##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended August 31, 2008



| ̈ | 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)

SABA SOFTWARE, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3267638                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2400 Bridge Parkway Redwood Shores, California                 |  | 94065-1166                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

(650) 581-2500

(Registrants telephone number, including area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.
See the definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-Accelerated filer   ̈                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (do not check if a smaller reporting
company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

On September 30, 2008, 29,173,156 shares of the registrant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, 2008

INDEX



|         |  |                                                                                                                |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                |  | Page
|Part I.  |  | FINANCIAL INFORMATION                                                                                          |  |     
|         |  |                                                                                                               
|Item 1.  |  | Financial Statements (Unaudited)                                                                               |  | 3   
|         |  |                                                                                                               
|         |  | Condensed Consolidated Balance Sheets as of August 31, 2008 and May 31, 2008                                   |  | 3   
|         |  |                                                                                                               
|         |  | Condensed Consolidated Statements of Operations for the three months ended August 31, 2008 and August 31, 2007 |  | 4   
|         |  |                                                                                                               
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2008 and August 31, 2007 |  | 5   
|         |  |                                                                                                               
|         |  | Notes to Condensed Consolidated Financial Statements                                                           |  | 6   
|         |  |                                                                                                               
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 18  
|         |  |                                                                                                               
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 30  
|         |  |                                                                                                               
|Item 4.  |  | Controls and Procedures                                                                                        |  | 32  
|         |  |                                                                                                               
|Part II. |  | OTHER INFORMATION                                                                                              |  |     
|         |  |                                                                                                               
|Item 1.  |  | Legal Proceedings                                                                                              |  | 33  
|         |  |                                                                                                               
|Item 1A. |  | Risk Factors                                                                                                   |  | 36  
|         |  |                                                                                                               
|Item 2.  |  | Unregistered Sales of Equity Securities and Use Of Proceeds                                                    |  | 45  
|         |  |                                                                                                               
|Item 3.  |  | Defaults Upon Senior Securities                                                                                |  | 45  
|         |  |                                                                                                               
|Item 4.  |  | Submission of Matters to a Vote of Securities Holders                                                          |  | 45  
|         |  |                                                                                                               
|Item 5.  |  | Other Information                                                                                              |  | 45  
|         |  |                                                                                                               
|Item 6.  |  | Exhibits                                                                                                       |  | 45  
|         |  |                                                                                                               
|         |  | Signatures                                                                                                     |  | 46  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

SABA SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                                |  | August 31,2008 |          |   | May 31,2008* |  
|                                                                                                                                                                                |  | (Unaudited)    |          |   |              |  
|ASSETS                                                                                                                                                                          |  |                |          |   |              |   |          |  
|Current assets:                                                                                                                                                                 |  |                |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                                                       |  | $              | 15,546   |   |              | $ | 16,624   |  
|Restricted cash                                                                                                                                                                 |  |                | 360      |   |              |   | 360      |  
|Accounts receivable, net                                                                                                                                                        |  |                | 21,372   |   |              |   | 22,095   |  
|Prepaid expenses and other current assets                                                                                                                                       |  |                | 2,686    |   |              |   | 2,893    |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total current assets                                                                                                                                                            |  |                | 39,964   |   |              |   | 41,972   |  
|Property and equipment, net                                                                                                                                                     |  |                | 5,798    |   |              |   | 5,239    |  
|Goodwill                                                                                                                                                                        |  |                | 37,674   |   |              |   | 37,708   |  
|Purchased intangible assets, net                                                                                                                                                |  |                | 11,530   |   |              |   | 12,459   |  
|Other assets                                                                                                                                                                    |  |                | 1,540    |   |              |   | 1,553    |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total assets                                                                                                                                                                    |  | $              | 96,506   |   |              | $ | 98,931   |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                |          |   |              |   |          |  
|Current liabilities:                                                                                                                                                            |  |                |          |   |              |   |          |  
|Accounts payable                                                                                                                                                                |  | $              | 5,442    |   |              | $ | 4,017    |  
|Accrued compensation and related expenses                                                                                                                                       |  |                | 5,571    |   |              |   | 5,912    |  
|Accrued expenses                                                                                                                                                                |  |                | 4,489    |   |              |   | 4,568    |  
|Deferred revenue                                                                                                                                                                |  |                | 28,296   |   |              |   | 29,257   |  
|Current portion of debt and lease obligations                                                                                                                                   |  |                | 725      |   |              |   | 658      |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total current liabilities                                                                                                                                                       |  |                | 44,523   |   |              |   | 44,412   |  
|Deferred revenue                                                                                                                                                                |  |                | 1,431    |   |              |   | 2,028    |  
|Other long term liabilities                                                                                                                                                     |  |                | 1,337    |   |              |   | 1,386    |  
|Accrued rent                                                                                                                                                                    |  |                | 2,445    |   |              |   | 2,363    |  
|Debt and lease obligations, less current portion                                                                                                                                |  |                | 145      |   |              |   | 254      |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total liabilities                                                                                                                                                               |  |                | 49,881   |   |              |   | 50,443   |  
|Commitments and contingencies                                                                                                                                                   |  |                |          |   |              |   |          |  
|Stockholders equity:                                                                                                                                                           |  |                |          |   |              |   |          |  
|Preferred stock, issuable in series: $0.001 par value: 5,000,000 authorized shares at August 31, 2008 and May 31, 2008; none issued
or outstanding                              |  |                |         |   |              |   |         |  
|Common stock, $0.001 par value: 50,000,000 authorized; 29,266,699 shares issued and outstanding at August 31, 2008 and 29,227,656 shares
issued and outstanding at May 31, 2008 |  |                | 30       |   |              |   | 30       |  
|Additional paid-in capital                                                                                                                                                      |  |                | 256,334  |   |              |   | 255,637  |  
|Treasury stock: 102,997 shares at August 31, 2008 and May 31, 2008, at cost                                                                                                     |  |                | (233     | ) |              |   | (232     | )
|Accumulated deficit                                                                                                                                                             |  |                | (209,089 | ) |              |   | (206,875 | )
|Accumulated other comprehensive income                                                                                                                                          |  |                | (417     | ) |              |   | (72      | )
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total stockholders equity                                                                                                                                                      |  |                | 46,625   |   |              |   | 48,488   |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $              | 96,506   |   |              | $ | 98,931   |  
|                                                                                                                                                                                |  |                |          |   |              |   |          |  



|* | Derived from audited financial statements included in The Companys Annual Report on Form 10-K for the year ended May 31, 2008 filed with the United States Securities and
Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Accompanying Notes to Condensed Consolidated Financial Statements.



3



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SABA SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per
share data)

(Unaudited)



|                                                              |  |                    |        |   |                |   |        |  
|------------------------------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                              |  | Three months ended |       
|                                                              |  | August 31,2008     |        |   | August 31,2007 |  
|Revenues:                                                     |  |                    |        |   |                |   |        |  
|License                                                       |  | $                  | 2,958  |   |                | $ | 4,730  |  
|License updates and product support                           |  |                    | 8,641  |   |                |   | 8,817  |  
|OnDemand                                                      |  |                    | 4,918  |   |                |   | 4,427  |  
|Professional services                                         |  |                    | 8,782  |   |                |   | 7,478  |  
|                                                              |  |                    |        |   |                |   |        |  
|Total revenues                                                |  |                    | 25,299 |   |                |   | 25,452 |  
|Cost of revenues:                                             |  |                    |        |   |                |   |        |  
|Cost of license                                               |  |                    | 213    |   |                |   | 195    |  
|Cost of license updates and product support                   |  |                    | 2,207  |   |                |   | 2,221  |  
|Cost of OnDemand                                              |  |                    | 2,426  |   |                |   | 1,631  |  
|Cost of professional services                                 |  |                    | 5,916  |   |                |   | 5,414  |  
|Amortization of acquired developed technology                 |  |                    | 295    |   |                |   | 294    |  
|                                                              |  |                    |        |   |                |   |        |  
|Total cost of revenues                                        |  |                    | 11,057 |   |                |   | 9,755  |  
|                                                              |  |                    |        |   |                |   |        |  
|Gross profit                                                  |  |                    | 14,242 |   |                |   | 15,697 |  
|Operating expenses:                                           |  |                    |        |   |                |   |        |  
|Research and development                                      |  |                    | 4,286  |   |                |   | 4,208  |  
|Sales and marketing                                           |  |                    | 7,107  |   |                |   | 9,267  |  
|General and administrative                                    |  |                    | 4,341  |   |                |   | 3,807  |  
|Amortization of purchased intangible assets                   |  |                    | 634    |   |                |   | 634    |  
|                                                              |  |                    |        |   |                |   |        |  
|Total operating expenses                                      |  |                    | 16,368 |   |                |   | 17,916 |  
|Loss from operations                                          |  |                    | (2,126 | ) |                |   | (2,219 | )
|Interest income and other, net                                |  |                    | 81     |   |                |   | 51     |  
|Interest expense                                              |  |                    | (10    | ) |                |   | (70    | )
|                                                              |  |                    |        |   |                |   |        |  
|Loss before provision for income taxes                        |  |                    | (2,055 | ) |                |   | (2,238 | )
|Provision for income taxes                                    |  |                    | 159    |   |                |   | 118    |  
|                                                              |  |                    |        |   |                |   |        |  
|Net loss                                                      |  | $                  | (2,214 | ) |                | $ | (2,356 | )
|                                                              |  |                    |        |   |                |   |        |  
|Basic and diluted net loss per share                          |  | $                  | (0.08  | ) |                | $ | (0.08  | )
|                                                              |  |                    |        |   |                |   |        |  
|Shares used in computing basic and diluted net loss per share |  |                    | 29,151 |   |                |   | 28,859 |  
|                                                              |  |                    |        |   |                |   |        |  

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 31,2008     |        |   | August 31,2007 |  
|Operating activities:                                                           |  |                    |        |   |                |   |        |  
|Net loss                                                                        |  | $                  | (2,214 | ) |                | $ | (2,356 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                    |        |   |                |   |        |  
|Depreciation and amortization                                                   |  |                    | 576    |   |                |   | 408    |  
|Amortization of purchased intangible assets                                     |  |                    | 929    |   |                |   | 1,009  |  
|Share-based compensation expense                                                |  |                    | 590    |   |                |   | 1,329  |  
|Loss on disposal of property and equipment                                      |  |                    |       |   |                |   |       |  
|Changes in operating assets and liabilities:                                    |  |                    |        |   |                |   |        |  
|Accounts receivable                                                             |  |                    | 330    |   |                |   | (3,003 | )
|Prepaid expenses and other current assets                                       |  |                    | 167    |   |                |   | (263   | )
|Other assets                                                                    |  |                    | 19     |   |                |   | (194   | )
|Accounts payable                                                                |  |                    | 1,492  |   |                |   | (121   | )
|Accrued compensation and related expenses                                       |  |                    | (165   | ) |                |   | (545   | )
|Accrued expenses                                                                |  |                    | (63    | ) |                |   | (19    | )
|Accrued rent                                                                    |  |                    | 184    |   |                |   | (47    | )
|Deferred revenue                                                                |  |                    | (1,208 | ) |                |   | 128    |  
|                                                                                |  |                    |        |   |                |   |        |  
|Net cash provided by (used in) operating activities                             |  |                    | 637    |   |                |   | (3,674 | )
|Investing activities:                                                           |  |                    |        |   |                |   |        |  
|Purchases of property and equipment                                             |  |                    | (1,194 | ) |                |   | (816   | )
|                                                                                |  |                    |        |   |                |   |        |  
|Net cash used in investing activities                                           |  |                    | (1,194 | ) |                |   | (816   | )
|Financing activities:                                                           |  |                    |        |   |                |   |        |  
|Proceeds from issuance of common stock under employee stock plans               |  |                    | 107    |   |                |   | 635    |  
|Repayments on borrowings under credit facility                                  |  |                    | (100   | ) |                |   | (2,341 | )
|Repayments on note payable                                                      |  |                    | (26    | ) |                |   | (24    | )
|                                                                                |  |                    |        |   |                |   |        |  
|Net cash used in financing activities                                           |  |                    | (19    | ) |                |   | (1,730 | )
|Effect of exchange rate changes on cash                                         |  |                    | (502   | ) |                |   | (92    | )
|                                                                                |  |                    |        |   |                |   |        |  
|Decrease in cash and cash equivalents                                           |  |                    | (1,078 | ) |                |   | (6,312 | )
|Cash and cash equivalents, beginning of period                                  |  |                    | 16,624 |   |                |   | 18,088 |  
|                                                                                |  |                    |        |   |                |   |        |  
|Cash and cash equivalents, end of period                                        |  | $                  | 15,546 |   |                | $ | 11,776 |  
|                                                                                |  |                    |        |   |                |   |        |  
|Supplemental disclosure of other cash flow information:                         |  |                    |        |   |                |   |        |  
|Cash paid out for income taxes, net of refunds                                  |  | $                  | 196    |   |                | $ | 304    |  
|                                                                                |  |                    |        |   |                |   |        |  
|Cash paid for interest                                                          |  | $                  | 9      |   |                | $ | 70     |  
|                                                                                |  |                    |        |   |                |   |        |  

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
condensed consolidated financial statements include the accounts of Saba Software, Inc. and its wholly owned subsidiaries (Saba or the Company). All intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated balance sheet as of August 31, 2008 and the condensed consolidated statements of operations and cash flows
for the three months ended August 31, 2008 and 2007, respectively, are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (US
GAAP). In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Companys financial position as of
August 31, 2008, and the Companys results of operations and cash flows for the three months ended August 31, 2008.

These
unaudited condensed consolidated financial statements should be read in conjunction with Sabas audited condensed consolidated financial statements included in Sabas Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC) on August 14, 2008. The results of operations for the three months ended August 31, 2008 are not necessarily indicative of results for the entire fiscal year ending May 31, 2009 or for any future period.

The condensed consolidated balance sheet at May 31, 2008 has been derived from the audited financial statements at that date but does
not include all of the information and footnotes required by US GAAP for complete financial statements.

2. Summary of Significant Accounting
Policies

Revenue Recognition

Saba
recognizes license revenues addressed below 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, Saba recognizes license revenues when all of the following conditions are met:



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



| |  |  | delivery has occurred;
| | - |  | ----------------------



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



| |  |  | collection is probable.
| | - |  | -----------------------

SOP 97-2,
as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Saba has analyzed each element in its multiple-element arrangements and
determined that it has sufficient vendor-specific objective evidence (VSOE) to allocate revenues to certain OnDemand offerings, license updates and product support and professional services. Accordingly, assuming all other revenue
recognition criteria are met, revenues from perpetual licenses are recognized upon delivery using the residual method in accordance with SOP 98-9. Saba limits its 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.



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



License revenues from licenses with a term of three years or more are generally recognized on
delivery if the other conditions of SOP 97-2 are satisfied. Saba does not grant its resellers the right of return and does not recognize revenue from resellers until an end-user has been identified and the other conditions of SOP 97-2 are satisfied.
License revenues from licenses with a term of less than three years are generally recognized ratably over the term of the arrangement. License updates and product support revenue is recognized ratably over the term of the arrangement, typically 12
months. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement, Saba allocates the revenue to license revenue and to license updates and
product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products.

Revenue related to professional services is generally recognized as the services are performed. Although Saba provides professional services on a time and materials basis, a portion of these services is provided on a fixed-fee basis. For
services performed on a fixed fee basis, revenues are generally recognized on the proportional performance of the project, with performance measured based on hours of work performed. For contracts that involve significant customization and
implementation or professional services that are essential to the functionality of the software, the license and services revenues are recognized using the percentage-of-completion method or, if we are unable to reliably estimate the costs to
complete the services, Saba uses the completed contract method of accounting in accordance with SOP 97-2 and relevant guidance of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. A contract is
considered complete when all significant costs have been incurred or the item has been accepted by the customer.

Revenue from Sabas
OnDemand offerings is recognized as a service arrangement whereby the revenue is recognized ratably over the term of the arrangement or on an as-used basis if defined in the contract. Certain of its OnDemand offerings are integrated offerings
pursuant to which the customers ability to access the Companys software is not separable from the services necessary to operate the software and customers are not allowed to take possession of the Companys software, in which case
revenue is recognized under the SECs Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Sabas OnDemand offerings also include arrangements with customers that have separately licensed and taken
possession of the Companys software. When these OnDemand offerings are part of a multiple element arrangement involving licenses, Saba recognizes revenue in accordance with SOP 97-2.

If the requirements of SOP 97-2 are not met when Saba bills a customer or a customer pays Saba, the billed or paid amount is recorded as deferred
revenue, a liability account. As the revenue recognition principals of SOP 97-2 are satisfied, the requisite amounts are recognized as revenue. In arrangements that include professional services and OnDemand offerings, but not a license of the
Companys software, Saba recognizes consulting revenue for professional services as the services are performed if these professional services qualify as a separate element of the arrangement. If the professional services do not qualify as a
separate element of the arrangement, the related revenues are combined with the subscription revenue and recognized ratably over the subscription service period. Additionally, Saba defers the direct costs related to the professional services and
recognizes them ratably over the applicable service period. Saba categorizes deferred revenues and deferred costs on its condensed consolidated balance sheet as current if the Company expects to recognize such revenue or cost within the following
twelve months. When the revenue from professional services is recognized ratably over the subscription service period, Saba allocates the revenue to professional services revenue and to OnDemand revenue based on the VSOE of fair value for similar
professional services that qualify as a separate element of an arrangement. Sabas judgment as to whether the consulting services qualify as a separate unit of accounting may materially affect the timing of our revenue recognition and our
results of operations.

3. Share-Based Compensation

The Company accounts for share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment, which requires that these awards (to the extent they are compensatory) be recognized in the Companys consolidated statements of operations based on their fair values.



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The Company currently uses the Black-Scholes-Merton option pricing model to determine the fair value
of stock options and employee stock purchase plan shares. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of complex and subjective variables. These variables include the expected term of the awards; the Companys expected stock price volatility over the term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends. The Company estimates the expected term of share-based awards granted based, in part, on the Companys historical option term experience and, prior to December 31, 2007, by
applying the simplified method in accordance with the SECs Staff Accounting Bulletin No. 107 (SAB No. 107) Share-Based Payment, which provides supplemental implementation guidance for SFAS 123R. We estimate the
volatility of the Companys common stock based upon the Companys historical stock price volatility over the length of the expected term of the options. The Company bases the risk-free interest rate that it uses in the option valuation
model on U.S. Treasury zero-coupon issues with remaining maturities similar to the expected term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of
zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate
pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The Company also consider, each quarter, whether there have been any significant changes in facts and circumstances that
would affect our forfeiture rate. The expected term of the employee stock purchase plan shares is the average of the remaining purchase periods under each offering period.

The following assumptions have been used to value the awards granted during the three months ended August 31, 2008 and 2007, respectively, under the
Companys stock option plans and stock purchased under the Companys employee stock purchase plan:



|                             |  |                    |   |  |                |  
|---------------------------- |  | ------------------ | - |  | -------------- | -
|                             |  | Three months ended |  
|                             |  | August 31,2008     |   |  | August 31,2007 |  
|Stock Options:               |  |                    |   |  |                |  
|Expected volatility          |  | 49                 | % |  | 49             | %
|Risk-free interest rates     |  | 2.86               | % |  | 4.2            | %
|Expected term (years)        |  | 3.8                |   |  | 4.1            |  
|Expected dividend yield      |  | 0                  | % |  | 0              | %
|Employee Sock Purchase Plan: |  |                    |   |  |                |  
|Expected volatility          |  | 50                 | % |  | 43             | %
|Risk-free interest rates     |  | 2.3                | % |  | 4.9            | %
|Expected term (years)        |  | 0.5  2.0          |   |  | 0.5  2.0      |  
|Expected dividend yield      |  | 0                  | % |  | 0              | %

The following table summarizes the stock-based compensation expense for stock options and the
Companys employee stock purchase plan shares that was recorded in the Companys results of operations in accordance with SFAS 123R for the three months ended August 31, 2008 and 2007, respectively.



|                                                      |  |                    |     |                |   |      
|----------------------------------------------------- |  | ------------------ | --- | -------------- | - | -----
|                                                      |  | Three months ended
|(in thousands)                                        |  | August 31,2008     |     | August 31,2007
|Cost of revenues                                      |  | $                  | 103 |                | $ | 115  
|Research and development                              |  |                    | 107 |                |   | 148  
|Sales and marketing                                   |  |                    | 196 |                |   | 250  
|General and administrative                            |  |                    | 184 |                |   | 816  
|                                                      |  |                    |     |                |   |      
|Share-based compensation expense included in net loss |  | $                  | 590 |                | $ | 1,329
|                                                      |  |                    |     |                |   |      



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Included in the share-based compensation expense allocated to general and administrative expense for
the three months ended August 31, 2007 was a non-cash charge of $632,000 related to an employment agreement amendment which modified the events that trigger accelerated vesting of options and allowed for an extension to standard exercise terms.
The modification of terms created incremental compensation costs when remeasured based on the then current circumstances. Those current assumptions ranged as follows: expected volatility of 42% to 49%; risk free interest rates of 4.9% to 5.0%; and
expected term (years) of 0.75 to 3.5.

4. Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share information for all periods is presented under the requirements of SFAS No. 128, Earnings per Share.
Basic earnings per share have been computed using the weighted-average number of shares of common stock outstanding during the period. Basic earnings per share excludes the dilutive effects of options as well as any contingently issuable shares in
escrow for which specific conditions have not yet been met. 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:



|                                                                                                 |  |                    |        |   |                |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                                                                 |  | Three months ended |       
|(in thousands, except per share data)                                                            |  | August 31,2008     |        |   | August 31,2007 |  
|Net loss                                                                                         |  | $                  | (2,214 | ) |                | $ | (2,356 | )
|                                                                                                 |  |                    |        |   |                |   |        |  
|Weighted-average shares of common stock outstanding used in computing diluted net loss per share |  |                    | 29,151 |   |                |   | 28,859 |  
|Effect of dilutive employee stock options                                                        |  |                    |       |   |                |   |       |  
|                                                                                                 |  |                    |        |   |                |   |        |  
|Weighted-average shares of common stock used in computing diluted net loss per share             |  |                    | 29,151 |   |                |   | 28,859 |  
|                                                                                                 |  |                    |        |   |                |   |        |  
|Basic net loss per share                                                                         |  | $                  | (0.08  | ) |                | $ | (0.08  | )
|                                                                                                 |  |                    |        |   |                |   |        |  

Potentially dilutive stock options representing 4.0 million and 3.5 million shares of
common stock for the three months ended August 31, 2008 and 2007, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would be anti-dilutive.

5. 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:



|                                  |  |                    |        |   |                |   |        |  
|--------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                  |  | Three months ended |       
|(in thousands)                    |  | August 31,2008     |        |   | August 31,2007 |  
|Net loss                          |  | $                  | (2,214 | ) |                | $ | (2,356 | )
|                                  |  |                    |        |   |                |   |        |  
|Foreign currency translation loss |  |                    | (345   | ) |                |   | (27    | )
|                                  |  |                    |        |   |                |   |        |  
|Comprehensive loss                |  | $                  | (2,559 | ) |                | $ | (2,383 | )
|                                  |  |                    |        |   |                |   |        |  



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



6. Goodwill and Purchased Intangible Assets

Purchased intangible assets consist of acquired developed technology, customer relationships, tradenames and customer backlog acquired as part of a
purchase business combination. 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 two to seven years.

There were no additions to intangible assets during the three months ended August 31, 2008. The following tables provide a summary of the carrying
amounts of purchased intangible assets that continue to be amortized:



|                              |  |                     |        |                            |   |         |                   |  |   |        |  |          
|----------------------------- |  | ------------------- | ------ | -------------------------- | - | ------- | ----------------- |  | - | ------ |  | ---------
|                              |  | August 31, 2008     |        | WeightedAverageUseful Life
|(in thousands)                |  | GrossCarryingAmount |        | AccumulatedAmortization    |   |         | NetCarryingAmount | 
|Customer backlog              |  | $                   | 740    |                            | $ | (740    | )                 |  | $ |       |  | 2.4 Years
|Customer relationships        |  |                     | 14,920 |                            |   | (6,633  | )                 |  |   | 8,287  |  | 6.3 Years
|Tradenames                    |  |                     | 820    |                            |   | (424    | )                 |  |   | 396    |  | 5 Years  
|Acquired developed technology |  |                     | 5,890  |                            |   | (3,043  | )                 |  |   | 2,847  |  | 5 Years  
|                              |  |                     |        |                            |   |         |                   |  |   |        |  |          
|Total                         |  | $                   | 22,370 |                            | $ | (10,840 | )                 |  | $ | 11,530 |  |          
|                              |  |                     |        |                            |   |         |                   |  |   |        |  |          
|                              |  |                    
|                              |  | May 31, 2008        |        | WeightedAverageUseful Life
|(in thousands)                |  | GrossCarryingAmount |        | AccumulatedAmortization    |   |         | NetCarryingAmount | 
|Customer backlog              |  | $                   | 740    |                            | $ | (740    | )                 |  | $ |       |  | 2.4 Years
|Customer relationships        |  |                     | 14,920 |                            |   | (6,040  | )                 |  |   | 8,880  |  | 6.3 Years
|Tradenames                    |  |                     | 820    |                            |   | (383    | )                 |  |   | 437    |  | 5 Years  
|Acquired developed technology |  |                     | 5,890  |                            |   | (2,749  | )                 |  |   | 3,141  |  | 5 Years  
|                              |  |                     |        |                            |   |         |                   |  |   |        |  |          
|Total                         |  | $                   | 22,370 |                            | $ | (9,911  | )                 |  | $ | 12,459 |  |          
|                              |  |                     |        |                            |   |         |                   |  |   |        |  |          

The total expected future amortization related to purchased intangible assets will be
approximately $2,787,000, for the remainder of fiscal 2009 and $3,716,000, $3,268,000 and $1,759,000 in fiscal years 2010 through 2012, respectively.

Goodwill is reviewed annually for impairment (or more frequently if indicators of impairment arise or circumstances otherwise dictate). The Company completed its annual impairment assessment in fiscal 2008 and
concluded that goodwill was not impaired. Through the three months period ended August 31, 2008, there were no indicators of impairment of goodwill and intangible assets. The Company will complete its annual impairment assessment for fiscal
year 2009 in the fourth quarter.

There were no changes to the carrying amount of goodwill for the three months ended August 31, 2008.

7. Debt and Other Obligations

Credit Facility

Since August 2002, Saba has maintained a credit facility with a bank. The credit facility provides for (i) a term loan in a
principal amount of $6,500,000, (ii) a receivables borrowing base revolving credit line in an aggregate principal amount of up to $7,500,000 at any time outstanding, which includes a sub-limit of up to $5,000,000 for letters of credit, cash
management and foreign exchange services and (iii) an equipment facility up to a principal amount of $3,000,000. Both the term loan and the equipment facility are required to be repaid in 36 equal monthly installments of principal, plus
interest. The equipment facilitys term begins with the date of each advance under the contract. The Company obtained advances on November 30, 2006 and February 28, 2007. The maturity date of the term loan and the revolving credit
line is January 31, 2009. The interest rate applicable to the loans under the credit facility is the banks prime rate plus 0.50% for the term loan and the banks prime rate plus 0.25% for borrowings under the revolving credit line
and the equipment facility. The Company is required to pay an early termination fee



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



if the credit facility is terminated by the bank due to the occurrence of an event of default or is refinanced by another financial institution, in each
case, prior to the second anniversary of the credit facility. As of August 31, 2008, the Company had no borrowings on the term loan and outstanding obligations of $530,000 on the equipment facility. As of August 31, 2008, there were no
borrowings and $7.1 million was available under the accounts receivable borrowing base portion of the revolving credit line.

The credit
facility is secured by all of the Companys personal property other than its intellectual property. The credit facility includes certain negative covenants restricting or limiting the ability of the Company and its subsidiaries to, among other
things: encumber its intellectual property; incur additional indebtedness; create liens on its property; make certain investments and acquisitions; merge or consolidate with any other entity; convey, sell, lease, transfer or otherwise dispose of
assets; change its business; experience a change of control; pay dividends, distributions or make other specified restricted payments; and enter into certain transactions with affiliates. Such restrictions and limitations are subject to usual and
customary exceptions contained in credit agreements of this nature. In addition, the credit facility requires the Company to satisfy a minimum consolidated EBITDA covenant on a quarterly basis and a minimum liquidity covenant on a monthly basis.
EBITDA, or earnings before income tax, depreciation and amortization, also excludes share-based compensation and includes the estimated revenue that would have been recorded related to Centra Software, Inc (Centra) deferred
revenue fair value adjustment. As of August 31, 2008, the Company was in compliance with the liquidity covenant, but not in compliance with the EBITDA covenant. Subsequent to August 31, 2008, the Company and the bank entered into a waiver
for the Companys non-compliance with the EBITDA covenant at August 31, 2008. If the Company violates any of these amended restrictive covenants or otherwise breaches the credit facility agreement, the Company may be required to repay the
obligations under the credit facility prior to their stated maturity date, the Companys ability to borrow under the revolving credit line may be terminated and the bank may be able to foreclose on any collateral provided by the Company. Any of
these events, were they to occur, would likely have a material and adverse effect on the Companys business, financial condition and results of operations.

8. Restructuring

During fiscal 2006, as part of the acquisition of Centra management approved and initiated a plan to
restructure and eliminate duplicative pre-merger activities and reduce the Companys cost structure (the Centra Restructuring). Total restructuring costs associated with exiting activities were estimated to be approximately $2.4
million. The components of accrued restructuring charges and movements within these components through August 31, 2008 for the Centra Restructuring were as follows:



|                              |  |                           |     |   |                          |   |      |       |  |   |      |  
|----------------------------- |  | ------------------------- | --- | - | ------------------------ | - | ---- | ----- |  | - | ---- | -
|(in thousands)                |  | WorkforceReductionCharges |     |   | FacilitiesRelatedCharges |   |      | Total | 
|Accrual as of May 31, 2007    |  | $                         | 92  |   |                          | $ | 354  |       |  | $ | 446  |  
|Adjustments                   |  |                           | 9   |   |                          |   |     |       |  |   | (9   | )
|Deductionscash payments      |  |                           | (83 | ) |                          |   | (312 | )     |  |   | (395 | )
|                              |  |                           |     |   |                          |   |      |       |  |   |      |  
|Accrual as of May 31, 2008    |  |                           |    |   |                          |   | 42   |       |  |   | 42   |  
|Deductionscash payments      |  |                           |    |   |                          |   | (18  | )     |  |   | (18  | )
|Adjustments                   |  |                           |    |   |                          |   | (24  | )     |  |   | (24  | )
|                              |  |                           |     |   |                          |   |      |       |  |   |      |  
|Accrual as of August 31, 2008 |  | $                         |    |   |                          | $ |     |       |  | $ |     |  
|                              |  |                           |     |   |                          |   |      |       |  |   |      |  

The Company reversed all remaining unused amounts in the quarter in addition all activities are complete and no
further action will be taken.



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



9. Guarantees

Saba enters into license agreements that generally provide indemnification for its customers against intellectual property claims. To date, Saba has not incurred any costs as a result of such indemnifications and has
not accrued any liabilities related to such obligations in its consolidated financial statements.

Sabas license agreements also
generally include a warranty that its software products will substantially operate as described in the applicable program documentation for a period of generally 90 days after delivery. To date, Saba has not incurred or accrued any material costs
associated with these warranties.

10. Income Taxes

From inception through August 31, 2008, the Company has incurred net losses for federal and state tax purposes. Income tax expense for the three months ended August 31, 2008 and 2007, respectively, was
$159,000, and $118,000, respectively. Income tax expense during both of these periods consists primarily of foreign tax expense incurred as a result of local country profits and tax contingencies.

During the first quarter of fiscal year 2009, the unrecognized tax benefits decreased by $83,000. The decrease is mainly the result of the Companys
continuing effort to reserve for tax contingencies.

As of August 31, 2008 and May 31, 2008, respectively, the Company has
established a valuation allowance against the full amount of any net deferred tax assets. The Company currently provides a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of its deferred tax
assets, will not be realized.

11. Segment Information

Saba operates in a single operating segment, providing software and services that drive organizational excellence by bringing a disciplined approach to aligning, developing, and managing people across the entire
organization.

12. Litigation

Litigation Relating
to Initial Public Offering of Saba

In November 2001, a complaint was filed in the United States District Court for the Southern
District of New York (the District Court) against the Company, certain of its officers and directors, and certain underwriters of the Companys initial public offering. The complaint was purportedly filed on behalf of a class of
certain persons who purchased the Companys common stock between April 6, 2000 and December 6, 2000. The complaint alleges violations by the Company and its officers and directors of Section 11 of the Securities Act of 1933, as
amended (the Securities Act), Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and other related provisions in connection with certain alleged compensation arrangements entered into by
the underwriters in connection with the initial public 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
allege that the prospectus and the registration statement for the initial public offering failed to disclose that the underwriters allegedly solicited and received excessive commissions from investors and that some investors in the
initial public offering agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Companys stock. The complaints were later consolidated into a single action. The complaint seeks unspecified
damages, attorney and expert fees, and other unspecified litigation costs.

On July 1, 2002, the underwriter defendants in the
consolidated actions moved to dismiss all of the actions, including the action involving the Company. On July 15, 2002, the Company, along with other non-underwriter defendants in the coordinated cases, moved to dismiss the litigation. On
February 19, 2003, the District Court ruled



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



on the motions. The District Court granted the Companys motion to dismiss the claims against it under Rule 10b-5, due to the insufficiency of the
allegations against the defendants. The District Court also granted the motion of the individual defendants, Bobby Yazdani and Terry Carlitz, the Companys Chief Executive Officer and Chairman of the Board and former Chief Financial Officer and
a member of the Companys Board of Directors, to dismiss the claims against them under Rule 10b-5 and Section 20 of the Exchange Act. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually
all of the defendants in the consolidated cases, including the Company.

In June 2003, a proposed collective partial settlement of this
litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers insurance companies. In June 2004, an agreement of partial settlement
was submitted to the District Court for preliminary approval. The District Court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005 the District Court issued a preliminary
order further approving the modifications to the settlement and certifying the settlement classes. The District Court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all
settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.

While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The District Court directed that the litigation proceed within a number of focus
cases rather than in all of the 310 cases that have been consolidated. The Companys case is not one of these focus cases. On October 13, 2004, the District Court certified the focus cases as class actions. The underwriter defendants
appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the District Courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for
rehearing. In light of the Second Circuit opinion, counsel for the issuer defendants informed the District Court that this settlement could not be approved because the defined settlement class, like the litigation class, could not be certified. On
June 25, 2007, the District Court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and on September 27,
2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the District Court denied the
motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the
class certification motion was completed in May 2008. On October 3, 2008, plaintiffs submitted a proposed order withdrawing the class certification motion without prejudice.

The Company intends to dispute these claims and defend the law suit vigorously. However, due to the inherent uncertainties of litigation, the Company
cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely affect the Companys business, financial condition and results of operations.

Litigation Relating to Centras Initial Public Offering

Centra, certain of its former officers and directors and the managing underwriters of Centras initial public offering were named as defendants in an action filed in the District Court. The plaintiffs filed an initial complaint on
December 6, 2001 and purported to serve the Centra defendants on or about March 18, 2002. The original complaint has been superseded by an amended complaint filed in April 2002. The action, captioned in re Centra Software, Inc. Initial
Public Offering Securities Litigation, No. 01 CV 10988, is purportedly brought on behalf of the class of persons who purchased Centras common stock between February 3, 2000 and December 6, 2000. The complaint asserts
claims under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act. The complaint alleges that, in connection with Centras initial public offering in February 2000, the underwriters received undisclosed
commissions from certain investors in exchange for allocating shares to them and also agreed to allocate shares to certain customers in exchange for the agreement of those customers to purchase additional shares in the aftermarket at pre-determined
prices. The complaint asserts that Centras registration statement and prospectus for the offering were materially false and misleading due to their failure to disclose these alleged arrangements. The complaint seeks damages in an unspecified
amount against Centra and the named individuals. Similar complaints have been filed against hundreds of other issuers that have had initial public offerings since 1998; the complaints have been consolidated into an action captioned in re Initial
Public Offering Securities Litigation, No. 21 MC 92.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all the
actions, including the action involving Centra. On July 15, 2002, Centra, along with other non-underwriter defendants in the coordinated cases, moved to dismiss the litigation. On October 9, 2002, the plaintiffs dismissed, without
prejudice, the claims against the named Centra officers and directors in the above-referenced action. On February 19, 2003, the District Court issued an order denying the motion to dismiss the claims against Centra under Rule 10b-5. The motions
to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including Centra.

In June 2003, a proposed collective partial settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as
defendants, and the issuers insurance companies. In June 2004, an agreement of settlement was submitted to the District Court for preliminary approval. The District Court granted the preliminary approval motion on February 15, 2005,
subject to certain modifications. On August 31, 2005 the District Court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The District Court also appointed the notice
administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at
that time.

While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The
District Court directed that the litigation proceed within a number of focus cases rather than in all of the 310 cases that have been consolidated. The Companys case is not one of these focus cases. On October 13, 2004, the
District Court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the District Courts class certification decision. On
April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuit opinion, counsel for the issuer defendants informed the District Court that this settlement could not be approved because the
defined settlement class, like the litigation class, could not be certified. On June 25, 2007, the District Court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated
amended class action complaints against the focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended
class action complaints. On March 26, 2008, the District Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those
who purchased outside the previously certified class period. Briefing on the class certification motion was completed in May 2008. On October 3, 2008, plaintiffs submitted a proposed order withdrawing the class certification motion without
prejudice.

On December 28, 2007, the underwriter defendants moved to strike class allegations in 26 cases, including Centras,
in which the plaintiffs failed to identify proposed class representatives, and the issuer defendants joined in the motion. On May 13, 2008, the District Court granted the motion in part and struck the class allegations in eight cases in which
the proposed class representative was not a member of the class. The District Court denied the motion with respect to the remaining 18 cases, including Centras case. For those 18 cases, the plaintiffs must notify the defendants and the
District Court by October 30, 2008 of the identity of the putative class representatives and the basis of each putative representatives claim, and indicate whether the putative representatives are members of the proposed class. The
defendants may renew their motion to strike class allegations if the plaintiffs fail to identify the putative class representatives within the allocated time or if the putative representatives are not members of the proposed class.

The Company, on behalf of Centra, intends to dispute these claims and defend the law suit vigorously. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely affect the Companys business, financial condition and results of operations.



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Litigation Relating to Claim of Patent Infringement by Centra

On August 19, 2003, a complaint was filed against Centra and two other defendants by EdiSync Systems, LLC, in the United States District Court for
the District of Colorado (No. 03-D-1587 (OES)) (the Colorado District Court). The complaint alleges infringement of two patents for a remote multiple user editing system and method and seeks permanent injunctive relief against
continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses associated with the litigation. Centra has filed an answer to the complaint denying all of the allegations. No amount has been accrued
related to this matter and legal costs incurred in the defense of the matter are being expensed as incurred. Centra filed a request for reexamination of the patents at issue with the U.S. Patent and Trademark Office (the Patent
Office). The Companys patent counsel is of the opinion that claims of the patents involved in the suit are invalid. The re-examination request was accepted by the Patent Office and the Colorado District Court has approved the
parties motion to stay the court proceedings during the re-examination proceedings. A reexamination certificate has issued for one of the patents that canceled all of the patents claims, thus rendering that patent of no further
force or effect. On July 17, 2008, the Patent Office issued an advisory action in the other reexamination proceeding confirming the rejection of all of the patents original claims and allowing certain newly-added claims. The Company
therefore expects that a reexamination certificate will issue in due course that will cancel all of the patents original claims and indicate that only the newly-added claims are patentable. If that happens, the Company will be free from
liability for past actions, as the newly-added claims would be enforceable only prospectively as of the issue date of the anticipated reexamination certificate. The Company believes that it has meritorious defenses with respect to any future
claims and intends to vigorously defend this action. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome of the litigation could
materially and adversely affect the Companys business, financial condition and results of operations.

Litigation Relating to Claim of
Patent Infringement by Saba

On November 19, 2007, a complaint was filed against the Company and ten other defendants by Gemini IP,
LLC, in the United States District Court for the Eastern District of Texas (No. 07-CV-521) (the Texas District Court). The complaint alleges infringement of a patent directed to a method for processing client help requests using a
computer network and seeks permanent injunctive relief against continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses associated with the litigation. The Company has filed an answer to the
complaint denying all of the allegations. At the Companys request, the United States Patent and Trademark Office (the Patent Office) has instituted reexamination proceedings against the asserted patent and the Texas District
Court has stayed the action pending the outcome of those proceedings. The Company believes that it has meritorious defenses with respect to the asserted patent and intends to vigorously defend this action. However, due to the inherent
uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome of the litigation could materially and adversely affect the Companys business, financial condition and
results of operations.

Other Litigation

The Company 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 the Company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 the Company.



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(Unaudited)



13. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair
value hierarchy used to classify the source of the information. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:



| |  |  | Level 1: quoted prices in active markets for identical assets and liabilities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2: inputs other than Level 1 that are observable, either directly and indirectly, such as quoted prices in active markets for similar assets or liabilities,
quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of
August 31, 2008 (Level 1 input is defined above):



|                       |  |                                       |      
|---------------------- |  | ------------------------------------- | -----
|                       |  | Fair ValueMeasurementsUsing InputType
|(in thousands)         |  | Level 1                              
|Assets:                |  |                                       |      
|Money market funds     |  | $                                     | 6,590
|                       |  |                                       |      
|Total financial assets |  | $                                     | 6,590
|                       |  |                                       |      

Our valuation techniques used to measure the fair values of our money market funds were derived from quoted market
prices.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement
No. 157. Collectively, the Staff Positions defer the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or
disclosed at fair value on a recurring basis at least annually, and amended the scope of SFAS No. 157. The Company adopted SFAS No. 157 except for those items specifically deferred under FSP No. FAS 157-2. The adoption of SFAS No. 157
did not have a material impact on the Companys condensed consolidated financial statements and the Company is currently evaluating the impact of the full adoption of SFAS No. 157 on its condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS
No. 159 allows entities to voluntarily choose, at specified election dates, to measure certain financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value
(the fair value option). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that
instrument shall be reported in earnings. Adoption of SFAS No. 159 did not have a material impact on the Companys condensed consolidated financial statements.

In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 did not have a material impact on the Companys condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised) (SFAS No. 141(R)), Business Combinations. SFAS
No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and
loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the
acquirers income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company will be required to adopt SFAS No. 141(R) in the first
quarter of fiscal year 2010.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible
Assets. This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(R) when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or
extension.



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SABA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS No. 142s entity-specific factors. FSP No. FAS 142-3 is effective for
the Company beginning June 1, 2009.

14. Related Party Transactions

During the three months ended August 31, 2008, Saba licensed its software and sold related support and services to Varian Medical Systems, Inc.
(Varian) and Duck Creek Technologies, Inc. (Duck Creek) in the aggregate amounts of $52,000 and $4,000 respectively. For the three months ended August 31, 2007, Saba licensed its software and sold related support and
services to Varian and Masimo Corporation (Masimo) in the aggregate amounts of $116,000 and $6,000, respectively.

At
August 31, 2008, Sabas accounts receivable included $67,000 due from Varian and $29,000 due from Masimo. At May 31, 2008, Sabas accounts receivable included $29,000 due from Masimo, $20,000 due from Varian and $1,600 due from
Duck Creek. The Executive Vice President of Varian, the Chairman and Chief Executive Officer of Masimo and a member of the Duck Creeks Board of Directors serve as directors on Sabas Board of Directors.



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|ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes contained herein and the
information included in our other filings with the Securities and Exchange Commission. This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward-looking
statements. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may 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 Part II, Item 1A: Risk Factors of this Quarterly Report on Form 10-Q. All forward-looking statements and risk factors included in this document are made as of the date of
this report, based on information available to us as of such date. We assume no obligation to update any forward-looking statement or risk factor.

Forward-looking statements include statements regarding:

(i) in Part I, Item 1,



| |  |  | future amortization related to intangible assets,
| | - |  | -------------------------------------------------



| |  |  | our anticipation that we will not pay any cash dividends in the foreseeable future,
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the resolution and effect of pending litigation,
| | - |  | ------------------------------------------------



| |  |  | the effect of recent accounting changes,
| | - |  | ----------------------------------------



| |  |  | our expectation that the Patent Office will issue a reexamination certificate that will cancel all of the patents original claims and indicate that only
the newly added claims are patentable.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(ii) in Part I, Item 2,



| |  |  | our belief that the acquisition of Centra strengthened our competitive position and provided us with a broader and deeper product offering,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that the Saba Enterprise Suite and Saba Centra product suite will generate substantially all of our license revenues for the foreseeable
future,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that OnDemand revenue will continue to grow for the foreseeable future,
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our belief that license updates and product support revenue will continue to grow for the foreseeable future due to our expanded customer base,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation that a substantial majority of our customers will renew their annual contracts and the sale of new licenses will increase the number of
customers that purchase license updates and product support,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectations regarding future levels of research and development expenses,
| | - |  | ------------------------------------------------------------------------------



| |  |  | our expectations relating to future amortization expenses,
| | - |  | ----------------------------------------------------------



| |  |  | our expectations relating to future general and administrative expenses,
| | - |  | ------------------------------------------------------------------------



| |  |  | our anticipation that we will continue to experience long sales cycles,
| | - |  | -----------------------------------------------------------------------



| |  |  | our anticipation 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,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectations regarding future levels of sales and marketing expenses,
| | - |  | -------------------------------------------------------------------------



| |  |  | our anticipation that we will not pay any cash dividends in the foreseeable future;
| | - |  | -----------------------------------------------------------------------------------

(iii) in Part II, Item 1,



| |  |  | the resolution and effect of pending litigation,
| | - |  | ------------------------------------------------

(iv) in Part II, Item 1A,



| |  |  | our expectation that we will derive substantially all of our revenues for the foreseeable future from the licensing of the Saba Enterprise Suite and the Saba
Centra product suite and providing related services,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation to continue to incur non-cash expenses relating to the amortization of purchased intangible assets along with any potential goodwill
impairment,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that our operating results will fluctuate significantly in the future,
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our success depending on our ability to attract and retain additional personnel,
| | - |  | --------------------------------------------------------------------------------



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| |  |  | our expectation that competition and the pace of change will increase in the future,
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our intention to expand our international presence in the future,
| | - |  | -----------------------------------------------------------------



| |  |  | our expectation to continue to acquire complementary businesses or technologies,
| | - |  | --------------------------------------------------------------------------------



| |  |  | our expectation to regularly release new products and new versions of our existing products,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our belief regarding the Edisync Systems litigation,
| | - |  | ----------------------------------------------------



| |  |  | our belief that our success depends on our proprietary technology, and
| | - |  | ----------------------------------------------------------------------



| |  |  | our belief that our success depends on the acceptance and successful integration by customers of our products.
| | - |  | --------------------------------------------------------------------------------------------------------------

These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those projected or assumed in such
forward-looking statements. Among the factors that could cause actual results to differ materially are:



| |  |  | defects and other problems with our products,
| | - |  | ---------------------------------------------



| |  |  | unanticipated adverse changes in the international markets,
| | - |  | -----------------------------------------------------------



| |  |  | incorrect estimates or assumptions,
| | - |  | -----------------------------------



| |  |  | unanticipated adverse results for pending litigation,
| | - |  | -----------------------------------------------------



| |  |  | contraction of the economy and world markets,
| | - |  | ---------------------------------------------



| |  |  | lack of demand for information technologies from our customers,
| | - |  | ---------------------------------------------------------------



| |  |  | requirements for increased spending in research and development,
| | - |  | ----------------------------------------------------------------



| |  |  | unanticipated need for capital for operations,
| | - |  | ----------------------------------------------



| |  |  | lack of demand for our products,
| | - |  | --------------------------------



| |  |  | negative effects of amortization rates
| | - |  | --------------------------------------



| |  |  | inability to accurately predict the impact of new accounting pronouncements,
| | - |  | ----------------------------------------------------------------------------



| |  |  | unanticipated difficulties integrating and developing products acquired through acquisitions,
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | inability to introduce new products, and
| | - |  | ----------------------------------------

the factors detailed under Part II, Item 1A: Risk Factors of this Quarterly Report on Form 10-Q.

OVERVIEW

General

We help organizations
manage their most important assettheir people. We provide the premier software platform for enterprise learning, collaboration, performance, and talent management, as well as license updates and product support, OnDemand, implementation,
training, and consulting services. Our people management solutions drive organizational excellence by bringing a disciplined approach to aligning, developing and managing people across the entire organization.

By using Saba to manage their extended workforce, our customers achieve demonstrably higher levels of performance through:



| |  |  | Increased productivity, sales and service effectiveness
| | - |  | -------------------------------------------------------



| |  |  | Reduced personnel development and training costs; and
| | - |  | -----------------------------------------------------



| |  |  | Improved organizational agility and execution.
| | - |  | ----------------------------------------------

Our solutions help our customers through the implementation of a management system for aligning goals, developing and motivating people and measuring results. By implementing our solutions, organizations are better
equipped to: align their workforce around the organizations business objectives; effectively manage growing regulatory requirements; increase sales and channel readiness; accelerate the productivity of new people joining the extended
enterprise of employees, customers, partners, and suppliers; increase both the speed of customer acquisition and long-term customer loyalty; shorten time-to-market of new products; and improve visibility into organizational performance.



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Background

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 Enterprise Learning
products and began to generate revenues from software license fees, implementation and consulting services fees and support fees in April 1998.

On May 5, 2005, we completed the acquisition of THINQ Learning Solutions, Inc. (THINQ), a provider of enterprise learning management solutions which allowed us to expand our customer base and provided greater scale to
increase our investment in research and development to accelerate innovation and increase stockholder value.

On January 31, 2006, we
completed the acquisition of Centra Software, Inc. (Centra), a provider of online learning and training software and services. We believe our acquisition of Centra strengthened our competitive position in the human capital management
market and provided us with a broader and deeper product offering. In addition, as a result of the acquisition our customer base substantially increased. The Centra acquisition included total purchase consideration of $62.3 million.

Our corporate headquarters are located in Redwood Shores, California. We have an international presence in Australia, Canada, France, Germany, India,
Japan, and the United Kingdom through which we conduct various operating activities related to our business. In each of the non-U.S. jurisdictions in which we have subsidiaries, other than India, we have employees or consultants engaged in sales and
services activities. In the case of our India subsidiary, our employees primarily engage in software development and quality assurance testing activities.

Sources of Revenue

We generate revenues from the sale of software licenses, OnDemand services, annual license updates and
product support, and professional services.

Software Licenses

We license our software solutions in multi-element arrangements that include a combination of our software, license updates and product support and/or professional services. A significant amount of our license sales
are for perpetual licenses. To date, a substantial majority of our software license revenue has been derived from the Saba Learning product suite. For the foreseeable future, we expect the Saba Enterprise Suite and Saba Centra product suite to
generate substantially all of our software license revenue. Our license revenue is affected by the strength of general economic and business conditions, as well as customers budgetary cycles and the competitive position of our software
products. In addition, the sales cycle for our products is long, typically six to twelve months. The timing of a few large software license transactions can substantially affect our quarterly license revenue.

OnDemand

OnDemand revenue includes revenue derived
from term-based managed application services. These services are provided pursuant to customer agreements with terms typically ranging from one to three years. The associated OnDemand revenue is recognized ratably over the term of the agreement. We
believe that OnDemand revenue will continue to grow for the foreseeable future as we anticipate that a substantial majority of our customers will renew their contracts on expiration and that we will continue to add new OnDemand customers.

Licenses Updates and Product Support

License updates and product support includes the right to receive future unspecified updates for the applicable software product and technical support. We typically sell license updates and product support for an initial period of one year
concurrently with the sale of the related software license. After the initial period, license updates and product support is renewable on an annual basis at the option of the customer. Our license updates and product support revenue depends upon
both our sales of additional software licenses and annual renewals of existing license updates and product support agreements. We believe that license updates and product support revenue will grow steadily for the foreseeable future as we anticipate
that a substantial majority of our customers will renew their annual contracts and the sale of new software licenses will increase the number of customers that purchase license updates and product support.



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Professional Services

Our professional services business consists of consulting, education and strategic services. Consulting and education services are typically provided to customers that license software directly from us. These
consulting and education services are generally provided over a period of three to nine months after licensing the software. Generally, consulting services related to software implementation are not considered essential to the functionality of the
software. Our consulting and education services revenue varies directly with the levels of license revenue generated from our direct sales organization in the preceding three to nine month period. In addition, our consulting and education services
revenue varies following our commercial release of significant software updates as our customers generally engage our services to assist with the implementation of their software update. We provide consulting services on a time and materials basis
and on a fixed fee basis. Strategic services are less dependent than consulting and education services on the sale of our licenses. Strategic services present additional opportunities that arise at different times throughout a customer life cycle.
In arrangements that include professional services and OnDemand offerings, but not a license of our software, we recognize revenue for professional services as the services are performed if these professional services qualify as a separate element
of the arrangement. If the professional services do not qualify as a separate element of the arrangement, the related revenue is combined with the subscription revenue and recognized ratably over the subscription service period.

Cost of Revenue

Our cost of revenue primarily
consists of compensation, employee benefits and out-of-pocket travel-related expenses for our employees, including our OnDemand and license update and product support personnel, and the fees of third-party subcontractors, who provide professional
services to our clients. Additionally, costs of revenue also includes external hosting fees and depreciation and amortization charges on the necessary OnDemand infrastructure, third-party license royalty costs, and overhead allocated based on
headcount and reimbursed expenses. The amortization of acquired developed technology, comprised of the ratable amortization of technological assets acquired in the acquisition of Centra in 2006, is also included in the cost of revenue. Many factors
affect our cost of revenue, including changes in the mix of products and services, pricing trends and changes in the amount of reimbursed expenses. Because cost as a percentage of revenues is higher for services than for software licenses, an
increase in services, including OnDemand services, as a percentage of our total revenue would reduce gross profit as a percentage of total revenue.

Additionally, when our professional services revenue is combined with our OnDemand subscription revenue, we also defer the direct costs related to the professional services and recognize them ratably over the applicable service period. We
categorize deferred revenue and deferred costs on our consolidated balance sheet as current if we expect to recognize such revenue or cost within the following twelve months. As of August 31, 2008, the deferred balance of the professional
services revenue related to such OnDemand offerings and the related deferred costs was $1.0 million and $829,000, respectively. When the revenue from professional services is recognized ratably over the subscription service period, we allocate the
revenue to professional services revenue and to OnDemand revenue based on the VSOE of fair value for similar professional services that qualify as a separate element of the arrangement. Our judgment as to whether the consulting services qualify as a
separate unit of accounting may materially affect the timing of our revenue recognition and our results of operations.

Operating Expenses

We classify all operating expenses, except amortization of purchased intangible assets and in-process research and development, 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 (including stock-based
compensation), employee benefits, travel and entertainment costs, and allocated communication, rent and depreciation costs. We allocate communication, rent and depreciation costs to each of the functional areas that derive a benefit from such costs
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, administrative and professional services fees.



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CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. 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 a number of accounting policies, methods and estimates affect our financial statements, areas that are particularly
significant include revenue recognition policies, the allowance for doubtful accounts, the assessment of recoverability of goodwill and purchased intangible assets and restructuring costs. We have reviewed the critical accounting policies described
in the following paragraphs with the Audit Committee of our Board of Directors.

Revenue recognition. We recognize license revenue
addressed below 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 revenue when all of the following conditions are met:



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



| |  |  | delivery has occurred;
| | - |  | ----------------------



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



| |  |  | collection is probable.
| | - |  | -----------------------

SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. We have analyzed each element in our multiple element
arrangements and determined that we have sufficient VSOE to allocate revenues to certain OnDemand offerings, license updates and product support and professional services. Accordingly, assuming all other revenue recognition criteria are met,
revenues from perpetual licenses are recognized upon delivery using the residual method in accordance with SOP 98-9. 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.

License revenues from
licenses with a term of three years or more are generally recognized on delivery if the other conditions of SOP 97-2 are satisfied. We do not grant our resellers the right of return and we do not recognize revenue from resellers until an
end-user has been identified and the other conditions of SOP 97-2 are satisfied. License revenues from licenses with a term of less than three years are generally recognized ratably over the term of the arrangement. License updates and product
support revenue is also recognized ratably over the term of the arrangement, typically 12 months. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the
arrangement, we allocate the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products.

Revenue related to professional services is generally recognized as the services are performed. Although we provide professional services on a time and
materials basis, a portion of these services is provided on a fixed-fee basis. For services performed on a fixed fee basis, revenues are generally recognized on the proportional performance of the project, with performance measured based on hours of
work performed. For contracts that involve significant customization and implementation or professional services that are essential to the functionality of the software, the license and services revenues are recognized using the
percentage-of-completion method or, if we are unable to reliably estimate the costs to complete the services, we use the completed contract method of accounting in accordance with SOP 97-2 and relevant guidance of SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. A contract is considered complete when all significant costs have been incurred or the item has been accepted by the customer.



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Revenue from our OnDemand offerings is recognized as a service arrangement whereby the revenue is
recognized ratably over the term of the arrangement or on an as-used basis if defined in the contract. Certain of our OnDemand offerings are integrated offerings pursuant to which the customers ability to access our software is not separable
from the services necessary to operate the software and customers are not allowed to take possession of our software, in which case revenue is recognized under the SECs Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. Our OnDemand offerings also include arrangements with customers that have separately licensed and taken possession of our software. When these OnDemand offerings are part of a multiple element arrangement involving licenses, we
recognize revenue in accordance with SOP 97-2.

If the requirements of SOP 97-2 are not met when Saba bills a customer or a customer pays
us, the billed or paid amount is recorded as deferred revenue, a liability account. As the revenue recognition principals of SOP 97-2 are satisfied, the requisite amounts are recognized as revenue. In arrangements that include professional services
and OnDemand offerings, but not a license of our software, we recognize revenue for professional services as the services are performed if these professional services qualify as a separate element of the arrangement. If the professional services do
not qualify as a separate element of the arrangement, the related revenues are combined with the subscription revenue and recognized ratably over the subscription service period. Additionally, we defer the direct costs related to the professional
services and recognize them ratably over the applicable service period. We categorize deferred revenue and deferred costs on our condensed consolidated balance sheet as current if we expect to recognize such revenue or cost within the following
twelve months. As of August 31, 2008, the deferred balance of the professional services revenue related to such OnDemand offerings and the related deferred costs was $1.0 million and $829,000, respectively. When the revenue from professional
services is recognized ratably over the subscription service period, we allocate the revenue to professional services revenue and to OnDemand revenue based on the VSOE of fair value for similar professional services that qualify as a separate
element of the arrangement. Our judgment as to whether the consulting services qualify as a separate unit of accounting may materially affect the timing of our revenue recognition and our results of operations.

Allowance for doubtful accounts. Accounts receivable are recorded net of allowance for doubtful accounts and totaled $21.4 million as of
August 31, 2008. The allowance for doubtful accounts, which totaled $310,000 as of August 31, 2008, is based on our assessment of the amount of probable credit losses in the existing accounts receivable. We determine the allowance based on
the aging of the accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. Past due balances based on order terms and other specific accounts as necessary are
reviewed monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 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. We account for goodwill and other intangibles under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Our goodwill balance at August 31, 2008 and May 31, 2008 was $37.7 million, including $22.9 million and $9.5 million recorded as a result of our acquisitions of Centra and THINQ, respectively. As of August 31, 2008, our purchased
intangible assets balance was $11.5 million, net of accumulated amortization. The total expected future amortization related to purchased intangible assets will be approximately $2,787,000, for the remainder of fiscal 2009 and $3,716,000, $3,268,000
and $1,759,000 in fiscal years 2010 through 2012, respectively.

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 consider Saba to be a single reporting unit. Accordingly, all of our goodwill is associated with the entire company. We perform the
required impairment analysis of goodwill annually or on a more frequent basis if indicators or impairment arise or circumstances otherwise dictate. Any reduction of enterprise fair value below the recorded amount of stockholders equity could
require us to write down the value of and record an expense for an impairment loss.

Share-based compensation. On June 1, 2006,
we adopted SFAS 123R, Share-Based Payment, under the modified prospective method. SFAS 123R generally requires share-based payments to employees to be recognized in our consolidated statements of operations based on their fair values. Prior
to June 1, 2006, we accounted for our



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share-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board (APB) Opinion
No. 25, (APB 25), Accounting for Stock Issued to Employees and applied the disclosure provisions of SFAS 123R, Accounting for Stock-Based Compensation, as amended. Under APB 25, we generally did not recognize any
compensation expense for stock options granted to employees or outside directors as the exercise price of our options was equivalent to the market price of our common stock on the date of grant. For pro forma disclosures of share-based compensation
prior to June 1, 2006, the estimated fair values for options granted and options assumed were amortized using the accelerated expense attribution method. In addition, we reduced pro forma share-based compensation expense for actual forfeitures
in the periods they occurred. In March 2005, the SEC issued SAB 107, which provides supplemental implementation guidance for SFAS 123R. We applied the provisions of SAB 107 in our adoption of SFAS 123R.

Upon our adoption of SFAS 123R, we were required to estimate the awards that we ultimately expect to vest and to reduce share-based compensation
expense for the effects of estimated forfeitures of awards over the expense recognition period. Although we estimate forfeitures based on historical experience, forfeitures in the future may differ. Under SFAS 123R, the forfeiture rate must be
revised if actual forfeitures differ from our original estimates. Also in connection with our adoption of SFAS 123R, we elected to recognize awards granted after our adoption date under the straight-line amortization method.

We estimate the fair value of employee stock options using the Black-Scholes-Merton (BSM) pricing model. The fair value of an award is
affected by our stock price on the date of grant as well as other assumptions including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.
The risk-free interest rate assumption is based upon United States treasury interest rates appropriate for the expected life of the awards. We estimate the volatility of our common stock based upon our historical stock price volatility over the
length of the expected term of the stock option. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. Our expected dividend rate is zero since
we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. Collectively, the
Staff Positions defer the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring
basis at least annually, and amend the scope of SFAS No. 157. We adopted SFAS No. 157 except for those items specifically deferred under FSP No. FAS 157-2. The adoption of SFAS No. 157 did not have a material impact on our condensed
consolidated financial statements and we are currently evaluating the impact of the full adoption of SFAS No. 157 on our condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities to voluntarily choose, at specified election dates,
to measure certain financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value (the fair value option). The election is made on an
instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. Adoption of SFAS
No. 159 did not have a material impact on our condensed consolidated financial statements.



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In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be
deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The adoption of
EITF 07-3 did not have a material impact on our condensed consolidated financial statements.

In December 2007, the FASB issued SFAS
No. 141 (revised) (SFAS No. 141(R)), Business Combinations. SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirers income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. We will be required to adopt SFAS No. 141(R) in the first quarter of fiscal year 2010.

In April 2008, the
FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) when the underlying arrangement includes renewal or extension of terms that would require substantial costs
or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142s entity-specific factors. FSP No. FAS 142-3 is effective for us beginning June 1, 2009.



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RESULTS OF OPERATIONS

THREE MONTHS ENDED AUGUST 31, 2008 AND 2007

Revenues



|                                    |  |                    |        |                         |     |   |                |   |                         |  |     |  
|----------------------------------- |  | ------------------ | ------ | ----------------------- | --- | - | -------------- | - | ----------------------- |  | --- | -
|                                    |  | Three months ended |       
|(dollars in thousands)              |  | August 31,2008     |        | Percentof TotalRevenues |     |   | August 31,2007 |   | Percentof TotalRevenues | 
|Revenues:                           |  |                    |        |                         |     |   |                |   |                         |  |     |  
|License                             |  | $                  | 2,958  |                         | 12  | % |                | $ | 4,730                   |  | 19  | %
|License updates and product support |  |                    | 8,641  |                         | 34  | % |                |   | 8,817                   |  | 35  | %
|OnDemand                            |  |                    | 4,918  |                         | 19  | % |                |   | 4,427                   |  | 17  | %
|Professional services               |  |                    | 8,782  |                         | 35  | % |                |   | 7,478                   |  | 29  | %
|                                    |  |                    |        |                         |     |   |                |   |                         |  |     |  
|Total revenues                      |  | $                  | 25,299 |                         | 100 | % |                | $ | 25,452                  |  | 100 | %
|                                    |  |                    |        |                         |     |   |                |   |                         |  |     |  

Total Revenues. Total revenues decreased by $152,000 during the three months ended
August 31, 2008 compared to the three months ended August 31, 2007. As a percentage of total revenues, revenues from customers outside the United States represented 27% for the three months ended August 31 2008 and 32% for the three
months ended August 31, 2007.

License Revenue. License revenue decreased by $1.8 million, or 38%, during the three months
ended August 31, 2008 compared to the three months ended August 31, 2007. The decrease is primarily attributable to a continued shift from license to OnDemand transactions as well as contractual terms included in a number of license
transactions signed during the quarter that precluded revenue recognition on those licenses.

License Updates and Product Support
Revenue. License updates and product support revenue decreased by $176,000, or 2%, during the three months ended August 31, 2008 compared to the three months ended August 31, 2007. The decrease is primarily attributable to higher
license update and product support revenue in the three months ended August 31, 2007, related to reactivation of previously expired contracts, as renewal rates remained relatively constant for the past twelve months.

OnDemand Revenue. OnDemand revenue increased by $491,000, or 11%, during the three months ended August 31, 2008 compared to the three months
ended August 31, 2007. The increase is primarily attributable to a high rate of renewals coupled with the sale of additional OnDemand services over the past twelve months.

Professional Services Revenue. Professional services revenue increased by $1.3 million, or 18%, during the three months ended August 31, 2008
compared to the three months ended August 31, 2007. The increase is due to increased demand for our consulting services from our expanded customer base.

International revenue as a percentage of total revenues and the mix of license and services revenue as a percentage of total revenues have varied significantly primarily due to variability in new license sales.

Cost of Revenues



|                                              |  |                    |        |                         |    |   |                |   |                         |  |    |  
|--------------------------------------------- |  | ------------------ | ------ | ----------------------- | -- | - | -------------- | - | ----------------------- |  | -- | -
|                                              |  | Three months ended |       
|(dollars in thousands)                        |  | August 31,2008     |        | Percentof TotalRevenues |    |   | August 31,2007 |   | Percentof TotalRevenues | 
|Cost of revenues:                             |  |                    |        |                         |    |   |                |   |                         |  |    |  
|Cost of license                               |  | $                  | 213    |                         | 1  | % |                | $ | 195                     |  | 1  | %
|Cost of license updates and product support   |  |                    | 2,207  |                         | 9  | % |                |   | 2,221                   |  | 9  | %
|Cost of OnDemand                              |  |                    | 2,426  |                         | 10 | % |                |   | 1,631                   |  | 6  | %
|Cost of professional services                 |  |                    | 5,916  |                         | 23 | % |                |   | 5,414                   |  | 21 | %
|Amortization of acquired developed technology |  |                    | 295    |                         | 1  | % |                |   | 294                     |  | 1  | %
|                                              |  |                    |        |                         |    |   |                |   |                         |  |    |  
|Total cost of revenues                        |  | $                  | 11,057 |                         | 44 | % |                | $ | 9,755                   |  | 38 | %
|                                              |  |                    |        |                         |    |   |                |   |                         |  |    |  



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The following table is a summary of gross margin:



|                                                                  |  |                    |        |   |                |   |        |  
|----------------------------------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                                  |  | Three months ended |       
|(dollars in thousands)                                            |  | August 31,2008     |        |   | August 31,2007 |  
|Gross margin:                                                     |  |                    |        |   |                |   |        |  
|License (including amortization of acquired developed technology) |  | $                  | 2,450  |   |                | $ | 4,241  |  
|Percentage of license revenue                                     |  |                    | 83     | % |                |   | 90     | %
|License updates and product support                               |  |                    | 6,434  |   |                |   | 6,596  |  
|Percentage of license updates and product support revenue         |  |                    | 74     | % |                |   | 75     | %
|OnDemand                                                          |  |                    | 2,492  |   |                |   | 2,796  |  
|Percentage of OnDemand revenue                                    |  |                    | 51     | % |                |   | 63     | %
|Professional services                                             |  |                    | 2,866  |   |                |   | 2,064  |  
|Percentage of professional services revenue                       |  |                    | 33     | % |                |   | 28     | %
|                                                                  |  |                    |        |   |                |   |        |  
|Total                                                             |  | $                  | 14,242 |   |                | $ | 15,697 |  
|Percentage of total revenues                                      |  |                    | 56     | % |                |   | 62     | %

Cost of License Revenue. Cost of license revenue increased slightly during the three months
ended August 31, 2008 when compared to the three months ended August 31, 2007 due to an increase in third party royalty costs. Gross margin on license revenue decreased to 83% during the three months ended August 31, 2008 from 90%
during the three months ended August 31, 2007. The decrease in gross margin is the result of the decrease in license revenue while the cost of license revenue remained relatively flat.

Cost of License Updates and Product Support Revenue. Cost of license updates and product support revenue decreased slightly during the three
months ended August 31, 2008 when compared to the three months ended August 31, 2007. Gross margin on license updates and product support was 74% during the three months ended August 31, 2008 and 75% during the three months ended
August 31, 2007. The one point decrease in gross margins is due to slightly lower license update and product support revenue with a relatively flat cost of license update and product support.

Cost of OnDemand Revenue. Cost of OnDemand revenue increased by $795,000, or 49%, during the three months ended August 31, 2008 compared to
the three months ended August 31, 2007. The increase in the cost of OnDemand revenue is primarily due to increases in external hosting fees of $211,000 to support our growing hosting infrastructure, personnel costs of $200,000, depreciation and
amortization of computer equipment used in our OnDemand environments of $137,000 and consulting services to augment our internal staff of $71,000. The OnDemand gross margin decreased to 51% during the three months ended August 31, 2008 from 63%
during the three months ended August 31, 2007. The decrease in OnDemand gross margins was the result of our continued investment to support anticipated growth in our OnDemand business

Cost of Professional Services Revenue. For the three months ended August 31, 2008, cost of professional services revenue increased $503,000,
or 9%, compared to the three months ended August 31, 2007. The increase in cost of professional services revenue is primarily the result of increases in salaries and related benefits of $403,000 and billable travel expenses of $102,000,
necessary to support the increased professional services revenue. The professional services gross margin increased from 28% during the three months ended August 31, 2007 to 33% during the three months ended August 31, 2008. The increase in
gross margin is primarily attributable to slightly higher realization rates.



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Operating Expenses

We classify all operating expenses, except amortization of purchased intangible assets, 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, share-based compensation, 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 allowance for doubtful accounts and administrative and professional services fees.



|                                            |  |                    |        |                        |    |   |                |   |                        |  |    |  
|------------------------------------------- |  | ------------------ | ------ | ---------------------- | -- | - | -------------- | - | ---------------------- |  | -- | -
|                                            |  | Three months ended |       
|(dollars in thousands)                      |  | August 31,2008     |        | Percentof TotalRevenue |    |   | August 31,2007 |   | Percentof TotalRevenue | 
|Operating expenses:                         |  |                    |        |                        |    |   |                |   |                        |  |    |  
|Research and development                    |  | $                  | 4,286  |                        | 17 | % |                | $ | 4,208                  |  | 16 | %
|Sales and marketing                         |  |                    | 7,107  |                        | 28 | % |                |   | 9,267                  |  | 36 | %
|General and administrative                  |  |                    | 4,341  |                        | 17 | % |                |   | 3,807                  |  | 15 | %
|Amortization of purchased intangible assets |  |                    | 634    |                        | 3  | % |                |   | 634                    |  | 3  | %
|                                            |  |                    |        |                        |    |   |                |   |                        |  |    |  
|Total operating expenses                    |  | $                  | 16,368 |                        | 65 | % |                | $ | 17,916                 |  | 70 | %
|                                            |  |                    |        |                        |    |   |                |   |                        |  |    |  

Research and development. Research and development expenses increased by $78,000, or 2%,
for the three months ended August 31, 2008 compared to the three months ended August 31, 2007.

Sales and marketing.Sales
and marketing expenses decreased by $2.2 million, or 23%, for the three months ended August 31, 2008 compared to the three months ended August 31, 2007. The decrease is primarily attributable to a decrease in salaries and related benefits
of $1.3 million due to lower headcount and decreases in marketing programs of $348,000, facilities related expenses of $251,000 and recruiting fees of $191,000.

General and administrative.General and administrative expenses increased by $535,000, or 15%, for the three months ended August 31, 2008 compared to the three months ended August 31, 2007. The
increase is due to increases in legal and accounting fees of $526,000, facilities and internal IT related costs of $326,000, salaries and related benefits of $213,000 and consulting services of $142,000, partially offset by a decrease in share-based
compensation expense of $631,000 related to the acceleration of vesting of options during the three months period ended August 31, 2007. During the three months ended August 31, 2008, we incurred $672,000 of non-operating general and
administrative costs primarily related to legal and accounting fees associated with the evaluation of strategic transactions.

Amortization of purchased intangible assets.Amortization of purchased intangible assets was consistent for the three months ended August 31, 2008 compared to the three months ended August 31, 2007. Future amortization
expense over each of the next four years is currently expected to be approximately $2.8 million for the remainder of fiscal 2009 and range from $3.7 million in fiscal 2010 to $1.8 million in fiscal 2012. We review our intangible assets and the
estimated remaining useful lives of those intangible assets for impairment annually or on a more frequent basis if indicators of impairment arise or circumstances otherwise dictate. Any impairment or reduction in our estimate of remaining useful
lives could result in increased amortization expense in future periods.

Other Income and Expenses

Interest income and other, net. Interest income and other, net consists of interest income and other non-operating expenses. Interest income and
other, net increased by $29,000 for the three months ended August 31, 2008 compared to the three months ended August 31, 2007. This increase was primarily attributable to realized and unrealized losses on certain foreign denominated
transactions partially offset by a decrease in interest income.



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Interest expense Interest expense was $10,000 for the three months ended August 31, 2008 and
$71,000 for the three months ended August 31, 2007. The decrease in interest expense during the three months ended August 31, 2008 compared to the three months ended August 31, 2007 was primarily due to the lower average debt
outstanding under our bank credit facility.

Provision for income taxes From inception through August 31, 2008, we have
incurred net losses for federal and state tax purposes. Income tax expense for the three months ended August 31, 2008 was $159,000, as compared to $118,000, during the three months ended August 31, 2007. Income tax expense during both of
these periods consists primarily of foreign tax expense incurred as a result of local country profits and tax contingencies.

During the
third quarter of fiscal year 2008, the unrecognized tax benefits decreased by $83,000. The decrease is mainly the result of the Companys continuing effort to reserve for tax contingencies.

As of August 31, 2008 and May 31, 2008, we had established a valuation allowance against the full amount of any net deferred tax assets. We
currently provide a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized.

FLUCTUATIONS OF QUARTERLY RESULTS

Our results of operations have in the past and will likely in the
future vary significantly from quarter to quarter. If revenues fall below our expectations, we will likely 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.

Factors that could affect our quarterly operating results are described under Part II, Item: 1A Risk Factors of this Quarterly Report on Form
10-Q.

LIQUIDITY AND CAPITAL RESOURCES



|                                                    |  |                    |        |   |                |   |        |  
|--------------------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                                    |  | Three months ended |       
|(in thousands)                                      |  | August 31,2008     |        |   | August 31,2007 |  
|Net cash provided by (used in) operating activities |  | $                  | 637    |   |                | $ | (3,674 | )
|Net cash used in investing activities               |  | $                  | (1,194 | ) |                | $ | (816   | )
|Net cash used in financing activities               |  | $                  | (19    | ) |                | $ | (1,730 | )

We have funded our operations through financing activities and our operations and our most
significant source of operating cash flows stems from customer purchases of our license, license updates and product support, OnDemand and professional services. Our primary uses of cash from operating activities are for personnel and facilities
related expenditures. As of August 31, 2008, we had $15.5 million in available cash and cash equivalents.

Net Cash Provided By (Used In)
Operating Activities

Net cash provided by operating activities during the three months ended August 31, 2008 was $637,000
compared to $3.7 million used in operating activities, during the three months ended August 31, 2007. Net cash provided by operating activities during the three months ended August 31, 2008 was primarily a result of adjusting our net loss
of $2.2 million for non-cash expenses related to share-based compensation of $590,000 and depreciation and amortization of $1.5 million, an increase of accounts payable of $1.5 million, and decreases in accounts receivable of $330,000 and prepaid
expenses and other assets of $186,000. These increases to our cash provided by operating activities were partially offset by a decrease in deferred revenue by $1.2 million, and accrued expenses of $227,000.



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Net cash used by operating activities during the three months ended August 31, 2007 was primarily a
result of adjusting our net loss of $2.4 million for non-cash expenses related to share-based compensation of $1.3 million and depreciation and amortization of $1.4 million, an increase in accounts receivable of $3.0 million, and a decrease in
accounts payable and accrued expenses of $685,000.

Total accounts receivable days sales outstanding (DSO), based on a rolling
four quarter calculation, was 79 days at August 31, 2008 and May 31, 2008. Changes in accounts receivable have a significant impact on our cash flow. Items that can affect our accounts receivable DSO include: timing of license revenue and
the proportion of that license revenue relative to our other types of revenue, timing of billing of our professional services revenue, contractual payment terms, client payment patterns (including approval or processing delays and cash management)
and the effectiveness of our collection efforts.

Net Cash Used In Investing Activities

Net cash used in investing activities during the three months ended August 31, 2008 was $1.2 million compared to net cash used in investing
activities of approximately $816,000 for the three months ended August 31, 2007 and are wholly attributable to the purchases of property and equipment to improve our OnDemand infrastructure.

Net Cash Used In Financing Activities

Net
cash used in financing activities of $19,000 during the three months ended August 31, 2008 was primarily attributable to repayment on borrowings under our credit facility and notes payable of $125,000, partially offset by proceeds from stock
issuance of $107,000. Net cash used in financing activities of $1.7 million during the three months ended August 31, 2007 was primarily attributable to net repayments on our credit facility of $2.4 million, partially offset by the issuance of
common stock of $635,000.

Contractual Obligations and Commitments

As of August 31, 2008, we were in compliance with our liquidity covenant, but not in compliance with our EBITDA covenant contained in our loan
agreement. In October 2008, Saba and the bank entered into a waiver for our non-compliance with the EBITDA covenant at August 31, 2008. As of August 31, 2008, there were no material changes in our long-term debt obligations, capital
leases, operating lease obligations, purchase obligations or any other long-term liabilities reflected on our condensed consolidated balance sheets as compared to such obligations and liabilities as of May 31, 2008. At August 31, 2008, we
did not have any material commitments for capital expenses or significant commitments to purchase obligations for goods or services.

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.

Off-Balance Sheet Arrangements

As of August 31, 2008, we did not have any off-balance sheet arrangements, as
defined in Item 303(a) (4) (ii) of SEC Regulation S-K.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our
borrowings and investments. We have a credit facility with a bank. The credit facility provides for (i) a term loan in a principal amount of $6,500,000, (ii) a receivables borrowing base revolving credit line in an aggregate principal
amount of up to



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$7,500,000, which includes a sub-limit of up to $5,000,000 for letters of credit, cash management and foreign exchange services, and (iii) an equipment
facility up to a principal amount of $3,000,000. Both the term loan and the equipment facility are required to be repaid in 36 equal monthly installments of principal, plus interest. The equipment facilitys term begins with the date of each
advance under the contract. We obtained advances on November 30, 2006 and February 28, 2007. The maturity date of the term loan and the revolving credit line is January 31, 2009. The interest rate applicable to the loans under the
credit facility is the banks prime rate (4.75% at August 31, 2008) plus 0.50% for the term loan and the banks prime rate plus 0.25% for borrowings under the revolving credit line and the equipment facility. We are required to pay an
early termination fee if the credit facility is terminated by the bank due to the occurrence of an event of default or is refinanced by another financial institution, in each case, prior to the second anniversary of the credit facility.

The credit facility is secured by all of our personal property other than our intellectual property. The credit facility includes certain negative
covenants restricting or limiting the ability of us and our subsidiaries to, among other things: incur additional indebtedness; create liens on its property; make certain investments and acquisitions; merge or consolidate with any other entity;
convey, sell, lease, transfer or otherwise dispose of assets; change its business; experience a change of control; pay dividends, distributions or make other specified restricted payments; and enter into certain transactions with affiliates. Such
restrictions and limitations are subject to usual and customary exceptions contained in credit agreements of this nature. In addition, the credit facility requires us to satisfy a minimum consolidated EBITDA covenant on a quarterly basis, and a
minimum liquidity covenant on a monthly basis. EBITDA, also excludes share-based compensation and includes the estimated revenue that would have been recorded related to the Centra deferred revenue fair value adjustment.

The credit facility also contains usual and customary events of default (subject to certain threshold amounts and grace periods). If an event of default
occurs and is continuing, we may be required to repay the obligations under the credit facility prior to their stated maturity date, our ability to borrow under the revolving credit line may be terminated, and the bank may be able to foreclose on
any collateral provided by us.

As of August 31, 2008, we had no outstanding balance under the term loan, and $530,000 outstanding
under the equipment facility and no outstanding borrowings under the receivables borrowing base revolving credit line. As of August 31, 2008, we were in compliance with our liquidity covenant of our credit facility, but not in compliance with
our EBITDA covenant contained in our loan agreement. In October 2008, Saba and the bank entered into a waiver for our non-compliance with the EBITDA covenant at August 31, 2008.

At August 31, 2008, we had available cash and cash equivalents totaling $15.5 million. Of this amount, approximately $11.4 million was invested
in money market accounts bearing variable interest rates of between 1.00% and 5.75%. The remainder of our cash and cash equivalents is held in non-interest bearing accounts at several banks. Variable interest rate securities may produce less income
than expected if interest rates fall. A 0.5% change in interest rates would not have a material impact on our financial statements.

Foreign Currency
Risk

We provide our products and services to customers in the United States, Europe and elsewhere throughout the world. Sales are
primarily made in U.S. dollars, and to a lesser but increasing extent, British pounds and Euros; however, as we continue to expand our operations, more of our contracts may be denominated in Australian dollars, Canadian dollars, Japanese yen or
other foreign currencies. A strengthening of the U.S. dollar could make our products less competitive in foreign markets. We do not use derivative instruments to manage risks associated with foreign currency transactions in order to minimize the
impact of changes in foreign currency exchange rates on earnings

Our exposure to foreign exchange rate fluctuations also arises in part
from inter-company accounts with our foreign subsidiaries. These inter-company accounts are typically denominated in the functional currency of the foreign subsidiary, and, when translated into U.S. dollars, have an impact on our operating results
depending upon the movement in foreign currency rates. During the three months ended August 31, 2008, our total realized and unrealized losses due to movements in foreign currencies, primarily British pounds, Japanese yen and Australian
dollars, were $344,000. As exchange rates vary, these foreign exchange results may vary and adversely or favorably impact operating results. An unfavorable change of 10% in foreign currency rates would not have a material impact on our financial
statements.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of disclosure controls
and procedures.

Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and interim chief financial officer concluded that our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms, and that such material information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure, particularly during the period when our periodic reports are being prepared and that our internal controls for financial reporting are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with US GAAP

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. As we grow
geographically and with new product offerings, we continue to create new processes and controls as well as improve our existing environment to increase efficiencies. Improvements may include such activities as implementing new, more efficient
systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.



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PART II OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Litigation Relating to Initial Public
Offering of Saba

In November 2001, a complaint was filed in the United States District Court for the Southern District of New York (the
District Court) against us, certain of its officers and directors, and certain underwriters of the Companys initial public offering. The complaint was purportedly filed on behalf of a class of certain persons who purchased our
common stock between April 6, 2000 and December 6, 2000. The complaint alleges violations by us and its officers and directors of Section 11 of the Securities Act of 1933, as amended (the Securities Act),
Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and other related provisions in connection with certain alleged compensation arrangements entered into by the underwriters in connection with the
initial public 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 allege that the prospectus and the
registration statement for the initial public offering failed to disclose that the underwriters allegedly solicited and received excessive commissions from investors and that some investors in the initial public offering agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the price of our stock. The complaints were later consolidated into a single action. The complaint seeks unspecified damages, attorney and expert fees, and other
unspecified litigation costs.

On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the
actions, including the action involving us. On July 15, 2002, we, along with other non-underwriter defendants in the coordinated cases, moved to dismiss the litigation. On February 19, 2003, the District Court ruled on the motions. The
District Court granted us motion to dismiss the claims against it under Rule 10b-5, due to the insufficiency of the allegations against us. The District Court also granted the motion of the individual defendants, Bobby Yazdani and Terry Carlitz, our
Chief Executive Officer and Chairman of the Board and former Chief Financial Officer and a member of our Board of Directors, to dismiss the claims against them under Rule 10b-5 and Section 20 of the Exchange Act. The motions to dismiss the
claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including us.

In June 2003, a proposed collective partial settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers
insurance companies. In June 2004, an agreement of partial settlement was submitted to the District Court for preliminary approval. The District Court granted the preliminary approval motion on February 15, 2005, subject to certain
modifications. On August 31, 2005 the District Court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The District Court also appointed the notice administrator for the
settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.

While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The District Court
directed that the litigation proceed within a number of focus cases rather than in all of the 310 cases that have been consolidated. Our case is not one of these focus cases. On October 13, 2004, the District Court certified the
focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the District Courts class certification decision. On April 6, 2007, the
Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuit opinion, counsel for the issuer defendants informed the District Court that this settlement could not be approved because the defined settlement class,
like the litigation class, could not be certified. On June 25, 2007, the District Court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action
complaints against the focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints.
On March 26, 2008, the District Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the
previously certified class period. Briefing on the class certification motion was completed in May 2008. On October 3, 2008, plaintiffs submitted a proposed order withdrawing the class certification motion without prejudice.



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We intend to dispute these claims and defend the law suit vigorously. However, due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely affect our business, financial condition and results of operations.

Litigation Relating to Centras Initial Public Offering

Centra, certain of its former officers and directors and the managing underwriters of Centras initial public offering were named as defendants in an action filed in the District Court. The plaintiffs filed an initial complaint on
December 6, 2001 and purported to serve the Centra defendants on or about March 18, 2002. The original complaint has been superseded by an amended complaint filed in April 2002. The action, captioned in re Centra Software, Inc. Initial
Public Offering Securities Litigation, No. 01 CV 10988, is purportedly brought on behalf of the class of persons who purchased Centras common stock between February 3, 2000 and December 6, 2000. The complaint asserts
claims under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act. The complaint alleges that, in connection with Centras initial public offering in February 2000, the underwriters received undisclosed
commissions from certain investors in exchange for allocating shares to them and also agreed to allocate shares to certain customers in exchange for the agreement of those customers to purchase additional shares in the aftermarket at pre-determined
prices. The complaint asserts that Centras registration statement and prospectus for the offering were materially false and misleading due to their failure to disclose these alleged arrangements. The complaint seeks damages in an unspecified
amount against Centra and the named individuals. Similar complaints have been filed against hundreds of other issuers that have had initial public offerings since 1998; the complaints have been consolidated into an action captioned in re Initial
Public Offering Securities Litigation, No. 21 MC 92.

On July 1, 2002, the underwriter defendants in the consolidated
actions moved to dismiss all the actions, including the action involving Centra. On July 15, 2002, Centra, along with other non-underwriter defendants in the coordinated cases, moved to dismiss the litigation. On October 9, 2002, the
plaintiffs dismissed, without prejudice, the claims against the named Centra officers and directors in the above-referenced action. On February 19, 2003, the District Court issued an order denying the motion to dismiss the claims against Centra
under Rule 10b-5. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including Centra.

In June 2003, a proposed collective partial settlement of this litigation was structured between the plaintiffs, the issuer defendants in the
consolidated actions, the issuer officers and directors named as defendants, and the issuers insurance companies. In June 2004, an agreement of settlement was submitted to the District Court for preliminary approval. The District Court granted
the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005 the District Court issued a preliminary order further approving the modifications to the settlement and certifying the settlement
classes. The District Court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.

While the partial settlement was pending approval, the plaintiffs
continued to litigate against the underwriter defendants. The District Court directed that the litigation proceed within a number of focus cases rather than in all of the 310 cases that have been consolidated. Our case is not one of
these focus cases. On October 13, 2004, the District Court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the
District Courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuit opinion, counsel for the issuer defendants informed the District Court that
this settlement could not be approved because the defined settlement class, like the litigation class, could not be certified. On June 25, 2007, the District Court entered an order terminating the settlement agreement. On August 14, 2007,
the plaintiffs filed their second consolidated amended class action complaints against the focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved
to dismiss



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the second consolidated amended class action complaints. On March 26, 2008, the District Court denied the motions to dismiss except as to
Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the class certification motion was
completed in May 2008. On October 3, 2008, plaintiffs submitted a proposed order withdrawing the class certification motion without prejudice.

On December 28, 2007, the underwriter defendants moved to strike class allegations in 26 cases, including Centras, in which the plaintiffs failed to identify proposed class representatives, and the issuer defendants joined in the
motion. On May 13, 2008, the District Court granted the motion in part and struck the class allegations in eight cases in which the proposed class representative was not a member of the class. The District Court denied the motion with respect
to the remaining 18 cases, including Centras case. For those 18 cases, the plaintiffs must notify the defendants and the District Court by October 30, 2008 of the identity of the putative class representatives and the basis of each
putative representatives claim, and indicate whether the putative representatives are members of the proposed class. The defendants may renew their motion to strike class allegations if the plaintiffs fail to identify the putative class
representatives within the allocated time or if the putative representatives are not members of the proposed class.

We, on behalf of
Centra, intend to dispute these claims and defend the law suit vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could
materially and adversely affect our business, financial condition and results of operations.

Litigation Relating to Claim of Patent Infringement by
Centra

On August 19, 2003, a complaint was filed against Centra and two other defendants by EdiSync Systems, LLC, in the United
States District Court for the District of Colorado (No. 03-D-1587 (OES)) (the Colorado District Court). The complaint alleges infringement of two patents for a remote multiple user editing system and method and seeks permanent
injunctive relief against continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses associated with the litigation. Centra has filed an answer to the complaint denying all of the
allegations. No amount has been accrued related to this matter and legal costs incurred in the defense of the matter are being expensed as incurred. Centra filed a request for reexamination of the patents at issue with the U.S. Patent and
Trademark Office (the Patent Office). Our patent counsel is of the opinion that claims of the patents involved in the suit are invalid. The re-examination request was accepted by the Patent Office and the Colorado District
Court has approved the parties motion to stay the court proceedings during the re-examination proceedings. A reexamination certificate has issued for one of the patents that canceled all of the patents claims, thus rendering that
patent of no further force or effect. On July 17, 2008, the Patent Office issued an advisory action in the other reexamination proceeding confirming the rejection of all of the patents original claims and allowing certain newly-added
claims. We therefore expects that a reexamination certificate will issue in due course that will cancel all of the patents original claims and indicate that only the newly-added claims are patentable. If that happens, we will be free from
liability for past actions, as the newly-added claims would be enforceable only prospectively as of the issue date of the anticipated reexamination certificate. We believe that it has meritorious defenses with respect to any future claims and
intends to vigorously defend this action. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome of the litigation could materially and
adversely affect the Companys business, financial condition and results of operations.

Litigation Relating to Claim of Patent
Infringement by Saba

On November 19, 2007, a complaint was filed against us and ten other defendants by Gemini IP, LLC, in the
United States District Court for the Eastern District of Texas (No. 07-CV-521) (Texas District Court). The complaint alleges infringement of a patent directed to a method for processing client help requests using a computer network
and seeks permanent injunctive relief against continuing infringement, compensatory damages in an unspecified amount, and interest, costs and expenses associated with the litigation. We have filed an answer to the



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complaint denying all of the allegations. At our request, the United States Patent and Trademark Office (the Patent Office) has instituted
reexamination proceedings against the asserted patent and the Texas District Court has stayed the action pending the outcome of those proceedings. We believe that it has meritorious defenses with respect to the asserted patent and intends to
vigorously defend this action. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome of the litigation could materially and adversely affect
our business, financial condition and results of operations.

Other Litigation

We are 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 our 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 us.



|ITEM 1A: | RISK FACTORS
|-------- | ------------

Set forth below and elsewhere in
this Quarterly Report on Form 10-Q and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in
this Quarterly Report. The fact that some of the risk factors may be the same or similar to our past filings means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are
part of doing business in our industry and will likely be present in all periods reported. The fact that certain risks are endemic to our industry does not lessen the significance of the risk. There are no material changes to the risk factors set
forth under the title Risk Factors in our Annual Report on Form 10-K for the fiscal year ended May 31, 2008,, except for the addition of the Risk Factor entitled Economic, political and market conditions can adversely affect
our revenue growth and profitability..

Economic, political and market conditions can adversely affect our revenue growth and
profitability. Our business is influenced by a range of factors that are beyond our control and that we have no comparative advantage in forecasting. These include:



| |  |  | general economic and business conditions;
| | - |  | -----------------------------------------



| |  |  | the overall demand for enterprise software and services; and
| | - |  | ------------------------------------------------------------



| |  |  | general political developments.
| | - |  | -------------------------------

A general weakening
of, or declining corporate confidence in, the global economy, or a curtailment in corporate spending could delay or decrease customer purchases. In addition, the war on terrorism, the war in Iraq and the potential for other hostilities in various
parts of the world, potential public health crises and natural disasters continue to contribute to a climate of economic and political uncertainty that could adversely affect our revenue growth and results of operations. These factors generally have
the strongest effect on our sales of software licenses and related services and, to a lesser extent, also affect our renewal rates for software license updates and product support.

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

We expect to continue to derive substantially all of our revenues for the foreseeable future from the licensing of the Saba Enterprise Suite and the Saba Centra product suite and providing related services, including
license updates and product support, OnDemand, implementation, training and consulting services. Except for two quarters, we have not been profitable on a quarterly or annual basis in the past. We cannot be certain that we will realize sufficient
revenues to achieve or sustain profitability on a quarterly or annual basis, especially if our recurring OnDemand business grows faster than expected relative to license sales. In addition, in the future, we expect to



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continue to incur non-cash expenses relating to the amortization of purchased intangible assets that will contribute to our net losses, along with any
potential goodwill impairment. As of August 31, 2008, we had $11.5 million of purchased intangible assets to be amortized as a result of our January 2006 acquisition of Centra and May 2005 acquisition of THINQ and our goodwill balance was $37.6
million. Further, starting with the first quarter of fiscal 2007, we were required to record as an expense charges related to all current outstanding and future grants of stock options in our reported results from operations in accordance with SFAS
No. 123R, which was issued by FASB in December 2004. These non-cash expenses have made it, and these and any similar expenses in the future, will continue to make it significantly more difficult for us to achieve profitability. If we achieve
US GAAP profitability, we may not be able to sustain it on a consistent basis.

Fluctuations in our quarterly 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. For instance, in fiscal 2008 and 2007, our quarterly revenues have fluctuated between approximately $28.2 million and $23.2 million and our quarterly results have fluctuated between net income of approximately
$158,000 and a net loss of approximately $2.6 million. Our quarterly operating results are particularly affected by the number of customers licensing our products during any quarter and the size of such licensing transactions. We have limited
visibility into our future revenue, especially license revenue, which often has been heavily concentrated in the third month of each quarter. As a result, if we were to fail to close a sufficient number of transactions by the end of our quarter,
particularly large license transactions, we would miss our revenue projections. In addition, our operating expenses are based in part on future revenue projections and are relatively fixed in the short-term. If we cannot meet our revenue
projections, our business would be seriously harmed and net losses in a given quarter would be even larger than expected.

Other factors
that could affect our quarterly operating results include:



| |  |  | The demand for our products and professional services and our efficiency in rendering our professional services;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | The variability in the mix of our revenues and bookings in any quarter;
| | - |  | -----------------------------------------------------------------------



| |  |  | The variability in the mix of the type of services delivered in any quarter and the extent to which third party contractors are used to provide such services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The size and complexity of our license transactions and potential delays in recognizing revenue from license transactions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | The amount and timing of our operating expenses and capital expenditures;
| | - |  | -------------------------------------------------------------------------



| |  |  | The performance of our international business, which accounts for a substantial part of our consolidated revenues; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Fluctuations in foreign currency exchange rates.
| | - |  | ------------------------------------------------

Due to these and other factors, we believe that quarter-to-quarter comparisons of our revenues and operating results are not necessarily meaningful and should not be relied upon as indicators of future performance. 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.

Because we generally recognize revenue from the sale of our OnDemand solutions ratably over the term of the subscription period, a significant downturn in our
OnDemand business may not be immediately reflected in our operating results.

We generally recognize OnDemand revenue over the terms of
our customer agreements, which typically range from one to three years. As a result, most of our quarterly OnDemand revenue results from agreements entered into during previous quarters. A decline in new or renewed subscriptions in any one quarter
may not impact our financial performance in that quarter, but will negatively affect our revenue in future quarters. If a number of contracts expire and are not renewed in the same quarter, our revenue could decline significantly in that quarter and
in subsequent quarters. Accordingly, the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations, making our results less indicative of our future prospects. It is
also difficult for us to rapidly increase our OnDemand revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.



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Our OnDemand business depends substantially on customers renewing their agreements and purchasing additional products
or users from us. Any decline in our customer renewals would harm our future operating results.

In order for us to improve our
operating results, it is important that our OnDemand customers renew their agreements with us when the initial contract term expires and also purchase additional products or additional users. Our OnDemand customers have no obligation to renew their
subscriptions after the initial subscription period, and we cannot assure you that customers will renew subscriptions at the same or higher level of service, if at all. In the past, some of our OnDemand customers have elected not to renew their
agreements with us. Our customers renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our product offerings, pricing, the prices of competing products or services,
completion of customer initiatives, mergers and acquisitions affecting our customer base, or reductions in our customers spending levels. If our OnDemand customers do not renew their subscriptions, renew on less favorable terms or fail to
purchase additional products or users, our revenue may decline, and we may not realize significantly improved operating results from our customer base.

A decline in the price of, or demand for, our products or our related services offerings, would seriously harm our revenues and operating margins.

To date, Saba Enterprise Learning products and related services have accounted for a substantial majority of our revenues. We anticipate that revenues from the Saba Enterprise suite and the Saba Centra product suite,
as well as related services, will constitute substantially all of our revenues for the foreseeable future. Consequently, a decline in the price of, or demand for, the Saba Enterprise suite, the Saba Centra product suite and related services or
failure to achieve broad market acceptance would seriously harm our business.

Our products have a long sales cycle, which increases the cost of
completing sales and renders completion of sales less predictable.

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 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. We may commit a
substantial amount of time and resources to potential customers without assurance that any sales will be completed or revenues generated. Many of our potential customers are large enterprises that generally take longer to make significant business
decisions. Our public sector customers, in particular, are subject to extensive procurement procedures that require many reviews and approvals. Our typical sales cycle has been approximately six to 12 months, making it difficult to predict the
quarter in which we may recognize revenue. The delay or failure to complete sales in a particular quarter could reduce our revenues in that quarter. If our sales cycle were to unexpectedly lengthen in general or for one or more large orders, it
would adversely affect the timing of our revenues. If we were to experience a delay on a large order, it could harm our ability to meet our forecasts for a given quarter.

Our performance depends on a new market: human capital management.

The market for software solutions
that automate human capital management is at an early stage of development and rapidly evolving. Substantially all of our revenues are attributable to product suites and services in this market. If this market fails to develop further or develops
more slowly than we expect, our business would be harmed. If the market grows, the prices of our products and services may decline rapidly as alternative products and services are introduced into the market. In addition, our products may become
obsolete if we fail to anticipate or adapt to evolving technology standards, or if we fail to identify the challenges and risks in this new market or successfully address these risks.



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We experience seasonality in our sales, which could cause our quarterly operating results to fluctuate from quarter to
quarter.

We experience quarterly seasonality in the licensing of our products and delivery of our services. For example, revenue has
historically been lower in our first fiscal quarter than in the immediately preceding fourth fiscal quarter. Contributing to this seasonality is the timing of our first fiscal quarter that occurs during the summer months when general business
activities slow down in a number of territories where we conduct our operations, particularly Europe. Our commission structure and other sales incentives also tend to result in fewer sales in the first fiscal quarter than in the fourth fiscal
quarter. These seasonal variations in our revenue are likely to lead to fluctuations in our quarterly operating results.

Reductions in information
technology spending could limit our ability to grow our business.

Our operating results may vary based on changes in the information
technology spending of our clients. The revenue growth and profitability of our business depend on the overall demand for enterprise application software and services. We sell our solutions primarily to large organizations whose businesses fluctuate
with general economic and business conditions. As a result, decreased demand for enterprise application software and services, and in particular human capital management solutions, caused by a weakening global economy may cause a decline in our
revenue. Historically, economic downturns have resulted in overall reductions in corporate information technology spending. In particular, human capital management software may be viewed by some of our existing and potential clients as a lower
priority and may be among the first expenditures reduced as a result of unfavorable economic conditions. In the future, potential clients may decide to reduce their information technology budgets by deferring or reconsidering product purchases,
which would negatively impact our operating results.

Changes in accounting regulations and related interpretations and policies, particularly those
related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue or to report lower earnings per share.

While we believe that we are in compliance with Statement of Position 97-2,Software Revenue Recognition, as amended, the accounting profession continues to discuss a wide range of potential interpretations. Additional implementation
guidelines, and changes in interpretations of such guidelines, could lead to unanticipated changes in our current revenue accounting practices that could cause us to defer the recognition of revenue to future periods or to recognize lower revenue.
In addition, policies, guidelines and interpretations related to accounting for acquisitions, income taxes, facilities consolidation charges, allowance for doubtful accounts and other financial reporting matters require different judgments on
complex matters that are often subject to multiple sources of authoritative guidance. To the extent that managements judgment is incorrect, it could result in an adverse impact on our financial statements.

Standards for compliance with Sarbanes-Oxley Section 404 are burdensome, and if we fail to comply in a timely manner, our business could be harmed and our stock
price could decline.

Pursuant to Sarbanes-Oxley Section 404, our management is required to report on and our independent
registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting, at least annually. The rules governing the standards that must be met for management to assess our internal controls over financial
reporting are complex. Currently, the rules require significant documentation, testing and possible remediation of our internal controls over financial reporting. The process of reviewing, documenting and testing our internal controls over financial
reporting will likely continue to result in increased expenses and the devotion of significant management and other internal resources. If we are not successful in attracting and retaining experienced personnel in our accounting and finance
organization, we will not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. During this process, if our management identifies one
or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective and the price of our stock may suffer. In addition, a control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our management does not expect that our internal controls and procedures will prevent all errors and all fraud, if any, because, in
addition to resource constraints, there are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. If our management
is unable to assert that our internal control over financial reporting is effective (or if our independent



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registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls) we may not be able to timely file, or file
at all, our periodic financial reports and thus we would be subject to delisting and adverse consequences under state and federal securities laws. Even if we are able to file such reports, investor confidence in the accuracy and completeness of our
financial reports may be lost, leading to an adverse effect on the price of our stock.

The loss of our senior executives and key personnel would likely
cause our business to suffer.

Our ability to implement a successful long-term strategy, strengthen our competitive position, expand our
customer base, and develop and support our products depends to a significant degree on the performance of the senior management team and other key employees, including Bobby Yazdani, our Chief Executive Officer. The loss of any of these individuals
could harm our business. Our success will depend in part on our ability to attract and retain additional personnel with the highly specialized expertise necessary to generate revenue and to engineer, design and support our products and services.
Like other software companies, we face intense competition for qualified personnel. We may not be able to attract or retain such personnel.

Intense
competition in our target market could impair our ability to grow and achieve profitability on a consistent basis.

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 they offer. We encounter competition with respect to
different aspects of our solution from a variety of sources including:



| |  |  | Companies that offer training, learning, performance, content, resource, talent and staffing management systems, such as SumTotal;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Companies that offer collaboration solutions, such as Microsoft and Cisco;
| | - |  | --------------------------------------------------------------------------



| |  |  | Enterprise software vendors that offer human resources information systems and employee relationship management systems with training and performance modules, such
as SAP and Oracle;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

We expect competition from a variety of companies.

Many of our competitors have longer operating histories, substantially greater financial, technical, marketing or other resources, or greater name recognition than we do, enabling them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Such resources also enable our competitors to withstand prolonged periods of negative cash flows and unfavorable economic, political and market conditions. 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 partners, 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.



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

Revenues from customers located outside the United States accounted for 27% and 32% of our revenue for the first three months of our fiscal
2009 and 2008, respectively. Although we intend to continue to expand our international presence, in the future we may not be able to successfully market, sell or distribute our products and services in foreign markets. Factors that could materially
adversely affect our international operations, and our business and future growth include:



| |  |  | Difficulties in staffing and managing foreign operations, including language barriers;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Difficulties in maintaining control over product development and quality, and timing of product releases;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Seasonal fluctuations in purchasing patterns in other countries, particularly declining sales during July and August in European markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties in collecting accounts receivable in foreign countries, particularly European countries in which collections take considerably more time than the
United States and collections are more difficult to effect;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Currency exchange rate fluctuations, particularly in countries where we sell our products in denominations other than U.S. dollars, such as in the United Kingdom,
the Euro zone, Australia and Japan, or have exposures in inter-company accounts denominated in foreign currencies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Exposure to tax regimes of multiple countries and potential increased tax exposure relating to in-country profits as well as audits and assessments relating to
transfer pricing matters;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs attributable to development of internationalized versions of our products and marketing and sales materials;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | The burdens of complying with a wide variety of foreign laws and reduced protection for intellectual property rights in some countries;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tariffs, export controls and other trade barriers; and
| | - |  | ------------------------------------------------------



| |  |  | Exposure to geopolitical instability, natural disasters and acts of war or terrorism.
| | - |  | -------------------------------------------------------------------------------------

In addition, the reallocation of certain design, development and testing functions from the United States to our lower-cost development centers in India
intensifies our exposure to international uncertainties. In recent years, increased growth and development of the technology market in general, and in India specifically, has made it more difficult for us to hire and retain qualified technical
employees and other personnel. In addition to the risks inherent in conducting international operations, certain risks are particularly acute in India, such as employee turnover, increasing salaries and less reliable infrastructure.

Future acquisitions may result in disruptions to our business if we fail to adequately integrate acquired businesses.

We acquired Centra Software, Inc. in January 2006 and THINQ Learning Solutions, Inc. in May 2005. As part of our overall business strategy, we expect to
continue to periodically acquire complementary businesses or technologies that will provide additional products or services offerings, additional industry expertise or an expanded geographic presence. The consideration and negotiation of potential
acquisitions, regardless of whether they are completed, could require us to incur substantial expense and divert managements attention from other business concerns.

Completed acquisitions could further result in the use of significant amounts of cash, the incurrence of debt or potentially dilutive issuances of equity securities which may reduce earnings per share. Acquisitions
that we complete expose us to 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;
| | - |  | --------------------------------------------------------------------------



| |  |  | The potential loss of key employees, significant customers and strategic partners of the acquired company; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Exposure to claims by terminated employees, stockholders of the acquired company or other third parties related to the acquisition. Although we generally obtain
indemnification and other contractual protection against such claims, we cannot assure that they will be enforceable or sufficient to protect us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Any impairment in the value of our goodwill will result in an accounting charge against our earnings, which could
negatively impact our stock price.

In June 2001 the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142).Under SFAS No. 142 purchased goodwill should not be amortized, but rather, will be periodically reviewed for impairment. Such impairment could be caused by internal factors as well as external factors beyond our control.
If future events cause additional impairment of any intangible assets acquired in the Centra acquisition or any other of our past or future acquisitions, we may have to record charges relating to such assets sooner than we expect which would cause
our profits to decline. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss should be charged as an operating expense in the statement of operations. The timing of such an
impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods following any such impairment could be materially adversely affected. We are required to determine
whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge such impairment as an expense. We have goodwill of approximately $37.7 million at August 31, 2008, so if we are
required to take such impairment charges in the future, the amounts could have a material adverse effect on our results of operations.

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. The reallocation of certain design, development and testing functions to our new lower-cost development center heightens risks relating to product design, development, testing and introduction. Any delay in releasing future products or
enhancements of our products could harm our business.

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.
Although our products are subject to rigorous testing and quality control processes, 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 cancellation of orders, loss of customers, difficulties in achieving our sales goals, increased demands on our support services and a decrease in our revenues. To
correct such errors, we may expend considerable time and resources to develop and release modifications to our software.

As a result of
such errors, we may be subject to warranty and product liability claims that are costly or difficult to settle. Our products and services enable customers to manage critical business information. If product errors are alleged to cause or contribute
to security and privacy breaches or misappropriation of confidential information, we may also be subject to significant liability. Although our license agreements contain provisions intended to limit our exposure to liability, we cannot assure that
these limits will be adequate, that they will be enforceable or, if enforceable, that they will be interpreted favorably by a court.



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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. We have in the past been and are presently subject to intellectual property actions. For example, on August 19, 2003, EdiSync Systems, LLC filed a complaint against Centra in federal
court in Denver, Colorado, alleging infringement of two patents for a remote multiple user editing system and method and seeking to enjoin us from continuing to sell our products, as well as unspecified compensatory damages. Centra filed an answer
to the complaint denying all of the allegations, and filed a request for reexamination of the patents at issue with the Patent Office. The reexamination request was accepted by the Patent Office and the court has approved the parties
motion to stay the court proceedings during the reexamination proceedings. The Patent Office issued a non-final rejection of all claims in each of the patents. EdiSync elected not to respond to the rejection of the claims in one of the two
patents, and the Patent Office has accordingly issued a Notice of Intent to Issue a Reexamination Certificate canceling all of the claims in that patent, thus rendering it of no further force or effect. Although we believe that we have
meritorious defenses and intend to vigorously defend this action, we can give no assurance that we will be able to achieve a satisfactory outcome. 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 non-infringing technology, obtain a license or cease selling the products that contain the
infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, if at all.

Our products include third party technology, the loss of which could materially harm our business.

We use licensed third
party technology components in our products. Future licenses to this technology may not be available to us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these technology licenses could result in
delays in the introduction of new products or could force us to discontinue offering portions of our solutions until equivalent technology, if available, is identified, licensed and integrated.

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 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, which may represent potential sales and revenue losses that are difficult to quantify. Policing unauthorized use of our technology is difficult, time-consuming and
costly. Were we to discover instances of unauthorized use, there can be no assurance that we would be able to enforce our proprietary rights or obtain adequate recovery for our losses. In addition, we have seven patents issued in the United States
and five patent applications pending in the United States. We cannot assure you that any patents will be issued for any of the pending patent applications. Even for the issued patents, or any patent issued to us in the future, there can be no
assurance that such patent will protect our intellectual property, or will 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. If we cannot protect our intellectual property rights against unauthorized copying or use, or other misappropriation we may not remain competitive.



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Our disaster recovery plan does not include redundant systems, and a disaster could severely damage our operations.

Our disaster recovery plan does not include 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 the OnDemand business. A
number of these computer systems are located on or near known earthquake fault zones. Although these systems are designed to be fault-tolerant, the systems 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 OnDemand business 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 our products for our OnDemand customers. We also rely on
third-party communications service providers for the high-speed connections that link our networks and our Internet service providers Web servers and office systems to the Internet. Our reliance on third party providers limits our ability to
control critical customer service functions and communications systems. 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.

If our security measures
are breached and unauthorized access is obtained to client data, clients may curtail or stop their use of our OnDemand solutions, which would harm our business, operating results and financial condition.

Our OnDemand solutions involve the storage and transmission of confidential information of clients and their existing and potential employees, and
security breaches could expose us to a risk of loss of, or unauthorized access to, this information, resulting in possible litigation and possible liability. Although we have never sustained such a breach, if our security measures were ever breached
as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, an unauthorized party obtained access to this confidential data, our reputation could be damaged, our business may suffer and we could incur significant
liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not discovered until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate
preventative measures. If an actual or perceived breach of our security occurs, the market perception of our security measures could be harmed and we could lose sales and clients.

We depend upon continuing relationships 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 must 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. Although we make reasonable efforts to ensure that our third party providers perform to our standards, we
have only limited control over the level and quality of service provided by our current and future third-party integrators.

Our stock price may
fluctuate substantially.

For example, from the beginning of fiscal 2005 through August 31, 2008, the market price for our common
stock has fluctuated between $7.75 per share and $2.70 per share. 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;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Actual or anticipated 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, including announcements of significant acquisitions or strategic partnerships; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



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| |  |  | 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 Global Market (formerly the Nasdaq National Market) technology
companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular 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. Volatility in the market price and trading volume of our common stock may prevent our stockholders from selling their shares at a favorable price.
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.

The anti-takeover provisions in our charter documents could delay or prevent a change in
control.

Our Amended and Restated Certificate of Incorporation and Amended and Restated 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 acquirer were to make a
hostile bid for us, the acquirer 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 acquirer would also be required to provide advance notice of its proposal to remove directors at an annual meeting. The acquirer will not be able to cumulate votes at a meeting, which will require the acquirer 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 acquirer. 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 acquirer that it did not feel was in our strategic
interests. If the acquirer was discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by our anti-takeover measures, our stockholders could lose the opportunity to sell their shares at a favorable
price.



|ITEM 2. | UNREGISTERED SALES OF EQUITY 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
|------- | --------

a. Exhibits

See Exhibit Index following the signature page, which is incorporated herein by reference.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |                     |  |                   |  |                                                                                
|----------------------- |  |  |  | ------------------- |  | ----------------- |  | -------------------------------------------------------------------------------
|                        |  |  |  | SABA SOFTWARE, INC.
|                        |  |  | 
|Dated: October 10, 2008 |  |  |  | By:                 |  | /s/ BOBBY YAZDANI
|                        |  |  |  |                     |  |                   |  | Bobby Yazdani                                                                  
|                        |  |  |  |                     |  |                   |  | Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
|                        |  |  |  |                    
|                        |  |  |  |                     |  | By:               |  | /s/ CAROL RICE-MURPHY                                                          
|                        |  |  |  |                     |  |                   |  | Carol Rice-Murphy                                                              
|                        |  |  |  |                     |  |                   |  | Interim Chief Financial Officer (Principal Financial and Accounting Officer)   



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Document                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|2.1(1)        |  | Agreement and Plan of Merger by and among the Company, Storm Holding Corporation, a Delaware corporation that is a wholly-owned subsidiary of the Company (Holding), Storm Acquisition
Corporation, a Delaware corporation that is a wholly-owned subsidiary of Holding, THINQ Learning Solutions, Inc, a Delaware corporation and an unaffiliated entity (THINQ), and Daniel H. Bathon, Jr. as representative of the stockholders
of THINQ.
|              | 
|2.2(2)        |  | Agreement and Plan of Reorganization, dated October 5, 2005, by and among the Company, Spruce Acquisition Corporation, a Delaware corporation, Spruce Acquisition, LLC, a Delaware limited
liability company and Centra Software, Inc., a Delaware corporation.                                                                                                                                                                                 
|              | 
|3.1(3)        |  | Amended and Restated Certificate of Incorporation of the Company effective as of April 12, 2000.                                                                                                                                                                                                                                                                                                                                                
|              | 
|3.2(4)        |  | Amendment to Amended and Restated Certificate of Incorporation of the Company effective as of May 12, 2003.                                                                                                                                                                                                                                                                                                                                     
|              | 
|3.3(5)        |  | Amendment to Amended and Restated Certificate of Incorporation of the Company effective as of November 19, 2004.                                                                                                                                                                                                                                                                                                                                
|              | 
|3.4(6)        |  | Amended and Restated Bylaws of the Company effective as of August 24, 2006.                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|3.5(7)        |  | Amendment to Amended and Restated Bylaws of the Company, effective as of November 27, 2007.                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.1           |  | Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|31.1          |  | Certification of Bobby Yazdani, Chief Executive Officer and Chairman of the Board, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 10, 2008.                                                                                                                                                                                                                                                                           
|              | 
|31.2          |  | Certification of Carol Rice-Murphy, Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 10, 2008.                                                                                                                                                                                                                                                                                         
|              | 
|32.1          |  | Certification of Bobby Yazdani, Chief Executive Officer and Chairman of the Board, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated October 10, 2008.                                                                                                                                                                                                                                                                           
|              | 
|32.2          |  | Certification of Carol Rice-Murphy, Interim Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated October 10, 2008.                                                                                                                                                                                                                                                                                         



|(1) | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the period ended February 28, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed October 6, 2005.
|--- | -----------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Exhibit 3.2 previously filed with the Companys Registration Statement on Form S-1/A (Registration No. 333-95761) filed on March 3, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to Exhibit 3.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended November 30, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the period ended November 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed August 28, 2006.
|--- | -----------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed November 28, 2007.
|--- | -------------------------------------------------------------------------------------------------------------



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