Purchases of property, plant and equipment                            |  |                  | (16,322  | ) |               |   | (12,508 | )
|Proceeds from sale of venture capital funds                           |  |                  |         |   |               |   | 4,964   |  
|Net cash paid for acquisitions                                        |  |                  | (220,473 | ) |               |   | (9,727  | )
|Net (distributions) proceeds from the sale of discontinued operations |  |                  | (909     | ) |               |   | 2,749   |  
|Cash restricted due to litigation                                     |  |                  | (52,124  | ) |               |   |        |  

Cash used in operating activities during the first six months of fiscal 2008 of $44.0 million
resulted primarily from the payout of amounts that were accrued as of October 31, 2007, including the fiscal 2007 annual bonus and restructuring expenses. Cash used in operating activities during the first six months of fiscal 2008 also
included the final $13.9 million of special interest payments required under the consent solicitation for the Debentures, discussed further below.

Cash provided by operating activities during the first six months of fiscal 2007 included the receipt of $348.0 million in cash in connection with the November 2006 Microsoft agreements.

As of April 30, 2008, we had cash, cash equivalents, and short-term investments of approximately $455.1 million held in accounts outside the United
States. Our short-term investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a portion of our investment portfolio is invested in equity securities and mutual funds,
which are subject to market risk. As of April 30, 2008, $7.6 million of our short-term investments are invested in equity securities designated for deferred compensation payments, which are paid out as requested by participants of the Novell,
Inc.



35



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##### Table of Contents

NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Liquidity and Capital Resources (Continued)

Deferred Compensation Plan. As of April 30, 2008, our short-term investment portfolio includes gross unrealized gains and losses of $5.4 million and $1.1 million, respectively. We monitor our investments and
record losses to our consolidated statements of operations when a decline in the investments market value is determined to be other-than-temporary.

As of April 30, 2008, we estimated that our auction-rate securities had a fair value of $30.3 million. During the second quarter and first six months of fiscal 2008, we recorded unrealized losses on these
securities of $1.6 million and $7.0 million, respectively. This unrealized loss is in addition to the $2.5 million unrealized loss that was recorded during the fourth quarter of fiscal 2007. These unrealized losses were recorded in accumulated other
comprehensive income in our consolidated balance sheets. We concluded that this unrealized loss is temporary because: 1) we have the intent and ability to hold these investments until a recovery of par value; 2) the securities have maintained AAA or
AA credit ratings, and the overall credit situation is substantially unchanged from the prior quarter; and 3) the underlying collateral is sound. As these securities are no longer in a liquid market, their fair value was estimated by utilizing
valuation models.

As a result of the failure of the auctions for these investments, we will not be able to access these funds without
realizing a loss of principal unless a future auction on these investments is successful. If the issuers are unable to successfully close future auctions and their credit ratings significantly deteriorate, we may be required to further adjust the
carrying value of these investments and realize an impairment charge for an other-than-temporary decline in fair value. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other
potential sources of cash, we do not anticipate that the lack of liquidity on these investments will affect our ability to operate our business as usual.

During the first quarter of fiscal 2008, our holdings in an enhanced liquidity fund were frozen due to liquidity issues. We believe that the underlying securities are not impaired if held to maturity. As the
underlying securities mature, the fund manager is distributing the cash on a pro rata basis to the funds shareholders. During the second quarter and first six months of fiscal 2008, we received $14.3 million and $44.1 million in fund
distributions, respectively. As of April 30, 2008, the balance of this investment is $33.0 million. As of April 30, 2008, we anticipate that $21.2 million of this balance will be distributed during the next twelve months. The remaining
$11.8 million is anticipated to be distributed more than one year after April 30, 2008, and is classified as a long-term investment on our consolidated balance sheets. At present, the funds cash is being distributed faster than originally
scheduled. The fund continues to accrue interest income and, as there are no other-than-temporary impairment or valuation issues with these securities, no impairment charges were recorded.

In relation to the appeal we filed in the Amer Jneid legal matter, we were required by the court to post in the first quarter of fiscal 2008 a $51.5
million bond (See note L, Legal Proceedings). The amount of the bond was determined by statutory regulations and has no connection to the amount we believe may ultimately be paid in this matter. The bond is held in an interest-bearing
account in our name, but is restricted and classified as such on our consolidated balance sheets. The restriction will continue until the resolution of this legal matter. During the second quarter of fiscal 2008, the bond earned $0.6 million of
interest, which increased restricted cash to $52.1 million.

According to the terms of the Open Invention Network, LLC (OIN)
agreement, under which we have a $20.0 million or 17% interest in OIN, we could be required to make future cash contributions which we would fund with cash from operating activities and cash on hand.

Under the terms of the consent solicitation that was entered into as of November 9, 2006, we were required to make special interest payments of
$44.0 million over three periods. During the first six months of fiscal 2008, we made total cash payments for interest of $15.6 million, of which $13.9 million was for the final special interest payment. During the second quarter and first six
months of fiscal 2008, we incurred interest expense related to the Debentures of $5.5 million and $11.1 million, respectively.

During the
second quarter of fiscal 2008, we received authorization from our Board of Directors to repurchase, from time to time, up to $600 million face value of the Debentures in such quantities, at such prices, and in such manner as may be directed by our
management. During the second quarter of fiscal 2008, we purchased and retired $120.6 million face value of the Debentures for total cash consideration of $115.6 million, including $0.2 million of accrued interest. As part of this transaction, the
portions of the unamortized debt issuance costs and prepaid interest related to the bonds that were repurchased were written off, resulting in a $0.4 million gain. This gain is shown as a component of interest expense and other in our consolidated
statements of operations.



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NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Liquidity and Capital Resources (Continued)

On May 13, 2008, we announced that our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. The
manner, timing and amount of any repurchases will be determined by our management. There is no fixed termination date for the repurchase program. No repurchases have yet been made.

There have been no significant changes to our contractual obligations as disclosed in our fiscal 2007 Annual Report on Form

10-K.

Our principal sources of liquidity continue to be
from operating activities, cash on hand, and short-term investments. At April 30, 2008, our principal unused sources of liquidity consisted of cash and cash equivalents of $1.0 billion and short-term investments of $427.3 million. Our liquidity
needs for the next twelve months are principally for financing of fixed assets, interest payments on the Debentures, any repurchases we may make of the Debentures, repurchases of common stock under our share repurchase plan, payments under our
restructuring plans, product development investments, and to maintain flexibility in a dynamic and competitive operating environment, including pursuing potential acquisition and investment opportunities. Our liquidity needs beyond the next twelve
months include those mentioned previously in addition to the possible redemption of our Debentures, which the holders can first require us to repurchase on July 15, 2009. As a result, the outstanding balance of the Debentures and related
deferred financing costs will be classified as a current liability and asset, respectively, beginning in the third quarter of fiscal 2008.

We anticipate being able to fund our current operating activities, potential future acquisitions, further integration restructuring, additional merger-related costs, any repurchases of Debentures or our common stock, and planned capital
expenditures for the next twelve months with existing cash and short-term investments together with cash generated from operating activities and investment income. We believe that borrowings under our credit facilities or offerings of equity or debt
securities are possible for expenditures beyond the next twelve months, if the need arises, although such offerings may not be available to us on acceptable terms and are dependent on market conditions at such time. 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.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value and provides enhanced guidance for using fair value to measure assets and liabilities. It also expands the amount of disclosure about the use of fair value to measure assets and
liabilities. The standard applies whenever other standards require assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. In February 2008, the FASB issued FASB Staff Position
No. 157-2, which delayed by one year the effective date of SFAS No. 157 related to the valuation of nonfinancial assets and liabilities. Accordingly, SFAS No. 157 is effective beginning the first fiscal year that begins after
November 15, 2007 (our fiscal 2009) except for those portions of SFAS No. 157 related to the valuation of nonfinancial assets and liabilities which is effective for fiscal years beginning after November 15, 2008 (our fiscal 2010). We
are currently evaluating the impact of this pronouncement on our financial position and results of operations.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. Previously, accounting rules required different measurement attributes for different assets and liabilities that created artificial volatility in earnings.
SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for
hedge accounting. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007 (our fiscal 2009), though early adoption is permitted. We are currently evaluating the impact of
this pronouncement on our financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. This statement replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquiring company: 1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, including loss contingencies such as litigation, and any non-controlling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is
effective for business combinations occurring on or after the beginning of the fiscal year beginning on or after December 15, 2008 (our fiscal 2010). We are currently evaluating the impact of this pronouncement on our financial position and
results of operations.



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NOVELL, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)



Recent Accounting Pronouncements (Continued)

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of
ARB No. 51. SFAS No. 160 requires the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but
separate from the parents equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.
SFAS No. 160 is effective for fiscal years and fiscal quarters beginning on or after December 15, 2008 (our fiscal 2010). We are currently evaluating the impact of this pronouncement on our financial position and results of
operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities 
an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a companys derivative and hedging activities, in particular: 1) how and why derivative instruments are utilized; 2) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect a companys financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (our second quarter of fiscal 2009), with early adoption encouraged. We have minimal derivative
instruments and are currently evaluating the impact of this pronouncement on our financial position and results of operations.

In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was
directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The FASB does not expect that this statement will result in a change to
current practice.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates, and market prices of equity securities. To mitigate some of our foreign currency exchange risks, we utilize currency forward
contracts and currency options. We do not use derivative financial instruments for speculative or trading purposes, and no significant derivative financial instruments were outstanding at April 30, 2008.

Interest Rate Risk

The primary
objective of our short-term investment activities is to preserve principal while maximizing yields without significantly increasing risk. Our strategy is to invest in widely diversified short-term investments, consisting primarily of investment
grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximately $3 million decrease
(less than 1.0 %) in the fair value of our available-for-sale securities.

Market Risk

We have experienced some market risk and liquidity issues related to some of our investment funds. See the liquidity and capital resources section in
managements discussion and analysis for more detail on these investments. We hold available-for-sale equity securities in our short-term investment portfolio. As of April 30, 2008, the gross unrealized loss before tax effect on the
short-term public equity securities totaled $0.3 million. A reduction in prices of 10% of these short-term equity securities would result in an approximately $0.8 million decrease (less than 0.2%) in the fair value of our short-term investments.



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NOVELL, INC.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK  (Continued)



|Item 3. | Quantitative and Qualitative Disclosure about Market Risk (Continued)
|------- | ---------------------------------------------------------------------

As a result of the failure of the auctions for our auction rate securities, which have an estimated fair value of $30.3 million, we will not be able to access these funds without realizing a loss of principal unless a
future auction on these investments is successful. If the issuers are unable to successfully close future auctions and their credit ratings significantly deteriorate, we may be required to further adjust the carrying value of these investments and
realize an impairment charge for an other-than-temporary decline in fair value. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other potential sources of cash, we do not
anticipate that the lack of liquidity on these investments will affect our ability to operate our business as usual.

Foreign Currency
Risk

We use derivatives to hedge those net assets and liabilities that, when re-measured or settled according to accounting principles
generally accepted in the United States, impact our consolidated statements of operations. Currency forward contracts are utilized in these hedging programs. All forward contracts entered into by us are components of hedging programs and are entered
into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation or trading purposes. Gains and losses on these currency forward contracts would generally be offset by corresponding gains and losses on the net
foreign currency assets and liabilities that they hedge, resulting in negligible net gain or loss overall on the hedged exposures. When hedging balance sheet exposures, all gains and losses on forward contracts are recognized in other income
(expense) in the same period as when the gains and losses on re-measurement of the foreign currency denominated assets and liabilities occur. All gains and losses related to foreign exchange contracts are included in cash flows from operating
activities in our consolidated statements of cash flows. Our hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. If we do not hedge against foreign currency exchange rate movement,
an increase or decrease of 10% in exchange rates would result in an increase or decrease in income before taxes of approximately $7.1 million. This number represents the exposure related to balance sheet re-measurement only and assumes that all
currencies move in the same direction at the same time relative to the U.S. dollar.

We do not currently hedge currency risk related to
revenues or expenses denominated in foreign currencies. Foreign currency exchange rate fluctuations during the second quarter of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $7.6 million, unfavorably
impacted operating expenses by $8.6 million and unfavorably impacted income from operations by $1.0 million. Foreign currency exchange rate fluctuations during the first six months of fiscal 2008, compared to the same period in fiscal 2007,
favorably impacted revenue by $15.0 million, unfavorably impacted operating expenses by $15.9 million and unfavorably impacted income from operations by $0.9 million.

All of the potential changes noted above are based on sensitivity analyses performed on our financial position at April 30, 2008. Actual results may differ materially.



|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Evaluation of Disclosure Controls and
Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of
the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company
have been detected.

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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NOVELL, INC.

PART II. OTHER INFORMATION

Part II. Other Information

Except as listed below, other items in Part II are omitted because the items are
inapplicable or require no response.



|Item 1. | Legal Proceedings
|------- | -----------------

The information required by this
item is incorporated herein by reference from note L of our financial statements contained in Part I, Item 1 of this Form 10-Q.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
from the risk factors disclosed in Part 1, Item 1A of our Form 10-K for the fiscal year ended October 31, 2007.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The following table presents information regarding purchases of shares of Novell common stock made by us during the second quarter of fiscal 2008.



|                                           |  |                        |  |               |      |                                                      |   |                                                         |  
|------------------------------------------ |  | ---------------------- |  | ------------- | ---- | ---------------------------------------------------- | - | ------------------------------------------------------- | -
|(In thousands, except per share amounts)   |  | Total number           |  | Average price |      | Total number of shares purchased as part of publicly |   | Maximum dollar value of shares that may yet bepurchased
|Period                                     |  | of sharespurchased (1) |  | paid pershare |      | announced plansor programs                           |   | under the plansor programs                             
|February 1, 2007 through February 29, 2007 |  | 2                      |  | $             | 6.54 |                                                      |  |                                                         | 
|March 1, 2007 through March 31, 2007       |  | 249                    |  |               | 6.19 |                                                      |  |                                                         | 
|April 1, 2008 through April 30, 2008       |  | 8                      |  |               | 6.17 |                                                      |  |                                                         | 
|                                           |  |                        |  |               |      |                                                      |   |                                                         |  
|Total                                      |  | 259                    |  | $             | 6.19 |                                                      |  |                                                         | 
|                                           |  |                        |  |               |      |                                                      |   |                                                         |  



|(1) | The total number of shares purchased includes shares surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock units, restricted
stock rights, and stock issued under a stock-based deferred compensation plan totaling 258,759 shares in the months of February, March, and April of fiscal 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On May 13, 2008, we announced that our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. The
manner, timing and amount of any repurchases will be determined by our management. There is no fixed termination date for the repurchase program. No repurchases have yet been made.



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NOVELL, INC.

PART II. OTHER INFORMATION  (Continued)



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

2008 Annual Meeting of Stockholders

Our 2008 Annual Meeting was held on April 9, 2008, at 404 Wyman Street, Waltham,
Massachusetts. Out of the 351,946,568 shares of common stock that were outstanding and entitled to vote at the meeting as of February 20, 2008 (record date), a total of 305,043,491 shares were present in person or by proxy at the
meeting, representing 86.7% of the outstanding shares. The following are the voting results for the items considered by the stockholders:

I. Election
of Directors

Each of the eleven nominees for Director was elected, by the votes set forth below, to hold office until the next annual
meeting of stockholders and until his or her successor is elected and qualified, except in the event of his or her earlier death, resignation, or removal.



|                       |  |             |  |               |  |                
|---------------------- |  | ----------- |  | ------------- |  | ---------------
|Nominee                |  | Votes For   |  | Votes Against |  | VotesAbstaining
|Albert Aiello          |  | 298,191,122 |  | 3,976,295     |  | 2,876,074      
|Fred Corrado           |  | 297,639,123 |  | 4,527,936     |  | 2,876,432      
|Richard L. Crandall    |  | 298,268,102 |  | 3,902,488     |  | 2,872,901      
|Ronald W. Hovsepian    |  | 299,036,380 |  | 3,192,876     |  | 2,814,235      
|Patrick S. Jones       |  | 296,303,051 |  | 5,769,790     |  | 2,970,650      
|Claudine B. Malone     |  | 287,793,253 |  | 14,391,729    |  | 2,858,509      
|Richard L. Nolan       |  | 290,496,020 |  | 11,677,429    |  | 2,870,042      
|Thomas G. Plaskett     |  | 290,043,092 |  | 12,112,436    |  | 2,887,963      
|John W. Poduska, Sr.   |  | 286,838,326 |  | 15,327,391    |  | 2,877,774      
|James D. Robinson, III |  | 191,198,774 |  | 110,952,872   |  | 2,891,845      
|Kathy Brittain White   |  | 296,450,251 |  | 5,722,142     |  | 2,871,098      

II. Ratification of Independent Public Accounting Firm

Ratification of the appointment of our independent registered public accounting firm for the fiscal year ending October 31, 2008 passed by the
following vote:



|                           |  |             |  |               |  |                
|-------------------------- |  | ----------- |  | ------------- |  | ---------------
|Nominee                    |  | Votes For   |  | Votes Against |  | VotesAbstaining
|PricewaterhouseCoopers LLP |  | 300,299,953 |  | 2,023,222     |  | 2,720,316      



|Item 6. | Exhibits
|------- | --------

The exhibits listed on the Exhibit Index
filed as a part of this Quarterly Report on Form 10-Q are incorporated herein by reference.



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NOVELL, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |  |  |                           |  |                     |  |                                                                                                                                 
|------------------ |  |  |  | ------------------------- |  | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|                   |  |  |  | Novell, Inc. (Registrant)
|                   |  |  | 
|Date: June 6, 2008 |  |  |  | By:                       |  | /s/ DANA C. RUSSELL
|                   |  |  |  |                           |  |                     |  | Dana C. Russell Senior Vice President and Chief
Financial Officer (Principal Financial Officer and Principal Accounting Officer)



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NOVELL, INC.

EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:



|               |  |                                                          
|-------------- |  | ---------------------------------------------------------
|Exhibit Number |  | Description                                              
|               | 
|10.1           |  | Novell, Inc. 2008 Annual Bonus Program for Executives (1)
|               | 
|31.1           |  | Rule 13a-14(a) Certification                             
|               | 
|31.2           |  | Rule 13a-14(a) Certification                             
|               | 
|32.1           |  | 18 U.S.C. Section 1350 Certification                     
|               | 
|32.2           |  | 18 U.S.C. Section 1350 Certification                     



|(1) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed April 11, 2008 (File No. 0-13351).
|--- | ------------------------------------------------------------------------------------------------------------------



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