SABA SOFTWARE INC

The Company reviews the status of each litigation or other relevant claim and records a provision for a liability when it is considered both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions, if any, are reviewed quarterly and adjusted as additional information becomes available. If either or both of the criteria are not met, the Company assesses whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss may have been incurred, the Company discloses the estimate of the amount of loss or range of loss, discloses that the amount is immaterial, or discloses that an estimate of loss cannot be made, as applicable.

In December 2011, the FASB issued ASU No. 2011-12. Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), to defer the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to other comprehensive income. These amendments are being delayed to allow the FASB time to redeliberate whether to present the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income on the face of the financial statements for all periods presented . While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company is required to continue reporting reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No 2011-05.

Cost of Subscription Revenue. Cost of subscription revenue increased by $0.5 million, or 14%, for the three months ended November 30, 2011 compared to the three months ended November 30, 2010. The subscription gross margin increased to 77% for the three months ended November 30, 2011 from 75% for the three months ended November 30, 2010. The increase in cost of subscription revenue was primarily the result of increases in third party data center service fees, license product costs and compensation costs associated with the increase in subscription revenue. The increase in subscription gross margin for the three months ended November 30, 2011 compared to the same period in the prior year was due to a 23% increase in subscription revenue with a corresponding increase in subscription revenue costs of only 14% for the three months ended November 30, 2011 compared to the same period in prior year. Cost of subscription revenue increased by $1.0 million, or 12%, for the six months ended November 30, 2011 compared to the six months ended November 30, 2010. The subscription gross margin increased to 77% for the six months ended November 30, 2011 from 74% for the six months ended November 30, 2010. The increase in cost of subscription revenue was primarily the result of increases in third party hosting data center fees, license product costs and compensation costs associated with the increase in subscription revenue. The increase in subscription gross margin for the six months ended November 30, 2011 compared to the same period in the prior year was due a 24% increase in subscription revenue with a corresponding increase in subscription revenue costs of only 12% for the six months ended November 30, 2011 compared to the same period in prior year.

Cost of License Revenue. Cost of license revenue increased by $56,000, or 30%, for the three months ended November 30, 2011 compared to the three months ended November 30, 2010, due to an increase in royalty expense. Gross margin on license revenue decreased to 76% for the three months ended November 30, 2011 from 90% for the three months ended November 30, 2010. The decrease in gross margin is primarily the result of a decrease in license revenue relative to the fixed cost of license revenue, including amortization of acquired technologies. Cost of license revenue decreased by $13,000, or 3%, for the six months ended November 30, 2011 compared to the six months ended November 30, 2010, due to a reduction in royalty expense. Gross margin on license revenue decreased to 86% for the six months ended November 30, 2011 from 89% for the six months ended November 30, 2010. The decrease in gross margin is primarily the result of a decrease in license revenue relative to the fixed cost of license revenue, including amortization of acquired technologies.

Interest income and other, net consists of interest income and other non-operating expenses. Interest income and other, net increased by $0.5 million for the three months ended November 30, 2011 compared to the three months ended November 30, 2010. The increase was attributable to a $0.9 million net increase in foreign currency unrealized gains related to currency fluctuations in the Swiss Franc and other income of $0.2 million related to the recovery of an investment previously written off. The increase was partially offset by a $0.3 million net increase in realized foreign currency losses related to currency fluctuations in the Indian Rupee. Interest income and other, net increased by $0.6 million for the six months ended November 30, 2011 compared to the six months ended November 30, 2010. The increase was attributable to a $0.3 million net increase in foreign currency unrealized gains related to currency fluctuations in the British Pound and other income of $0.2 million related to the recovery of an investment previously written off.