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, beliefs, 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 and changes to laws to which we are subject, failure to manage international activities, inability to control indirect sales activities, dependence on relationships with significant strategic partners, 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 in 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 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 second quarter and first six months 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. We are using our Open Platform Solutions business segment 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 category within our Open Platform Solutions business unit segment increased 25% in the second quarter of fiscal 2009 compared to the prior year period. This product revenue increase was partially offset by lower services revenue of 11%, such that total revenue from our Open Platform Solutions business unit segment increased 18% in the second quarter of fiscal 2009 compared to the prior year period.

Revenue from our Linux Platform Products category within our Open Platform Solutions business unit segment increased 24% in the first six months of fiscal 2009 compared to the prior year period. This product revenue increase was partially offset by lower services revenue of 17%, such that total revenue from our Open Platform Solutions business unit segment increased 15% in the first six months of fiscal 2009 compared to the prior year period.

Overview (Continued)

• 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 products increased 2% in the second quarter of fiscal 2009 compared to the prior year period. In addition, services revenue was lower by 45%, such that total revenue from our Identity and Security Management business unit segment decreased 16% in the second quarter of fiscal 2009 compared to the prior year period.

Revenue from our Identity, Access and Compliance Management products decreased 3% in the first six months of fiscal 2009 compared to the prior year period. In addition, services revenue was lower by 40%, such that total revenue from our Identity and Security Management business unit segment decreased 18% in the first six months of fiscal 2009 compared to the prior year period.

• Our Systems and Resource Management business unit segment strategy is to provide a complete "desktop to data center" offering, with virtualization for both Linux and mixed-source environments. Systems and Resource Management product revenue decreased 2% in the second quarter of fiscal 2009 compared to the prior year period. In addition, services revenue was lower by 10%, such that total revenue from our Systems and Resource Management business unit segment decreased 3% in the second quarter of fiscal 2009 compared to the prior year period. In the second quarter of fiscal 2009, total business unit segment revenue was higher by 8%, compared to the prior year period, as a result of our acquisitions of Managed Object Solutions, Inc. ("Managed Objects") which we acquired on November 13, 2008 and PlateSpin Ltd. ("PlateSpin") which we acquired on March 26, 2008.

Systems and Resource Management product revenue increased 3% in the first six months of fiscal 2009 compared to the prior year period. The total product revenue increase was partially offset by lower services revenue of 14% in the first six months of fiscal 2009 compared to the prior year period. Total revenue from our Systems and Resource Management business unit segment increased 1% in the first six months of fiscal 2009 compared to the prior year period. In the first six months of fiscal 2009 total business unit segment revenue was higher by 12% compared to the prior year period as a result of our Managed Objects and PlateSpin acquisitions.

• 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 14% in the second quarter of fiscal 2009 compared to the prior year period. In addition, services revenue was lower by 39%, such that total revenue from our Workgroup business unit segment decreased 17% in the second quarter of fiscal 2009 compared to the prior year period.

Our revenue from Workgroup products decreased 12% in the first six months of fiscal 2009 compared to the prior year period. In addition, services revenue was lower by 39%, such that total revenue from our Workgroup business unit segment decreased 15% in the first six months of fiscal 2009 compared to the prior year period.

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. Our prior strategy positioned our services offerings less as an enablement of software sales, and more as an independent and unrelated direct revenue initiative. We shifted our services strategy and positioning in fiscal 2008, with gradual implementation. As a result of this, we have seen a general decline in our services revenue. Total product revenue was down 3% and services revenue was down 33%, resulting in a net decrease in total revenue of 9% in the second quarter of fiscal 2009 compared to the prior year period. Foreign currency exchange rate fluctuations unfavorably impacted revenue by 3% during the second quarter of fiscal 2009 compared to the prior year period. Our Managed Objects and PlateSpin acquisitions resulted in higher revenue of 2% in the second quarter of fiscal 2009 compared to the prior year period.

In the first six months of fiscal 2009, total product revenue was down 3% and services revenue was down 32%, resulting in a net decrease in total revenue of 8% compared to the prior year period. Foreign currency exchange rate fluctuations unfavorably impacted revenue by 2% in the first six months of fiscal 2009 compared to the prior year period. Our Managed Objects and PlateSpin acquisitions resulted in higher revenue of 2% in the first six months of fiscal 2009 compared to the prior year period.

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 lower in all of our business unit segments, except for the Open Platform Solutions business unit segment, for the second quarter of fiscal 2009 and lower in all of our

Overview (Continued)

business unit segments for the first six months of fiscal 2009, compared to the respective prior year periods, 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 remain 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 the potential for expanded opportunities for certain of our products.

During the second quarter and first six months of fiscal 2009, we recorded net restructuring expenses of $7.2 million and $15.3 million, respectively, which were primarily a completion of our restructuring plan that began in the fourth quarter of fiscal 2006. That plan was related to our strategy to implement a comprehensive transformation of our business and to achieve competitive operating margins through 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.

Results of Operations

Reclassifications

Certain 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.

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. 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                          Six months ended
                                      April 30,       April 30,                  April 30,       April 30,
(Dollars in thousands)                  2009            2008         Change        2009            2008         Change
Software licenses                   $      30,250   $      44,416      (32)%   $      58,517   $      84,618      (31)%
Maintenance and subscriptions             158,329         150,872        5%          317,144         300,939        5%
Services                                   27,016          40,378      (33)%          54,805          81,035      (32)%

Total net revenue                   $     215,595   $     235,666       (9)%   $     430,466   $     466,592       (8)%

Revenue in our software licenses category decreased during the second quarter and first six months of fiscal 2009 compared to the prior year periods primarily due to the impact of the slowing economy as new business declined across all segments. This decrease was partially offset by $1.7 million and $6.4 million of additional revenue during the second quarter and first six months of fiscal 2009, respectively, from our PlateSpin and Managed Objects acquisitions.

Revenue from maintenance and subscriptions increased in the second quarter and first six months of fiscal 2009 compared to the prior year periods primarily due to increased revenue from Linux Platform Products, which increased $7.4 million, or 25%, over the second quarter of fiscal 2008, and $14.1 million, or 24%, over the first six months of fiscal 2008. Revenue from maintenance and subscriptions also benefited from our acquisitions of PlateSpin and Managed Objects, which contributed an additional $2.1 million and $4.3 million in the second quarter and first six months of fiscal 2009, respectively. In general, despite challenges posed by the current economic climate, maintenance and subscriptions revenue continued at relatively steady rates due primarily to consistent renewal rates with respect to existing software deployments.

While our services offerings are focused increasingly on supporting product sales, not generating stand-alone revenue or profits, the decline in services revenue in the second quarter and first six months of fiscal 2009 compared to the prior year periods was greater than anticipated as customers lowered their discretionary spending in response to current economic conditions.

Results of Operations (Continued)

Foreign currency exchange rate fluctuations, as measured by using prior period foreign currency exchange rates on non-U.S. dollar denominated revenue, negatively impacted total net revenue by $6.3 million, or 3%, and $9.0 million, or 2%, during the second quarter and first six months of fiscal 2009, respectively.

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

                                         Three months ended                        Six months ended
                                      April 30,      April 30,                 April 30,      April 30,
(Dollars in thousands)                   2009           2008        Change        2009           2008        Change
Software licenses                    $         31   $        164      (81)%   $         31   $        164      (81)%
Maintenance and subscriptions              38,785         31,419       23%          75,896         62,555       21%
Services                                    5,296          5,933      (11)%          9,647         11,596      (17)%

Total net revenue                    $     44,112   $     37,516       18%    $     85,574   $     74,315       15%

Revenue from our Open Platform Solutions segment increased in the second quarter of fiscal 2009 compared to the prior year period primarily due to Linux Platform Products, which increased by $7.4 million, or 25%. Invoicing for Linux Platform Products in the second quarter of fiscal 2009 increased 2% compared to the prior year period.

Revenue from our Open Platform Solutions segment increased in the first six months of fiscal 2009 compared to the prior year period primarily due to Linux Platform Products, which increased by $14.1 million, or 24%. Invoicing for Linux Platform Products in the first six months of fiscal 2009 decreased 20% compared to the prior year period. Because our Linux business is dependent on large deals, we experience fluctuations in our quarterly invoicing. The invoicing decrease in the first six months of 2009 reflects the results of the first quarter of fiscal 2009 when we did not sign any large deals, many of which have historically been fulfilled by SUSE Linux Enterprise Server ("SLES") certificates delivered through Microsoft.

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

                                         Three months ended                        Six months ended
                                      April 30,      April 30,                 April 30,      April 30,
(Dollars in thousands)                   2009           2008        Change        2009           2008        Change
Software licenses                    $      9,191   $     11,388      (19)%   $     15,158   $     24,014      (37)%
Maintenance and subscriptions              21,135         19,312        9%          43,454         39,028       11%
Services                                    8,520         15,599      (45)%         18,220         30,287      (40)%

Total net revenue                    $     38,846   $     46,299      (16)%   $     76,832   $     93,329      (18)%

Revenue from our Identity and Security Management segment decreased in the second quarter of fiscal 2009 compared to the prior year period. This decrease resulted primarily from lower software licenses revenue as well as lower services revenue, reflecting the impact of current economic conditions. Identity, Access and Compliance Management product revenue increased $0.5 million, or 2%, compared to the second quarter of fiscal 2008. Invoicing for Identity, Access and Compliance Management products decreased 7% in the second quarter of fiscal 2009 compared to the prior year period, in response to global economic declines.

Revenue from our Identity and Security Management segment decreased in the first six months of fiscal 2009 compared to the prior year period, primarily due to declining general economic conditions. Identity, Access and Compliance Management product revenue decreased $1.9 million, or 3%, compared to the first six months of fiscal 2008. Invoicing for Identity, Access and Compliance Management products decreased 12% in the first six months of fiscal 2009 compared to the prior year period.

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

                                         Three months ended                        Six months ended
                                      April 30,      April 30,                 April 30,      April 30,
(Dollars in thousands)                   2009           2008        Change        2009           2008        Change
Software licenses                    $      8,520   $     11,092      (23)%   $     17,656   $     19,037       (7)%
Maintenance and subscriptions              31,566         29,806         6%         62,682         58,902         6%
Services                                    5,268          5,871      (10)%         10,419         12,169      (14)%

Total net revenue                    $     45,354   $     46,769       (3)%   $     90,757   $     90,108         1%

Results of Operations (Continued)

Revenue from our Systems and Resource Management segment decreased in the second quarter of fiscal 2009 compared to the prior year period primarily from lower revenue from our ZENworks products. This decrease was partially offset by $3.8 million of additional revenue from our PlateSpin and Managed Objects acquisitions. Invoicing for Systems and Resource Management products decreased 13% in the second quarter of fiscal 2009 compared to the prior year period, primarily due to lower invoicing from our ZENworks products, reflecting the impact of current economic conditions. PlateSpin and Managed Objects products accounted for 21% of total Systems and Resource Management invoicing in the second quarter of fiscal 2009.

Revenue from our Systems and Resource Management segment increased in the first six months of fiscal 2009 compared to the prior year period primarily from $10.7 million of additional revenue from our PlateSpin and Managed Objects acquisitions. This increase was partially offset by lower revenue from our ZENworks products for the first six months of fiscal 2009 compared to the prior year period. Invoicing for Systems and Resource Management products decreased 2% in the first six months of fiscal 2009 compared to the prior year period, primarily due to lower invoicing from our ZENworks products. PlateSpin and Managed Objects products accounted for 26% of total Systems and Resource Management invoicing in the first six months of fiscal 2009.

Net revenue in the Workgroup segment was as follows:

                                         Three months ended                          Six months ended
                                      April 30,       April 30,                  April 30,       April 30,
(Dollars in thousands)                  2009            2008         Change        2009            2008         Change
Software licenses                   $      12,508   $      21,772      (43)%   $      25,672   $      41,403      (38)%
Maintenance and subscriptions              66,843          70,335       (5)%         135,112         140,454       (4)%
Services                                    7,932          12,975      (39)%          16,519          26,983      (39)%

Total net revenue                   $      87,283   $     105,082      (17)%   $     177,303   $     208,840      (15)%

Revenue from our Workgroup segment decreased in the second quarter of fiscal 2009 compared to the prior year period primarily from lower combined OES and NetWare-related product revenue of $6.4 million, lower services revenue of $5.0 million and lower Collaboration product revenue of $3.9 million. Invoicing for the combined OES and NetWare-related products decreased 28% in the second quarter of fiscal 2009 compared to the prior year period. Product invoicing for the Workgroup segment decreased 24% in the second quarter of fiscal 2009 compared to the prior year period.

Revenue from our Workgroup segment decreased in the first six months of fiscal 2009 compared to the prior year period primarily from lower combined OES and NetWare-related revenue of $13.7 million, lower services revenue of $10.5 million and lower Collaboration product revenue of $6.3 million. Invoicing for the combined OES and NetWare-related products decreased 25% in the first six months of fiscal 2009 compared to the prior year period. Product invoicing for the Workgroup segment decreased 21% in the first six months of fiscal 2009 compared to the prior year period.

Deferred Revenue

We had total deferred revenue of $659.4 million as of April 30, 2009 compared to $701.6 million and $730.1 million at April 30, 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 $70.7 million compared to October 31, 2008 is primarily attributable to lower invoicing during the first six months of fiscal 2009, partially offset by the receipt of $25.0 million from Microsoft for the first payment under an August 2008 agreement with Microsoft to purchase additional SLES certificates (See the subsection entitled, "Microsoft Agreements-Related Revenue" of Note B, "Summary of Significant Accounting Policies" in our fiscal 2008 Annual Report on Form 10-K for more details on the 2006 Microsoft agreement).

                                  NOVELL, INC.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Results of Operations (Continued)



Gross Profit



                                        Three months ended                          Six months ended
                                    April 30,       April 30,                  April 30,       April 30,
(Dollars in thousands)                 2009            2008          Change       2009            2008          Change
Software licenses                   $   27,870      $   40,388         (31)%   $   53,611      $   77,491         (31)%
percentage of related revenue               92 %            91 %                       92 %            92 %
. . .