Analyst Conference Summary

conference date: August 29, 2007 @ 2 PM Pacific Time
for quarter ending: July 31, 2007 (3rd quarter fiscal 2007)

Forward-looking statements

Overview:

Basic data:

Revenues of $243 million, up 1.7% sequentially from $239 million and up 3% from $236 million year-earlier.

Net loss was $3 million or negative $0.01 per share, a slight decline sequentially but improved from a loss of $17 million or $0.05 per share year-earlier.

Cash and equivalents ended at $1.8 billion, flat sequentially.

Guidance:

For full fiscal year 2007, net revenue between $925 and $955 million (no change). Non-GAAP income between zero and $10 million. Expects to exit fiscal 2007 with non-GAAP operating margin between 5% and 7%.

Conference Highlights:

Overall good results as Workgroup revenues declined less than expected and Linux continued to grow. Some areas need improvement, which is not surprising given the magnitude of changes needed. Goal was for revenues to be flat in 2007, rather than declining as in past years. Year-to-date is flat.

Foreign currency exchange rates impaced revenue favorably by $4 million and impacted negatively $1 million on net loss, year-over-year.

Non-GAAP net income given as $16 million, up from $6 million year-earlier.

$22 million of revenue was from Open Platform Solutions, with $21 million of that from Linux Platform products, a 77% increase over year-earlier. Invoicing increased 95%. Microsoft relationship delivering strong results. Lenovo and Dell's China division will offer Novell Linux pre-installed.

Identity and Security Management revenue was $30 million, up 2%. Invoices grew only 3%, due to lack of execution in Americas. Working on improving sales force.

Resource Management revenue was $35 million, up 4%. Two new Xen products released in August.

Workgroup revenue declined 2% to $83 million. Invoicing declined 9% year-over-year.

Deferred revenue ended at $743 million, up 88% from year-earlier.

Cash flow from operations was $26 million.

Cost of revenue was$72 million. Gross profit $171 million, or 70.4% of revenue. R&D cost $54.2 million, sales and marketing $84.6 million, general and administrative $28.6 million, for total operating expenses$167.4 million. Other operating expenses $13.8 million. Loss from operations $10.2 million. Income tax $8.7 million. Investment income was $21.6 million.

Q&A:

Netware pricing? Did do a price increase.

Xen virtualization management? Is an open source product. Sees no problem with including it with Suse Linux. Don't know what Citrix will do with it.

Macroeconomic concerns? In financial vertical, has seen no sign of slow down so far.

Positive trend sustainability? Are cautious about whether Workgroup revenues is a trend. Linux upward pattern is strong; are bullish on that. OES 2 to be shipped soon; would like to see how customers react to that.

Operating margin guidance for 2008? 12% to 15% exit rate achievable. At some point will give a full 2008 operating margin plan, rather than an exit number.

Pricing effect of virtualization? We have a little different model than Red Hat. We don't usually tie to just a server; we have a broader array of products client to server. Don't expect near term change in Linux pricing.

How did you achieve such low sales expense? Very focussed sales team. Will have some seasonality. Expect a slight uptick in Q4.

Legal expenses going forward? Trial begins mid-September. Expenses will be about the same going forward.

Free Software Organization dispute with Microsoft? Does not expect that to effect Novell business.

India win? Deal size was nice, 30,000 desktops and 2000 servers. Show advantage of enterprise discussions versus edge discussions.

IBM support for Solaris impact? Just on mainframe Z-series. We have great support from IBM and have lion's share of Z market; not worried.

New product effect on revenue? Zen Works including orchestrator are ready to go with solid beta process. We used to have some disruption with new versions of Netware, are trying to avoid that with these new products.

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