10-Q

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 July 31, 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 August 29, 2008, there were 345,254,451 shares of the registrant’s common stock outstanding.

NOVELL, INC.

TABLE OF CONTENTS

Part I — Financial Information:	3
Item 1: Financial Statements	3
Consolidated Balance Sheets at July 31, 2008 (unaudited) and October 31, 2007	3
Consolidated Statements of Operations for the three and nine months ended July  31, 2008 and 2007 (unaudited)	4
Consolidated Statements of Cash Flows for the nine months ended July  31, 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	26
Item 3: Quantitative and Qualitative Disclosures about Market Risk	42
Item 4: Controls and Procedures	43
Part II — Other Information:	44
Item 1: Legal Proceedings	44
Item 1A: Risk Factors	44
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6: Exhibits	44

2

Part I. Financial Information

Item 1. Financial Statements

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

	July 31, 2008			October 31, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	973,837		$	1,079,819
Short-term investments		390,715			777,818
Restricted cash		52,410			—
Receivables (net of allowances of $4,361 and $3,897 at July 31, 2008 and October 31, 2007, respectively)		212,923			208,318
Prepaid expenses		50,725			53,316
Other current assets		40,580			35,065
Current deferred tax assets		3,773			—
Total current assets		1,724,963			2,154,336
Property, plant and equipment, net		187,641			180,537
Long-term investments		29,586			37,304
Goodwill		593,983			404,612
Intangible assets, net		65,508			33,572
Deferred income taxes		32,729			14,518
Other assets		22,503			29,515
Total assets	$	2,656,913		$	2,854,394
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	39,678		$	45,135
Accrued compensation		100,323			112,794
Other accrued liabilities		104,469			122,850
Income taxes payable		14,772			46,724
Senior convertible debentures		451,394			—
Deferred revenue		480,765			494,615
Total current liabilities		1,191,401			822,118
Deferred income taxes		7,703			884
Other long-term liabilities		45,436			—
Long-term deferred revenue		244,876			273,066
Senior convertible debentures		—			600,000
Total liabilities		1,489,416			1,696,068
Stockholders’ equity:
Common stock, par value $0.10 per share, Authorized — 600,000,000 shares; Issued — 362,397,263 and 365,739,499 shares at July 31, 2008 and October 31, 2007, respectively; Outstanding — 347,278,942 and 350,610,468 shares at July 31, 2008 and October 31, 2007, respectively		36,240			36,574
Additional paid-in capital		428,398			413,182
Treasury stock, at cost — 15,118,321 and 15,129,031 shares at July 31, 2008 and October 31, 2007, respectively		(124,424	)		(124,512	)
Retained earnings		792,170			795,984
Accumulated other comprehensive income		35,113			37,098
Total stockholders’ equity		1,167,497			1,158,326
Total liabilities and stockholders’ equity	$	2,656,913		$	2,854,394

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

3

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

	Three months ended
	July 31, 2008			July 31, 2007
	(unaudited)
Net revenue:
Software licenses	$	53,408		$	44,738
Maintenance and subscriptions		154,982			142,833
Services		36,795			49,219
Total net revenue		245,185			236,790
Cost of revenue:
Software licenses		5,544			4,793
Maintenance and subscriptions		13,948			13,184
Services		40,678			48,546
Total cost of revenue		60,170			66,523
Gross profit		185,015			170,267
Operating expenses:
Sales and marketing		94,213			84,176
Product development		51,759			54,207
General and administrative		27,691			32,124
Restructuring expenses		6,570			6,024
Impairment of intangible assets		—			3,851
Loss on sale of subsidiaries		3,811			—
Total operating expenses		184,044			180,382
Income (loss) from operations		971			(10,115	)
Other income (expense):
Investment income		11,667			21,611
Other-than-temporary impairments on long-term investments		(14,738	)		—
Interest expense and other, net		(5,705	)		(6,158	)
Total other (expense) income, net		(8,776	)		15,453
(Loss) income from continuing operations before taxes		(7,805	)		5,338
Income tax expense		7,320			8,970
Loss from continuing operations		(15,125	)		(3,632	)
Loss from discontinued operations before taxes		—			(47	)
Income tax expense on discontinued operations		—			—
Loss from discontinued operations		—			(47	)
Net loss	$	(15,125	)	$	(3,679	)
Basic earnings per share:
Loss from continuing operations	$	(0.04	)	$	(0.01	)
Net loss per share	$	(0.04	)	$	(0.01	)
Diluted earnings per share:
Loss from continuing operations	$	(0.04	)	$	(0.01	)
Net loss per share	$	(0.04	)	$	(0.01	)
Weighted-average shares outstanding — basic and diluted		351,878			348,177

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

4

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

	Nine months ended
	July 31, 2008			July 31, 2007
	(unaudited)
Net revenue:
Software licenses	$	138,293		$	125,070
Maintenance and subscriptions		454,287			417,246
Services		119,197			145,247
Total net revenue		711,777			687,563
Cost of revenue:
Software licenses		13,003			13,280
Maintenance and subscriptions		38,234			36,109
Services		128,540			146,151
Total cost of revenue		179,777			195,540
Gross profit		532,000			492,023
Operating expenses:
Sales and marketing		272,894			262,450
Product development		145,846			153,236
General and administrative		84,301			97,072
Restructuring expenses		11,329			17,891
Impairment of intangible assets		—			3,851
Loss on sale of subsidiaries		3,811			—
Purchased in-process research and development		2,700			—
Total operating expenses		520,881			534,500
Income (loss) from operations		11,119			(42,477	)
Other income (expense):
Investment income		59,444			62,969
Other-than-temporary impairments on long-term investments		(14,738	)		—
Gain on sale of venture capital funds		—			3,591
Interest expense and other, net		(18,474	)		(19,314	)
Total other income, net		26,232			47,246
Income from continuing operations before taxes		37,351			4,769
Income tax expense		31,926			21,882
Income (loss) from continuing operations		5,425			(17,113	)
Income (loss) from discontinued operations before taxes		1,285			(9,468	)
Income tax benefit on discontinued operations		(836	)		(69	)
Income (loss) from discontinued operations		2,121			(9,399	)
Net income (loss)	$	7,546		$	(26,512	)
Basic earnings per share:
Income (loss) from continuing operations	$	0.02		$	(0.05	)
Net income (loss) per share	$	0.02		$	(0.08	)
Diluted earnings per share:
Income (loss) from continuing operations	$	0.02		$	(0.05	)
Net income (loss) per share	$	0.02		$	(0.08	)
Weighted-average shares outstanding — basic		351,931			346,731
Weighted-average shares outstanding — diluted		353,290			346,731

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

5

NOVELL, INC.

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Nine months ended
	July 31, 2008			July 31, 2007
	(unaudited)
Cash flows from operating activities
Net income (loss)	$	7,546		$	(26,512	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Stock-based compensation expense		25,370			25,964
Depreciation and amortization		30,827			31,163
Change in accounts receivable allowances		421			(878	)
Utilization of previously reserved acquired net operating losses		5,026			4,835
Impairment of intangible assets		—			3,851
(Gain) loss on discontinued operations, before taxes		(1,180	)		10,220
Loss on sale of subsidiaries		3,811			—
Gain on sale of venture capital funds		—			(3,591	)
Loss (gain) on impaired long-term investments		14,488			(1,738	)
Gain on debenture repurchases		(544	)		—
Purchased in-process research and development		2,700			—
Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:
Receivables		(3,769	)		30,855
Prepaid expenses		1,041			(23,265	)
Other current assets		1,022			(3,598	)
Deferred income taxes		(15,395	)		1,839
Accounts payable		(6,757	)		(7,031	)
Accrued liabilities		(28,487	)		(6,726	)
Deferred revenue		(49,978	)		308,300
Net cash (used in) provided by operating activities		(13,858	)		343,688
Cash flows from financing activities
Debenture repurchases		(142,457	)		—
Common stock repurchases/retirements		(44,663	)		—
Issuance of common stock, net		7,646			14,370
Excess tax benefits from stock-based compensation		16,809			6,357
Net cash (used in) provided by financing activities		(162,665	)		20,727
Cash flows from investing activities
Purchases of property, plant and equipment		(28,523	)		(17,479	)
Purchases of short-term investments		(341,860	)		(377,765	)
Maturities of short-term investments		108,656			109,142
Sales of short-term investments		592,464			196,290
Proceeds from sale of venture capital funds		—			4,964
Net cash paid for acquisitions		(219,553	)		(9,727	)
Net cash (distributions) proceeds from sale of subsidiaries		(7,336	)		2,749
Cash restricted due to litigation		(52,410	)		—
Proceeds from sales of and distributions from long-term investments		21,738			1,738
Purchases of intangible assets		(6,000	)		(1,175	)
Other		3,365			8,440
Net cash provided by (used in) investing activities		70,541			(82,823	)
(Decrease) increase in cash and cash equivalents		(105,982	)		281,592
Cash and cash equivalents — beginning of period		1,079,819			675,787
Cash and cash equivalents — end of period	$	973,837		$	957,379
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

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A. Quarterly Financial Statements

The interim consolidated financial statements as of July 31, 2008 and for the three and nine months ended July 31, 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)	Estimated Fair Value			Estimated Useful Life
Net liabilities assumed	$	(3,792	)	N/A
Identifiable intangible assets:
Developed technology		1,800		3 years
Customer relationships		1,200		3 years
Goodwill		19,723		Indefinite
Total net assets acquired	$	18,931

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

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. During the third quarter of fiscal 2008, goodwill related to PlateSpin was reduced by $0.6 million due primarily to the finalization of working capital adjustments and the valuation of fixed assets. The updated purchase price, consisting of $204.1 million in cash, plus merger and transaction costs of $3.8 million, was allocated as follows:

(In thousands)	Estimated Fair Value		Estimated Useful Life
Net tangible assets acquired	$	3,303	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		176,480	Indefinite
Total net assets acquired	$	207,883

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.

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

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 on November 1, 2006, our unaudited pro forma results of operations would have been as follows:

	Three months ended						Nine months ended
(In thousands)	July 31, 2008			July 31, 2007			July 31, 2008			July 31, 2007
Net revenue	$	245,185		$	245,251		$	723,031		$	712,056
Net loss		(15,125	)		(7,582	)		(3,544	)		(39,866	)
Net loss per diluted share	$	(0.04	)	$	(0.02	)	$	(0.01	)	$	(0.11	)

Our pro forma net loss for the nine months ended July 31, 2008 and July 31, 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 on January 31, 2008, plus an additional contingent payment of up to approximately $0.3 million. The contingent payment is based on an earn-out model that is tied to CTP Switzerland’s consultant bonuses which, if met, will be received by the end of November 2008. As of January 31, 2008, we ceased shareholder or operational relationships with 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 total net loss on the disposition 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	)
Realization of cumulative translation adjustment		(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

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. Of the $4.9 million, $2.9 million was received at the time of sale and the remaining $2.0 million was received during the second quarter of fiscal 2008. The $2.0 million was originally recorded as a receivable and 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					Nine months ended
(In thousands)	July 31, 2008		July 31, 2007			July 31, 2008			July 31, 2007
CTP Switzerland net revenue	$	—	$	6,345		$	6,566		$	19,324
Salmon net revenue		—		—			—			7,351
	$	—	$	6,345		$	6,566		$	26,675
CTP Switzerland (loss) income before taxes	$	—	$	(47	)	$	105		$	669
Salmon income before taxes		—		—			—			83
(Loss) income before taxes		—		(47	)		105			752
Salmon loss on sale		—		—			—			(10,220	)
CTP Switzerland gain on sale		—		—			1,180			—
(Loss) gain on discontinued operations		—		(47	)		1,285			(9,468	)
Income tax benefit		—		—			(836	)		(69	)
(Loss) income from discontinued operations	$	—	$	(47	)	$	2,121		$	(9,399	)

Mexico and Argentina subsidiaries

On July 1, 2008, we sold our Mexico subsidiary (“Mexico”) and our Argentina subsidiary (“Argentina”) to one of our Latin American distributor partners for a total of $6.6 million ($5.9 million for Mexico and $0.7 million for Argentina). Total selling costs for both subsidiaries were less than $0.1 million. As of July 31, 2008, we have a receivable on our consolidated balance sheet for the full sales price for both subsidiaries. Payment of the receivable is being made in three installments, with the final payment occurring on November 17, 2008. The first installment of $5.3 million was received in August 2008. During the third quarter of fiscal 2008, we recorded a total loss on the sale of both subsidiaries of $3.8 million ($3.1 million for Mexico and $0.7 million for Argentina), which included a goodwill allocation of $1.5 million ($1.3 million for Mexico and $0.2 million for Argentina). These subsidiaries were primarily sales operations and sold products from our four business unit segments (See the table in note G, “Goodwill and Intangible Assets” for the goodwill amounts allocated to each business unit segment).

The loss on the sale of both subsidiaries was calculated as follows:

(In thousands)	Mexico			Argentina			Total
Proceeds	$	5,891		$	686		$	6,577
Direct costs to sell		(20	)		(15	)		(35	)
		5,871			671			6,542
Net book value:
Assets		8,268			1,671			9,939
Liabilities		(1,357	)		(504	)		(1,861	)
Allocated goodwill		1,330			155			1,485
Realization of cumulative translation adjustment		785			5			790
		9,026			1,327			10,353
Loss before income taxes	$	(3,155	)	$	(656	)	$	(3,811	)

10

NOVELL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

C. Divestitures (Continued)

We will continue to sell products to customers in these countries through the distributor partner. Accordingly, we will have continuing cash flows from these businesses and have not presented them as discontinued operations in our consolidated statements of operations.

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 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 the “Accumulated other comprehensive income” line item in our consolidated balance sheets. Other-than-temporary declines in fair value are recorded in the “Other-than-temporary impairments on long-term investments” line item in the consolidated statements of operations. Fair values are based on quoted market prices.

As of July 31, 2008, $7.1 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 in the Novell, Inc. Deferred Compensation Plan.

As of July 31, 2008, contractual maturities of our short-term investments were:

(In thousands)	Cost		Fair Market Value
Less than one year	$	48,680	$	48,930
Due in one to two years		144,696		145,810
Due in two to three years		104,244		104,928
Due in more than three years		62,209		62,461
No contractual maturity		29,404		28,586
Total short-term investments	$	389,233	$	390,715

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 the “Investment income” line item in the consolidated statements of operations. Realized gains and losses on short-term investments were as follows:

	Three months ended				Nine months ended
(In thousands)	July 31, 2008		July 31, 2007		July 31, 2008		July 31, 2007
Realized gains	$	457	$	179	$	10,961	$	346
Realized losses	$	370	$	362	$	677	$	1,005

We had net unrealized gains related to short-term investments of $1.5 million as of July 31, 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 $3.7 million and $2.2 million, respectively, as of July 31, 2008. We did not record any impairment losses on short-term investments during the third quarters and first nine months of fiscal 2008 and 2007, as we considered the unrealized losses to be temporary.

All of our investments in auction-rate securities (“ARSs”) are classified as long-term investments (See note F, “Long-Term Investments”). As of July 31, 2008, we have also classified $4.5 million of investments related to an enhanced liquidity fund to long-term investments (See note F, “Long-Term Investments”).

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E. Restricted Cash

In relation to the appeal we filed in the Amer Jneid legal matter, we were required by the court in the first quarter of fiscal 2008 to post 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. Since the posting of the bond near the end of the first quarter of fiscal 2008, the bond earned $0.9 million of interest, increasing restricted cash to $52.4 million.

F. Long-Term Investments

At July 31, 2008 and October 31, 2007, we held eight ARSs that are classified as long-term investments on our consolidated balance sheets. Contractual maturities for these ARSs are 17 years or greater with an interest reset date approximately every 28 days. Until the fourth quarter of fiscal 2007, the carrying value of our ARSs approximated fair value. With the liquidity issues experienced in the global credit and capital markets, our ARSs have experienced multiple failed auctions and the estimated market value of these securities is less than cost.

We estimated the fair value of these ARSs using a discounted cash flow analysis that considered the following key inputs: (i) the underlying structure of each security; (ii) the present value of the future principal and interest payments discounted at rates considered to reflect current market conditions and the relevant risk associated with each security; and (iii) consideration of the time horizon that the market value of each security could return to its cost. We estimated that the fair market value of these securities at July 31, 2008 and October 31, 2007 was $25.1 million and $37.3 million, respectively.

In the third quarter of fiscal 2008, we recorded an other-than-temporary impairment charge of $14.7 million based on our assessment that it is likely that the fair value of the ARSs will not fully recover in the foreseeable future, given a combination of factors, including the duration, severity and continuing declining trend of the fair value of these securities as well as a deterioration in some of the securities’ credit ratings. In connection with the other-than-temporary impairment charge, we reversed all of the $9.5 million of temporary impairment charges pertaining to these securities that had been recorded in the “Accumulated other comprehensive income” line item in our consolidated balance sheets in prior periods.

The fair value of the ARSs could change significantly in the future and we may be required to record additional temporary or other-than-temporary impairment charges if there are further reductions in fair value in future periods.

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 third quarter and first nine months of fiscal 2008, we received $7.2 million and $51.3 million in fund distributions, respectively. As of July 31, 2008, the balance of this investment is $26.0 million. As of July 31, 2008, we anticipate that $21.5 million of this balance will be distributed during the next twelve months. The remaining $4.5 million is anticipated to be distributed more than one year after July 31, 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.

Based on our ability to access our cash, cash equivalents, and 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 the enhanced liquidity fund and our ARSs will affect our ability to operate our business as usual.

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G. Goodwill and Intangible Assets

Goodwill

Goodwill allocated to our business unit segments as of July 31, 2008 is as follows:

(In thousands)	Open Platform Solutions			Identity and Security Management			Systems and Resource Management			Workgroup			Total
Balance as of October 31, 2007	$	70,599		$	81,142		$	120,802		$	132,069		$	404,612
PlateSpin acquisition		—			—			176,480			—			176,480
SiteScape acquisition		—			—			—			19,723			19,723
Mexico/Argentina disposition		(468	)		(355	)		(251	)		(411	)		(1,485	)
Adjustments		(873	)		(1,021	)		(1,730	)		(1,723	)		(5,347	)
Balance as of July 31, 2008	$	69,258		$	79,766		$	295,301		$	149,658		$	593,983

Adjustments during the first nine months of fiscal 2008 decreased goodwill by $5.3 million. The adjustments were comprised of a $5.0 million decrease in tax adjustments and a $0.3 million decrease primarily from foreign currency exchange rate adjustments related to PlateSpin goodwill. 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 nine months of fiscal 2008. During the third quarter of fiscal 2008, goodwill related to PlateSpin was also reduced by $0.6 million due primarily to the finalization of working capital adjustments and the valuation of fixed assets, which is reflected in the PlateSpin acquisition line, in the above table.

Intangible Assets

The following is a summary of intangible assets:

	July 31, 2008							October 31, 2007
(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value		Asset Lives
Developed technology	$	60,433	$	(32,226	)	$	28,207	$	34,033	$	(26,203	)	$	7,830	3-4 years
Trademarks/trade names		25,631		(578	)		25,053		24,731		(419	)		24,312	3 years or Indefinite
Customer/contractual relationships		31,911		(19,663	)		12,248		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	$	123,032	$	(57,524	)	$	65,508	$	82,632	$	(49,060	)	$	33,572

Amortization of intangible assets for the third quarters of fiscal 2008 and 2007 was $4.5 million and $1.9 million, respectively. Amortization of intangible assets for the first nine months of fiscal 2008 and 2007 was $8.5 million and $6.9 million, respectively. Amortization of existing intangibles is estimated to be approximately $4.5 million for the remainder of fiscal 2008, $16.7 million in fiscal 2009, $14.3 million in fiscal 2010, and $5.8 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.

During the third quarter of fiscal 2008, we acquired $12.0 million of developed technology, $6.0 million of which was paid in the third quarter of fiscal 2008 and the remaining $6.0 million will be paid in the fourth quarter of fiscal 2008. This developed technology relates to our Identity and Security Management business unit segment and will be amortized over a three year estimated useful life.

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 third quarter and first nine months of fiscal 2008, we provided for income tax expense on continuing operations of $7.3 million and $31.9 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

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H. Income Taxes (Continued)

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 third quarter of fiscal 2008 a tax adjustment of $7.2 million was debited to additional paid-in capital reflecting a $4.8 million reduction in current year utilization of previously reserved tax credits combined with $2.4 million adjustment for prior year tax filings. During the first nine months of fiscal 2008, a tax benefit of $16.8 million was credited to additional paid-in capital relating to stock options for current year exercises and utilization of previously reserved net operating losses and tax credits. During the first nine 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 third quarter and first nine 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 third quarter of fiscal 2008 was (94)% compared to an effective tax rate of 168% for the same period in fiscal 2007. The effective tax rate on continuing operations for the first nine months of fiscal 2008 was 85% compared to an effective tax rate of 459% for the same period in fiscal 2007. The effective tax rate for the third quarter and first nine months of fiscal 2008 differs from the effective tax rate for the same periods of fiscal 2007 because, even though we had losses from continuing operations in the third quarter and first nine 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 a significant amount 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”). 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”). 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. As of July 31, 2008, we had reserves for unrecognized tax benefits totaling $62.0 million including related accrued interest of $7.2 million, of which $45.4 million would favorably impact the effective tax rate if recognized. The $0.2 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 and settlements with tax authorities, partially offset by increases for unrecognized tax benefits originating during the year. The $45.4 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 July 31, 2008, we believe it is reasonably possible that $2.7 million of unrecognized tax benefits will decrease within the next 12 months as the result of statute of limitations expiring in various jurisdictions. We do not believe that the favorable $2.7 million decrease in unrecognized tax benefits would significantly impact the effective tax rate in any one period.

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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 July 31, 2008, there were standby letters of credit of $15.3 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 July 31, 2008, we are in full compliance with all the financial covenants and restrictions contained in this credit agreement. In addition, as of July 31, 2008, we had outstanding letters of credit of an insignificant amount at other banks.

J. Restructuring and Merger Liabilities

Restructuring liabilities

During the first nine months of fiscal 2008, we recorded net restructuring expenses of $11.3 million. This was comprised of $13.4 million in additional restructuring charges partially offset by $2.1 million in reductions of accruals for restructuring activities recorded in prior periods.

The restructuring actions undertaken during the third quarter of fiscal 2008 are a continuation of the restructuring plan that we began during the fourth quarter of fiscal 2006. We expect total restructuring charges for fiscal 2008 to be at the high end of our previously announced range of $15 million to $25 million. The restructuring plan is related to our strategy to implement 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 nine months of fiscal 2008 included reducing our workforce by 107 employees, comprised of: 32 general and administrative employees, 26 sales and marketing employees, 23 technical support employees, 19 consulting employees, and 7 product development employees. At July 31, 2008, our total headcount was approximately 4,100. We also vacated several facilities and terminated a service provider contract.

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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 July 31, 2008 and activity during the first nine months of fiscal 2008:

(In thousands)	Fiscal 2008			Fiscal 2007			Fiscal 2006			Fiscal 2005			Prior to Fiscal 2005			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		9,951			(518	)		—			(1,197	)		—			8,236
Excess facilities, property and equipment		1,935			(71	)		—			(4	)		(159	)		1,701
Other restructuring-related costs		1,502			—			(15	)		(95	)		—			1,392
Total original charge/adjustments		13,388			(589	)		(15	)		(1,296	)		(159	)		11,329
Payments:
Workforce reductions		(6,194	)		(19,840	)		—			(16	)		—			(26,050	)
Excess facilities, property and equipment		(1,019	)		(780	)		—			(735	)		(941	)		(3,475	)
Other restructuring-related costs		(32	)		(14	)		—			—			—			(46	)
Total payments		(7,245	)		(20,634	)		—			(751	)		(941	)		(29,571	)
Balance as of July 31, 2008:
Workforce reductions		3,757			952			—			21			—			4,730
Excess facilities, property and equipment		916			1,250			—			2,668			1,384			6,218
Other restructuring-related costs		1,470			—			25			—			—			1,495
Total restructuring reserve balance	$	6,143		$	2,202		$	25		$	2,689		$	1,384		$	12,443

Net adjustments reduced the restructuring reserves during the first nine months of fiscal 2008 by $2.1 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 July 31, 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, contract termination costs, which will be paid over the next two quarters, 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 nine months of fiscal 2008:

(In thousands)	Balance at October 31, 2007		Additions from Acquisitions		Payments/ Adjustments			Balance at July 31, 2008
Facilities related	$	12,725	$	150	$	(817	)	$	12,058
Employee related		—		454		(255	)		199
Other		325		3,630		(3,862	)		93
Total merger liabilities	$	13,050	$	4,234	$	(4,934	)	$	12,350

The additions from acquisitions relate to the SiteScape and PlateSpin acquisitions (See note B, “Acquisitions”). As of July 31, 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 2025, severance and related benefits, and professional fees, which will be paid over the next twelve months.

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K. Senior Convertible Debentures

Under the terms of the consent solicitation that was entered into as of November 9, 2006 related to the Senior Convertible Debentures (“Debentures”), we were required to make special interest payments of $44.0 million over three periods. During the first nine months of fiscal 2008, we made total cash payments for interest of $16.8 million, of which $13.9 million was for the final special interest payment. During the third quarter and first nine months of fiscal 2008, we incurred interest expense, including the amortization of deferred financing costs, related to the Debentures of $4.2 million and $15.3 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 third quarter of fiscal 2008, we purchased and retired $28.0 million face value of the Debentures for total cash consideration of $26.9 million, including less than $0.1 million of accrued interest. During the first nine months of fiscal 2008, we purchased and retired $148.6 million face value of the Debentures for total cash consideration of $142.5 million, including $0.2 million of accrued interest. The portions of the unamortized debt issuance costs and prepaid interest related to the bonds that were repurchased were written off, resulting in a $0.1 million gain during the third quarter of fiscal 2008 and a $0.5 million gain during the first nine months of fiscal 2008. This gain is shown as a component of the line item “Interest expense and other, net” 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, at July 31, 2008, the outstanding balance of the Debentures and related deferred financing costs are classified as a current liability and asset, respectively.

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 the state court complaints. Plaintiffs’ counsel recently informed us that they did not intend to file a reply to the motion and will stipulate to the dismissal of the complaints. We believe there are strong defenses to the remaining consolidated case pending in the federal court. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

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 infringed 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, our wholly-owned subsidiary, SUSE Linux AG (“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. On

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

L. Legal Proceedings (Continued)

September 14, 2007, SCO filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On July 16, 2008, the U.S. District Court issued Findings of Fact and Conclusions of Law wherein the Court determined that SCO owed us $2.5 million (along with an additional amount for prejudgment interest) from amounts received under a license agreement between SCO and Sun Microsystems, Inc. (“Sun”). The Court concluded that SCO lacked authority to enter into the 2003 agreement with Sun, and as such, we were entitled to a share (one-third) of the amount SCO received under that agreement. The Court further concluded that SCO’s licenses to Microsoft and other “SCOsource licensees” included an “incidental” license to Unix SVRX code and therefore we were not entitled to any proceeds from such licenses. Although SCO has repeatedly expressed its intent to appeal the trial court’s rulings, we continue to evaluate the next steps in connection with this matter. As for the SUSE Arbitration proceeding, hearings before the International Court 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. 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”). 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.

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 complaints 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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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

L. Legal Proceedings (Continued)

In November 2007, we were served with a complaint by IP Innovations (a patent litigation company), alleging that the distribution of Linux-based products by both Red Hat, Inc. (a co-defendant in the case) and us violates certain U.S. Patents. Our initial evaluation of the patent claims asserted by the plaintiff indicates that we have strong defenses to the claims. As such, we are prepared to aggressively defend the claims. We have also entered into negotiations to settle this claim to avoid litigation costs, and accordingly, during the third quarter of fiscal 2008 we accrued $0.8 million for this matter. While there can be no assurance as to the ultimate disposition of the litigation or negotiations, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

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. Income (Loss) Per Share From Continuing Operations

The following tables reconcile the numerators and denominators of the income (loss) per share from continuing operations calculation for the third quarters and first nine months of fiscal 2008 and 2007:

	Three months ended
(In thousands, except per share data)	July 31, 2008			July 31, 2007
Basic income (loss) per share from continuing operations computation:
Loss from continuing operations	$	(15,125	)	$	(3,632	)
Weighted-average common shares outstanding, excluding unvested restricted stock		351,878			348,177
Basic loss per share from continuing operations	$	(0.04	)	$	(0.01	)
Diluted income (loss) per share from continuing operations computation:
Loss from continuing operations	$	(15,125	)	$	(3,632	)
Weighted-average common shares outstanding, excluding unvested restricted stock		351,878			348,177
Incremental shares attributable to the assumed exercise of outstanding options, unvested restricted stock, and other stock plans		—			—
Total adjusted weighted-average common shares		351,878			348,177
Diluted loss per share from continuing operations	$	(0.04	)	$	(0.01	)

In the calculation of diluted earnings per share, 39.7 million and 52.1 million shares of common stock attributable to the assumed conversion of the Debentures were excluded from the calculation in the third quarters of fiscal 2008 and 2007, respectively, as their effect would have been anti-dilutive.

Incremental shares of 1,318,247 and 2,969,022 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 loss per share for the third quarters of fiscal 2008 and fiscal 2007, respectively, as their effect would have been anti-dilutive due to the 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 also not included in the calculation of diluted loss per share for the third quarters of fiscal 2008 and 2007 as their effect would have been anti-dilutive. Out-of-the-money options for the third quarters of fiscal 2008 and 2007 totaled 15,385,595 and 19,297,554, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	Nine months ended
(In thousands, except per share data)	July 31, 2008		July 31, 2007
Basic income (loss) per share from continuing operations computation:
Income (loss) from continuing operations	$	5,425	$	(17,113	)
Weighted-average common shares outstanding, excluding unvested restricted stock		351,931		346,731
Basic income (loss) per share from continuing operations	$	0.02	$	(0.05	)
Diluted income (loss) per share from continuing operations computation:
Income (loss) from continuing operations	$	5,425	$	(17,113	)
Weighted-average common shares outstanding, excluding unvested restricted stock		351,931		346,731
Incremental shares attributable to the assumed exercise of outstanding options, unvested restricted stock, and other stock plans		1,359		—
Total adjusted weighted-average common shares		353,290		346,731
Diluted Income (loss) per share from continuing operations	$	0.02	$	(0.05	)

In the calculation of diluted earnings per share, 47.5 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 nine months of fiscal 2008 and 2007, respectively, as their effect would have been anti-dilutive.

Incremental shares of 2,217,248 attributable to the assumed exercise of outstanding in-the-money options were not included in the calculation of diluted loss per share for the first nine months of fiscal 2007 as their effect would have been anti-dilutive due to the loss in the period. Incremental shares attributable to out-of-the-money options were also not included in the calculation of diluted income (loss) per share for the first nine months of fiscal 2008 and 2007 as their effect would have been anti-dilutive. Out-of-the-money options for the first nine months of fiscal 2008 and 2007 totaled 15,685,524 and 19,461,403, respectively.

N. Comprehensive Income

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

(In thousands)	Three months ended						Nine months ended
Increase/(decrease)	July 31, 2008			July 31, 2007			July 31, 2008			July 31, 2007
Net (loss) income	$	(15,125	)	$	(3,679	)	$	7,546		$	(26,512	)
Change in net unrealized gain (loss) on investments		(2,824	)		(375	)		(1,835	)		2,426
Reversal of previously recorded unrealized losses related to ARS impairment		9,488			—			2,500			—
Change in cumulative translation adjustments		(1,802	)		2,896			(2,762	)		9,922
Change in pension obligations		(8	)		—			112			—
Comprehensive (loss) income	$	(10,271	)	$	(1,158	)	$	5,561		$	(14,164	)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

N. Comprehensive Income (Continued)

Our accumulated other comprehensive income is comprised of the following:

(In thousands)	July 31, 2008		October 31, 2007
Net unrealized gain on investments	$	1,483	$	818
Cumulative translation adjustment		32,109		34,871
Pension obligation		1,521		1,409
Total accumulated other comprehensive income	$	35,113	$	37,098

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 (“Director Plan”). No additional awards can be granted under the Director Plan; however, we continue to manage outstanding options under this Director Plan. All future stock-based compensation awards will be issued under one of the five stock award plans. When granting stock options, we typically grant nonstatutory options at fair market value on the grant date, defined in the stock award 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 nine months of fiscal 2008 and 2007:

	Nine months ended
(In thousands)	July 31, 2008	July 31, 2007
Stock options:
Performance-based	1,583	728
Time-based	1,994	2,567
Total stock options	3,577	3,295
Restricted stock units:
Performance-based	626	1,104
Time-based	4,152	4,360
Total restricted stock units	4,778	5,464

In the first quarter of fiscal 2008, we provided two of our executive officers with a mechanism to cure potentially adverse tax consequences under Section 409A of the Internal Revenue Code of 1986, as amended, arising from options with incorrect measurement dates that were identified during our internal stock option review (for a discussion of the review, see “Historical Stock-Based Compensation Practices” under note C of our fiscal 2007 Annual Report on Form 10-K). With their agreement, we cancelled options that had been previously granted to the two executives to acquire an aggregate of 213,000 shares of our common stock and granted new options to acquire the same number of shares. The re-granted options have the same terms as the cancelled options other than the new grant date. In addition, we increased the exercise price on options for 6,000 shares.

Stock options

Performance-based: In the first nine 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 nine months of fiscal 2008 and 2007, we granted time-based 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

O. Stock-Based Compensation (Continued)

Restricted stock units

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

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				Nine months ended
(In thousands)	July 31, 2008		July 31, 2007		July 31, 2008		July 31, 2007
Cost of revenue	$	881	$	1,257	$	2,724	$	3,241
Sales and marketing		1,953		2,831		7,400		7,091
Product development		2,543		2,684		7,900		7,370
General and administrative		2,216		2,760		7,346		8,262
Operating expenses		6,712		8,275		22,646		22,723
Tax benefit		—		—		—		—
Total stock-based compensation expense	$	7,593	$	9,532	$	25,370	$	25,964

Total unrecognized stock-based compensation expense expected to be recognized over an estimated weighted-average amortization period of 2.1 years was $83.1 million at July 31, 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 nine months of fiscal 2008 and 2007 totaled 233,126 and 304,530 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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

P. Segment Information (Continued)

Our performance is evaluated by our Chief Executive Officer and our other chief decision makers based on reviewing revenue and operating income (loss) information for each segment. The business unit 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
	July 31, 2008								July 31, 2007
(in thousands)	Net revenue		Gross profit			Operating income (loss)			Net revenue		Gross profit			Operating income (loss)
Open Platform Solutions	$	38,884	$	28,601		$	13,042		$	32,239	$	21,745		$	8,107
Identity and Security Management		50,360		31,153			19,489			51,744		26,571			11,042
Systems and Resource Management		53,082		43,877			31,731			45,482		37,081			26,933
Workgroup		102,859		85,449			75,602			107,325		87,487			75,279
Common unallocated operating costs		—		(4,065	)		(138,893	)		—		(2,617	)		(131,476	)
Total per statements of operations	$	245,185	$	185,015		$	971		$	236,790	$	170,267		$	(10,115	)

	Nine months ended
	July 31, 2008								July 31, 2007
(in thousands)	Net revenue		Gross profit			Operating income (loss)			Net revenue		Gross profit			Operating income (loss)
Open Platform Solutions	$	113,200	$	80,812		$	35,935		$	87,097	$	57,977		$	19,125
Identity and Security Management		143,689		83,011			48,144			149,958		74,951			29,667
Systems and Resource Management		143,190		118,519			88,575			129,966		105,265			79,579
Workgroup		311,698		258,417			230,159			320,542		260,988			225,089
Common unallocated operating costs		—		(8,759	)		(391,694	)		—		(7,158	)		(395,937	)
Total per statements of operations	$	711,777	$	532,000		$	11,119		$	687,563	$	492,023		$	(42,477	)

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 third quarters of fiscal 2008 and 2007, revenue in the United States was $117.2 million and $120.5 million, respectively. The lower revenue in the United States is due to lower services revenue partially offset by higher product revenue. Revenue from customers outside the United States was $128.0 million and $116.3 million in the third quarters of fiscal 2008 and 2007, respectively. The higher revenue outside the United States is due to higher product revenue and favorable foreign currency exchange rates, partially offset by lower services revenue. For the third quarters of fiscal 2008 and 2007, 67% and 68%, 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 nine months of fiscal 2008 and 2007, revenue in the United States was $340.4 million and $347.8 million, respectively. The lower revenue in the United States is due to lower services revenue partially offset by higher product revenue. Revenue from customers outside the United States was $371.4 million and $339.8 million in the first nine months of fiscal 2008 and 2007, respectively. The higher revenue outside the United States is due to higher product revenue and favorable foreign currency exchange rates, partially offset by lower services revenue. For the first nine months of fiscal 2008 and 2007, 69% 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Q. Share Repurchase Program

On May 13, 2008, our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. There is no fixed termination date for the repurchase program. As of July 31, 2008, 7,477,300 shares of common stock have been repurchased and retired under this program at an average price of $5.97 per share. The total amount paid for the repurchase of our common stock was $44.7 million, leaving $55.3 million remaining to be repurchased under the current Board authorization.

R. 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. The adoption of this standard is optional. Since we do not currently have complex hedge accounting requirements, there is little incentive to elect the fair value option on any of our applicable financial assets or liabilities. Therefore, we do not currently plan on utilizing the fair value option as outlined in SFAS No. 159.

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). For acquisitions that close after November 1, 2009 or for any acquisition-related tax adjustments that occur after November 1, 2009, this pronouncement will impact 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 that 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). The impact of this pronouncement on our financial position and results of operations is anticipated to be immaterial.

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. As this pronouncement is only disclosure-related it will not have an impact on our financial position and results of operations. However, this pronouncement will require increased disclosures around our use of foreign exchange forward contracts, which is our only use of derivative instruments.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

R. Recent Accounting Pronouncements (Continued)

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.

In April 2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the guidance in FASB Statement No. 142, “Goodwill and Other Intangible Assets”, for estimating useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of a recognized intangible asset. In estimating the useful life of a recognized intangible asset, FSP No. 142-3 requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008 (our fiscal 2010), and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets. For intangible assets acquired after November 1, 2009, this pronouncement may impact our financial position and results of operations.

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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 of 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.

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 platform 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)

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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 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 systems and resource management solutions, 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:

¡    NetWare

¡    Novell Cluster Services

— Collaboration products:

¡    GroupWise

¡    Teaming + Conferencing

— Other Workgroup products:

¡    BorderManager

¡    Novell Open Workgroup Suite (“NOWs”), including:

¨    OES

¨    GroupWise

¨    ZENworks Suite

¨    SUSE Linux Enterprise Desktop — open source desktop

¨    OpenOffice.org for Linux and Windows — open source productivity suite

27

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 third-party 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 the third quarter of fiscal 2008 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 30% in the third quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was partially offset by lower services revenue of 12%, such that total revenue from our Open Platform Solutions business unit increased 21% in the third 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 we believe 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 22% in the third 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 31%, such that total revenue from our Identity and Security Management business unit decreased 3% in the third 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 25% in the third quarter of fiscal 2008 compared to the same period a year ago. Excluding the impact of our PlateSpin acquisition in March 2008, product revenue increased 8% year-over-year. Overall product revenue was partially offset by lower services revenue of 24%, such that total revenue from our Systems and Resource Management business unit increased 17% in the third 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 and NetWare-related products. Our revenue from Workgroup products decreased 1% in the third quarter of fiscal 2008 compared to the same period a year ago. In addition, services revenue was lower by 25%, such that total revenue from our Workgroup business unit decreased 4% in the third quarter of fiscal 2008 compared to the same period a year ago.

Our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits, in line with our strategic initiatives. This includes focusing our services business to drive more profitable product revenue while leveraging our services capabilities internally and through third-party partners. Our results for the third quarter of fiscal 2008 are showing signs of success in this initiative to shift to a more profitable revenue mix, which is reflected in our higher total gross profit and total gross profit margins for both the third quarter of fiscal 2008 and the first nine months of fiscal 2008, compared to the related prior year periods. Though total services revenue was down 25%, total product revenue was up 11%, resulting in a net increase in total revenue of 4% in the third quarter of fiscal 2008 compared to the same period a year ago. Foreign currency exchange rate fluctuations and the PlateSpin acquisition each favorably impacted revenue by 3% during the third quarter of fiscal 2008, compared to the same period in fiscal 2007.

During fiscal 2008, in continuation of our strategic plan, we are refining the improvements we have made in our sales, product development, and back office initiatives. In addition, we continue to realign our services business to improve its efficiency and focus. In conjunction with these initiatives, through the first nine months of fiscal 2008, we incurred $13.4 million of restructuring expenses. We expect total restructuring charges for fiscal 2008 to be at the high end of our previously announced range of $15 million to $25 million. While our initiatives and their implementation involve opportunities, risks, and challenges, we believe they will result in sustainable profitability.

28

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Overview (Continued)

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).

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, Inc. (“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. During the third quarter of fiscal 2008, goodwill related to PlateSpin was reduced by $0.6 million due primarily to the finalization of working capital adjustments and the valuation of fixed assets. The updated purchase price, consisted of $204.1 million in cash, plus merger and transaction costs of $3.8 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 on January 31, 2008, plus an additional contingent payment of up to approximately $0.3 million. The contingent payment is based on an earn-out model that is tied to CTP Switzerland’s consultant bonuses which, if met, will be received by the end of November 2008. As of January 31, 2008, we ceased shareholder or operational relationships with 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 total net loss on the disposition of $7.7 million. For more information, see note C, “Divestitures.”

29

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

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. Of the $4.9 million, $2.9 million was received at the time of sale and the remaining $2.0 million was received during the second quarter of fiscal 2008. The $2.0 million was originally recorded as a receivable and 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					Nine months ended
(In thousands)	July 31, 2008		July 31, 2007			July 31, 2008			July 31, 2007
CTP Switzerland net revenue	$	—	$	6,345		$	6,566		$	19,324
Salmon net revenue		—		—			—			7,351
	$	—	$	6,345		$	6,566		$	26,675
CTP Switzerland (loss) income before taxes	$	—	$	(47	)	$	105		$	669
Salmon income before taxes		—		—			—			83
(Loss) income before taxes		—		(47	)		105			752
Salmon loss on sale		—		—			—			(10,220	)
CTP Switzerland gain on sale		—		—			1,180			—
(Loss) gain on discontinued operations		—		(47	)		1,285			(9,468	)
Income tax benefit		—		—			(836	)		(69	)
(Loss) income from discontinued operations	$	—	$	(47	)	$	2,121		$	(9,399	)

Mexico and Argentina subsidiaries

On July 1, 2008, we sold our Mexico subsidiary (“Mexico”) and our Argentina subsidiary (“Argentina”) to one of our Latin American distributor partners for a total of $6.6 million ($5.9 million for Mexico and $0.7 million for Argentina). Total selling costs for both subsidiaries were less than $0.1 million. As of July 31, 2008, we have a receivable on our consolidated balance sheet for the full sales price for both subsidiaries. Payment of the receivable is being made in three installments, with the final payment occurring on November 17, 2008. The first installment of $5.3 million was received in August 2008. During the third quarter of fiscal 2008, we recorded a total loss on the sale of both subsidiaries of $3.8 million ($3.1 million for Mexico and $0.7 million for Argentina), which included a goodwill allocation of $1.5 million ($1.3 million for Mexico and $0.2 million for Argentina). These subsidiaries were primarily sales operations and sold products from our four business unit segments.

We will continue to sell products to customers in these countries through the distributor partner. Accordingly, we will have continuing cash flows from these businesses and have not presented them as discontinued operations in our consolidated statements of operations. For more information, see note C, “Divestitures.”

Results of Operations

Revenue

We sell our software and services 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. In the third quarter of fiscal 2007, we began reporting our services revenue and related cost of revenue in separate line items on the consolidated statements of operations.

30

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

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					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Software licenses	$	53,408	$	44,738	19%	$	138,293	$	125,070	11%
Maintenance and subscriptions		154,982		142,833	9%		454,287		417,246	9%
Services		36,795		49,219	(25)%		119,197		145,247	(18)%
Total net revenue	$	245,185	$	236,790	4%	$	711,777	$	687,563	4%

Revenue in our software licenses category increased during the third 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 $6.1 million, or 63%, over the prior year. Of this increase, $4.9 million was revenue from PlateSpin, which we acquired in March 2008. Software license revenue in our Identity and Access Management products also increased $4.1 million, or 35%, over the prior year period. Revenue from maintenance and subscriptions increased in the third quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily due to increased revenue from Linux Platform Products, which increased $7.0 million, or 30%, over the prior year, and increased revenue from our Systems and Resource Management segment, which increased $3.3 million, or 12%, over the prior year. Services revenue decreased, reflecting the impact of realigning our services business to be more efficient and product focused. Foreign currency exchange rate fluctuations favorably impacted revenue by $6.6 million, or 3%, during the third quarter of fiscal 2008, compared to the same period in fiscal 2007. Likewise, foreign currency exchange rate fluctuations favorably impacted revenue in each of our business unit segments by approximately 3% during the third quarter of fiscal 2008, compared to the same period in fiscal 2007.

Revenue in our software licenses category increased during the first nine months of fiscal 2008 compared to the same period of fiscal 2007 primarily due to increased software license revenue from our Systems and Resource Management segment, which increased $10.3 million, or 41%. Of this increase, $7.3 million was PlateSpin revenue. Software license revenue also increased $6.4 million, or 20%, in our Identity and Access Management products over the prior year period. The increase in maintenance and subscriptions revenue during the first nine months of fiscal 2008 compared to the same period of fiscal 2007 was primarily the result of increased revenue from Linux Platform Products, which increased $24.8 million, or 40%. Services revenue decreased as anticipated, reflecting the impact of realigning our services business to be more efficient and product focused. Foreign currency exchange rate fluctuations favorably impacted revenue by $21.6 million, or 3%, during the first nine months of fiscal 2008, compared to the same period in fiscal 2007. Likewise, foreign currency exchange rate fluctuations favorably impacted revenue in each of our business unit segments by approximately 3% during the first nine months of fiscal 2008, compared to the same period in fiscal 2007. Our revenue by business unit segment is detailed below.

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

	Three months ended					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Software licenses	$	—	$	3	—%	$	164	$	197	(17)%
Maintenance and subscriptions		32,517		25,020	30%		92,893		67,572	37%
Services		6,367		7,216	(12)%		20,143		19,328	4%
Total net revenue	$	38,884	$	32,239	21%	$	113,200	$	87,097	30%

Revenue from our Open Platform Solutions segment increased in the third quarter of fiscal 2008 compared to the same period of fiscal 2007 primarily due to Linux Platform Products, which increased maintenance and subscriptions revenue by $7.0 million, or 30%. 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 force performance and future revenue performance. Invoicing for Linux Platform Products in the third quarter of fiscal 2008 was $50.7 million, a 36% increase compared to the third quarter of fiscal 2007.

31

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

Revenue from our Open Platform Solutions segment increased in the first nine months of fiscal 2008 compared to the same period of fiscal 2007, primarily due to Linux Platform Products, which increased maintenance and subscriptions revenue by $24.8 million, or 40%. Invoicing for Linux Platform Products in the first nine months of fiscal 2008 was down $34.2 million, or 21% compared to the same period of fiscal 2007. This decrease was primarily due to the high invoicing levels ($73.3 million) 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					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Software licenses	$	16,567	$	12,957	28%	$	40,571	$	35,610	14%
Maintenance and subscriptions		20,306		19,187	6%		59,328		54,986	8%
Services		13,487		19,600	(31)%		43,790		59,362	(26)%
Total net revenue	$	50,360	$	51,744	(3)%	$	143,689	$	149,958	(4)%

Revenue from our Identity and Security Management segment decreased in the third 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 $6.2 million, or 22%, compared to the third quarter of 2007. Invoicing for Identity and Access Management products increased 16% in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007.

Revenue from our Identity and Security Management segment decreased in the first nine 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 of $12.9 million, or 17%. Invoicing for Identity and Access Management products increased 21% in the first nine 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					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Software licenses	$	15,836	$	9,688	63%	$	35,187	$	24,836	42%
Maintenance and subscriptions		31,544		28,279	12%		90,183		83,766	8%
Services		5,702		7,515	(24)%		17,820		21,364	(17)%
Total net revenue	$	53,082	$	45,482	17%	$	143,190	$	129,966	10%

Revenue from our Systems and Resource Management segment increased in the third quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily as a result of $8.6 million of total revenue from our recent PlateSpin and Senforce acquisitions. Senforce was acquired in the fourth quarter of fiscal 2007 and PlateSpin was acquired in the second quarter of fiscal 2008. Invoicing for Systems and Resource Management products increased 29% in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007.

Revenue from our Systems and Resource Management segment increased in the first nine months of fiscal 2008 compared to the same period of fiscal 2007 primarily as a result of $13.3 million of total revenue from our recent PlateSpin and Senforce acquisitions. Invoicing for Systems and Resource Management products increased 25% in the first nine months of fiscal 2008 compared to the same period of fiscal 2007.

32

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

Net revenue in the Workgroup segment was as follows:

	Three months ended					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Software licenses	$	21,005	$	22,090	(5)%	$	62,371	$	64,427	(3)%
Maintenance and subscriptions		70,615		70,347	—%		211,883		210,922	—%
Services		11,239		14,888	(25)%		37,444		45,193	(17)%
Total net revenue	$	102,859	$	107,325	(4)%	$	311,698	$	320,542	(3)%

Revenue from our Workgroup segment decreased in the third 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 $2.4 million, or 4%, partially offset by a $1.6 million, or 6%, increase in Collaboration revenue. Invoicing for the combined OES and NetWare-related products was relatively flat in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. Product invoicing for the Workgroup segment increased 4% in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007.

Revenue from our Workgroup segment decreased in the first nine months of fiscal 2008 compared to the same period of fiscal 2007 primarily from lower services revenue as well as a decrease in combined OES and NetWare-related revenue of $5.5 million, or 3%, partially offset by a $6.1 million, or 8%, increase in Collaboration revenue. Invoicing for the combined OES and NetWare-related products increased 2% in the first nine months of fiscal 2008 compared to the same period of fiscal 2007. Product invoicing for the Workgroup segment increased 4% in the first nine months of fiscal 2008 compared to the same period of fiscal 2007 after excluding the $108 million of invoicing in the first quarter of 2007 that followed the November 2, 2006 signing of the Microsoft agreements.

Deferred revenue

We have total deferred revenue of $725.6 million as of July 31, 2008 compared to $733.9 million and $767.7 million at July 31, 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 $42.1 million compared to October 31, 2007 is primarily attributable to the recognition of Microsoft-related deferred revenue.

Gross profit

	Three months ended							Nine months ended
(Dollars in thousands)	July 31, 2008			July 31, 2007			Change	July 31, 2008			July 31, 2007			Change
Software licenses gross profit	$	47,864		$	39,945		20%	$	125,290		$	111,790		12%
percentage of related revenue		90	%		89	%			91	%		89	%
Maintenance and subscriptions gross profit	$	141,034		$	129,649		9%	$	416,053		$	381,137		9%
percentage of related revenue		91	%		91	%			92	%		91	%
Services gross profit	$	(3,883	)	$	673		(676)%	$	(9,343	)	$	(904	)	(934)%
percentage of related revenue		(11)	%		1	%			(8)	%		(1)	%
Total gross profit	$	185,015		$	170,267		9%	$	532,000		$	492,023		8%
percentage of revenue		75	%		72	%			75	%		72	%

Higher gross profit and gross profit percentage of revenue for the third quarter and first nine months of fiscal 2008 compared to the same periods of fiscal 2007 reflected the benefits of our prior restructuring actions, other cost reduction initiatives and favorable foreign currency exchange rate fluctuations. 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 negative margin services revenue to higher-margin product revenue as discussed above. Our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits, in line with our strategic initiatives. Foreign currency exchange rate fluctuations during the third quarter of fiscal 2008, compared to the same quarter of fiscal 2007, favorably impacted gross profit by $4.9 million. Foreign currency exchange rate fluctuations during the first nine months of fiscal 2008, compared to the same period of fiscal 2007, favorably impacted gross profit by $15.7 million.

33

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

Gross profit by business unit segment was as follows:

	Three months ended							Nine months ended
(Dollars in thousands)	July 31, 2008			July 31, 2007			Change	July 31, 2008			July 31, 2007			Change
Open Platform Solutions	$	28,601		$	21,745		32%	$	80,812		$	57,977		39%
percentage of related revenue		74	%		67	%			71	%		67	%
Identity and Security Management	$	31,153		$	26,571		17%	$	83,011		$	74,951		11%
percentage of related revenue		62	%		51	%			58	%		50	%
Systems and Resource Management	$	43,877		$	37,081		18%	$	118,519		$	105,265		13%
percentage of related revenue		83	%		82	%			83	%		81	%
Workgroup	$	85,449		$	87,487		(2)%	$	258,417		$	260,988		(1)%
percentage of related revenue		83	%		82	%			83	%		81	%
Common unallocated operating costs	$	(4,065	)	$	(2,617	)	(55)%	$	(8,759	)	$	(7,158	)	(22)%
Total gross profit	$	185,015		$	170,267		9%	$	532,000		$	492,023		8%
percentage of revenue		75	%		72	%			75	%		72	%

In all business unit segments except Workgroup, product-related gross profit increased in both dollar and percentage terms, while services-related gross profit decreased in both dollar and percentage terms in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. Workgroup product-related gross profit remained relatively flat in dollar terms, but increased slightly as a percentage of revenue due to cost containment efforts, while services-related gross profit decreased in both dollar and percentage terms in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. The decrease in services gross profit is in line with our strategic initiatives, as our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits.

In all business unit segments except Workgroup, product-related gross profit increased in both dollar and percentage terms, while services-related gross profit decreased in both dollar and percentage terms in the first nine months of fiscal 2008 compared to the same period of fiscal 2007. Workgroup product-related gross profit remained relatively flat in dollar terms, but increased slightly as a percentage of revenue due to cost containment efforts, while services-related gross profit decreased in both dollar and percentage terms in the first nine months of fiscal 2008 compared to the same period of fiscal 2007. The decrease in services gross profit is in line with our strategic initiatives, as our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits.

Operating expenses

	Three months ended							Nine months ended
(Dollars in thousands)	July 31, 2008			July 31, 2007			Change	July 31, 2008			July 31, 2007			Change
Sales and marketing	$	94,213		$	84,176		12%	$	272,894		$	262,450		4%
percentage of revenue		38	%		36	%			38	%		38	%
Product development	$	51,759		$	54,207		(5)%	$	145,846		$	153,236		(5)%
percentage of revenue		21	%		23	%			20	%		22	%
General and administrative	$	27,691		$	32,124		(14)%	$	84,301		$	97,072		(13)%
percentage of revenue		11	%		14	%			12	%		14	%
Restructuring expenses	$	6,570		$	6,024		9%	$	11,329		$	17,891		(37)%
percentage of revenue		3	%		3	%			2	%		3	%
Impairment of intangible assets	$	—		$	3,851		—%	$	—		$	3,851		—%
percentage of revenue		—	%		2	%			—	%		1	%
Loss on sale of subsidiaries	$	3,811		$	—		—%	$	3,811		$	—		—%
percentage of revenue		2	%		—	%			1	%		—	%
Purchased in-process research and development	$	—		$	—		—%	$	2,700		$	—		—%
percentage of revenue		—	%		—	%			—	%		—	%
Total operating expenses	$	184,044		$	180,382		2%	$	520,881		$	534,500		(3)%
percentage of revenue		75	%		76	%			73	%		78	%

34

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

Sales and marketing expenses increased in the third quarter of fiscal 2008 compared to the same period of fiscal 2007 primarily from $5.1 million and $0.4 million of sales and marketing expenses from PlateSpin and SiteScape, respectively, both of which were acquired during the second quarter of fiscal 2008, and an additional $3.7 million of unfavorable foreign currency exchange rate fluctuations. Sales and marketing headcount was lower by 31 employees, or 3%, at the end of the third quarter of fiscal 2008 compared to the same period in fiscal 2007.

Sales and marketing expenses increased in the first nine months of fiscal 2008 compared to the same period of fiscal 2007 primarily from $11.1 million of unfavorable foreign currency exchange rate fluctuations and an additional $6.9 million and $0.8 million of sales and marketing expenses from PlateSpin and SiteScape, respectively, partially offset by lower headcount and other cost reductions reflecting the benefits of our strategic sales initiatives.

Product development expenses in the third 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 102 employees, or 7%, at the end of the third quarter of fiscal 2008 compared to the same period of fiscal 2007. These expense decreases were offset by an additional $2.5 million of expense related to PlateSpin, as well as $1.2 million of unfavorable foreign currency exchange rate fluctuations.

Product development expenses in the first nine months of fiscal 2008 decreased compared to the same period of fiscal 2007 primarily due to our strategic initiative described above, offset by an additional $3.3 million of expense related to PlateSpin, as well as $4.4 million of unfavorable foreign currency exchange rate fluctuations.

General and administrative expenses decreased in the third 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 $3.5 million of expenses in the third quarter of fiscal 2007. General and administrative headcount was lower by 22 employees, or 4%, at the end of the third quarter of fiscal 2008 compared to the same period in fiscal 2007. These decreases were partially offset by $1.1 million of general and administrative expenses related to PlateSpin.

General and administrative expenses decreased in the first nine 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 $15.7 million of expenses in the first nine months of 2007. This decrease was partially offset by $1.6 million of general and administrative expenses related to PlateSpin.

During the first nine months of fiscal 2008, we recorded net restructuring expenses of $11.3 million. This was comprised of $13.4 million in additional restructuring charges partially offset by $2.1 million in reductions of accruals for restructuring activities recorded in prior periods.

The restructuring actions undertaken during the third quarter of fiscal 2008 are a continuation of the restructuring plan that we began during the fourth quarter of fiscal 2006. We expect total restructuring charges for fiscal 2008 to be at the high end of our previously announced range of $15 million to $25 million. The restructuring plan is related to our strategy to implement 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 nine months of fiscal 2008 included reducing our workforce by 107 employees, comprised of: 32 general and administrative employees, 26 sales and marketing employees, 23 technical support employees, 19 consulting employees, and 7 product development employees. At July 31, 2008, our total headcount was approximately 4,100. We also vacated several facilities and terminated a service provider contract.

35

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

During the third quarter of fiscal 2007, as part of our periodic review of intangible assets, we determined that e-Security’s financial performance declined significantly and that its estimated future undiscounted direct cash flows would not be sufficient to cover the carrying value of its intangible assets. We used discounted cash flow models to estimate the value of e-Security’s intangible assets and determined that $2.5 million, $1.3 million, and $0.1 million of e-Security’s developed technology, customer relationship and trade name intangible assets, respectively, had become impaired. These intangible assets were written down and the related charges were recorded as a component of operating expenses in the consolidated statements of operations during the third quarter of fiscal 2007. The entire $3.9 million impairment charge related to the Identity and Security Management business unit segment.

The loss on sale of subsidiaries resulted from the divestitures of Mexico and Argentina as discussed above in the Divestitures section.

Purchased in-process research and development of $2.7 million during the first nine 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.

Foreign currency exchange rate fluctuations during the third quarter of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $6.6 million, unfavorably impacted operating expenses by $7.2 million and unfavorably impacted income from operations by $0.6 million. Foreign currency exchange rate fluctuations during the first nine months of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $21.6 million, unfavorably impacted operating expenses by $23.2 million and unfavorably impacted income from operations by $1.6 million.

Other income (expense)

	Three months ended					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Investment income	$	11,667	$	21,611	(46)%	$	59,444	$	62,969	(6)%
percentage of revenue		5%		9%			8%		9%
Other-than-temporary impairments on long-term investments	$	(14,738)	$	—	—%	$	(14,738)	$	—	—%
percentage of revenue		(6)%		—%			(2)%		—%
Gain on sale of venture capital funds	$	—	$	—	—%	$	—	$	3,591	—%
percentage of revenue		—%		—%			—%		1%
Interest expense and other, net	$	(5,705)	$	(6,158)	7%	$	(18,474)	$	(19,314)	4%
percentage of revenue		(2)%		(3)%			(3)%		(3)%
Total other (expense) income, net	$	(8,776)	$	15,453	(157)%	$	26,232	$	47,246	(44)%
percentage of revenue		(4)%		7%			4%		7%

Investment income includes income from short-term and long-term investments. Investment income for the third quarter and first nine months of fiscal 2008 decreased compared to the same periods of fiscal 2007 due primarily to a decrease in cash, cash equivalents and short-term investments as a result of the PlateSpin acquisition, Debenture and common stock repurchases and lower interest rates. 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.

In the third quarter of 2008, we recorded an other-than-temporary impairment charge of $14.7 million related to our auction-rate securities (“ARSs”). For further information, see the “Liquidity and Capital Resources” section below.

Income tax expense on income (loss) from continuing operations

	Three months ended					Nine months ended
(Dollars in thousands)	July 31, 2008		July 31, 2007		Change	July 31, 2008		July 31, 2007		Change
Income tax expense	$	7,320	$	8,970	(18)%	$	31,926	$	21,882	46%
Effective tax rate		(94)%		168%			85%		459%

36

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

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 third quarter and first nine months of fiscal 2008, we provided for income tax expense on continuing operations of $7.3 million and $31.9 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 third quarter of fiscal 2008 a tax adjustment of $7.2 million was debited to additional paid-in capital reflecting a $4.8 million reduction in current year utilization of previously reserved tax credits combined with $2.4 million adjustment for prior year tax filings. During the first nine months of fiscal 2008, a tax benefit of $16.8 million was credited to additional paid-in capital relating to stock options for current year exercises and utilization of previously reserved net operating losses and tax credits. During the first nine 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 third quarter and first nine 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 third quarter of fiscal 2008 was (94)% compared to an effective tax rate of 168% for the same period in fiscal 2007. The effective tax rate on continuing operations for the first nine months of fiscal 2008 was 85% compared to an effective tax rate of 459% for the same period in fiscal 2007. The effective tax rate for the third quarter and first nine months of fiscal 2008 differs from the effective tax rate for the same periods of fiscal 2007 because, even though we had losses from continuing operations in the third quarter and first nine 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 a significant amount 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”). 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”). 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. As of July 31, 2008, we had reserves for unrecognized tax benefits totaling $62.0 million including related accrued interest of $7.2 million, of which $45.4 million would favorably impact the effective tax rate if recognized. The $0.2 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 and settlements with tax authorities, partially offset by increases for unrecognized tax benefits originating during the year.

37

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Results of Operations (Continued)

The $45.4 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 July 31, 2008, we believe it is reasonably possible that $2.7 million of unrecognized tax benefits will decrease within the next 12 months as the result of statute of limitations expiring in various jurisdictions. We do not believe that the favorable $2.7 million decrease in unrecognized tax benefits would significantly impact the effective tax rate in any one period.

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						Nine months ended
(In thousands)	July 31, 2008			July 31, 2007			July 31, 2008		July 31, 2007
(Loss ) income from continuing operations	$	(15,125	)	$	(3,632	)	$	5,425	$	(17,113	)
(Loss) income from discontinued operations, net of tax		—			(47	)		2,121		(9,399	)
Net (loss) income	$	(15,125	)	$	(3,679	)	$	7,546	$	(26,512	)

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

(Dollars in thousands)	July 31, 2008			October 31, 2007			Change
Cash, cash equivalents, and short-term investments	$	1,364,552		$	1,857,637		(27)%
Percent of total assets		51	%		65	%

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

	Nine months ended
(in thousands)	July 31, 2008			July 31, 2007
Net cash (used in) provided by operating activities	$	(13,858	)	$	343,688
Issuance of common stock, net		7,646			14,370
Debenture repurchases		(142,457	)		—
Common stock repurchases/retirements		(44,663	)		—
Purchases of property, plant and equipment		(28,523	)		(17,479	)
Proceeds from sale of venture capital funds		—			4,964
Net cash paid for acquisitions		(219,553	)		(9,727	)
Net cash (distributions) proceeds from sale of subsidiaries		(7,336	)		2,749
Purchases of intangible assets		(6,000	)		(1,175	)
Cash restricted due to litigation		(52,410	)		—

Cash used in operating activities during the first nine months of fiscal 2008 of $13.9 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 nine months of fiscal 2008 also included the final $13.9 million of special interest payments required under the consent solicitation for the Convertible Debentures (“Debentures”), discussed further below. Cash flow from operations is expected to be positive for the full 2008 fiscal year.

38

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Liquidity and Capital Resources (Continued)

Cash provided by operating activities during the first nine months of fiscal 2007 included the receipt of $355.6 million in cash in connection with the November 2006 Microsoft agreements.

As of July 31, 2008, we had cash, cash equivalents, and short-term investments of approximately $422.2 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 July 31, 2008, $7.1 million of our short-term investments are invested in equity securities designated for deferred compensation payments, which are paid out as requested by participants in the Novell, Inc. Deferred Compensation Plan. As of July 31, 2008, our short-term investment portfolio includes gross unrealized gains and losses of $3.7 million and $2.2 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.

At July 31, 2008 and October 31, 2007, we held eight ARSs that are classified as long-term investments on our consolidated balance sheets. We estimated the fair value of these ARSs using a discounted cash flow analysis that considered the following key inputs: (i) the underlying structure of each security; (ii) the present value of the future principal and interest payments discounted at rates considered to reflect current market conditions and the relevant risk associated with each security; and (iii) consideration of the time horizon that the market value of each security could return to its cost. We estimated that the fair market value of these securities at July 31, 2008 and October 31, 2007 was $25.1 million and $37.3 million, respectively.

In the third quarter of fiscal 2008, we recorded an other-than-temporary impairment charge of $14.7 million based on our assessment that it is likely that the fair value of the ARSs will not fully recover in the foreseeable future, given a combination of factors, including the duration, severity and continuing declining trend of the fair value of these securities as well as a deterioration in some of the securities’ credit ratings. In connection with the other-than-temporary impairment charge, we reversed all of the $9.5 million of temporary impairment charges pertaining to these securities that had been recorded in the “Accumulated other comprehensive income” line item in our consolidated balance sheets in prior periods.

The fair value of the ARSs could change significantly in the future and we may be required to record additional temporary or other-than-temporary impairment charges if there are further reductions in fair value in future periods.

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 third quarter and first nine months of fiscal 2008, we received $7.2 million and $51.3 million in fund distributions, respectively. As of July 31, 2008, the balance of this investment is $26.0 million. As of July 31, 2008, we anticipate that $21.5 million of this balance will be distributed during the next twelve months. The remaining $4.5 million is anticipated to be distributed more than one year after July 31, 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.

Based on our ability to access our cash, cash equivalents, and 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 the enhanced liquidity fund and our ARSs will affect our ability to operate our business as usual.

In relation to the appeal we filed in the Amer Jneid legal matter, we were required by the court in the first quarter of fiscal 2008 to post 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. Since the posting of the bond near the end of the first quarter of fiscal 2008, the bond earned $0.9 million of interest, increasing restricted cash to $52.4 million.

39

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Liquidity and Capital Resources (Continued)

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 related to the Debentures, we were required to make special interest payments of $44.0 million over three periods. During the first nine months of fiscal 2008, we made total cash payments for interest of $16.8 million, of which $13.9 million was for the final special interest payment. During the third quarter and first nine months of fiscal 2008, we incurred interest expense, including the amortization of deferred financing costs, related to the Debentures of $4.2 million and $15.3 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 third quarter of fiscal 2008, we purchased and retired $28.0 million face value of the Debentures for total cash consideration of $26.9 million, including less than $0.1 million of accrued interest. During the first nine months of fiscal 2008, we purchased and retired $148.6 million face value of the Debentures for total cash consideration of $142.5 million, including $0.2 million of accrued interest. The portions of the unamortized debt issuance costs and prepaid interest related to the bonds that were repurchased were written off, resulting in a $0.1 million gain during the third quarter of fiscal 2008 and a $0.5 million gain during the first nine months of fiscal 2008. This gain is shown as a component of the line item, “Interest expense and other, net” in our consolidated statements of operations.

On May 13, 2008, our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. There is no fixed termination date for the repurchase program. As of July 31, 2008, 7,477,300 shares of common stock have been repurchased and retired under this program at an average price of $5.97 per share. The total amount paid for the repurchase of our common stock was $44.7 million, leaving $55.3 million remaining to be repurchased under the current Board authorization.

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 July 31, 2008, our principal unused sources of liquidity consisted of cash and cash equivalents of $973.8 million and short-term investments of $390.7 million. Our liquidity needs for the next twelve months and beyond are principally for financing of fixed assets, repurchases of common stock under our share repurchase plan, payments under our restructuring plans, product development investments, maintaining flexibility in a dynamic and competitive operating environment, including pursuing potential acquisition and investment opportunities, interest payments on the Debentures, any repurchases we may make of the Debentures, and 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 have been classified as a current liability and asset, respectively.

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, cash equivalents, 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.

40

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Recent Accounting Pronouncements (Continued)

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. The adoption of this standard is optional. Since we do not currently have complex hedge accounting requirements, there is little incentive to elect the fair value option on any of our applicable financial assets or liabilities. Therefore, we do not currently plan on utilizing the fair value option as outlined in SFAS No. 159.

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). For acquisitions that close after November 1, 2009 or for any acquisition-related tax adjustments that occur after November 1, 2009, this pronouncement will impact 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 that 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). The impact of this pronouncement on our financial position and results of operations is anticipated to be immaterial.

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. As this pronouncement is only disclosure-related it will not have an impact on our financial position and results of operations. However, this pronouncement will require increased disclosures around our use of foreign exchange forward contracts, which is our only use of derivative instruments.

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.

In April 2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the guidance in FASB Statement No. 142, “Goodwill and Other Intangible Assets”, for estimating useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of a recognized

41

NOVELL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)

Recent Accounting Pronouncements (Continued)

intangible asset. In estimating the useful life of a recognized intangible asset, FSP No. 142-3 requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008 (our fiscal 2010), and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets. For intangible assets acquired after November 1, 2009, this pronouncement may impact our financial position and results of operations.

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 July 31, 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 other characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximately $3.0 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 July 31, 2008, the gross unrealized loss before tax effect on the short-term public equity securities totaled $0.8 million. A reduction in prices of 10% of these short-term equity securities would result in an approximately $0.7 million decrease (less than 0.2%) in the fair value of our short-term investments.

As a result of the failure of the auctions for our ARSs, and the ensuing duration, severity and continuing decline of the fair value of these securities, we recorded an other-than-temporary impairment charge of $14.7 million on our ARSs during the third quarter of fiscal 2008. We estimate that these securities have a fair value of $25.1 million at July 31, 2008. 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 recognize additional other-than-temporary declines 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 $6.7 million. This number represents the exposure related to balance sheet re-

42

NOVELL, INC.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK – (Continued)

Item 3. Quantitative and Qualitative Disclosures about Market Risk (Continued)

measurement only and assumes that all currencies move in the same direction at the same time relative to the U.S. dollar. If the U.S. dollar were to strengthen 10%, it is anticipated that the impact to revenue would be approximately 2% to 3%, and we would anticipate a comparable movement in the opposite direction for expenses. This assumes that all currencies move in the same direction at the same time and the ratio of non-U.S. denominated revenue does not change from current levels.

We do not currently hedge currency risk related to revenues or expenses denominated in foreign currencies. Foreign currency exchange rate fluctuations during the third quarter of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $6.6 million, unfavorably impacted operating expenses by $7.2 million and unfavorably impacted income from operations by $0.6 million. Foreign currency exchange rate fluctuations during the first nine months of fiscal 2008, compared to the same period in fiscal 2007, favorably impacted revenue by $21.6 million, unfavorably impacted operating expenses by $23.2 million and unfavorably impacted income from operations by $1.6 million.

All of the potential changes noted above are based on sensitivity analyses performed on our financial position at July 31, 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 third quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

43

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 third quarter of fiscal 2008 for our share repurchase plan and for our stock-based compensation plans.

(In thousands, except per share amounts) Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum dollar value of shares that may yet be purchased under the plans or programs
May 1, 2008 through May 31, 2008	24	$	6.36	—	$	100,000
June 1, 2008 through June 30, 2008	2,653		6.24	2,450		84,695
July 1, 2008 through July 31, 2008	5,028		5.84	5,027		55,337
Total	7,705	$	5.98	7,477		55,337

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 227,842 shares in the months of May, June and July of fiscal 2008.

On May 13, 2008, our Board of Directors authorized the repurchase of up to $100 million of our outstanding common stock. There is no fixed termination date for the repurchase program. As of July 31, 2008, 7,477,300 shares of common stock have been repurchased and retired under this program at an average price of $5.97 per share. The total amount paid for the repurchase of our common stock was $44.7 million, leaving $55.3 million remaining to be repurchased under the current Board authorization.

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: September 8, 2008	By:	/s/ DANA C. RUSSELL
	Dana C. Russell
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

45

NOVELL, INC.

EXHIBIT INDEX

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

Exhibit Number		Description
	10.1*	Amended Novell, Inc. 2000 Stock Plan
	10.2*	Non-Employee Director Remuneration and Expense Reimbursement Summary
	10.3*	Stock Option Amendment Agreement with Dana C. Russell
	10.4*	Stock Option Amendment Agreement with Susan Heystee
	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
	*       Indicates management contracts or compensatory plans.

46

EX-10.1

Exhibit 10.1

NOVELL, INC.

2000 STOCK PLAN

Amended April 3, 2003

Amended May 13, 2008

1.  Purposes of the Plan. The purposes of this Novell, Inc., 2000 Stock Plan are:

— to attract and retain the best available personnel,

— to provide additional incentive to Employees, Directors and Consultants, and

— to promote the success of the Company’s business.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights and Common Stock Equivalents may also be granted or awarded under the Plan. The Administrator may determine that Shares may be issued under the Plan to satisfy the Company’s obligations under the Novell, Inc. Stock-Based Deferred Compensation Plan.

2.  Definitions. As used herein, the following definitions shall apply:

    (a)  “Administrator” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

    (b)  “Annual Retainer Fee” means the annual fee to which an Outside Director is entitled for serving as a Director during a fiscal year of the Company, but shall not include reimbursement for expenses, fees associated with service on any committee of the Board or fees for other services provided to the Company.

    (c)  “Applicable Laws” means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

    (d)  “Award” means an award of Options, Stock Purchase Rights or Common Stock Equivalents pursuant to the terms of the Plan.

    (e)  “Board” means the Board of Directors of the Company.

    (f)  “Code” means the Internal Revenue Code of 1986, as amended.

    (g)  “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

    (h)  “Common Stock” means the common stock of the Company.

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    (i)  “Common Stock Equivalent” means an unfunded and unsecured right to receive Shares in the future that may be granted to a Director pursuant to Section 12.

    (j)  “Common Stock Equivalent Agreement” means a written agreement between the Company and a Director evidencing the terms and conditions of an individual Common Stock Equivalent grant.

    (k)  “Company” means Novell, Inc., a Delaware corporation.

    (l)  “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

    (m)  “Director” means a member of the Board.

    (n)  “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

    (o)  “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

    (p)  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

    (q)  “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)    If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii)    If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii)    In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator.

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(r)  “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(s)  “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

(t)  “Notice of Grant” means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement.

(u)  “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(v)  “Option” means a stock option granted pursuant to the Plan.

(w)  “Option Agreement” means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(x)  “Optioned Stock” means the Common Stock subject to an Option or Stock Purchase Right.

(y)  “Optionee” means the holder of an outstanding Award granted under the Plan.

(z)  “Outside Director” means a Director who is not an Employee.

(aa)      “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(bb)      “Plan” means this Novell, Inc., 2000 Stock Plan.

(cc)      “Restricted Stock” means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.

(dd)      “Restricted Stock Purchase Agreement” means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.

(ee)      “Retirement” means, as applicable, (i) a Service Provider who is not an Outside Director who leaves the employment of the Company at an age of 65 or older or (ii) a Service Provider who is an Outside Director who leaves the service of the Company at the age of 73.

(ff)      “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(gg)      “Section 16(b)” means Section 16(b) of the Exchange Act.

(hh)      “Service Provider” means an Employee, Director or Consultant.

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(ii)  “Share” means a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan.

(jj)  “Stock Purchase Right” means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.

(kk)      “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3.  Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 16,000,000, plus any forfeited Shares. For purposes of this Section 3, ”forfeited Shares” means any Shares issued pursuant to Awards made under the Plan that are forfeited to the Company pursuant to award terms and conditions, plus any Shares covered by Awards granted under the Plan that are canceled or forfeited. In no event, however, except as to Section 14 of the Plan shall more than 10,000,000 of the Shares eligible for issuance under the Plan be issued upon the exercise of Incentive Stock Options. The Shares may be authorized, but unissued, or reacquired Common Stock.

    If an Award expires or becomes unexercisable without having been exercised or converted in full, the unpurchased or unissued Shares which were subject thereto shall become available for future issuance under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Stock Purchase Right or conversion of a Common Stock Equivalent, shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future award under the Plan.

    Notwithstanding anything in the Plan to the contrary, the Administrator may provide that a portion of the Shares authorized for issuance under the Plan pursuant to this Section 3 may be distributed under the Novell, Inc. Stock-Based Deferred Compensation Plan to meet the Company’s obligations with respect to such plan. Any Shares used to meet the Company’s obligations under the Novell, Inc. Stock-Based Deferred Compensation Plan shall reduce the maximum aggregate number of Shares which may be optioned and sold under the Plan.

4.  Administration of the Plan.

    (a)  Procedure.

(i)      Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers.

(ii)      Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii)      Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

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(iv)      Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

    (b)  Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

    (i)      to determine the Fair Market Value;

   (ii)      to select the Service Providers to whom Awards may be granted hereunder;

  (iii)      to determine the number of shares of Common Stock to be covered by each Award granted hereunder;

  (iv)      to approve forms of agreement for use under the Plan;

   (v)      to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), the time or times when Common Stock Equivalents may be converted to Shares, any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Awards or the Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

  (vi)      to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;

 (vii)      to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred treatment under foreign laws;

(viii)      to modify or amend each Award (subject to Section 16(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

  (ix)      to allow Optionees to satisfy required withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or in connection with Shares acquired pursuant to a Stock Purchase Right or upon the conversion of a Common Stock Equivalent that number of Shares having a Fair Market Value equal to (or less than) the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

   (x)      to authorize any person to execute on behalf of the Company any instrument required to effect an Award previously granted by the Administrator;

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(xi)      to make all other determinations deemed necessary or advisable for administering the Plan.

    (c)  Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Awards.

5.  Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Common Stock Equivalents may be granted to Outside Directors. Incentive Stock Options may be granted only to Employees.

6.  Limitations.

    (a)  Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

    (b)  Neither the Plan nor any Award shall confer upon an Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee’s right or the Company’s right to terminate such relationship at any time, with or without cause.

    (c)  The following limitations shall apply to grants of Options:

 (i)      No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 1,500,000 Shares.

(ii)      In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 1,500,000 Shares which shall not count against the limit set forth in subsection (i) above.

    (d)  The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 14.

7.  Term of Plan. Subject to Section 20 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan.

8.  Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

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9.  Option Exercise Price and Consideration.

    (a)  Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be no less than 100% of Fair Market Value, as shall be determined by the Administrator.

    (b)  Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction.

    (c)  Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.

    (d)  Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

    (i)    cash;

   (ii)    check;

  (iii)    promissory note;

  (iv)    other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

   (v)    to the extent permitted by applicable law, consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;

  (vi)    a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee’s participation in any Company-sponsored deferred compensation program or arrangement;

 (vii)    any combination of the foregoing methods of payment; or

(viii)    such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

10.  Exercise of Option.

    (a)  Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share.

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    An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan.

    Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

    (b)  Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee’s Death, Disability, or Retirement, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for 12 months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

    (c)  Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

    (d)  Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is

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vested on the date of death. Immediately upon an Optionee’s death while a Service Provider, each of the Optionee’s outstanding Options shall become vested on an accelerated basis with respect to all Shares that would have become vested during the twelve (12) months following such death if Optionee had remained a Service Provider. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee’s estate or, if none, by the person(s) entitled to exercise the Option under the Optionee’s will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

    (e)  Retirement.

 (i)      Optionees Other than Outside Directors. Following the Retirement of an Optionee who is not an Outside Director, the Option may be exercised by such Optionee within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), but only to the extent that the Option is vested on the date of Retirement. Immediately upon the Retirement of an Optionee who is not an Outside Director, each of such Optionee’s outstanding Options shall become vested on an accelerated basis with respect to all Shares that would have become vested during the twelve (12) months following such Retirement if such Optionee had remained a Service Provider. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twenty four (24) months following such Optionee’s Retirement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, at the time of Retirement, an Optionee who is not an Outside Director is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If, after Retirement, an Optionee who is not an Outside Director does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(ii)      Optionees Who Are Outside Directors. Following the Retirement of an Optionee who is an Outside Director, the Option may be exercised by such Optionee within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), but only to the extent that the Option is vested on the date of Retirement. Immediately upon the Retirement of an Optionee who is an Outside Director, each of such Optionee’s outstanding Options shall become vested on an accelerated basis with respect to all Shares that would have become vested following such Retirement if such Optionee had remained a Service Provider. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twenty four (24) months following such Optionee’s Retirement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, after Retirement, an Optionee who is an Outside Director does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

    (f)  Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

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11.  Stock Purchase Rights.

    (a)  Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

    (b)  Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s service with the Company for any reason (including Death, Disability, or Retirement). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate or under such conditions as shall be determined by the Administrator and set forth in the restricted Stock Purchase Agreement.

    (c)  Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

    (d)  Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company.

    No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 14 of the Plan.

12.  Director Common Stock Equivalents.

    (a)  Elective Award of Common Stock Equivalents.

 (i)      Elective Award. An Outside Director may elect no later than March 1st of each calendar year to have up to one hundred percent (100%) of the Director’s Annual Retainer Fee for the following fiscal year converted to the award of Common Stock Equivalents (“Elective Award”). Such Common Stock Equivalents shall be awarded either (i) on the date that the Annual Retainer Fee is to be paid or (ii) pro rata on each date that installments of the Annual Retainer Fee are to be paid, whichever is applicable. The number of Common Stock Equivalents to be awarded on each such date shall be based on the Fair Market Value per Share on the date of the award.

(ii)      Conversion. The Common Stock Equivalents subject to an Elective Award shall be converted into Shares upon the earlier of (i) the termination of the individual’s service as a Director, (ii) a date specified by the Outside Director at the time the Director makes the election to receive the Elective Award, or (iii) as otherwise provided in Section 14. Upon the conversion of each Elective Award, the Outside Director (or his or her designated beneficiary or estate) shall receive the number of Shares equal to the whole number of Common Stock Equivalents then credited to the Director’s applicable Elective Award account.

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    (b)  Awards in General. Common Stock Equivalents may be awarded either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. An Award of Common Stock Equivalents shall be made pursuant to a Common Stock Equivalent Agreement in such form as is determined by the Administrator.

    (c)  Bookkeeping Accounts; Nontransferability. The number of Common Stock Equivalents awarded pursuant to Section 12(a) shall be credited to a bookkeeping account established in the name of the Director. The Company’s obligation with respect to such Common Stock Equivalents shall not be funded or secured in any manner. A Director’s right to receive Common Stock Equivalents may not be assigned or transferred, voluntarily or involuntarily, except as expressly provided herein.

    (d)  Dividends. If the Company pays a cash dividend with respect to the Shares at any time while Common Stock Equivalents are credited to a Director’s account, there shall be credited to the Director’s account additional Common Stock Equivalents equal to (i) the dollar amount of the cash dividend the Director would have received had he or she been the actual owner of the Shares to which the Common Stock Equivalents then credited to the Director’s account relate, divided by (ii) the Fair Market Value of one Share on the dividend payment date. The Company will pay the Director a cash payment in lieu of fractional Common Stock Equivalents on the date of such dividend payment.

    (e)  Shareholder Rights. A Director (or his or her designated beneficiary or estate) shall not be entitled to any voting or other shareholder rights as a result of the credit of Common Stock Equivalents to the Director’s account, until certificates representing Shares are delivered to the Director (or his or her designated beneficiary or estate) upon conversion of the Director’s Common Stock Equivalents pursuant to Section 12(a)(ii).

13.  Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Award transferable, such Award shall contain such additional terms and conditions as the Administrator deems appropriate.

14.  Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

    (a)  Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Award, the number of Common Stock Equivalents credited to a Director’s account under Section 12, the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, the number of shares of Common Stock subject to the Incentive Stock Option limit set forth in Section 3, as well as the price per share of Common Stock covered by each such outstanding Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award.

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    (b)  Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator may, in its discretion, provide (i) for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable, (ii) that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated, and (iii) that any Common Stock Equivalents credited to a Director’s account under Section 12 shall convert into Shares (as provided in Section 12(a)) immediately prior to the consummation of any such dissolution or liquidation. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

    (c)  Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Award shall be assumed or an equivalent award substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for such Awards: (i) each Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable; (ii) any Company repurchase option applicable to any Shares acquired upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares; and (iii) Common Stock Equivalents credited to a Director’s account under Section 12 shall convert into Shares (as provided in Section 12) immediately prior to the merger or sale of assets. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. If a Common Stock Equivalent converts to Shares in such event, the Administrator shall notify the Optionee at least fifteen (15) days prior to the consummation of the proposed transaction. For the purposes of this paragraph, an Award shall be considered assumed if, following the merger or sale of assets, the award confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right or for each Common Stock Equivalent immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right or upon conversion of each Common Stock Equivalent, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

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15.  Date of Grant. The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. However, the date of grant of Common Stock Equivalents shall be determined in accordance with Section 12. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.

16.  Amendment and Termination of the Plan.

    (a)  Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

    (b)  Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

    (c)  Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

17.  Conditions Upon Issuance of Shares.

    (a)  Legal Compliance. Shares shall not be issued pursuant to the exercise or conversion of an Award unless the exercise or conversion of such Award and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

    (b)  Investment Representations. As a condition to the exercise or conversion of an Award, the Company may require the person exercising or converting such Award to represent and warrant at the time of any such exercise or conversion that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

18.  Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

19.  Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

20.  Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws.

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EX-10.2

Exhibit 10.2

Non-Employee Director Remuneration and Expense Reimbursement Summary

1. Cash Compensation

a)	Annual Retainers
—	A non-employee Chairperson of the Board of Directors shall receive an annual Board retainer of $125,000.00 paid quarterly in advance on May 1, August 1, November 1 and February 1
—	Each non-employee member of the Board of Directors other than the non-employee Chairperson shall receive an annual Board retainer of $50,000.00 paid quarterly in advance on May 1, August 1, November 1 and February 1
—	The non-employee director who serves as Chairperson of the Audit Committee shall receive, in addition to his or her Board retainer, an annual Committee retainer of $20,000.00 paid quarterly in advance on May 1, August 1, November 1 and February 1
—	Each non-employee director who serves as Chairperson of a Board Committee other than the Audit Committee shall receive, in addition to his or her Board retainer, an annual Committee retainer of $10,000.00 paid quarterly in advance on May 1, August 1, November 1 and February 1
—	Under the terms of the 2000 Stock Plan, non-employee directors have the right to convert all or any portion of their annual Board retainers (but not their Committee retainers) to the award of Common Stock Equivalents (the “Retainer CSEs”)
	—	Retainer CSEs are purchased on each date an installment of the annual Board retainer is paid
	—	Any non-employee director who elects to purchase Retainer CSEs will receive a supplemental credit equal to 25% of the portion of the annual Board retainer used to purchase Retainer CSEs (referred to as the “Match”)
	—	The Match may be applied only to the purchase of additional CSEs (“Match CSEs”)
	—	The number of Retainer CSEs and Match CSEs to be received is based on the closing price of Novell common stock on the day before the grant
	—	Retainer CSEs are fully vested at the time of the grant
	—	Match CSEs, unlike Retainer CSEs, are subject to a cliff vesting period of three years from the date of award
	—	The Retainer CSEs will be converted into shares of Novell common stock on the earlier to occur of (i) the termination of service as a director and (ii) a date prior to the termination of service as a director specified by the director
	—	Vested Match CSEs will be converted into shares of Novell common stock on the termination of service as a director

1

b)	Meeting Fees
—	$1,500 for each Board and Board telephonic meeting attended
—	$1,500 for each Committee and Committee telephonic meeting attended as a Committee member

2. Equity Compensation

— 25,000 options granted annually that vest over 2 years at 50% per year on anniversary date of award

— One-time grant of 50,000 options made to new non-employee directors that vest over 4 years at 25% per year on anniversary date of award

— Non-employee directors are required to hold equity (Novell common stock) equal to three times their annual Board retainer

— Non-employee Chairperson of the Board of Directors Total Stock Ownership Requirement (“Total SOR”) is $375,000 ($125k x 3)

— Other non-employee directors Total SOR is $150,000 ($50k x 3)

— Non-employee directors have five years to achieve the Total SOR, in accordance with the following schedule:

Year	Incremental SOR Percentage (Percentage of the Participant’s Total SOR)
1	5%
2	15%
3	30%
4	60%
5	100%

— Forms of equity that count towards Total SOR consist of shares that are already owned and held, shares acquired on the open market or upon the exercise of stock options, Retainer CSEs, and any vested Match CSEs

— The five year “phase in” of the SOR requirement described above applies (i) from November 1, 2004 for non-employee directors who were on the Board as of that date and (ii) for non-employee directors who joined the Board after November 1, 2004, from the date of their election to the Board

3. Retirement/Disability/Death Provisions

a) Directors’ Plan (As to options granted under this Plan prior to its expiration)

2

—	Upon retirement at age 73, 100% acceleration of all unvested options
—	Upon retirement at age 73, vested options remain exercisable for up to 12 months following retirement
—	Upon disability, no acceleration of unvested options
—	Upon disability, vested options remain exercisable for up to 12 months following disability
—	Upon death, no acceleration of unvested options
—	Upon death, options remain exercisable for up to 12 months
b)	2000 Stock Plan
—	Upon retirement at age 73, 100% acceleration of all unvested options
—	Upon retirement at age 73, vested options remain exercisable for either (i) the amount of time specified in the Option Agreement (but not beyond the expiration date of the option) or (ii) 24 months following retirement in the absence of a time specified in the Option Agreement (but not beyond the expiration date of the option)
—	Upon disability, no acceleration of unvested options
—	Upon disability, vested options remain exercisable for up to 12 months following disability
—	Upon death, vesting on an accelerated basis with respect to options that would have vested within 12 months following such death had the director not died and remained a director
—	Upon death, vested options remain exercisable for up to 12 months

4. Reimbursements

a)	Meetings
—	Novell will provide reimbursement for attendance to all Board and Committee meetings covering the following:
	—	first class airfare ticket or equivalent
	—	lodging
	—	meals
	—	ground transportation to and from the meeting
b)	Conferences
—	Novell will provide reimbursement for attendance to one conference per year covering the following:
	—	registration fees
	—	first class airfare ticket or equivalent
	—	lodging
	—	meals
	—	ground transportation to and from the conference

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c)	Orientation
—	Novell will provide reimbursement for new directors for attendance to one third-party orientation program covering the following:
	—	registration fees
	—	first class airfare ticket or equivalent
	—	lodging
	—	meals
	—	ground transportation to and from the orientation program

4

EX-10.3

Exhibit 10.3

STOCK OPTION AMENDMENT AGREEMENT

THIS STOCK OPTION AMENDMENT AGREEMENT (“Agreement”) is made by and between Novell, Inc. (the “Company”) and Dana C. Russell (the “Employee”) on this 10th day of January, 2008 (the “Effective Date”).

WHEREAS, the Company previously granted the Employee the options identified on Schedule I (the “Options”) to purchase shares of the Company’s common stock (“Company Stock”) under one or more of the Company’s employee stock incentive plans (individually, a “Plan”).

WHEREAS, the Company and Employee entered into a formal Stock Option Agreement (the “Option Agreement”) evidencing such Options.

WHEREAS, the Company has determined, on the basis of the findings of the Audit Committee of the Board of Directors in connection with its investigation into the Company’s historical option grant practices, that the Options were incorrectly priced in that the exercise price of each such Option is based on the fair market value of the Company’s common stock on a date earlier than the date that has now been determined to be the actual grant date of that Option for financial accounting purposes.

WHEREAS, the Employee will be subject to tax disadvantages under Section 409A of the Internal Revenue Code, as amended (the “Code”) and state tax law with respect to the Options, unless certain remedial actions under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), are taken within the relief period provided under the regulations issued by the Internal Revenue Service.

WHEREAS, to avoid any potentially adverse tax consequences under Section 409A of the Code, and any comparable provisions of applicable state tax law, the Company wishes to increase the exercise price per share of the 6,000 Options shown in column four of Section A of Schedule I (the “Repriced Options”) to the higher “New Exercise Price Per Share Following Amendment” set forth for those Options in column six of Section A of Schedule I, and the Employee has agreed to do so.

WHEREAS, in order to compensate Employee for the increased exercise price to be in effect for the Repriced Options, the Company is willing to pay Employee a special cash bonus in a gross dollar amount set forth as the “Total Special Bonus” in Section A of Schedule I (the “Special Bonus”).

WHEREAS, with respect to the Options shown in Section B of Schedule I, because, as of the Effective Date, the exercise price of such Options is greater than the fair market value of the underlying Company Stock, the parties desire to cancel such Options (the “Cancelled Options”) and issue new options (the “New Options”) to replace such Cancelled Options on substantially identical terms and conditions as the Cancelled Options.

NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Employee and the Company agree as follows:

1.        Increased Exercise Price. The exercise price per share set forth in the Option Agreement for each of the 6,000 Repriced Options is hereby increased to the higher “New Exercise Price Per Share Following Amendment” set forth for the Repriced Options in column six of Section A of Schedule I. Except for the foregoing increase to the exercise price per share of the 6,000 Repriced Options, no other terms or provisions of the Option Agreements for the 32,000 Options set forth in Section A of Schedule I or the applicable Plans for such Options have been modified as a result of this Agreement, and those terms and provisions shall continue in full force and effect.

2.         Special Bonus. Company shall pay the Special Bonus to Employee on the Company’s first regularly-scheduled payroll date after January 1, 2009, which will not be later than January 31, 2009. The Special Bonus shall be subject to the Company’s collection of all applicable federal, state and local income taxes and payroll withholdings, and Employee shall be paid only the net amount of such Special Bonus remaining after such taxes and withholdings have been collected by the Company. Employee need not remain in the Company’s employ to receive the Special Bonus.

3.         Cancellation and Regrant of Options.

  (a)    The Cancelled Options shall be deemed rescinded, cancelled and disposed of to the Company as of the Effective Date. Employee hereby agrees that he has no further right, title or interest in or to the Cancelled Options and that he no longer has any right or entitlement to purchase any shares of Company Stock or other capital stock of the Company under the Cancelled Options. Employee releases the Company, its officers and directors of all liability in connection with such Cancelled Options.

  (b)    As of the Effective Date, Employee shall receive New Options in cancellation and replacement of the Cancelled Options. It is the intent of the parties that, with the exception of the grant date, the New Options shall have exactly the same terms and conditions as the Cancelled Options, including, without limitation, the exercise price payable per share of Company Stock, the number of underlying shares of Company Stock, the vesting provisions, and the expiration date. The New Options shall be granted under the same Plan under which the Cancelled Options were granted and shall be subject to terms set forth in the Option Agreement for the New Options. The cancellation and regrant is effected solely to evidence the cancellation and regrant procedure required under Code Section 409A for any option (or portion thereof) which was not vested as of December 31, 2004 and which may be deemed to have been granted with an exercise price below the fair market value of the option shares on the grant date.

4.         Indemnity. In the event that the Repriced Options and/or the New Options are deemed to constitute a deferred compensation arrangement subject to Section 409A of the Code, the Company agrees that it will defend Employee and, upon final adjudication and assessment of any income taxes imposed on

Employee by virtue of Section 409A and subject to the terms of this Agreement, indemnify and hold Employee harmless from and against any portion of such taxes which arise and are imposed pursuant to Section 409A(a)(1)(B) and any penalties and/or interest assessed against Employee based on the failure to pay and discharge any such taxes (whether assessed under Section 409A(a)(1)(B) or otherwise) in a timely manner. In addition, to the extent that such indemnification gives rise to taxable income to the Employee, the Company shall provide a “gross-up” of the reimbursement payment made sufficient to offset Employee’s federal income tax liability in respect of the reimbursement and the gross-up payment. The obligation of the Company to defend and indemnify in accordance with the foregoing is conditioned upon (i) Employee giving prompt written notice to the Company of any audit, notice or examination of Employee’s federal tax returns raising the application of Section 409A to the Repriced Options and/or the New Options and (ii) Employee permitting the Company, at the Company’s expense, to engage counsel to contest the application of Section 409A and control that aspect of any resulting audit or proceedings to resolve the issue. In accepting the indemnification provided hereby, Employee understands and agrees that the Company is not agreeing to or obligated to provide indemnification in respect of income or withholding taxes arising from the actual exercise or any imputed exercise of the Options themselves (including, without limitation, any federal income tax arising under Section 409A(a)(1)(A)).

5.        Entire Agreement. This Agreement, together with the Option Agreements (to the extent not expressly amended hereby) and the applicable Plans, represents the entire agreement of the parties with respect to the matters addressed herein and supersedes any and all previous contracts, arrangements or understandings, whether oral or in writing, between the parties with respect to the matters addressed herein. This Agreement may be amended at any time only by means of a writing signed by Employee and an authorized officer of the Company.

6.         Governing Law. This Agreement shall be governed by the laws of The Commonwealth of Massachusetts without reference to its conflicts of law principles.

IN WITNESS WHEREOF, this Agreement has been executed on behalf of the Company by a duly-authorized officer and Employee has hereunto set his or her hand as of the date first written above.

NOVELL, INC.		EMPLOYEE
/s/ Alan J. Friedman		/s/ Dana C. Russell
By:	Alan J. Friedman	Dana C. Russell
Title:	Senior Vice President

SCHEDULE I

Section A: Repriced Option

Original Grant Date	Total Number of Outstanding Option Shares	Number of Outstanding Option Shares Not Subject to Amended Exercise Price	Number of Outstanding Option Shares Subject to Amended Exercise Price	Exercise Price Per Share Prior to Amendment	New Exercise Price Per Share Following Amendment	Special Bonus Payable on the first regularly scheduled payroll date following January 1, 2009
9/10/2001	32,000	26,000	6,000	$3.92	$3.94	$120.00

Total Special Bonus: $120.00                                

Section B: Cancelled Option/New Grants

Prior Option	Original Grant Date	Revised Grant Date	Current Exercise Price	Total Number of Option Shares to be Canceled and Regranted	New Exercise Price
13,000	1/07/2004	1/10/2008	$10.68	13,000	$10.68

EX-10.4

Exhibit 10.4

STOCK OPTION AMENDMENT AGREEMENT

THIS STOCK OPTION AMENDMENT AGREEMENT (“Agreement”) is made by and between Novell, Inc. (the “Company”) and Susan Heystee (the “Employee”) on this 10th day of January, 2008 (the “Effective Date”).

WHEREAS, the Company previously granted the Employee the options identified on Schedule I (the “Options”) to purchase shares of the Company’s common stock (“Company Stock”) under one or more of the Company’s employee stock incentive plans (individually, a “Plan”).

WHEREAS, the Company and Employee entered into a formal Stock Option Agreement (the “Option Agreement”) evidencing such Options.

WHEREAS, the Company has determined, on the basis of the findings of the Audit Committee of the Board of Directors in connection with its investigation into the Company’s historical option grant practices, that the Options were incorrectly priced in that the exercise price of each such Option is based on the fair market value of the Company’s common stock on a date earlier than the date that has now been determined to be the actual grant date of that Option for financial accounting purposes.

WHEREAS, the Employee will be subject to tax disadvantages under Section 409A of the Internal Revenue Code, as amended (the “Code”), state tax law, and Canadian tax law with respect to the Options , unless certain remedial actions under Section 409A are taken within the relief period provided under the regulations issued by the Internal Revenue Service.

WHEREAS, because, as of the Effective Date, the exercise price of the Options is greater than the fair market value of the underlying Company Stock, the parties desire to cancel the Options (the “Cancelled Options”) and issue new options (the “New Options”) to replace such Cancelled Options on substantially identical terms and conditions as the Cancelled Options to avoid any potentially adverse tax consequences under Section 409A of the Code, and any comparable provisions of applicable state and Canadian tax law.

NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Employee and the Company agree as follows:

1. Cancellation and Regrant of Options.

(a) The Cancelled Options shall be deemed rescinded, cancelled and disposed of to the Company as of the Effective Date. Employee hereby agrees that she has no further right, title or interest in or to the Cancelled Options and that she no longer has any right or entitlement to purchase any shares of Company Stock or other capital stock of the Company under the Cancelled Options. Employee releases the Company, its officers and directors of all liability in connection with such Cancelled Options.

(b) As of the Effective Date, Employee shall receive New Options in cancellation and replacement of the Cancelled Options. It is the intent of the parties that, with the exception of the grant date, the New Options shall have exactly the same terms and conditions as the Cancelled Options, including, without limitation, the exercise price payable per share of Company Stock, the number of underlying shares of Company Stock, the vesting provisions, and the expiration date. The New Options shall be granted under the same Plan under which the Cancelled Options were granted and shall be subject to terms set forth in the Option Agreement

for the New Options. The cancellation and regrant is effected solely to evidence the cancellation and regrant procedure required under Section 409A of the Code for any option (or portion thereof) which was not vested as of December 31, 2004 and which may be deemed to have been granted with an exercise price below the fair market value of the option shares on the grant date.

2.         Indemnity. In the event that the Options are deemed to constitute a deferred compensation arrangement subject to Section 409A of the Code, the Company agrees that it will defend Employee and, upon final adjudication and assessment of any income taxes imposed on Employee by virtue of Section 409A and subject to the terms of this Agreement, indemnify and hold Employee harmless from and against any portion of such taxes which arise and are imposed pursuant to Section 409A(a)(1)(B) and any penalties and/or interest assessed against Employee based on the failure to pay and discharge any such taxes (whether assessed under Section 409A(a)(1)(B) or otherwise) in a timely manner. In addition, to the extent that such indemnification gives rise to taxable income to the Employee, the Company shall provide a “gross-up” of the reimbursement payment made sufficient to offset Employee’s federal income tax liability in respect of the reimbursement and the gross-up payment. The obligation of the Company to defend and indemnify in accordance with the foregoing is conditioned upon (i) Employee giving prompt written notice to the Company of any audit, notice or examination of Employee’s federal tax returns raising the application of Section 409A to the Options and (ii) Employee permitting the Company, at the Company’s expense, to engage counsel to contest the application of Section 409A and control that aspect of any resulting audit or proceedings to resolve the issue. In accepting the indemnification provided hereby, Employee understands and agrees that the Company is not agreeing to or obligated to provide indemnification in respect of income or withholding taxes arising from the actual exercise or any imputed exercise of the Options themselves (including, without limitation, any federal income tax arising under Section 409A(a)(1)(A)).

3.         Entire Agreement. This Agreement, together with the Option Agreements (to the extent not expressly amended hereby) and the applicable Plans, represents the entire agreement of the parties with respect to the matters addressed herein and supersedes any and all previous contracts, arrangements or understandings, whether oral or in writing, between the parties with respect to the matters addressed herein. This Agreement may be amended at any time only by means of a writing signed by Employee and an authorized officer of the Company.

4.         Governing Law. This Agreement shall be governed by the laws of The Commonwealth of Massachusetts without reference to its conflicts of law principles.

IN WITNESS WHEREOF, this Agreement has been executed on behalf of the Company by a duly-authorized officer and Employee has hereunto set his or her hand as of the date first written above.

NOVELL, INC.		EMPLOYEE
/s/ Alan J. Friedman		/s/ Susan Heystee
By:	Alan J. Friedman	Susan Heystee
Title:	Senior Vice President

SCHEDULE I

Cancelled Option/New Grants

Prior Option	Original Grant Date	Revised Grant Date	Current Exercise Price	Total Number of Option Shares to be Canceled and Regranted	New Exercise Price
100,000	9/06/2005	1/10/2008	$6.80	100,000	$6.80
50,000	9/06/2005	1/10/2008	$6.80	50,000	$6.80
50,000	9/06/2005	1/10/2008	$6.80	50,000	$6.80

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Ronald W. Hovsepian, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Novell, Inc;

2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2008

/s/ RONALD W. HOVSEPIAN

Ronald W. Hovsepian

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Dana C. Russell, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Novell, Inc;

2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

     b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2008

/s/ DANA C. RUSSELL

Dana C. Russell

Senior Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

SECTION 906 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER

I, Ronald W. Hovsepian, Chief Executive Officer of Novell, Inc., a Delaware corporation (the “Company”), hereby certify that to my knowledge:

(1) The Company’s periodic report on Form 10-Q for the period ended July 31, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

* * *

CHIEF EXECUTIVE OFFICER

/s/ RONALD W. HOVSEPIAN

Ronald W. Hovsepian

Date: September 8, 2008

EX-32.2

EXHIBIT 32.2

SECTION 906 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER

I, Dana C. Russell, Chief Financial Officer of Novell, Inc., a Delaware corporation (the “Company”), hereby certify that to my knowledge:

(1) The Company’s periodic report on Form 10-Q for the period ended July 31, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

* * *

CHIEF FINANCIAL OFFICER

/s/ DANA C. RUSSELL

Dana C. Russell

Date: September 8, 2008