##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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FORM 10-Q





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|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------




For the quarterly period ended August 31, 2002





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period
from    to





000-30221


(Commission File number)





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SABA SOFTWARE, INC.


(Exact Name of Company as Specified in Its Charter)





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Delaware

94-3267638(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)2400 Bridge Parkway,Redwood Shores, CA

94065-1166(Address of principal executive offices)

(Zip Code)





(650) 696-3840


(Companys telephone number, including area code)





Indicate by check mark whether the Company: (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 Company was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No  ̈





On
September 30, 2002, 48,528,636 shares of the Companys Common Stock, $.001 par value, were outstanding.





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##### Table of Contents

SABA SOFTWARE, INC.





FORM 10-Q





QUARTER ENDED AUGUST 31, 2002





INDEX





PagePart I.

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of August 31, 2002 and May 31, 2002

2Condensed Consolidated Statements of Operations for the three months ended August 31, 2002 and 2001

3Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2002 and 2001

4Notes to Condensed Consolidated Financial Statements

5Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

10Item 3.

Qualitative and Quantitative Disclosures About Market Risk

27Item 4.

Controls and Procedures

28Part II.

OTHER INFORMATIONItem 1.

Legal Proceedings

28Item 2.

Changes in Securities and Use of Proceeds

29Item 3.

Defaults Upon Senior Securities

29Item 4.

Submission of Matters to a Vote of Securities Holders

29Item 5.

Other Information

29Item 6.

Exhibits and Reports on Form 8-K

29SIGNATURES

30CERTIFICATIONS

31




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##### Table of Contents




PART 1:    FINANCIAL INFORMATION





Item 1.    Financial Statements





SABA SOFTWARE, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





(in thousands)


(unaudited)





August 31, 2002


May 31, 2002(Note 1)ASSETSCurrent assets:Cash and cash equivalents

$
8,350


$
9,523Short-term investments


12,008



12,618Accounts receivable, net


13,011



12,182Prepaid expenses and other current assets


1,032



901Total current assets


34,401



35,224Property and equipment, net


4,016



4,575Goodwill, net


5,288



5,288Purchased intangible assets, net


2,109



2,755Other assets


888



846Total assets

$
46,702


$
48,688LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,593


$
1,547Accrued expenses


6,426



7,844Deferred revenue


8,773



10,127Short-term debt and current portion of capital lease obligations


2,269



1,381Total current liabilities


19,061



20,899Deferred revenue


201



52Long-term debt and other long-term liabilities


3,166



3,019Capital lease obligations, less current portion


271



372Total liabilities


22,699



24,342Stockholders equity:Preferred stock, issuable in series: $0.001 par value; 5,000,000 authorized shares at August 31, 2002; none issued
or outstanding






Common stock: $0.001 par value; 200,000,000 authorized shares at August 31, 2002; 48,518,461 shares issued at
August 31, 2002 and 48,264,537 shares issued at May 31, 2002


48



48Additional paid-in capital


182,687



182,424Deferred stock compensation


(1,309
)


(2,578
)Notes receivable from stockholders


(76
)


(188
)Treasury stock: 377,500 shares held at August 31, 2002 and at May 31, 2002, at cost


(201
)


(201
)Accumulated deficit


(157,055
)


(155,122
)Accumulated other comprehensive loss


(91
)


(37
)Total stockholders equity


24,003



24,346Total liabilities and stockholders equity

$
46,702


$
48,688





See Accompanying Notes to Condensed Consolidated Financial Statements.




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SABA SOFTWARE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended August 31
,2002


2001Revenues:License

$
7,450


$
7,008Services


7,246



7,874Total revenues


14,696



14,882Cost of revenues:Cost of license


50



59Cost of services


3,293



4,568Amortization of acquired developed technology


388



372Total cost of revenues


3,731



4,999Gross profit


10,965



9,883Operating expenses:Research and development


3,027



4,125Sales and marketing


6,940



9,612General and administrative


1,353



1,991Amortization of deferred stock compensation and other stock charges


1,351



2,294Amortization of purchased intangible assets


258



369Amortization of goodwill






538Acquired in-process research and development






2,199Total operating expenses


12,929



21,128Loss from operations


(1,964
)


(11,245
)Interest income and other, net


96



71Loss before provision for income taxes


(1,868
)


(11,174
)Provision for income taxes


(65
)


(25
)Net loss

$
(1,933
)

$
(11,199
)Basic and diluted net loss per share

$
(0.04
)

$
(0.25
)Shares used in computing basic and diluted net loss per share


47,779



45,402





See Accompanying Notes to Condensed Consolidated Financial Statements.




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SABA SOFTWARE, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





(in thousands)


(unaudited)





Three months ended August
31,2002


2001Operating activities:Net loss

$
(1,933
)

$
(11,199
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


805



915Amortization of purchased intangible assets


258



369Amortization of goodwill






538Amortization of acquired developed technology


388



372Acquired in-process research and development






2,199Amortization of deferred stock compensation


784



2,294Issuance of common stock to third parties


82



Compensation expense resulting from acceleration of vesting of common stock


314



Compensation expense resulting from cancelled stock options


171



Changes in operating assets and liabilities:Accounts receivable


(879
)


7,771Prepaid expenses and other current assets


(142
)


347Other assets


(42
)


(39
)Accounts payable


46



(2,363
)Accrued expenses


(1,418
)


(1,727
)Deferred revenue


(1,205
)


(4,716
)Other liabilities


(12
)


236Net cash used in operating activities


(2,783
)


(5,003
)Investing activities:Purchases of short-term investments


(5,168
)


(9,232
)Proceeds from redemptions and maturities of short-term investments


5,774



17,143Purchases of property and equipment


(132
)


(309
)Net cash provided by investing activities


474



7,602Financing activities:Proceeds from issuance of common stock


181



2,077Repurchase of common stock






(4
)Borrowings under revolving line of credit


1,000



Borrowings under equipment term loan


256



Repayments of note payable


(17
)


(17
)Principal payments under capital lease obligations


(396
)


(367
)Collections on notes receivable from stockholders


112



32Net cash provided by financing activities


1,136



1,721(Decrease) increase in cash and cash equivalents


(1,173
)


4,320Cash and cash equivalents, beginning of period


9,523



11,833Cash and cash equivalents, end of period


8,350



16,153Short-term investments, end of period


12,008



14,636Total cash, cash equivalents and short-term investments, end of period

$
20,358


$
30,789Supplemental disclosure of non-cash transactions:Equipment purchased under capital lease obligations

$
103


$
Common stock issued for acquisition

$



$
14,078





See Accompanying Notes to Condensed Consolidated Financial
Statements.




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SABA SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.    Basis of Presentation





The accompanying unaudited condensed consolidated financial statements include the accounts of Saba Software, Inc. and its subsidiaries (Saba) and, in the opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary to fairly state Sabas consolidated financial position, results of operations, and cash flows as of and for the dates and periods presented.





These unaudited condensed consolidated financial statements should be read in conjunction with Sabas audited consolidated financial statements included in Sabas
Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 29, 2002. The results of operations for the three months ended August 31, 2002 are not necessarily indicative of results for the entire fiscal year ending May 31,
2003 or for any future period.





The condensed consolidated balance sheet at May 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.





Certain amounts previously reported have been reclassified to conform to the current period presentation.





2.    Basic and Diluted Net Loss Per Share





Basic and diluted net loss per share information for all periods is presented under the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Basic earnings per share has been
computed using the weighted-average number of shares of common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options and warrants. Potentially dilutive issuances have been excluded
from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The calculations of basic and diluted net loss per share are as follows (in thousands, except per share amounts):





Three months ended August
31,2002


2001Net loss

$
(1,933
)

$
(11,199
)Weighted-average shares of common stock outstanding


48,448



46,888Weighted-average shares subject to repurchase


(669
)


(1,486
)Weighted-average shares of common stock used in computing basic and diluted net loss per share


47,779



45,402Basic and diluted net loss per share

$
(0.04
)

$
(0.25
)




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3.    Comprehensive Loss





Saba reports comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive Income. The following table sets
forth the calculation of comprehensive loss for all periods presented (in thousands):





Three months ended August
31,2002


2001Net loss

$
(1,933
)

$
(11,199
)Foreign currency translation loss


(50
)


(31
)Unrealized (loss) gain on investments


(4
)


47Comprehensive loss

$
(1,987
)

$
(11,183
)





4.    Goodwill





Effective June 1, 2002, Saba adopted SFAS No. 142, Goodwill and Other Intangible Assets. As required by SFAS No. 142, Saba is
no longer amortizing goodwill, but will be reviewing annually (or more frequently if impairment indicators arise) for impairment. Upon initial application of SFAS No. 142, Saba determined there was no impairment of goodwill. The following adjusted
earnings and earnings per share data have been presented on a pro forma basis to eliminate goodwill amortization (in thousands, except per share amounts):





Three months ended August
31,2002


2001Net loss as reported

$
(1,933
)

$
(11,199
)Add: Amortization of goodwill






538Adjusted net loss

$
(1,933
)

$
(10,661
)Net loss per share as reported

$
(0.04
)

$
(0.25
)Add: Amortization of goodwill per share






0.02Adjusted net loss per share

$
(0.04
)

$
(0.23
)





5.     Segment Information





Saba operates primarily in a single operating segment, providing software and services that increase business performance through human
capital development and management.





Geographic Information





The following tables present revenue and long-lived assets information by geographic area (in thousands):





Total Revenue

Long-Lived AssetsThree months ended August 31,August 31, 2002

May 31, 20022002

2001United States

$
12,126

$
11,596

$
11,104

$
12,293International


2,570


3,286


309


325Total

$
14,696

$
14,882

$
11,413

$
12,618




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Major Customers





For three months ended August 31, 2002, one customer accounted for greater than 10% of revenues. For three months ended August 31, 2001, no customer accounted for greater
than 10% of revenues.





6.    Credit Facility





In August 2002, Saba entered into a credit facility with a bank that provides for an equipment term loan of up to $1.0 million and a revolving line of credit secured by
eligible accounts receivable of up to $6.0 million. Borrowings under the credit facility are secured by certain of Sabas assets. Under the term loan, Saba may make draws through May 2003, borrowings must be repaid in 36 equal monthly
installments of principal plus interest and outstanding principal bears interest at either a fluctuating rate equal to the banks Prime Rate plus 1.25% or a fixed rate equal to the 36-month U.S. Treasury note plus 3.25%. The outstanding balance
on the equipment term loan as of August 31, 2002 carries a fixed interest rate of 5.81%. The revolving line of credit expires in August 2003 and borrowings are at the banks Prime Rate plus 1%, with interest payable monthly and principal due at
the expiration of the credit facility. The outstanding balance on the revolving line of credit as of August 31, 2002 carries a fixed interest rate of 5.75%. Outstanding balances under the credit facility were as follows as of August 31, 2002
(in thousands):





Equipment term loan

$
256Revolving line of credit


1,000Total long-term debt


1,256Less current portion


1,080Total long-term debt, less current portion

$
176





The outstanding balance on the revolving line of credit was repaid
in September 2002. The credit facility requires Saba to satisfy, on a monthly basis, certain financial and other covenants including minimum quick, tangible net worth and liquidity coverage ratios. In addition, the credit facility restricts
Sabas ability to pay cash dividends.





7.    Restructuring





During the second and fourth quarters of fiscal 2002 and the fourth quarter of fiscal 2001, Saba implemented restructuring programs to
reduce expenses to align its operations and cost structure with market conditions. The restructuring programs included a worldwide workforce reduction and consolidation of excess facilities. No restructuring charges are included in operating
expenses for the three months ended August 31, 2002 and 2001.





A summary of the restructuring charges is outlined
as follows (in thousands):





Workforce Charges Reduction


Facilities Charges Related


TotalAccrual as of May 31, 2002

$
321


$
1,108


$
1,429Charges










Deductionscash payments


(221
)


(174
)


(395
)Accrual as of August 31, 2002

$
100


$
934


$
1,034Estimated remaining cash expenditures

$
100


$
934


$
1,034




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8.    Acquisitions





On June 15, 2001, Saba completed its acquisition of Ultris Inc., a provider of Internet-based real-time knowledge content management and collaborative learning software. In
consideration for Ultris Inc., Saba issued approximately 1.0 million shares of Sabas common stock, including 198,465 shares subject to repurchase, with a fair value of approximately $14.1 million and assumed net liabilities of approximately
$20,000. The acquisition was accounted for using the purchase method of accounting for business combinations. Accordingly, the fair market value of the acquired assets and liabilities has been included in Sabas consolidated financial
statements as of June 15, 2001 and the results of operations of Ultris Inc. have been included thereafter. Pursuant to an independent valuation, the purchase price of Ultris Inc., represented by the 801,500 shares not subject to repurchase, was
allocated based on the fair value of specific tangible and intangible assets acquired and liabilities assumed from Ultris Inc. The estimated excess of the purchase price over the fair value of the net liabilities acquired has been valued at $11.4
million, of which $7.8 million has been allocated to goodwill, $2.2 million has been allocated to acquired in-process research and development, $1.2 million has been allocated to developed technology and $176,000 has been allocated to workforce.
Saba also recorded a charge to operations of approximately $2.2 million upon consummation of the transaction related to acquired in-process research and development. Saba recorded deferred compensation for the intrinsic value of 198,465 shares of
stock subject to repurchase. The estimated intrinsic value of the shares was approximately $2.8 million, which is included as a component of stockholders equity and is being amortized by charges to operations over the four-year repurchase
period using the graded vesting method. Included in amortization of deferred stock compensation and other stock charges for the three months ended August 31, 2002 is $221,000 of compensation expense resulting from the acceleration of vesting of
common stock for a terminated employee.





9.    Recent Accounting Pronouncements





In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires businesses to
record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. We are required to adopt SFAS No. 143 for our fiscal year beginning June 1, 2003. We are currently assessing the impact, if any, of SFAS No. 143 on our financial position and results of operations.





In the quarter ended May 31, 2002, Saba adopted Staff Announcement Topic No. D-103, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, which was subsequently incorporated in Emerging Issues Task Force (EITF) No. 01-14. EITF No. 01-14 establishes that reimbursements received for
out-of-pocket expenses should be characterized as revenue in the statement of operations. Previously, Saba recorded the reimbursement of out-of-pocket expenses as a reduction to cost of services to offset the related cost
incurred. The adoption of EITF No. 01-14 does not impact operating or net income in any past or future periods. The adoption increased revenues and cost of revenues by $277,000 for the three months ended August 31, 2002 and $389,000 for the three
months ended August 31, 2001 and caused a slight decrease in gross margin percentage.





In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as generally defined in EITF No. 94-3 was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is




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effective for exit or disposal activities initiated after December 31, 2002 and could result in us recognizing the cost of future restructuring
activities, if any, over a period of time as opposed to as a single event.





10.    Option Exchange Program





In June 2002, Saba announced a voluntary stock option exchange program for employees. Under this program,
employees were given the opportunity until June 28, 2002 to make an election to cancel their outstanding stock options with exercise prices greater than $5.93 per share under the 1997 Plan or 2000 Plan, in exchange for an equal number of shares to
be granted at least six months and one day from the cancellation date at an exercise price equal to the fair market value on the date of grant. Those employees who elected to participate in the exchange program were required to exchange all options
granted during the six-month period prior to the cancellation date. Under this program, options to purchase approximately 1.7 million shares of Saba common stock were tendered by 142 employees. The vesting period of each new option will start on the
date that the new options are granted and end 12 months after the end of the vesting period stated in the cancelled options. In no event, however, will the new vesting period exceed four years. The new options will vest in equal quarterly
installments over the vesting period of the new options (proportionately adjusted for any partial quarter at the end of the new vesting period). Saba incurred compensation expense of $171,000 relative to this program for Sabas first quarter
ending August 31, 2002 related to cancelled awards. The exchange program is not expected to result in any additional compensation charges or variable plan accounting. This program was not made available to Sabas executive officers or
directors.





11.    Legal Matters





In November 2001, a complaint was filed in the United States District Court for the Southern District of New York against Saba, certain of its officers and directors, and
certain underwriters of Sabas initial public offering. The complaint was purportedly filed on behalf of a class of certain persons who purchased Saba common stock between April 6, 2000 and December 6, 2000. The complaint alleges violations by
Saba and its officers and directors of the Securities Act of 1933 in connection with certain alleged compensation arrangements entered into by the underwriters in connection with the offering. An amended complaint was filed in April 2002. Similar
complaints have been filed against hundreds of other issuers that have had initial public offerings since 1998. The complaints have since been consolidated into a single action. Saba intends to vigorously defend against this action. Although no
assurance can be given that this matter will be resolved in Sabas favor, Saba believes that the resolution of this lawsuit will not have a material adverse effect on its financial position, results of operations or cash flows.





On May 31, 2002, IP Learn, LLC (IP Learn) filed a complaint against Saba in the United States District Court for the Northern
District of California. The compliant alleges that Saba infringed a number of U.S. patents assigned to IP Learn and asks the court for a preliminary and permanent injunction, as well as unspecified damages. Substantially similar complaints have been
filed against at least three other companies in Sabas industry. Saba believes that the complaint is without merit and intends to defend against it vigorously. Although no assurance can be given that this matter will be resolved favorably, Saba
believes that the resolution of this lawsuit will not have a material adverse effect on its financial position, results of operations or cash flows.





Saba is also party to various legal disputes and proceedings arising from the ordinary course of general business activities. While, in the opinion of management, resolution of these matters is not
expected to have a material adverse effect on Sabas consolidated financial position, results of operations or cash flows, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material
to Saba.




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12.    Subsequent Event





In October 2002, Saba completed a private placement of 4,302,323 shares of common stock for aggregate proceeds of $9.25 million with funds affiliated with Sequoia
Capital. Michael Moritz, a director on Sabas Board of Directors, is a General Partner of Sequoia Capital. Mr. Moritz disclaims beneficial ownership of shares held by these funds except to the extent of his pecuniary interest in these funds.





ITEM 2:

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion of financial condition and results of
operations should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K
for the year ended May 31, 2002. This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities and Exchange Act of
1934 (the Exchange Act). All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward-looking statements for purposes of these provisions, including any statements of the plans and
objectives for future operations and any statement of assumptions underlying any of the foregoing. Statements that include the use of terminology such as may, will, expects, believes,
plans, estimates, potential, or continue, or the negative thereof or other comparable terminology are forward-looking statements. Forward-looking statements include, in Item 2, statements regarding an
increase in operating expenses, including sales and marketing, research and development, and general and administrative, incurrence of non-cash expenses relating to stock compensation, amortization of purchased intangible assets and any potential
goodwill impairment, growth of our operations and personnel, fluctuations in operating results from quarter to quarter, long sales cycles, effects of our voluntary stock option exchange program, possible acquisitions and strategic ventures,
expansion of our sales and marketing organization, sufficiency of cash resources, credit facilities and cash flows to meet working capital, capital expense and business expansion requirements, development of new or enhanced applications and
services, impact of SFAS No. 143, 144 and 146 and EITF No. 01-14, and the significance of Saba Learning Enterprise Edition and related services, as well as other products, for our revenues. These forward-looking statements involve risks and
uncertainties, and it is important to note that our actual results could differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors
detailed under the heading Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Impact Future Operating Results. All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or risk factor.





OVERVIEW





We are a leading provider of
human capital development and management infrastructure software and services. Our software solutions are designed to enable businesses and governments to increase performance by automating the processes necessary to develop and manage the people,
or human capital, that comprise their extended enterprise of employees, customers, partners and suppliers. Our offerings are designed to increase the return to the organization on their investment in human capital by cost-effectively
meeting the learning and performance management needs of enterprises across geographies and industries. Our solutions provide information and business processes that empower managers to more tightly align organizational capabilities with desired
business outcomes.




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General





We commenced operations in April 1997 and, through March 1998, focused substantially all of our efforts on research activities, developing our products and building our business infrastructure. We
shipped our first Saba Learning products and began to generate revenues from software license fees, implementation and consulting services fees and support fees in April 1998. We began to operate Saba Exchange in December 1999 and our application
service provider (ASP) edition of Saba Learning in September 2000, and first shipped our limited release version of Saba Performance in May 2001. To date, we have not generated significant revenues from Saba Exchange, Saba Learning ASP Edition or
Saba Performance.





Sources of Revenues and Revenue Recognition





To date, we have generated revenues primarily from licensing Saba Learning Enterprise Edition, and providing related services, including implementation, consulting,
support, hosting and education.





We recognize revenues in accordance with the provisions of American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Under
SOP 97-2, as amended, we recognize revenues when all of the following conditions are met:





| |  |  | persuasive evidence of an agreement exists;
| | - |  | -------------------------------------------




| |  |  | delivery of the product has occurred;
| | - |  | -------------------------------------




| |  |  | the fee is fixed or determinable; and
| | - |  | -------------------------------------




| |  |  | collection of these fees is probable.
| | - |  | -------------------------------------




SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue
recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as support services, based on the relative fair values of the elements. Our determination of fair value of each element in multi-element
arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant
authority to do so, for an element not yet sold separately.





A substantial majority of our licenses entered into
from November 30, 1999 to August 31, 2001 included rights to unspecified additional platform versions of our software, extended payment terms and/or services essential to the functionality of the software. For licenses that included rights to
unspecified additional platform versions, we recognized license revenues ratably over the period during which we were required to provide the additional platform versions beginning in the month when all other revenue recognition criteria had been
met. Revenue from contracts with extended payment terms are recognized at the lesser of amounts due and payable or the amount of the arrangement fee otherwise recognizable. For contracts that involve significant customization and implementation or
consulting services essential to the functionality of the software, the license and services revenues are recognized over the service delivery period using the percentage-of-completion method. We use labor hours incurred as a percentage of total
expected hours as the measure of progress towards completion. A substantial majority of our licenses entered into after August 31, 2001 do not provide for unspecified additional platform versions, extended payment terms or service essential to the
functionality of the software. Revenues derived from these licenses are recognized on delivery if the other conditions of SOP 97-2 are satisfied. Revenues from our application service provider offering and from our hosting services are generally
recognized ratably over the term of the arrangement.




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Support revenue is recognized ratably over the support term, typically 12 months,
and revenue related to implementation, consulting, education and other services is generally recognized as the services are performed. Although we primarily provide implementation and consulting services on a time and materials basis, a significant
portion of these services has been provided on a fixed-fee basis.





Cost of Revenues





Our cost of revenues includes cost of our license revenues and cost of our services revenues. Our cost of license revenues includes the
cost of manuals and product documentation, production media, shipping costs and royalties to third parties. Our cost of services revenues includes salaries and related expenses for our professional services organization, as well as third-party
hosting costs and billed expenses. Because our cost of services revenues is greater than cost of license revenues, cost of total revenues as a percentage of total revenues may fluctuate based on the mix of products and services sold.





Operating Expenses





Our operating expenses are classified into three general operational categories: research and development, sales and marketing, and general and administrative. In addition, our operating expenses include amortization of deferred
stock compensation and other stock charges, and amortization of purchased intangible assets.





We classify all
charges, except stock compensation and other stock charges, to the research and development, sales and marketing and general and administrative expense categories based on the nature of the expenses. Each of these three categories includes commonly
recurring expenses such as salaries, employee benefits, travel and entertainment costs, and allocated communication, rent and depreciation costs. We allocate these expenses to each of the functional areas that derive a benefit from such expenses
based upon their respective headcounts. The sales and marketing category of operating expenses also includes sales commissions and expenses related to public relations and advertising, trade shows and marketing collateral materials. The general and
administrative category of operating expenses also includes allowances for doubtful accounts and administrative and professional services fees.





In connection with the granting of stock options to, and restricted stock purchases by, our employees, we recorded deferred stock compensation totaling approximately $38.4 million. This amount
represents the difference between the exercise or purchase price, as applicable, and the deemed fair value of our common stock for financial accounting purposes on the date these stock options were granted or purchase agreements for restricted stock
were signed. These charges were recorded during fiscal 1999 and 2000 and reduced in fiscal 2001 and 2002 as a result of cancellation of stock options resulting from employee attrition and reductions in workforce and in the three months ended August
31, 2002 as a result of our voluntary stock option exchange program. During the first quarter of fiscal 2002, we also recorded deferred stock compensation of $2.8 million for the intrinsic value of stock subject to repurchase assumed by us in
connection with the acquisition of Ultris Inc. These amounts are included as a component of stockholders equity and are being amortized by charges to operations over the vesting period of the restricted stock using the graded vesting method.
The amortization of the remaining deferred stock compensation will result in additional charges to operations through fiscal 2005.





Our March 2001 acquisition of Human Performance Technologies, Inc. resulted in purchased intangible assets of $4.6 million, and our June 2001 acquisition of Ultris Inc. resulted in goodwill and purchased intangible assets of
$9.1 million. Purchased intangible assets consist of intellectual property, customer base, assembled workforce and noncompetition agreements. The intangible assets are stated at cost less accumulated amortization and are being amortized on a
straight-line basis over their estimated useful lives of six months to three years. Effective June 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. As required by SFAS No. 142, we no longer amortize goodwill, but
will review it annually (or more frequently if impairment indicators arise) for impairment. Upon initial application of SFAS No. 142, we determined there was no impairment of goodwill. Prior to June 1, 2002, goodwill was being amortized on a
straight-line basis over its estimated useful life of three years.




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There was no acquisition activity during the three months ended August 31, 2002.
Acquired in-process research and development in the three months ended August 31, 2001 represents the write-off of the fair value of acquired research and development work obtained in connection with the acquisition of Ultris Inc. For the
acquisition of Ultris Inc., the write-off was necessary because the acquired in-process research and development had not yet reached technological feasibility and the related products under development have not achieved commercial viability. The
nature of the efforts required to develop the purchased in-process research and development into commercially viable products principally relate to planning, designing, prototyping, verification and testing activities that are necessary to establish
that the product can be produced to meet its design specifications, including functions, features and technical performance requirements.





We obtained an independent valuation for the allocation of the purchase price of Ultris Inc. Values were assigned to acquired developed technology, in-process research and development, goodwill and workforce. The fair value
of the acquired in-process research and development was determined by estimating the projected net cash flows related to the products, including costs to complete the development of the technology and the future revenues to be earned upon
commercialization of the products. These cash flows were then discounted back to their net present value. The projected net cash flows from the project were based on managements estimates of future revenues and operating profits.





History of Losses





We have incurred significant losses and negative cash flows from operations since our inception. As of August 31, 2002, we had an accumulated deficit of $157.1 million. We have not achieved profitability and cannot be certain that we
will be able to realize sufficient revenues to achieve or, once achieved, sustain profitability. While we have in the recent past and may from time to time in the future reduce operating expenses in response to the downturns in the United States or
international economies, we generally expect to incur significantly greater operating expenses in the future. We also expect to incur substantial non-cash expenses relating to stock compensation, amortization of purchased intangible assets and any
potential goodwill impairment. We expect to incur significant losses for the foreseeable future and will need to generate significantly higher revenues in order to achieve profitability. If we achieve profitability, we may not be able to sustain it.





We had 326 full-time employees as of August 31, 2002. Despite recent reductions in staffing, we have generally
experienced periods of significant expansion of operations that have placed significant demands on our management and operational resources. To manage future growth of our operations and personnel, we must continue to invest in scalable operational
systems, procedures and controls. We expect any future expansion to continue to challenge our ability to hire, train, manage and retain our employees.





Limited Operating History





We have a limited operating history that makes it difficult to
forecast our future operating results. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early stage of development, particularly companies in new and rapidly evolving markets, such as human capital development and management, electronic commerce and Internet software. We may not be successful
in addressing these risks and difficulties. Although we have experienced significant growth in revenues in prior periods, we do not believe that these growth rates are indicative of our future operating results.




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RESULTS OF OPERATIONS





THREE MONTHS ENDED AUGUST 31, 2002 AND 2001





Revenues





Total revenues decreased to $14.7 million for the three months ended August 31, 2002 from $14.9 million for
the three months ended August 31, 2001. The decrease is primarily attributable to decreased services revenues, partially offset by increases in license revenues. As a percentage of total revenues, revenues from customers outside the United States
represented approximately 17% for the three months ended August 31, 2002 and 22% for the three months ended August 31, 2001. During the three months ended August 31, 2002, one customer represented more than 10% of our revenues. During the three
months ended August 31, 2001, no customer represented more than 10% of our revenues.





License revenues increased
to $7.5 million, or 51% of total revenues, for the three months ended August 31, 2002, from $7.0 million, or 47% of total revenues, for the three months ended August 31, 2001. The increase in the dollar amount of license revenues is primarily
attributable to an increase in sales of licenses to new customers, partially offset by a decrease in the amount of deferred revenue recognized from existing contracts.





Services revenues decreased to $7.2 million, or 49% of total revenues, for the three months ended August 31, 2002 from $7.9 million, or 53% of total revenues, for the
three months ended August 31, 2001. The decrease in dollar amount of services revenues is primarily attributable to decreased consulting revenues as a result of fewer active projects due to an increased number of projects with shorter implementation
periods and an increased number of implementations performed by third-party systems integrators. This decrease was partially offset by an increase in support and hosting revenues.





The mix of license and services revenues as a percentage of total revenues has varied significantly due to our relatively early stage of development.





Cost of Revenues





Total cost of revenues decreased to $3.7 million for the three months ended August 31, 2002 from $5.0 million for the three months ended August 31, 2001. The decrease is primarily attributable to a reduction in services
personnel in response to fewer active projects. Cost of services revenues represented 45% of services revenues for the three months ended August 31, 2002 and 58% of services revenues for the three months ended August 31, 2001. The decrease in the
cost of services as a percentage of services revenues is primarily attributable to an increased average billing rate of our consultants.





The cost of revenues includes amortization of acquired developed technology of $388,000 for the three months ended August 31, 2002 and $372,000 for the three months ended August 31, 2001. This amortization resulted from our
March 2001 acquisition of Human Performance Technologies, Inc. and June 2001 acquisition of Ultris Inc. The developed technology of $2.3 million acquired from Human Performance Technologies, Inc. is being amortized over a two-year useful life and
the developed technology of $1.2 million acquired from Ultris Inc. is being amortized over a three-year useful life.





Operating Expenses





Research and development.     Research and
development expenses decreased to $3.0 million for the three months ended August 31, 2002 from $4.1 million for the three months ended August 31, 2001. The decrease is primarily attributable to reduced personnel costs associated with a decrease in
research and development personnel in the U.S. and a decrease in the use of third-party consultants.




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Sales and marketing.    Sales and marketing expenses
decreased to $6.9 million for the three months ended August 31, 2002 from $9.6 million for the three months ended August 31, 2001. The decrease is primarily attributable to reduced personnel costs associated with a decrease in sales and marketing
personnel.





General and administrative.    General and administrative expenses
decreased to $1.4 million for the three months ended August 31, 2002 from $2.0 million for the three months ended August 31, 2001. The decrease is primarily attributable to reduced personnel costs associated with a decrease in general administrative
personnel, as well as a decrease in bad debt expenses.





Amortization of deferred stock compensation and other
stock charges.    Amortization of deferred stock compensation and other stock charges decreased to $1.4 million for the three months ended August 31, 2002 from $2.3 million for the three months ended August 31, 2001. Included
in the three months ended August 31, 2002 is $314,000 for compensation expense resulting from the acceleration of vesting of common stock for certain terminated employees. Also included in the three months ended August 31, 2002 is $171,000 for
compensation expense related to options cancelled in accordance with our voluntary stock option exchange program. The exchange program is not expected to result in any additional compensation charges or variable plan accounting.





Amortization of purchased intangible assets and goodwill.    Amortization of purchased intangible
assets decreased to $258,000 for the three months ended August 31, 2002 from $369,000 for the three months ended August 31, 2001. This amortization resulted from our March 2001 acquisition of Human Performance Technologies, Inc. and June 2001
acquisition of Ultris Inc. During the three months ended August 31, 2001, we recorded amortization of goodwill of $538,000 as a result of our June 2001 acquisition of Ultris Inc.





Acquired in-process research and development.    In the three months ended August 31, 2001, we expensed $2.2 million for in-process research and
development based on the value allocated to projects identified as in-process research and development, such as the completion and testing of instant messaging functionality and integration with software of other companies.





Interest income and other, net





Interest income and other, net consists of interest income, interest expense and other non-operating expenses. Interest income and other, net increased to $96,000 for the three months ended August 31, 2002, from $71,000 for the three
months ended August 31, 2001. The increase is primarily attributable to realized gains on the sales of short-term investments, which is partially offset by a decrease in interest income due to the decline in short-term interest rates since August
31, 2001.





Provision for income taxes





From inception through August 31, 2002, we incurred net losses for federal and state tax purposes. We recorded income tax expense of $65,000 during the three months ended August 31, 2002 compared to
$25,000 during the three months ended August 31, 2001. The income tax expense consists entirely of foreign tax expense incurred as a result of local country profits.





FLUCTUATIONS OF QUARTERLY RESULTS





Our results of
operations could vary significantly from quarter to quarter. If revenues fall below our expectations, we will not be able to reduce our spending rapidly in response to the shortfall and operating losses will increase. We anticipate that we will
continue to experience long sales cycles. Therefore, the timing of future customer contracts could be difficult to predict, making it difficult to predict revenues between quarters.




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We are subject to employer payroll taxes, both domestic and foreign, on employee
exercises of non-qualified stock options. These taxes are recorded as a charge to operations in the period such options are exercised based on actual gains realized by employees, measured by the difference between the price of our common stock on
the date of exercise and the exercise price. We receive domestic tax deductions for gains realized by domestic employees on the exercise of non-qualified stock options for which the benefit is recorded as additional paid-in capital when realized.
Our taxes and cash flows could vary significantly from quarter to quarter depending on the number of non-qualified stock options exercised by employees in any quarter and, consequently, our results of operations.





Other factors that could affect our quarterly operating results include those described below and under the caption Factors That May
Affect Future Operating Results:





| |  |  | dependence of our revenues on a small number of large orders and the average order value;
| | - |  | -----------------------------------------------------------------------------------------




| |  |  | our ability to attract new customers;
| | - |  | -------------------------------------




| |  |  | any changes in revenue recognition policies and provisions and interpretations of these provisions;
| | - |  | ---------------------------------------------------------------------------------------------------




| |  |  | our ability to license additional products to current customers;
| | - |  | ----------------------------------------------------------------




| |  |  | the announcement or introduction of new products or services by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------




| |  |  | changes in the pricing of our products and services or those of our competitors;
| | - |  | --------------------------------------------------------------------------------




| |  |  | variability in the mix of our products and services revenues in any quarter;
| | - |  | ----------------------------------------------------------------------------




| |  |  | technical difficulties or service interruptions of our computer network systems or the Internet generally; and
| | - |  | --------------------------------------------------------------------------------------------------------------




| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion or contraction of our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------




LIQUIDITY AND CAPITAL RESOURCES





Since inception, we have funded our operations primarily through the sale of equity securities, through which we have raised net proceeds of $126.4 million through August 31, 2002, equipment leases and other debt. As of
August 31, 2002, we had outstanding equipment leases of $1.5 million, debt of $1.5 million and $20.4 million of cash, cash equivalents and short-term investments.





Cash used in operating activities was $2.8 million during the three months ended August 31, 2002 and $5.0 million during the three months ended August 31, 2001. Cash used
in operating activities during the three months ended August 31, 2002 was primarily attributable to a net loss of $1.9 million, a decrease in accrued expenses of $1.4 million and a decrease in deferred revenues of $1.2 million, which was partially
offset by depreciation and amortization of $805,000 and amortization of deferred stock compensation of $784,000. Cash used in operating activities during the three months ended August 31, 2001 was primarily attributable to a net loss of $11.2
million, a decrease in deferred revenue of $4.7 million and a decrease in accounts payable of $2.4 million, which was partially offset by a decrease in accounts receivable of $7.8 million, $2.3 million in amortization of deferred stock compensation
and a charge for acquired in-process research and development of $2.2 million.





Cash provided by investing
activities during the three months ended August 31, 2002 was primarily attributable to net redemptions and maturities of short-term investments of $606,000. Cash provided by investing activities during the three months ended August 31, 2001 was
primarily attributable to net redemptions and maturities of short-term investments of $7.9 million.





Cash provided
by financing activities during the three months ended August 31, 2002 was primarily attributable to the proceeds of $1.0 million from borrowings under a revolving line of credit. Cash provided by financing activities during the three months ended
August 31, 2001 was primarily attributable to proceeds from the sale of stock under our stock incentive programs of $2.1 million, partially offset by $367,000 for payments on capital lease obligations.




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In October 2002, we completed a private placement of 4,302,323 shares of common
stock for aggregate proceeds of $9.25 million with funds affiliated with Sequoia Capital. Michael Moritz, a director on our Board of Directors, is a General Partner of Sequoia Capital. Mr. Moritz disclaims beneficial ownership of shares held by
these funds except to the extent of his pecuniary interest in these funds.





At August 31, 2002, we did not have
any material commitments for capital expenses. Our principal commitments consisted of obligations under capital and operating leases and our new credit facility. In August 2002, we entered into a credit facility with a bank that provides for an
equipment term loan of up to $1.0 million and a revolving line of credit secured by eligible accounts receivable of up to $6.0 million. Borrowings under the credit facility are secured by certain of our assets. At August 31, 2002, the outstanding
balances were $256,000 on the equipment term loan and $1.0 million on the revolving line of credit. Under the term loan, we may make draws through May 2003, borrowings must be repaid in 36 equal monthly installments of principal plus interest and
outstanding principal bears interest at either a fluctuating rate equal to the banks Prime Rate plus 1.25% or a fixed rate equal to the 36-month U.S. Treasury note plus 3.25%. The outstanding balance on the equipment term loan as of August 31,
2002 carries a fixed interest rate of 5.81%. The outstanding balance on the revolving line of credit as of August 31, 2002 carries a fixed interest rate of 5.75%. The revolving line of credit expires in August 2003 and borrowings are at the
banks Prime Rate plus 1%, with interest payable monthly and principal due at the expiration of the credit facility.





The following table summarizes our contractual obligations at August 31, 2002 and the effect these obligations are expected to have on our liquidity and cash flows in future periods (in thousands).





Total

Capital Leases

Operating Leases

Note PayableFiscal Year Ending May 31,2003

$
3,564

$
1,094

$
2,417

$
532004


3,897


498


3,329


702005


3,303


158


3,075


702006


3,067


30


2,967


702007


2,405





2,352


53Thereafter


18,289





18,289


$
34,525

$
1,780

$
32,429

$
316





We currently anticipate that our available cash resources and
credit facilities, combined with cash flows generated from revenues, will be sufficient to meet our presently anticipated working capital, capital expense and business expansion requirements for at least the next 12 months. However, we may be
required, or could choose, to raise additional funds at any time. Our future liquidity and capital requirements will depend on numerous factors, including our future revenues, the timing and extent of spending to support product development efforts
and expansion of sales and marketing and general and administrative activities, the success of our existing and new product and service offerings and competing technological and market developments. There can be no assurance that additional funding,
if needed, will be available on terms acceptable to us, if at all.




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CRITICAL ACCOUNTING POLICIES





Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We base our estimates and
judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. While there
are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition policies, the allowance for doubtful accounts and the assessment of recoverability of
goodwill and purchased intangible assets. Our critical accounting policies are described in the following paragraphs.





Revenue recognition.    Our revenue recognition policies are described at the beginning of Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.





Allowance for doubtful accounts.    The allowance for doubtful accounts is based on
our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customers credit worthiness or actual defaults are higher than our historical experience, we
may be required to increase the allowance for doubtful accounts.





Recoverability of goodwill and purchased
intangible assets.    Effective June 1, 2002, we adopted SFAS No. 142. As such, we ceased amortization of goodwill as of May 31, 2002. In addition, we evaluated our purchased intangible assets and determined that all such
assets have determinable lives. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years and performed impairment analyses under SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Total amortization of goodwill prior to June 1, 2002 was $2.5 million and our remaining goodwill balance at August 31, 2002 was $5.3 million.





SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment; while the second
phase, if necessary, measures the impairment. We performed the first of the required impairment tests of goodwill as of June 1, 2002. We consider Saba to be a single reporting unit. Accordingly, all of our goodwill is associated with the entire
company. As of June 1, 2002, based on our market capitalization, there was no impairment of goodwill recorded upon implementation of SFAS No. 142. Accordingly, the second testing phase was not necessary. During fiscal 2003, we will also perform the
required annual impairment analysis of goodwill, or on an interim basis if circumstances dictate. Any reduction of enterprise fair value below the carrying amount of goodwill could require us to write down the value of goodwill to its fair value and
record an expense for the impairment loss.





RECENT ACCOUNTING PRONOUNCEMENTS





In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires businesses to record the fair value of a
liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. We are required to adopt SFAS No. 143 for our fiscal year beginning June 1, 2003. We are currently assessing the impact, if any, of SFAS No. 143 on our financial position and results of operations.




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In the quarter ended May 31, 2002, Saba adopted Staff Announcement Topic No.
D-103, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, which was subsequently incorporated in Emerging Issues Task Force (EITF) No. 01-14. EITF No. 01-14 establishes that
reimbursements received for out-of-pocket expenses should be characterized as revenue in the statement of operations. Previously, Saba recorded the reimbursement of out-of-pocket expenses as a reduction to cost of services to
offset the related cost incurred. The adoption of EITF No. 01-14 does not impact operating or net income in any past or future periods. The adoption increased revenues and cost of revenues by $277,000 for the three months ended August 31, 2002 and
$389,000 for the three months ended August 31, 2001 and caused a slight decrease in gross margin percentage.





In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as generally defined in EITF No. 94-3 was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146
also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and could result in us recognizing the cost of future
restructuring activities, if any, over a period of time as opposed to as a single event.





FACTORS THAT MAY IMPACT
FUTURE OPERATING RESULTS





We have a limited operating history and are subject to the risks encountered by early-stage companies





We were founded in April 1997 and shipped our first products in April 1998. Because we have a limited
operating history, you should consider and evaluate our operating prospects in light of the risks and uncertainties frequently encountered by early-stage companies in rapidly evolving markets. For us, these risks include:





| |  |  | risks that our revenue forecasts may be incorrect because of our limited sales to date and our long sales process;
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | risks associated with our dependence on Saba Learning Enterprise Edition, and related services, for substantially all of our revenues for the foreseeable
future;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | risks that our new products, such as Saba Performance and Saba Content, will fail to achieve market acceptance;
| | - |  | ---------------------------------------------------------------------------------------------------------------




| |  |  | risks that our strategy of establishing Saba Exchange may not be successful;
| | - |  | ----------------------------------------------------------------------------




| |  |  | risks that fluctuations in our quarterly operating results will be significant relative to our revenues; and
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | risks that the current economic downturn will continue to negatively impact the demand for our products and services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------




These risks and other risks are described in more detail below. Our future growth will depend substantially on our ability to
address these and the other risks described in this section. If we do not successfully address these risks, our business would be significantly harmed.





We have a history of losses, expect future losses and cannot assure you that we will achieve profitability





We have incurred significant losses and negative cash flows from operations since our inception. We have not achieved profitability and cannot be certain that we will realize sufficient revenues to achieve or sustain profitability.
We expect to derive substantially all of our revenues for the foreseeable future from the licensing of our Saba Learning Enterprise Edition and providing related services. Over the longer term, we expect to derive revenues from Saba Exchange, which
is based on an evolving and unproven business




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model, and new products such as Saba Learning ASP Edition, Saba Performance, which is in limited
release, and Saba Content, and services related to these offerings. In the future, we expect to continue to incur substantial non-cash expenses relating to the amortization of deferred compensation and purchased intangible assets that will
contribute to our net losses. As of August 31, 2002, we had an aggregate of $1.3 million of deferred stock compensation and $2.1 million of purchased intangible assets to be amortized. As a result of all of the foregoing, we expect to incur losses
for the foreseeable future and will need to generate significantly higher revenues in order to achieve profitability. If we achieve profitability, we may not be able to sustain it.





Fluctuations of our results could cause our stock price to experience significant fluctuations or declines





Our operating results have varied significantly in the past and will likely fluctuate significantly in the future. We believe that quarter-to-quarter comparisons of our revenues and operating results
are not necessarily meaningful and should not be relied on as indicators of future performance. Our operating expenses are based on our expectations of future revenues and are relatively fixed in the short-term. During fiscal 2002, we took actions
to reduce our operating expenses and, while we may from time to time reduce operating expenses in response to downturns in the United States and/or international economies, we generally expect to increase our operating expenses to expand our sales
and marketing operations, fund greater levels of research and development, develop new alliances, increase our services and support capabilities and improve our operational and financial systems. If our revenues do not increase along with these
expenses, our business would be seriously harmed and net losses in a given quarter would be even larger than expected. It is possible that in some future quarter our operating results may be below the expectations of public market analysts or
investors, which could cause the market price of our common stock to fall.





Our quarterly revenues are especially
subject to fluctuations because they depend on the sale of a small number of relatively large orders, principally orders for Saba Learning Enterprise Edition and related services. As a result, our quarterly operating results may fluctuate if we are
unable to complete a sufficient number of large orders in any particular quarter. We have not fully developed our business model for Saba Exchange, including the structure and amount of the fees we intend to charge. As this business model evolves,
the potential for fluctuations in our quarterly results could increase. Furthermore, our quarterly revenues may be affected significantly by changes in revenue recognition policies and procedures based on changes to or new applicable accounting
standards and how these standards are interpreted.





Our lengthy sales cycle could cause delays in revenue growth





The period between our initial contact with a potential customer and the purchase of our products and services is often long. A
customers decision to purchase our products and services requires the commitment to increase performance through human capital development and management, involves a significant allocation of resources, and is influenced by a customers
budgetary cycles. To successfully sell our products and services, we generally must educate our potential customers regarding the use and benefits of our products and services, which can require significant time and resources. Many of our potential
customers are large enterprises that generally take longer to make significant business decisions. Our typical sales cycle has been approximately 6 to 12 months. The delay or failure to complete sales in a particular quarter could reduce our
revenues in that quarter. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenues and our revenue growth. If we were to experience a delay of several weeks on a large
order, it could harm our ability to meet our forecasts for a given quarter.





A decline in the price of, or demand for, our main
product Saba Learning Enterprise Edition or our related service offerings would seriously harm our revenues and operating margins





To date, Saba Learning Enterprise Edition and related services have accounted for a substantial majority of our revenues. We anticipate that revenues from our Saba Learning Enterprise Edition and related services will
continue to constitute a substantial majority of our revenues for the foreseeable future.




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Consequently, a decline in the price of, or demand for, Saba Learning Enterprise Edition or failure to
achieve broad market acceptance would seriously harm our business.





We are exposed to recent unfavorable economic conditions





We have seen a rapid and increasingly severe downturn in the United States economy since the first quarter of
fiscal 2001, which has been further stalled by terrorist attacks in September 2001. There can be no certainty as to the severity or duration of this downturn. Although we cannot predict the extent and timing, if any, of the impact of economic
downturns in the United States on economies in other countries or geographic regions, we are seeing an economic slowdown in certain international markets in which we conduct business. If the economic conditions in the United States continue or
worsen or if a global economic slowdown intensifies, the demand for our products and services may be reduced. Not only may these economic slowdowns reduce our customers and prospects budgets for our products and services, but also they
may adversely affect our customers ability to pay for our products and services. Accordingly, these economic slowdowns may have a material adverse impact on our business, operating results and financial condition.





Our performance depends on a new market: human capital development and management





The market for software solutions that automate human capital development and management is relatively new and rapidly evolving. Substantially all of our revenues are
attributable to the suite of products and services in this market. If this market fails to develop or develops more slowly than we expect, or if we fail to identify the challenges and risks in this new market and successfully address these risks,
our business would be harmed.





Our strategy of establishing Saba Exchange is unproven and may not be successful





We must more fully establish and enhance Saba Exchange, where organizations and learning providers can transact business and
collaborate. Our success depends on a significant number of organizations implementing Saba Learning and conducting business with learning providers over the Internet through Saba Exchange. If this business strategy is flawed, or if we are unable to
execute it effectively, our revenues may be seriously harmed. We began operating Saba Exchange in December 1999. Accordingly, we have limited experience developing and operating Saba Exchange. To date, only a limited number of learning providers and
organizations are connected to Saba Exchange. It is possible that we, together with the organizations and learning providers who comprise this exchange, will not be able to effectively operate this exchange, both in terms of technical performance as
well as commercial viability. It is possible that an insufficient number of organizations and/or learning providers will join and remain in Saba Exchange, and that we will be unable to generate significant revenues from Saba Exchange. Unless a
critical mass of organizations and learning providers join Saba Exchange, our solutions may not achieve widespread market acceptance and our business would be seriously harmed. To date, we have not generated significant revenues from Saba Exchange.





If we lose key personnel or are unable to attract and retain additional qualified personnel, we may not be able to successfully
manage our business and achieve our objectives





We believe our future success will depend upon our ability to
retain our key management personnel. These employees are not subject to employment contracts. We may not be successful in attracting, assimilating and retaining our key employees in the future. Our future success and our ability to expand our
operations will also depend in large part on our ability to attract and retain additional qualified technical, sales and marketing personnel. Competition for these types of employees is intense due to the limited number of qualified professionals
and the high demand for them, particularly in the San Francisco Bay Area, where our headquarters is located. We have in the past experienced difficulty in recruiting qualified personnel. Failure to attract, assimilate and retain personnel,
particularly technical, sales and marketing personnel, would have a material adverse effect on our business and potential growth. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to
retain key employees, all of whom have been granted stock options or been sold restricted stock.




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Difficulties we may encounter managing our growth could adversely affect our results of operations





We intend to grow our business significantly. To support our growth plans, we may need to expand our existing
management, operational, financial and human resources, customer service and management information systems and controls. We may be unable to expand these systems and to manage our planned growth successfully, and this inability would adversely
affect our business.





Intense competition in our target market could impair our ability to grow and to achieve profitability





The market for our products and services is intensely competitive, dynamic and subject to rapid technological
change. The intensity of the competition and the pace of change are expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously
harm our business. Competitors vary in size and in the scope and breadth of the products and services offered. We encounter competition with respect to different aspects of our solution from a variety of sources including:





| |  |  | companies that market and license training, learning, performance, content, resource, talent and staffing management systems;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------




| |  |  | enterprise software vendors that offer human resources information systems and employee relationship management systems with training and performance modules;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | potential customers internal development efforts;
| | - |  | --------------------------------------------------




| |  |  | companies that operate Internet-based marketplaces for the sale of on-line learning;
| | - |  | ------------------------------------------------------------------------------------




| |  |  | companies that operate Internet-based marketplaces for the sale of goods and services and could potentially decide to evolve their marketplaces to include
content offerings; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Internet portals that offer learning content, performance support tools or recruiting services.
| | - |  | -----------------------------------------------------------------------------------------------




Because there are relatively low barriers to entry in the electronic commerce market, which comprises a portion of our business model, we expect competition
from a variety of established and emerging companies





Many of our competitors have longer operating histories,
substantially greater financial, technical, marketing or other resources, or greater name recognition than we do. Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional products and services on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future products and services
obsolete, unmarketable or less competitive. Our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with other learning solution providers, thereby increasing the availability
of their services to address the needs of our current and prospective customers. We may not be able to compete successfully against our current and future competitors, and competitive pressures that we encounter may seriously harm our business.





If we are unable to manage the complexity of conducting business globally, our international revenues may suffer





International revenues accounted for 17% of our revenues in the first quarter of fiscal 2003 and 22% of our revenues in the
first quarter of fiscal 2002. We intend to expand our international presence in the future. Conducting business outside of the United States is subject to certain risks, including:





| |  |  | changes in regulatory requirements and tariffs;
| | - |  | -----------------------------------------------




| |  |  | language barriers;
| | - |  | ------------------




| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------




| |  |  | longer payment cycles and greater difficulty in collecting accounts receivable;
| | - |  | -------------------------------------------------------------------------------




| |  |  | reduced protection of intellectual property rights;
| | - |  | ---------------------------------------------------




| |  |  | potentially harmful tax consequences;
| | - |  | -------------------------------------




| |  |  | fluctuating exchange rates;
| | - |  | ---------------------------



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| |  |  | price controls and other restrictions on foreign currency;
| | - |  | ----------------------------------------------------------




| |  |  | difficulties in obtaining import and export licenses;
| | - |  | -----------------------------------------------------




| |  |  | political and social unrest or disturbances;
| | - |  | --------------------------------------------




| |  |  | the burden of complying with a variety of foreign laws; and
| | - |  | -----------------------------------------------------------




| |  |  | political or economic constraints on international trade.
| | - |  | ---------------------------------------------------------




We might not successfully market, sell or distribute our products and services in foreign markets, and we cannot be certain that one or more of such factors will not
materially adversely affect our future international operations, and consequently, our business and future growth.





We may become
subject to government regulation and legal uncertainties that could reduce demand for our products and services or increase the cost of doing business, thereby adversely affecting our financial results





We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to
businesses generally, export control laws and laws or regulations directly applicable to Internet commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may become applicable
to us or may be adopted in the future with respect to the Internet covering issues such as:





| |  |  | user privacy;
| | - |  | -------------




| |  |  | taxation;
| | - |  | ---------




| |  |  | content;
| | - |  | --------




| |  |  | right to access personal data;
| | - |  | ------------------------------




| |  |  | copyrights;
| | - |  | -----------




| |  |  | distribution; and
| | - |  | -----------------




| |  |  | characteristics and quality of services.
| | - |  | ----------------------------------------




The applicability of existing laws governing issues such as property ownership, copyrights, and other intellectual property issues, encryption, taxation, libel, export or import matters and personal
privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the broad commercial use of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and
related technologies. Changes to these laws, including some recently proposed changes, could create uncertainty in the Internet marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to
increased costs of litigation or increased service delivery costs.





In addition, we could be liable for the misuse
of personal information. The Federal Trade Commission, the European Union and certain state and local authorities have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if
new regulations regarding the use of personal information are introduced or if these authorities choose to investigate our privacy practices.





Our market is subject to rapid technological change and to compete, we must continually enhance our products and services





We must continue to enhance and improve the performance, functionality and reliability of our products and services. The software and electronic commerce industries are characterized by rapid
technological change, changes in user requirements and preferences, frequent new product and services introductions embodying new technologies and the emergence of new industry standards and practices that could render our products and services
obsolete. In the past, we have discovered that some of our customers desire additional performance and functionality not currently offered by our products. Our success will depend, in part, on our ability to both internally develop and license
leading technologies to enhance our existing products and services, develop new products and services that address the increasingly sophisticated and varied needs of our customers, and respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. In addition, the development of our technology and other proprietary technology involves significant technical and business risks. We may fail




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to use new technologies effectively or to adapt our proprietary technology and systems to customer requirements or emerging industry standards.
If we are unable to adapt to changing market conditions, customer requirements or emerging industry standards, we may not be able to increase our revenues and expand our business.





Delays in releasing new products or enhanced versions of our existing products could adversely affect our competitive position





As part of our strategy, we expect to regularly release new products and new versions of our existing products. Even if our new products or new versions of our existing
products contain the features and functionality our customers want, in the event we are unable to timely introduce these new products or product releases, our competitive position may be harmed. We cannot assure you that we will be able to
successfully complete the development of currently planned or future products or product releases in a timely and efficient manner. Due to the complexity of our products, internal quality assurance testing and customer testing of pre-commercial
releases may reveal product performance issues or desirable feature enhancements that could lead us to postpone the release of these products. In addition, the reallocation of resources associated with any postponement would likely cause delays in
the development and release of other future products or enhancements to our currently available products. Any delay in releasing future products or enhancements of our products could cause our stock price to decline.





If we release products containing defects, we may need to halt further shipments and our business and reputation would be harmed





Products as complex as ours often contain unknown and undetected errors or performance problems. Many serious defects are frequently found
during the period immediately following introduction and initial shipment of new products or enhancements to existing products. Although we attempt to resolve all errors that we believe would be considered serious by our customers before shipment to
them, our products are not error-free. These errors or performance problems could result in lost revenues or delays in customer acceptance and would be detrimental to our business and reputation. As is typical in the software industry, with each
release we have discovered errors in our products after introduction. We will not be able to detect and correct all errors before releasing our products commercially and these undetected errors could be significant. We cannot assure you that
undetected errors or performance problems in our existing or future products will not be discovered in the future or that known errors considered minor by us will not be considered serious by our customers, resulting in a decrease in our revenues.





Claims by third parties that we infringe their intellectual property rights, may result in costly litigation





In recent years, there has been significant litigation in the United States involving patents and other intellectual property
rights, particularly in the software and Internet-related industries. On May 31, 2002, IP Learn, LLC (IP Learn) filed a lawsuit against us alleging that we infringed a number of patents assigned to IP Learn, and asking the court for a preliminary
and permanent injunction as well as unspecified damages. We believe that IP Learns claims are without merit, and we intend to defend against them vigorously. We could become subject to additional intellectual property infringement claims as
the number of our competitors grows and our products and services overlap with competitive offerings. Any of these claims, even if not meritorious, could be expensive to defend and could divert managements attention from operating our company.
If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial award of damages and to develop noninfringing technology, obtain a license or cease selling the products that contain
the infringing intellectual property. We may be unable to develop noninfringing technology or obtain a license on commercially reasonable terms, if at all.





We may not be able to adequately protect our proprietary technology, and our competitors may be able to offer similar products and services that would harm our competitive position





Our success depends upon our proprietary technology. We rely primarily on copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to establish and protect our




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proprietary rights. As part of our confidentiality procedures, we enter into non-disclosure agreements
with our employees. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. In addition, we have filed nine patent applications in the U.S. We
cannot assure you that any patents will be issued or, if issued, such patents will protect our intellectual property or not be challenged by third parties. Furthermore, effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products and services or design around any
patents or other intellectual property rights we hold.





We do not have a comprehensive disaster recovery plan or back-up system, and a
disaster could severely damage our operations





We currently do not have a comprehensive disaster recovery plan
in effect and do not have fully redundant systems for our services at an alternate site. A disaster could severely harm our business because our services could be interrupted for an indeterminate length of time. Our operations depend upon our
ability to maintain and protect the computer systems needed for the day-to-day operation of Saba Exchange and Saba Learning ASP Edition. A number of these computer systems are located on or near known earthquake fault zones. Although these systems
are designed to be fault tolerant, they are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and other events. Additionally, we do not carry sufficient business insurance to compensate us for all potential
losses that could occur.





We outsource the management and maintenance of our hosted and ASP solutions to third parties and will depend
upon them to provide adequate management and maintenance services





We rely on third parties to provide key
components of our networks and systems. For instance, we rely on third-party Internet service providers to host Saba Exchange and Saba Learning Enterprise Edition for customers who desire to have these solutions hosted. We also rely on third-party
communications service providers for the high-speed connections that link our and our Internet service providers Web servers and office systems to the Internet. Any Internet or communications systems failure or interruption could result in
disruption of our service or loss or compromise of customer orders and data. These failures, especially if they are prolonged or repeated, would make our services less attractive to customers and tarnish our reputation.





We depend upon continuing our relationship with third-party integrators who support our solutions





Our success depends upon the acceptance and successful integration by customers of our products. We often rely on third-party systems integrators to assist with
implementation of our products. We will need to continue to rely on these systems integrators even as we increase the size of our professional services group. If large systems integrators fail to continue to support our solution or commit resources
to us, if any of our customers are not able to successfully integrate our solution or if we are unable to adequately train our existing systems integration partners, our business, operating results and financial condition could suffer. In addition,
we have only limited control over the level and quality of service provided by our current and future third-party integrators.





We may
not be able to secure necessary funding in the future; additional funding may result in dilution to our stockholders





We require substantial working capital to fund our business. We have had significant operating losses and negative cash flow from operations since inception and expect this to continue for the foreseeable future. We expect to use our
available cash resources and credit facilities primarily to fund sales and marketing activities, research and development, and continued operations, and possibly make future acquisitions. We believe that our existing capital resources will be
sufficient to meet our capital requirements for the next twelve months. However, if our capital requirements increase materially from those currently planned or if revenues fail to materialize, we may require additional financing sooner than




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anticipated. If additional funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience dilution, or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. Additional financing may not be available
when needed on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of future opportunities or respond to
competitive pressures.





Our past and future acquisitions may result in disruptions to our business if we fail to adequately integrate
acquired businesses





In March 2001, we acquired Human Performance Technologies, Inc. and in June 2001, we
acquired Ultris Inc. As part of our overall business strategy, we expect to continue to acquire complementary businesses or technologies that will provide additional products or services offerings, additional industry expertise or an expanded
geographic presence. These acquisitions could result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, or the incurrence of debt. In addition, any acquisition may increase the risk of future write-offs
for acquired in-process research and development, write-offs for the impairment of goodwill or long-lived assets, or amortization of expenses related to intangible assets, any of which could materially adversely affect our business and our operating
results. For example, as of August 31, 2002, we had an aggregate of $2.1 million of purchased intangible assets to be amortized as a result of the acquisition of Human Performance Technologies, Inc. and Ultris Inc. In addition, acquisitions involve
numerous risks, including:





| |  |  | difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company;
| | - |  | -----------------------------------------------------------------------------------------------------------------




| |  |  | the diversion of managements attention from other business concerns;
| | - |  | ---------------------------------------------------------------------




| |  |  | risks of entering markets in which we have no or limited prior experience; and
| | - |  | ------------------------------------------------------------------------------




| |  |  | the potential loss of key employees of the acquired company.
| | - |  | ------------------------------------------------------------




Our stock price may fluctuate substantially





The market
price for our common stock may be affected by a number of factors, including those described above and the following:





| |  |  | the announcement of new products and services or product and service enhancements by us or our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------




| |  |  | quarterly variations in our results of operations or those of our competitors;
| | - |  | ------------------------------------------------------------------------------




| |  |  | changes in earnings estimates or recommendations by securities analysts that may follow our stock;
| | - |  | --------------------------------------------------------------------------------------------------




| |  |  | developments in our industry; and
| | - |  | ---------------------------------




| |  |  | general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




In addition, the stock market in general, and the Nasdaq National Market and technology
companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry trends may also materially and adversely
affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a companys securities, securities class-action litigation has often been initiated
against that company. Class-action litigation could result in substantial costs and a diversion of managements attention and resources.





Sales of shares eligible for future sale could cause our stock price to decline





If our
stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of outstanding options and warrants) in the public market, the market price of our common stock could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.




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The anti-takeover provisions in our charter documents could adversely affect the rights of the
holders of our common stock





Our Certificate of Incorporation and Bylaws contain provisions that could make it
harder for a third-party to acquire us without the consent of our board of directors. For example, if a potential acquiror were to make a hostile bid for us, the acquiror would not be able to call a special meeting of stockholders to remove our
board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms that make it difficult to remove all directors at once. The acquiror would also be required to provide advance notice of its
proposal to remove directors at an annual meeting. The acquiror will not be able to cumulate votes at a meeting, which will require the acquiror to hold more shares to gain representation on the board of directors than if cumulative voting were
permitted.





Our board of directors also has the ability to issue preferred stock that would significantly dilute
the ownership of a hostile acquiror. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. These provisions and other
similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.





Our board of directors could choose not to negotiate with an acquiror that it did not feel was in our strategic interests. If the acquiror was discouraged from offering to
acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures, you could lose the opportunity to sell your shares at a favorable price.





ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK





Foreign Currency
Risk





We provide our services to customers primarily in the United States and, to a lesser extent, in Europe
and elsewhere throughout the world. As a result, our financial results could be affected by risks typical of an international business. Such factors include, but are not limited to, changes in foreign currency exchange rates, local regulations and
restrictions and political climates, weak economic conditions in foreign markets, differing tax structures and foreign currency rate volatility. Sales are primarily made in U.S. Dollars; however, as we continue to expand our operations, more of our
contracts may be denominated in Australian Dollars, British Pounds, Canadian Dollars, Euros and Japanese Yen. A strengthening of the U.S. Dollar could make our products less competitive in foreign markets.





Our exposure to foreign exchange rate fluctuations also arises in part from the translation of the financial results of foreign
subsidiaries into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability.





Interest Rate Risk





Our investments are made in accordance
with an investment policy approved by our board of directors. At August 31, 2002, the average maturity of our investment securities was approximately five months. The majority of our investment securities had maturities of less than one year. Our
interest income is sensitive to changes in the general level of U.S. interest rates. Due to the nature of our cash equivalents and investments, which are primarily money market funds, commercial paper, corporate bonds and U.S. government agency
bonds, we believe that there is no material market risk exposure.





All investments are carried at market value,
which approximates cost. At August 31, 2002, all of our investments were considered available-for-sale securities and the majority had maturities of less than one year. The weighted average interest rate of our portfolio was approximately 2.3% at
August 31, 2002.




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The interest payable on our revolving line of credit entered into in August 2002
is based on a variable interest rate using the banks Prime Rate plus 1%. However, the outstanding balance on the line of credit as of August 31, 2002 was repaid in September 2002. Therefore, only future borrowings on the line of credit would
be affected by changes in market interest rates.





The interest payable on our equipment term loan entered into in
August 2002 carries a fixed interest rate of 5.81%. Any future draws under the term loan through May 2003, which are limited to the remaining available balance of $744,000 at August 31, 2002, would bear an interest rate at either a fluctuating rate
equal to the banks Prime Rate plus 1.25% or a fixed rate equal to the 36-month U.S. Treasury note plus 3.25%. Therefore, only future borrowings on the equipment term loan would be affected by changes in market interest rates.





ITEM 4.    CONTROLS AND PROCEDURES





Evaluation of disclosure
controls and procedures.    Our chief executive officer and our chief financial officer, after evaluating the effectiveness of Sabas disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the Evaluation Date) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were
adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.





Changes in internal controls.    There were no significant changes in our internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.





PART
II    OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS





In November 2001, a complaint was
filed in the United States District Court for the Southern District of New York against Saba, certain of its officers and directors, and certain underwriters of Sabas initial public offering. The complaint was purportedly filed on behalf of a
class of certain persons who purchased Saba common stock between April 6, 2000 and December 6, 2000. The complaint alleges violations by Saba and its officers and directors of the Securities Act of 1933 in connection with certain alleged
compensation arrangements entered into by the underwriters in connection with the offering. An amended complaint was filed in April 2002. Similar complaints have been filed against hundreds of other issuers that have had initial public offerings
since 1998. The complaints have since been consolidated into a single action. Saba intends to vigorously defend against this action. Although no assurance can be given that this matter will be resolved in Sabas favor, Saba believes that the
resolution of this lawsuit will not have a material adverse effect on its financial position, results of operations or cash flows.





On May 31, 2002, IP Learn, LLC (IP Learn) filed a complaint against Saba in the United States District Court for the Northern District of California. The compliant alleges that Saba infringed a number of U.S. patents
assigned to IP Learn and asks the court for a preliminary and permanent injunction, as well as unspecified damages. Substantially similar complaints have been filed against at least three other companies in Sabas industry. Saba believes that
the complaint is without merit and intends to defend against it vigorously. Although no assurance can be given that this matter will be resolved favorably, Saba believes that the resolution of this lawsuit will not have a material adverse effect on
its financial position, results of operations or cash flows.





Saba is also party to various legal disputes and
proceedings arising from the ordinary course of general business activities. While, in the opinion of management, resolution of these matters is not expected to have a material adverse effect on Sabas consolidated financial position, results
of operations or cash flows, the




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ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could
be material to Saba.





ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS





None.





ITEM 3.    DEFAULTS UPON SENIOR SECURITIES





Not applicable.





ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM 5.    OTHER INFORMATION





None.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





a.  Exhibits





See Exhibit Index following the signature page.





b.  Reports on Form 8-K.





On August 29, 2002, Saba filed a current report on Form 8-K, pursuant to Item 9, reporting the execution of certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which accompanied Sabas Form 10-K filed with
the Securities and Exchange Commission on August 29, 2002.




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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.





SABA SOFTWARE, INC.Dated: October 15, 2002



By:

/s/    GENO TOLARIPresident and Chief Executive Officer (Principal Executive Officer)





By:

/s/    RONALD KISLINGChief Financial Officer (Principal Financial and Accounting Officer)







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CERTIFICATION





I, Geno Tolari, certify that:





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




|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures 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 quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 15, 2002

By:

/s/  Geno TolariGeno Tolari Chief Executive Officer




31




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##### Table of Contents

CERTIFICATION





I, Ronald Kisling, certify that:





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




|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures 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 quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 15, 2002

By:

/s/  Ronald KislingRonald Kisling Chief Financial Officer




32




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##### Table of Contents

CERTIFICATION





In connection with this quarterly report of Saba Software, Inc. (the Company) on Form 10-Q for the period ended August 31, 2002 (the Report), I, Geno Tolari, Chief Executive
Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:





| | (1) |  | the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates
and for the periods indicated.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 15, 2002

By:

/s/  Geno TolariGeno Tolari Chief Executive Officer




33




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##### Table of Contents

CERTIFICATION





In connection with this quarterly report of Saba Software, Inc. (the Company) on Form 10-Q for the period ended August 31, 2002 (the Report), I, Ronald Kisling, Chief Financial
Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:





| | (1) |  | the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates
and for the periods indicated.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: October 15, 2002

By:

/s/  Ronald KislingRonald Kisling Chief Financial Officer




34




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##### Table of Contents

EXHIBIT INDEX





ExhibitNumber

Document3.1(1)

Amended and Restated Certificate of Incorporation of the Company as effective as of April 12, 2000.3.3

Amended and Restated Bylaws of the Company4.1

Reference is made to Exhibits 3.1 and 3.2.10.12

Credit Agreement dated August 30, 2002 between Silicon Valley Bank and the Company.


---

|(1) |  | Incorporated by reference to Exhibit 3.2 to the Companys Registration Statement on Form S-1 (Registration No. 333-95761) previously filed with the SEC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



35