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 the impact of the current economic environment, 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 2008 filed with the Securities and Exchange Commission ("SEC") on December 23, 2008. Readers should carefully review the risk factors described in the Annual Report on Form 10-K for fiscal 2008.

Overview

We develop, sell and install enterprise-quality software that is positioned in the operating systems and infrastructure software layers of the information technology ("IT") industry. We develop and deliver Linux operating system software for the full range of computers from desktops to servers. In addition, we provide a portfolio of integrated IT management software for systems, identity and security management for both Linux and mixed-platform environments. Our 26 years of experience serving the full range of enterprise sizes, combined with the cost/effectiveness, quality and flexibility of our open-platform software technology, offers customers an IT infrastructure that is responsive to the cost pressures and the expanding IT initiatives that are characteristic of today's business environment.

In addition to our technology offerings, within each of our business unit segments we offer a worldwide network of service 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.

We are organized into four business unit segments, which are Open Platform Solutions, Identity and Security Management, Systems and Resource Management, and Workgroup. Below is a brief update on the revenue results for the first quarter of fiscal 2009 for each of our business unit segments:

• Within our Open Platform Solutions business unit segment, Linux and open source products remain an important growth business. While our goal is to operate our Open Platform Solutions business segment profitably, we are using it as a platform for acquiring new customers to which we can sell our other complementary cross-platform identity and management products and services. Revenue from our Linux Platform Products increased 24% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. This product revenue increase was partially offset by lower services revenue of 23%, such that total revenue from our Open Platform Solutions business unit segment increased 13% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

• Our Identity and Security Management business unit segment offers 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, Access and Compliance Management (formerly called Identity and Access Management) products decreased 8% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. In addition, services revenue was lower by 34%, such that total revenue from our Identity and Security Management business unit segment decreased 19% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

Overview (Continued)

• Our Systems and Resource Management business unit segment 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 9% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The total product revenue increase was partially offset by lower services revenue of 18%. Total product revenue from our Systems and Resource Management business unit segment increased $2.1 million, or 5%, in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Total business unit segment revenue would not have increased in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 without our acquisitions of PlateSpin Ltd. ("PlateSpin") and Managed Object Solutions, Inc. ("Managed Objects"), which we acquired in March 2008 and November 2008, respectively, which accounted for $7.0 million of revenue during the first quarter of fiscal 2009.

• Our Workgroup business unit segment is an important source of cash flow and provides us with the potential opportunity to sell additional products and services. Our revenue from Workgroup products decreased 9% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. In addition, services revenue was lower by 39%, such that total revenue from our Workgroup business unit segment decreased 13% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

Our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits, which is in line with our strategic initiative of focusing our services business on driving more profitable product revenue while leveraging our services capabilities internally and through third-party partners. As a result of this, we have seen a general decline in our services revenue. However, the decline in services revenue in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 was greater than anticipated as customers lowered their discretionary spending in response to current economic conditions. Total product revenue was down 2% and services revenue was down 32%, resulting in a net decrease in total revenue of 7% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Foreign currency exchange rate fluctuations unfavorably impacted revenue by 1% and the PlateSpin and Managed Objects acquisitions favorably impacted revenue by 3% during the first quarter of fiscal 2009, compared to the first quarter of fiscal 2008.

Because much of the revenue we invoice is deferred and recognized over time, we consider invoicing, or bookings, to be a key indicator of current sales performance and future revenue performance. Overall invoicing was below expectations in all of our business unit segments largely as a result of the weak economy as customers focused on capital conservation and expense management. These factors have led to smaller or delayed projects and extended sales cycles for our customers. While we expect these trends to continue in the near term, the fundamental markets that we serve and the value we bring to those markets still look attractive. We believe that the current customer focus on reducing cost, complexity and risk is aligned with our overall value proposition. Additionally, the recent financial turmoil demands stricter requirements for regulation and audit, creating opportunities for certain of our products.

During the first quarter of fiscal 2009, we recorded net restructuring expenses of $8.0 million, which were primarily a continuation of our restructuring activities that began in the fourth quarter of fiscal 2006. We anticipate restructuring charges in the range of $5 million to $7 million in the second quarter of fiscal 2009. We are still evaluating what additional charges we may incur in the second half of fiscal 2009. While our initiatives and their implementation involve opportunities, risks, and challenges, barring unforeseen circumstances, we believe they position us well in this challenging environment.

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. All prior periods have been reclassified to conform to the current year's presentation. Software licenses revenue includes sales of proprietary licenses and certain royalties. Maintenance and subscriptions revenue includes product maintenance agreements, Linux subscriptions and upgrade protection contracts. Services revenue includes professional services, technical support, and training.

                                                                    Three months ended
                                                             January 31,          January 31,
(Dollars in thousands)                                          2009                 2008             Change
Software licenses                                           $      28,267        $      40,202         (30)%
Maintenance and subscriptions                                     158,815              150,067            6%
Services                                                           27,789               40,657         (32)%

Total net revenue                                           $     214,871        $     230,926          (7)%

Revenue in our software licenses category decreased during the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008 primarily due to the impact of the slowing economy as new business declined across all segments. This decrease was partially offset by $4.7 million of revenue from our PlateSpin and Managed Objects acquisitions.

Revenue from maintenance and subscriptions increased in the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008 primarily due to increased revenue from Linux Platform Products, which increased $6.7 million, or 24%, over the prior year and $2.3 million of revenue from our acquisitions of PlateSpin and Managed Objects.

While our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits, the decline in services revenue was greater than anticipated as customers lowered their discretionary spending in response to current economic conditions.

Foreign currency exchange rate fluctuations negatively impacted total net revenue by $2.7 million, or 1%, during the first quarter of fiscal 2009, compared to the same period in fiscal 2008, as measured by using prior period foreign currency exchange rates on non-U.S. dollar denominated revenue.

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

                                                                    Three months ended
                                                             January 31,          January 31,
(Dollars in thousands)                                          2009                 2008             Change
Maintenance and subscriptions                               $      37,111        $      31,136           19%
Services                                                            4,351                5,663         (23)%

Total net revenue                                           $      41,462        $      36,799           13%

Revenue from our Open Platform Solutions segment increased in the first quarter of fiscal 2009 compared to the same period of fiscal 2008 primarily due to Linux Platform Products, which increased by $6.7 million, or 24%. Invoicing for Linux Platform Products in the first quarter of fiscal 2009 was $22.5 million, a 42% decrease compared to the first quarter of fiscal 2008. Because our Linux business is dependent on large deals, we experience fluctuations in our quarterly invoicing. During the first quarter of fiscal 2009, we did not sign any large deals, many of which have been historically fulfilled by SUSE Linux Enterprise Server ("SLES") certificates delivered through Microsoft.

                                  NOVELL, INC.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Results of Operations (Continued)



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



                                                            Three months ended
                                                        January 31,     January 31,
(Dollars in thousands)                                     2009            2008        Change
Software licenses                                      $       5,967   $      12,626    (53)%
Maintenance and subscriptions                                 22,319          19,716      13%
Services                                                       9,700          14,688    (34)%

Total net revenue                                      $      37,986   $      47,030    (19)%

Revenue from our Identity and Security Management segment decreased in the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008. This decrease resulted primarily from lower software licenses revenue as well as lower services revenue, reflecting the impact of current economic conditions, as discussed above. Identity, Access and Compliance Management product revenue was $26.1 million, a decline of 8%, compared to the first quarter of fiscal 2008. Invoicing for Identity, Access and Compliance Management products decreased 18% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

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

                                                            Three months ended
                                                        January 31,     January 31,
(Dollars in thousands)                                     2009            2008        Change
Software licenses                                      $       9,136   $       7,945      15%
Maintenance and subscriptions                                 31,116          29,096       7%
Services                                                       5,151           6,298    (18)%

Total net revenue                                      $      45,403   $      43,339       5%

Revenue from our Systems and Resource Management segment increased in the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008 primarily from $7.0 million of total revenue from our PlateSpin and Managed Objects acquisitions. This increase was partially offset by lower revenue from our ZENworks products, compared to the first quarter of fiscal 2008. Invoicing for Systems and Resource Management products increased 12% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, primarily due to the PlateSpin and Managed Objects acquisitions. PlateSpin and Managed Objects products accounted for 30% of total Systems and Resource Management invoicing in the first quarter of fiscal 2009.

Net revenue in the Workgroup segment was as follows:

                                                            Three months ended
                                                        January 31,     January 31,
(Dollars in thousands)                                     2009            2008        Change
Software licenses                                      $      13,164   $      19,631    (33)%
Maintenance and subscriptions                                 68,269          70,119     (3)%
Services                                                       8,587          14,008    (39)%

Total net revenue                                      $      90,020   $     103,758    (13)%

Revenue from our Workgroup segment decreased in the first quarter of fiscal 2009 compared to the same quarter of fiscal 2008 primarily from lower combined OES and NetWare-related revenue of $7.3 million, or 14%, which decreased primarily due to lower new software licenses revenue, as well as a decrease in services revenue. Invoicing for the combined OES and NetWare-related products decreased 21% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Product invoicing for the Workgroup segment decreased 17% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.

Results of Operations (Continued)

Deferred Revenue

We had total deferred revenue of $704.6 million as of January 31, 2009 compared to $723.1 million and $730.1 million at January 31, 2008 and October 31, 2008, 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. Deferred revenue related to our agreements with Microsoft is recognized ratably over various related service periods, which can extend up to five years. The decrease in total deferred revenue of $25.5 million compared to October 31, 2008 is primarily attributable to lower invoicing during the first quarter of fiscal 2009, partially offset by the receipt of $25.0 million from Microsoft for the first payment under the August 2008 agreement to purchase additional SLES certificates.

Gross Profit



                                                           Three months ended
                                                     January 31,         January 31,
(Dollars in thousands)                                  2009                2008            Change
Software licenses gross profit                      $      25,741       $      37,103        (31)%
percentage of related revenue                                  91 %                92 %
Maintenance and subscriptions gross profit          $     145,916       $     139,126           5%
percentage of related revenue                                  92 %                93 %
Services gross profit                               $      (3,683 )     $      (3,244 )      (14)%
percentage of related revenue                                 (13 )%               (8 )%
Total gross profit                                  $     167,974       $     172,985         (3)%
percentage of revenue                                          78 %                75 %

The increase in gross profit percentage of revenue reflected the benefits of our cost reduction initiatives, including our prior restructuring actions, and 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. Our services offerings are focused on supporting product sales, not generating stand-alone revenue or profits, in line with our strategic initiatives. Total gross profit was lower for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 primarily due to the 7% decrease in total net revenue. Foreign currency exchange rate fluctuations during the first quarter of fiscal 2009, compared to the same quarter of fiscal 2008, unfavorably impacted gross profit by $0.4 million.

Gross profit by business unit segment was as follows:

                                                           Three months ended
                                                     January 31,         January 31,
(Dollars in thousands)                                  2009                2008            Change
Open Platform Solutions                             $      33,769       $      25,789          31%
percentage of related revenue                                  81 %                70 %
Identity and Security Management                    $      25,392       $      27,855         (9)%
percentage of related revenue                                  67 %                59 %
Systems and Resource Management                     $      37,267       $      35,491           5%
percentage of related revenue                                  82 %                82 %
Workgroup                                           $      75,211       $      86,339        (13)%
percentage of related revenue                                  84 %                83 %
Common unallocated operating costs                  $      (3,665 )     $      (2,489 )      (47)%
Total gross profit                                  $     167,974       $     172,985         (3)%
percentage of revenue                                          78 %                75 %

Results of Operations (Continued)

The changes in gross profit in each of our business unit segments in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 can be characterized as follows:

- Open Platform Solutions - increased as a percentage of revenue and in total primarily from higher revenues and cost containment efforts.

- Identity and Security Management - increased as a percentage of revenue despite a 19% decrease in revenue due to a more favorable mix of higher-margin product revenue and cost containment efforts.

- Systems and Resource Management - remained flat as a percentage of revenue, but increased in total as a result of incremental revenue from the PlateSpin and Managed Objects acquisitions.

- Workgroup - increased as a percentage of revenue despite a 13% decrease in revenue primarily due to cost containment efforts.

Operating Expenses



                                            Three months ended
                                       January 31,      January 31,
          (Dollars in thousands)           2009             2008         Change
          Sales and marketing          $     76,894     $     88,005      (13)%
          percentage of revenue                  36 %             38 %
          Product development          $     45,392     $     44,735         1%
          percentage of revenue                  21 %             19 %
          General and administrative   $     24,195     $     27,397      (12)%
          percentage of revenue                  11 %             12 %
          Restructuring expenses       $      8,049     $      4,367        84%
          percentage of revenue                   4 %              2 %
          Gain on sale of subsidiary   $       (200 )   $          -         -%
          percentage of revenue                   - %              - %
          Total operating expenses     $    154,330     $    164,504       (6)%
          percentage of revenue                  72 %             71 %

Sales and marketing expenses decreased in the first quarter of fiscal 2009 compared to the same period of fiscal 2008 primarily from cost reduction initiatives, including our prior restructuring actions, lower sales-related and outside service costs, and favorable foreign currency exchange rate fluctuations of $5.2 million, partially offset by higher sales and marketing expenses of $6.3 million from our acquisitions of PlateSpin and Managed Objects. Sales and marketing headcount was higher by 29 employees, or 3%, at the end of the first quarter of fiscal 2009 compared to the same period in fiscal 2008, reflecting the additional headcount from the PlateSpin and Managed Objects acquisitions.

Product development expenses in the first quarter of fiscal 2009 increased compared to the same period of fiscal 2008 primarily due to $3.2 million from our acquisitions of PlateSpin and Managed Objects. Product development headcount increased by 101 employees, or 8%, at the end of the first quarter of fiscal 2009 compared to the same period of fiscal 2008, reflecting the additional headcount from the PlateSpin and Managed Objects acquisitions. These additional expenses were partially offset by $2.5 million of favorable foreign currency exchange rate fluctuations in the first quarter of fiscal 2009 compared to the same period of fiscal 2008.

General and administrative expenses decreased in the first quarter of fiscal 2009 compared to the same period of fiscal 2008 primarily from cost reduction initiatives, including our prior restructuring actions, a decrease in stock-based compensation expense of $1.0 million and favorable foreign currency exchange rate fluctuations of $0.8 million. General and administrative headcount was lower by 6 employees, or 1%, at the end of the first quarter of fiscal 2009 compared to the same period in fiscal 2008. These decreases were partially offset by higher general and administrative expenses of $1.3 million related to . . .