UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 March 31, 2004

or

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

For the transition period from:           to          

Commission File Number 0-24720

Business Objects S.A.

157-159 Rue Anatole France, 92300 Levallois-Perret, France
(Address of principal executive offices)

(408) 953-6000
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

As of March 31, 2004, the number of issued ordinary shares was 95,250,241, €0.10 nominal value, (including 36,414,728 American depository shares, each corresponding to one ordinary share, 1,067,675 treasury shares and 4,997,683 shares held by Business Objects Option LLC). As of March 31, 2004, we had issued and outstanding 90,252,558 ordinary shares of €0.10 nominal value.

Business Objects S.A.
Index

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

BUSINESS OBJECTS S.A.

See accompanying notes to Condensed Consolidated Financial Statements

(1) The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.

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BUSINESS OBJECTS S.A.

See accompanying notes to Condensed Consolidated Financial Statements

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BUSINESS OBJECTS S.A.

See accompanying notes to Condensed Consolidated Financial Statements

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Business Objects S.A.

1. Basis of Presentation and Significant Accounting Policies

     The accompanying unaudited condensed consolidated financial statements of Business Objects S.A. (the “Company” or “Business Objects”) have been prepared by the Company in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes of the Company in its Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the SEC on March 12, 2004.

     The consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows. All significant intercompany accounts and transactions have been eliminated. Operating results for the quarter ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or future operating periods. All information is stated in U.S. dollars unless otherwise noted.

     Certain comparative period figures have been reclassified to conform to the current basis of presentation. Such reclassifications had no effect on net income as previously reported.

Use of Estimates

     The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, business combinations, restructuring accruals, impairment of long-lived assets, contingencies and litigation, allowances for doubtful accounts and income taxes. Actual results could differ from those estimates.

Other Current Liabilities

     Other current liabilities include accruals for sales, use and value added taxes, accrued rent, accrued professional fees, deferred compensation under the Company’s deferred compensation plan, current deferred tax liabilities and other accruals, none of which individually account for more than five percent of total current liabilities.

Derivative Financial Instruments

     The Company has entered into forward contracts to hedge certain forecasted Canadian dollar expenses against U.S. and Canadian currency fluctuations. The purchase of these forward contracts is to protect the Company from risk that the eventual dollar cash flows resulting from Canadian dollar expenses will be adversely affected by changes in the exchange rates. As of March 31, 2004 and December 31, 2003, respectively, the Company held Canadian dollar foreign exchange forward contracts with a notional amount of $86.7 million and $40.3 million. The forward contracts have semi-monthly maturities from April 2, 2004 to September 17, 2004. These forward contracts do not qualify for hedge accounting as the functional currency of the Canadian subsidiary is Canadian dollars. At March 31, 2004 and December 31, 2003, a forward contract asset of $2.1 million and $1.8 million, respectively, were recorded on the balance sheet.

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Revenue Recognition

     The Company enters into arrangements for the sale of: 1) licenses of software products and related maintenance contracts; 2) bundled license, maintenance and services; and 3) services on a time and material basis. In instances where maintenance is bundled with a license of software products, such maintenance terms are typically one year.

     For each arrangement, the Company determines whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. In software arrangements that include rights to multiple software products and/or services, the Company uses the residual method, under which revenues are allocated to the undelivered elements based on vendor specific objective evidence of fair value of such undelivered elements and the residual amount of revenues are allocated to the delivered elements.

     For those contracts that consist solely of license and maintenance the Company recognizes net license revenues based upon the residual method after all licensed software product has been delivered as prescribed by Statement of Position 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions.” The Company recognizes maintenance revenues over the term of the maintenance contract. The maintenance rates for both license agreements with and without stated renewal rates are based upon the Company’s price list. Vendor specific objective evidence of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by the Company’s customers when maintenance is sold separately (that is, the renewal rate). Past history has shown that the rate the Company charges for maintenance on license agreements with a stated renewal rate is similar to the rate the Company charges for maintenance on license agreements without a stated renewal rate.

     Services can consist of maintenance, training and/or consulting services. In all cases, the Company assesses whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. When software services are considered essential or the arrangement involves customization or modification of the software, both the net license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on input measures of hours. For those arrangements for which the Company has concluded that the service element is not essential to the other elements of the arrangement the Company determines whether the services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria and whether the Company has sufficient experience in providing the service to be able to separately account for the service. When the service qualifies for separate accounting, the Company uses vendor specific objective evidence of fair value for the services and the maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Revenues allocable to services are recognized as the services are performed. Vendor-specific objective evidence of fair value of consulting services is based upon average daily rates. When the Company enters into contracts to provide services only, revenues are recognized on a time and material basis.

     For sales to resellers, value added resellers and strategic system integrators, collectively partners, there is no right of return or price protection. The Company does not accept orders from these partners when the Company is aware that the partner does not have a purchase order from an end-user. For sales to distributors that have a right of return, the revenue is recognized as it is sold to the distributor net of reserves of an amount

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equal to the Company’s estimate of all products subject to rights of return to approximate net sell-through. Some of the factors that are considered in determining this estimate include historical experience of returns received and level of inventory in the distribution channels. The reserve reduces the revenues and the related receivables. For sales to original equipment manufacturers (“OEMs”), revenues are recognized when the OEM reports sales that have occurred to an end user customer, provided that collection is probable. Some OEM arrangements include the payment of an upfront arrangement fee which is deferred and recognized either ratably over the contractual period or when the OEM reports sales that have occurred to an end user customer, in accordance with the contractual terms.

     Deferred revenues represent amounts under license and service arrangements for which the earnings process has not been completed. These amounts relate primarily to customer support services with future deliverables and arrangements where specified customer acceptance has not yet occurred.

Accounting for Stock-based Compensation

     The Company issues stock options or share warrants to its employees and outside directors and provides employees the right to purchase its stock pursuant to shareholder approved stock option and employee stock purchase programs. The Company accounts for its stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. No stock-based employee compensation cost is reflected in net income for the quarter ended March 31, 2004 or 2003 related to options granted under those plans for which the exercise price was equal to the market value of the underlying common stock on the date of grant.

     The following table provides pro forma disclosures of the effect on net income and earnings per ordinary share and American depository share (“ADS”) if the fair-value based method had been applied in measuring compensation expense. The fair-valued based method is in accordance with FAS No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”) which was amended by FAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”).

     The stock-based compensation expense included in reported net income for the quarter ended March 31, 2004 represents amortization of unearned compensation on unvested stock options that arose as a result of the acquisition of Crystal Decisions (the “Crystal Decisions Acquisition”).

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     The tax benefit for stock-based employee compensation was calculated on the total pro forma stock-based employee compensation expense at an effective tax rate of 38% for all periods presented. As this calculation is based on certain assumptions about the deductibility of the expense, the timing of the deduction and the ability to use it, the actual tax benefit could vary materially from this estimate. If no amount of the tax benefit was available on estimated stock-based employee compensation, pro forma basic income (loss) per share would have been $(0.05) and $0.01 for the quarter ended March 31, 2004 and 2003, respectively, and pro forma diluted income (loss) per share would have been $(0.05) and $0.01 for the quarter ended March 31, 2004 and 2003, respectively.

     Pro forma information regarding net income and earnings per ordinary share and ADS is required by FAS 123, as amended by FAS 148, and has been determined as if the Company had accounted for its employee stock options under the fair-value method. For purposes of the pro forma disclosure, management estimates the fair value of stock options issued to employees using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions, are fully transferable and do not have employment or trading restrictions. The model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because the changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

     The pro forma effects of applying FAS 123 for the periods presented are not likely to be representative of the pro forma effects of future periods as stock options usually vest over a period of four years, the number of stock options granted varies from period to period and the Black-Scholes fair value of each grant depends on the assumptions at the grant date. For purposes of the pro forma disclosures, the estimated fair value of the stock options was amortized over the stock options’ vesting period.

     The weighted average assumptions used and the resulting estimates of weighted average fair value of stock options granted under the Stock Option Plans during the following periods were as follows:

     The weighted average assumptions used and the resulting estimates of weighted average fair value of stock options granted under the Employee Stock Purchase Plans during the following periods were as follows:

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Recent Pronouncements

     On March 31, 2004, the Financial Accounting Standards Board published an Exposure Draft, “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” The proposed change in accounting would replace the existing requirements under FAS 123 and APB 25. Under the proposal, all forms for share-based payments to employees, including employee stock options and employee stock purchase plans, would be treated the same as other forms of compensation by recognizing the related cost in the statement of income. This proposed Statement would eliminate the ability to account for stock-based compensation transactions using APB 25 and generally would require instead that such transactions be accounted for using a fair-value based method, with a binomial or lattice model preferred to the Black-Scholes valuation model. The comment period for the exposure draft ends June 30, 2004. The Company is investigating what impact the adoption of the exposure draft will have on its financial position and results of operations.

2. Acquisition of Crystal Decisions, Inc.

     On December 11, 2003, Business Objects, Crystal Decisions, Inc. (“Crystal Decisions”), Seagate Software (Cayman) Holdings Corporation (“SSCH”) and three wholly owned subsidiaries of Business Objects merged in accordance with an Agreement and Plan of Merger, dated as of July 18, 2003, as amended August 29, 2003 (the “Merger Agreement”). Pursuant to the Merger Agreement, Crystal Decisions and SSCH merged with and into wholly owned subsidiaries of Business Objects and ceased to exist as separate entities on December 11, 2003 (the “Crystal Decisions Acquisition”). The results of Crystal Decisions’ operations were included in the consolidated financial statements after that date. The Crystal Decisions Acquisition was accounted for under the purchase method of accounting.

     The total purchase price of $1.2 billion for the Crystal Decisions Acquisition consisted of $307.6 million in cash, approximately 23.3 million newly issued ordinary shares or ADSs, the fair value of stock options assumed in connection with the transaction and estimated transaction costs. The allocation of the purchase price resulted in $978.0 million in goodwill. The purchase price under the Merger Agreement was fixed and there was no contingent consideration. At December 31, 2003, the Company had not identified any pre-acquisition contingencies where the related asset, liability or impairment was probable and the amount of asset, liability or impairment could be reasonably estimated.

     The purchase price allocation is preliminary. The final amount of these costs may change within the purchase price allocation period if information becomes known that results in a change in estimate of the transaction costs or liabilities assumed on the date of purchase. During the quarter ended March 31, 2004, there was a $346,000 adjustment made to goodwill as the result of a change in estimate of a liability that existed at the date of the purchase related to the underaccrual of commissions payable. To date, there have been no other charges related to the estimated direct transaction costs or allocation of the purchase price. The Company expects, with the exception of items related to open tax years, that the purchase price allocation period will end prior to the end of 2004.

     This note should be read in conjunction with the Crystal Decisions Acquisition note in the Annual Report on Form 10-K for December 31, 2003.

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3. Goodwill and Other Intangible Assets

     The change in the carrying amount of goodwill was as follows (in thousands):

     Other intangible assets, at cost, consisted of the following (in thousands):

     Certain intangible assets are held by our subsidiaries and are revalued at each reporting period which may result in a higher or lower cost base than originally recorded. There were no additions or impairment of long-lived assets during the quarter ended March 31, 2004. The aggregate intangible amortization expense was $7.8 million for the quarter ended March 31, 2004 and $737,000 for the quarter ended March 31, 2003. Amortization of $5.2 million is included in cost of net license fees for the quarter ended March 31, 2004, compared to $1.9 million for the quarter ended March 31, 2003. Amortization of $2.3 million is included in cost of service revenues for the quarter ended March 31, 2004, compared to $513,000 for the quarter ended March 31, 2003. Intangible assets are amortized on a straight-line basis over their respective estimated useful lives, which are generally 5 years.

     The estimated amortization expense for the next five fiscal years on existing other intangible assets is as follows. The estimated amortization expense is presented in U.S. dollars and does not take into account the foreign exchange impact expected on certain intangible assets.

4. Accounts Receivable

     Accounts receivable are stated net of allowance of doubtful accounts and distribution channel returns of $13.0 million at March 31, 2004 and $9.9 million at December 31, 2003. These allowances included bad debt reserves of $7.5 million at March 31, 2004 and $6.2 million at December 31, 2003.

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5. Earnings per Ordinary Share and ADS

     The components of basic and diluted earnings per ordinary share and ADS were as follows:

     In December 2003, the Company issued approximately 23.3 million ordinary shares as partial consideration for the purchase of Crystal Decisions. For the quarter ended March 31, 2004, approximately 1.1 million shares were issued on the exercise of stock options under stock option and employee purchase plans. For the quarter ended March 31, 2004 and 2003, respectively, 5.0 million and 5.5 million ordinary shares or ADSs were excluded from the calculation of diluted earnings per share because the options’ exercise price was greater than the average market price of ordinary shares or ADSs and such impact would not be dilutive.

     During December 2003, Business Objects assumed the as-converted outstanding options of former Crystal Decisions optionees. An aggregate of 6.3 million ordinary shares were issued to Business Objects Option LLC, which are issuable upon exercise of the options held at December 11, 2003 by former Crystal Decisions optionees. As Business Objects Option LLC is an indirect wholly owned subsidiary of Business Objects, the shares are not deemed to be outstanding and will not be entitled to voting rights until such time as the option holders exercise their options. During the quarter ended March 31, 2004, optionees exercised approximately 740,000 of these options.

6. Comprehensive Income

     Comprehensive income includes foreign currency translation gains and losses that have been excluded from net income and reflected instead in shareholders’ equity (in thousands):

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7. Business Segment Information

     The Company has one reportable segment - business intelligence software products. The Company recognizes its net license fees from three product families: Business Intelligence Platform, Enterprise Analytic Applications and Data Integration. The Company does not track services revenues by product family as it is impracticable to do so. The following summarizes net license fees recognized from each product family (in thousands):

     The following is a summary of our revenues by geographic region (in thousands):

8. Business Restructuring Charge

Acquisition-related Restructuring Liabilities

Crystal Decisions

     In December 2003, prior to the Crystal Decisions Acquisition, management began to assess and formulate a plan to restructure the combined company’s operations to eliminate duplicative activities, focus on strategic products and reduce the company’s cost structure. Management approved and committed the company to the plan shortly after the completion of the acquisition. The plan consisted primarily of the involuntary termination of 353 employees and the exit of certain facilities.

     Restructuring costs of $13.5 million related to Crystal Decisions were accounted for under EITF Issue No. 95-3 “Recognition of Liabilities in Connection with Purchase Business Combinations” (“EITF 95-3”). These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Crystal Decisions.

Restructuring Costs Expensed in 2003

     Accrued restructuring costs of $7.8 million related to the pre-acquisition Business Objects organization were expensed in accordance with FAS No. 146, "Cost Associated with Exit or Disposal Activities” (“FAS 146”). The charge consisted of severance and other related benefits for 159 employees across all functions worldwide. The Company paid severance and other related benefits of $2.9 million to 52 of these employees during the quarter ended March 31, 2004, and expects to pay the remaining balance during the remainder of 2004 in accordance with this restructuring plan. In addition to the $7.8 million of restructuring charges expensed in the fourth quarter of 2003, the Company anticipates that there will be additional charges related

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to exiting certain facilities previously leased by Business Objects prior to the Crystal Decisions Acquisition. These costs, which are estimated at $5.5 million, will be recognized as the facilities are vacated during 2004 as required under FAS 146.

     The balance of accrued restructuring charges associated with Business Objects employees prior to the Crystal Decisions Acquisition was as follows at March 31, 2004 (in thousands):

Restructuring Costs Included as a Cost of the Crystal Decisions Acquisition

     The charge of $13.5 million related to the Crystal Decisions Acquisition consisted primarily of severance and other related benefits for 194 employees across all functions worldwide and duplicative facilities in the Americas, Europe and Japan. The company paid benefits of approximately $4.7 million to 65 employees across all regions during the quarter ended March 31, 2004. The Company expects to pay the remaining restructuring liability during 2004. There are no significant additional expected terminations associated with this restructuring plan. Costs accrued to abandon 11 facilities primarily include future minimum lease payments once the facilities are vacated, net of estimated sublease income of $450,000, that are expected to remain through 2008. Cash payments during the quarter ended March 31, 2004, relate to minimum lease payments and settlement costs related to properties vacated at quarter end.

     The balances of accrued restructuring charges included as a cost of acquisition related to Crystal Decisions were as follows at March 31, 2004 (in thousands):

     Acta Technology, Inc.

     Immediately prior to the Company’s acquisition of Acta Technology, Inc. (“Acta”), Acta’s management initiated and approved plans to restructure Acta’s operations. The restructuring plan reduced Acta’s cost structure and better aligned product and operating expenses with then existing general economic conditions. Acta recorded approximately $13.5 million of restructuring costs in connection with restructuring the pre-acquisition Acta organization. Costs to restructure pre-acquisition Acta were accounted for under EITF 95-3. These costs were recorded as liabilities assumed as part of the purchase price allocation.

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     This restructuring liability consisted primarily of severance and other employee benefits and costs of vacating duplicate facilities. The severance and other employee benefits related to the planned termination of approximately 50 employees worldwide. Other related restructuring charges consisted primarily of the cost of vacating duplicate facilities and a $1.2 million write-down of excess equipment. The charge for lease abandonment was $7.9 million, representing total future minimum lease payments and settlement costs due through 2007, net of projected sublease income of $4.2 million for Acta’s Mountain View, California headquarters and other smaller European offices.

     The balance of accrued restructuring charges was capitalized as a cost of acquisition and was as follows at March 31, 2004 (in thousands):

     Upon termination of Acta’s Mountain View lease, the remaining $2.7 million accrual related to this property was reversed to goodwill. The remaining accrual of $544,000 at March 31, 2004 and $677,000 at December 31, 2003, represents the estimated future minimum lease payments for Acta’s U.K. facility which includes payments until 2005.

Non-Acquisition-related Restructuring Liabilities

     During the quarter ended June 30, 2002, the Company implemented a restructuring plan to eliminate approximately 50 positions in the Company’s European field operations in order to better align its revenues and costs structure in Europe in response to the region’s overall weak IT spending environment. In addition, the Company eliminated excess office space in France, Italy, Spain and Switzerland. Implementation of the plan resulted in restructuring charges to earnings totaling $3.9 million for severance and other employee termination benefits and costs associated with exiting facilities, representing the excess of lease costs over anticipated sublease income.

     During the quarter ended December 31, 2002, the Company substantially completed its restructuring plan, at which time the Company reversed $610,000 of previously-accrued expenses. The reversal was primarily due to savings from planned termination costs resulting from normal employee attrition for three of the 50 positions that were to be eliminated, lower than planned costs per terminated employee and the utilization of certain facilities originally scheduled for abandonment. In addition, during the quarter ended December 31, 2002, the Company adopted an additional restructuring plan to eliminate an additional four positions as part of its ongoing efforts to better align operating expenses with revenues. Implementation of this plan resulted in restructuring charges to earnings totaling $725,000 for severance and other employee termination benefits.

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     The Company has completed the implementation of both restructuring plans. The remaining $513,000 restructuring accrual relates to estimated remaining legal costs or payments to terminated employees who have initiated legal action against the Company. The Company does not expect a resolution in these lawsuits before the fourth quarter of 2004. No amounts were paid during the quarter ended March 31, 2004.

     The following table summarizes the Company’s accrued restructuring costs at March 31, 2004 (in thousands):

9. Legal Matters

     On October 17, 2001, the Company filed a lawsuit in the United States District Court for the Northern District of California against MicroStrategy Incorporated (“MicroStrategy”) for alleged patent infringement. The lawsuit alleges that MicroStrategy infringes on the Company’s U.S. Patent No. 5,555,403 by making, using, offering to sell and selling its product currently known as MicroStrategy Version 7.0. The Company’s complaint requested that MicroStrategy be enjoined from further infringing the patent and seeks an undetermined amount of damages. On June 27, 2003, MicroStrategy filed a motion for summary judgment that its products do not infringe the Company’s patent. On August 29, 2003, the Court ruled that the Company’s patent is not literally infringed and that the Company was estopped from asserting the doctrine of equivalents and dismissed the case. The Company has appealed the Court’s judgment to the Court of Appeals for the Federal Circuit and anticipates a ruling on the appeal in early 2005. The Company cannot reasonably estimate at this time whether a monetary settlement will be reached.

     On October 30, 2001, MicroStrategy filed an action for alleged patent infringement in the United States District Court for the Eastern District of Virginia against the Company and its subsidiary, Business Objects Americas. The complaint alleges that the Company’s software products, BusinessObjects Broadcast Agent Publisher, BusinessObjects Broadcast Agent Scheduler and BusinessObjects Infoview, infringe MicroStrategy’s U.S. Patent Nos. 6,279,033 and 6,260,050. In December 2003, the Court dismissed MicroStrategy’s claim of infringement on U.S. Patent No. 6,279,033 without prejudice. Trial on U.S. Patent No. 6,260,050 originally set for April 12, 2004 has been continued by the Court to June 16, 2004. The Company believes that it has valid defenses and will continue vigorously to defend the action. Should an unfavorable outcome arise, there can be no assurance that such outcome would not have a material adverse affect on Business Objects’ liquidity, financial position or results of operations.

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     In April 2002, MicroStrategy obtained leave to amend its patent claims against the Company to include claims for misappropriation of trade secrets, violation of the Computer Fraud and Abuse Act, tortuous interference with contractual relations and conspiracy in violation of the Virginia Code, seeking injunctive relief and damages. On December 30, 2002, the Court granted the Company’s motion for summary judgment and rejected MicroStrategy’s claims for damages as to the causes of action for misappropriation of trade secrets, Computer Fraud and Abuse Act and conspiracy in violation of the Virginia Code. Trial of the trade secret claim for injunctive relief and the sole remaining damages claim for tortious interference with contractual relations started on October 20, 2003. On October 28, 2003, the Court granted judgment as a matter of law in favor of the Company and dismissed the jury trial on MicroStrategy’s allegations that the Company tortiously interfered with certain employment agreements between MicroStrategy and its former employees. The Court took MicroStrategy’s claim for misappropriation of trade secrets under submission and has yet to rule. The only relief which remains available under the Court’s prior rulings is for an injunction. Should an unfavorable outcome arise, there can be no assurance that such outcome would not have a material adverse affect on Business Objects’ liquidity, financial position or results of operations. MicroStrategy also seeks an award of its attorneys’ fees in an undisclosed amount, should they prevail on the injunction claim. The Company does not believe that any attorneys’ fees awarded will be material.

     On December 10, 2003, MicroStrategy filed an action for patent infringement against Crystal Decisions in the United States District Court for the District of Delaware. The Company became a party to this action when it acquired Crystal Decisions on December 11, 2003. The complaint alleges that the Crystal Decisions software products, Crystal Enterprise, Crystal Reports, Crystal Analysis and Crystal Applications, infringe MicroStrategy’s U.S. Patent Nos. 6,279,033, 6,567,796 and 6,658,432. The complaint seeks relief in the form of an injunction, unspecified damages, an award of treble damages and attorney’s fees. The Company’s investigation of this matter is at a preliminary stage and no discovery has been obtained. The Company intends vigorously to defend this action. Should an unfavorable outcome arise, there can be no assurance that such outcome would not have a material adverse affect on Business Objects’ liquidity, financial position or results of operations.

     The Company became party to the following action when it acquired Crystal Decisions in December 2003. In November 1997, Vedatech Corporation (“Vedatech”) commenced an action in the Chancery Division of the High Court of Justice in the United Kingdom against Crystal Decisions (UK) Limited, now a wholly owned subsidiary of Business Objects Americas. The liability phase of the trial was completed in March 2002, and Crystal Decisions prevailed on all claims except for the quantum meruit claim. The court ordered the parties to mediate the amount of that claim and, in August 2002, the parties came to a mediated settlement. The mediated settlement was not material to Crystal Decisions’ operations and contained no continuing obligations. In September 2002, however, Crystal Decisions received a notice that Vedatech was seeking to set aside the settlement. The mediated settlement and related costs were accrued in the consolidated financial statements. In April 2003, Crystal Decisions filed an action in the High Court of Justice seeking a declaration that the mediated settlement agreement is valid and binding. In connection with this request for declaratory relief Crystal Decisions paid the agreed settlement amount into court.

     In October 2003, Vedatech and Mani Subramanian filed an action against Crystal Decisions, Crystal Decisions (UK) Limited and Susan J. Wolfe, then Vice President, General Counsel and Secretary of Crystal Decisions, in the United States District Court, Northern District of California, San Jose Division, alleging that the August 2002 mediated settlement was induced by fraud and that the defendants engaged in negligent misrepresentation and unfair competition. In October 2003, Crystal Decisions (UK) Limited, Crystal Decisions (Japan) K.K. and Crystal Decisions filed an application with the High Court of Justice claiming the proceedings in the United States District Court, Northern District of California, San Jose Division were commenced in breach of an exclusive jurisdiction clause in the settlement agreement and requesting injunctive relief to restrain Vedatech from pursuing the United States District Court proceedings. A hearing in the High Court of Justice took place in January 2004 to determine whether the injunction should be granted. The hearing was continued, and concluded March 9, 2004. The court has not yet rendered its decision.

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     Although Business Objects believes that Vedatech’s basis for seeking to set aside the mediated settlement and its claims in the October 2003 complaint is meritless, the outcome cannot be determined at this time. If the mediated settlement were to be set aside such an outcome could adversely affect Business Objects’ financial position, liquidity and results of operations.

     On July 15, 2002, Informatica Corporation (“Informatica”) filed an action for alleged patent infringement in the United States District Court for the Northern District of California against Acta. The Company became a party to this action when it acquired Acta in August 2002. The complaint alleges that the Acta software products infringe Informatica’s U.S. Patent Nos. 6,014,670, 6,339,775 and 6,208,990. On July 17, 2002, Informatica filed an amended complaint alleging that the Acta software products also infringe U.S. Patent No. 6,044,374. The complaint seeks relief in the form of an injunction, unspecified damages, an award of treble damages and attorney’s fees. The Company has answered the suit, denying infringement, and asserting that the patents are invalid, and other defenses. The parties are currently engaged in discovery and are awaiting a claim construction order to be issued by the Court. The August 16, 2004 trial date previously set has been vacated by the Court and will probably not be set again until the Court issues its claim construction order. The Company intends vigorously to defend the action. Should an unfavorable outcome arise, there can be no assurance that such outcome would not have a material adverse affect on Business Objects’ liquidity, financial position or results of operations.

     The Company is also involved in various other legal proceedings in the ordinary course of business and none is believed to be material to its financial condition and results of operations. Where the Company believes a loss is probable and can be reasonably estimated, the estimated loss is accrued in the consolidated financial statements. Where the outcome of these matters is not determinable, no provision is made in the financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known.

10. Notes and Escrows Payable and Restricted Cash

     At December 31, 2003, the Company held an aggregate of $9.7 million in notes payable related to its August 2002 purchase of Acta, which are secured by restricted cash. These amounts were originally due in February 2004 subject to indemnification obligations. As Informatica has filed an action for alleged patent infringement against Acta, which is not yet resolved, the amounts held in escrow were not available for release at March 31, 2004. The Company has assessed that one-third of the escrow will be available to former Acta employees to be distributed from escrow during the quarter ended June 30, 2004. Restricted cash also includes $526,000 subject to withdrawal restrictions for bonuses to be paid to Acta employees subject to employment related contingencies, $2.0 million which secures an overdraft credit facility and $7.0 million related to a deposit held to secure the leased space in San Jose, California.

11. Credit Line

     In November 2003, Business Objects executed a line of credit for one year ending November 25, 2004. The line provides up to €60 million which can be drawn in euros, U.S. dollars or Canadian dollars for general working capital requirements. The available amount is reduced by the aggregate of all outstanding drawings against the line of credit. Drawings are limited to advances in duration of ten days to twelve months and must be at least equal to €1 million or the converted currency equivalent in U.S. dollars or Canadian dollars or a whole-number multiple of these amounts. All drawings and interest amounts are due on the agreed upon credit repayment date determined at the time of the drawing. Interest is calculated dependent on the currency in which the draw originally occurs. The line is subject to a commitment fee on the available funds, payable on the first day of each quarter. The terms of the agreement do not allow for the prepayment of any drawings without the prior approval of the bank. The Company has the option to reduce the credit available in multiples of €5 million, without penalty. No drawings were made by the Company at March 31, 2004 or at December 31, 2003. The agreement restricts certain of the Company’s activities including the extension of a mortgage,

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lien, pledge, security interest or other rights related to all or part of its existing or future assets or revenues, as security for any existing or future debt for money borrowed.

12. Accounting for and Disclosure of Guarantees

     Guarantor’s Accounting for Guarantees. The Company from time-to-time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and employees and third parties, under which the Company may be required to indemnify such persons for liabilities arising out of their duties to the Company, and (iii) agreements under which the Company indemnifies customers and partners for claims arising from intellectual property infringement.

     The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of March 31, 2004 and December 31, 2003.

     The Company warrants to its customers that its software products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties are generally 30 days but may vary depending upon the country in which the product is sold. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified warranty claims. Due to extensive product testing, the short time between product shipments and the detection and correction of product failures, no history of material warranty claims, and the fact that no significant warranty issues have been identified, the Company has not recorded a warranty accrual to date.

     Environmental Liabilities. The Company only engages in the development, marketing and distribution of software, and it has never had any environment related claim. Therefore, the likelihood of incurring a loss related to these environmental indemnifications is remote and thus the Company is unable to reasonably estimate the amount. As a result, the Company has not recorded a related liability in accordance with the recognition and measurement provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” (“FAS 143”).

     Other Liabilities and Other Claims. The Company is responsible for certain costs of restoring leased premises to their original condition in accordance with the recognition and measurement provisions of FAS 143. During the quarter ended March 31, 2004, the Company recorded approximately $200,000 accrual and related expense for dilapidation costs to return a leased property to its original state. This liability was not related to the acquisition and accordingly is recorded as other current liabilities and a charge to general and administrative expense. Aside from this amount, the fair value of these obligations is not material at March 31, 2004.

13. Income Taxes

     The Company is subject to income taxes in numerous jurisdictions and the use of estimates is required in determining the Company’s provision for income taxes. Although the Company believes its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business. Due to the Company’s size it contemplates it will regularly be audited by tax authorities in most jurisdictions.

     The Company’s effective tax rate was 38% for the quarter ended March 31, 2004 and 2003. The Company provides for income taxes for each interim period based on the estimated annual effective tax rate for the year.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with our Condensed Consolidated Financial Statements and the Notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Business Objects and our industry. These forward-looking statements include, but are not limited to, statements concerning risks and uncertainties. Business Objects’ actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in the “Factors Affecting Future Operating Results” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q. Business Objects undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

     Business Objects is a leading worldwide provider of Business Intelligence solutions. We develop, market and distribute software that enables organizations to track, understand and manage enterprise performance within and beyond the enterprise. This allows organizations to make better, more informed business decisions. Users can view and interact with key performance indicators in a dashboard, create queries or reports, access catalogs of reports and do simple or complex analysis of the data. Users generally interact with data using business representations of information, or “business objects,” with which they are familiar. We have one reportable segment – Business Intelligence software products.

Key Performance Indicators

     On December 11, 2003, we acquired Crystal Decisions for its complementary geographical strengths, products, services and solutions that allow us to provide a more complete suite of Business Intelligence products to a broader range of business users. The Crystal Decisions Acquisition did not result in any new reportable segments, nor do we track the business operations from legacy Crystal Decisions. The first quarter of 2004 included a complete quarter of revenues and expenses of Crystal Decisions, and as a result our historical results are not expected to be indicative of our future results. In addition, we will incur certain acquisition related charges in the future, the magnitude of which we have not experienced in the past. The following table shows the estimated 2004 to 2008 acquisition related expenses resulting from the Crystal Decisions Acquisition.

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     During the quarter ended March 31, 2004, we expensed $5.2 million of amortization of developed technology, $2.6 million of amortization of other intangible assets and $2.1 million of amortization of stock-based compensation. At March 31, 2004, we had not completed the exit of any former Business Objects facilities and thus had not incurred any additional restructuring charges. These charges are expected to be incurred during the remainder of 2004.

Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations

     The translated U.S. dollar value of our revenues and expenses are impacted by changes in foreign currency exchange rates because we conduct a significant portion of our business in currencies other than the U.S. dollar, the currency in which we report our financial statements. Historically, we have generated a significant portion of our revenues and incurred a significant portion of our expenses in euro, British pound sterling and Japanese yen. As a result of the Crystal Decisions Acquisition, we incur a significant portion of our expenses in the Canadian dollar.

     The impact of fluctuations in foreign currency exchange rates on our net operating income has been mitigated by the fact that the level of our foreign currency denominated expenses has tended to be largely offset by the level of our foreign currency denominated revenues. Because non-U.S. denominated revenues and expenses were approximately equal, this exchange rate impact on income from operations was a decrease of $784,000. This decrease represents the decrease in income from operations assuming income from operations for the first quarter of 2004 were measured at the same rates applicable for the first quarter of 2003. This net decrease was comprised of: a $16.9 million increase in total revenues offset by a $3.8 million increase in cost of revenues and a $13.9 million increase in operating expenses.

     Our operating results may be adversely impacted by foreign currency exchange rate fluctuations in the future. In addition, our results of operations can be impacted by the effect of currency exchange rate fluctuations where assets or liabilities, such as inter-company loans, are held in any of our subsidiaries’ currencies other than their local statutory reporting currency. At March 31, 2004, significant inter-company loans existed due to currency transfers between consolidated entities associated with the Crystal Decisions Acquisition. During the quarter ended March 31, 2004, a net foreign currency loss of $6.8 million was recorded. A significant portion of this net foreign currency loss relates to “mark to market” currency losses related to inter-company loans that occurred as part of the Crystal Decisions Acquisition and integration process.

     In order to mitigate the risk of these currency losses occurring in the future, subsequent to the quarter ended March 31, 2004, the Company entered into forward exchange contracts for the purchase of U.S. dollars, Canadian dollars and pounds in exchange for euros at a future date. This future date coincides with the expiration of the inter-company loans between two of our subsidiaries. We believe we have contained the majority of the exposure related to our most material inter-company loans using this strategy. In order to facilitate this strategy, we entered into a pledge and security agreement on April 28, 2004 with a bank who will provide foreign exchange services to us and our subsidiaries.

     As of March 31, 2004, we held forward exchange contracts in the nominal amount of $86.7 million to mitigate some of our exposure to the risk of changes in foreign currency exchange rates between the U.S. and Canadian dollar. Subsequent to the quarter ended March 31, 2004, we entered into an additional $32 million of forward exchange contracts. We cannot predict the effect of exchange rate fluctuations upon our future results. Although we may hedge our foreign exchange risk in the future, we cannot be sure that any hedging techniques we may implement will be successful or that our business, results of operations, financial condition or cash flows will not be adversely affected by exchange rate fluctuations.

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Results of Operations

     The following table shows each line item on our condensed consolidated statements of income as a percent of total revenues:

Revenues

     Net License Fees. Net license fees increased by $58.3 million, or 104%, in the first quarter of 2004 from the first quarter of 2003. On a constant currency basis net license fees increased 88% year-over-year. Revenues from our Business Intelligence platform products, which include all current versions of Crystal Decisions product suites in 2004, increased by 114% year-over-year. This increase was attributable to the addition of the Crystal Decisions product suite, and to increased sales of our Enterprise 6 product, which was released in the second quarter of 2003. The increase was to a lesser extent the result of an increase of 176% in Data Integration license revenues.

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     We generate net license fees from the sale of licenses to use our software products. We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our net license fees through our direct sales force. The acquisition of Crystal Decisions strengthened our strong base of channel partner relationships, including original equipment manufacturers, value added resellers, system integrators and independent distributors. Net license fees from channel partners comprised 38% of total net license fees in the first quarter of 2004 compared to 41% in the first quarter of 2003. Net license fees from indirect channels increased by $20.0 million to $43.1 million for the first quarter of 2004 from $21.8 million for the first quarter of 2003. The percentage of our net license fees can fluctuate between periods, as this revenue channel is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single customer or channel partner represented more than 10% of total revenues during the periods presented.

     Service Revenues. Service revenues increased by $40.4 million, or 65%, in the first quarter of 2004 from the first quarter of 2003, which was comprised of a 60% increase in maintenance and support revenues and a 77% increase in professional services revenues including consulting and training. The increases in maintenance and support revenues in the first quarter of 2004 were primarily attributable to our acquisition of Crystal Decisions and, and to a lesser extent year-over-year growth in sales to our installed customer base. The increases in consulting and training services revenue in the first quarter of 2004 were principally due to our acquisition of Crystal Decisions, plus increased uptake in our on-line and on-site training services.

     As a percentage of total revenues, services revenues have decreased to 47% of total revenues for the first quarter of 2004 from 53% for the first quarter of 2003, while net license fees increased from 47% to 53% of total revenues. This change is primarily attributable to the proportion of Crystal Decisions total revenues which were historically split between license and services revenues at the ratio of 60-65% for net license fees and 35-40% for services revenues.

     Geographic Revenues Mix

     The following shows the geographic mix of our total revenues:

     European revenues increased 68% in the first quarter of 2004 over the first quarter of 2003 (year-over-year), decreasing as a percentage of total revenues in the first quarter of 2004 to 44% from 48% in the first quarter of 2003. Americas revenues increased 99% year-over-year increasing as a percentage of total revenues in the first quarter of 2004 to 48% from 44% in the first quarter of 2003. The mix shift from 44% Americas / 48% Europe to 48% Americas / 44% Europe is primarily due to the former Crystal Decisions earning a greater proportion of revenues from the Americas, with the region historically representing approximately 70% of total revenues for Crystal Decisions The percentage of total revenues for Asia Pacific and Japan remained constant at 8% of total revenues, with revenues from Japan and Asia Pacific increasing by 20% and 203%, respectively, year-over-year. While smaller than our sales in Europe and the Americas our revenues in Asia Pacific and Japan regions have continued to increase significantly as we continue to penetrate this market. License revenue in the Americas increased by 135% year-over-year, with European revenues increasing by 75% year-over-year primarily due to the acquisition of Crystal Decisions.

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Cost of Revenues

     Cost of revenues as a percentage of total revenues increased to 23% in the first quarter of 2004 from 18% in the first quarter of 2003. Two-thirds of this five percent increase was attributable to the amortization of intangible assets including developed technology and maintenance and support contracts acquired in the Crystal Decisions Acquisition. The additional increase was the result of the addition of Crystal Decisions costs associated with the previous Crystal Decisions revenues which had lower margins than historically obtained by Business Objects.

     Cost of net license fees. Gross margins on net license fees were 93% for the first quarter of 2004 compared to 98% for the first quarter of 2003. Cost of net license fees increased $6.8 million, or 5%, of net license fees in the first quarter of 2004, primarily due to $4.7 million in amortization of developed technology acquired through the acquisition of Crystal Decisions in December 2003. The remaining increase is the result of the costs associated with selling license fees and additional costs related to the release of version 10 of the Crystal Decisions product in January 2004.

     Cost of services revenues. Cost of services revenues consisted largely of compensation and benefits for technical support, consulting and training personnel. Cost of service revenues increased $21.6 million, or 108%, to 41% of service revenues in the first quarter of 2004 from 32% in the first quarter of 2003. Approximately 10% of this increase relates to $2.2 million of amortization of maintenance and support contracts acquired through the acquisition of Crystal Decisions. In addition, as a result of the application of purchase accounting, we were unable to recognize approximately $12.6 million of deferred revenues in the first quarter of 2004. The $12.6 million represents a portion of the total deferred revenues that were recorded on Crystal Decisions’ balance sheet on the date of acquisition. As there are related costs to performing the services associated with the deferred revenue, costs of services revenues as a percentage of services revenues have increased as anticipated. The majority of the increase was the result of increased headcount costs. Maintenance and services headcount grew to 975 employees at March 31, 2004 from 489 employees at March 31, 2003, primarily due to the addition of Crystal Decisions employees.

     Gross margin on services revenues were 59% for the first quarter of 2004 compared to 68% for the first quarter of 2003. The decrease in gross margin is primarily due to the accounting loss of the aforementioned $12.6 million of customer support revenues, additional outsourcing which is generally more costly than the use of internal employees, and to a lesser extent, to an increase in the level of amortization expense due to the acquisition of Crystal Decisions.

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OPERATING EXPENSES

     For the quarter ended March 31, 2004, total operating expenses included $1.8 million of the $2.1 million of amortization of unearned stock-based compensation cost related to the assumption of options on the acquisition of Crystal Decisions. The total expense represents the realization of the benefit by the employee on vesting of a portion of these stock options, and is expensed by operating expense line associated with the employee department. There was no comparable expense during the first quarter of 2003. Even including the charges, total operating expenses remained constant at 73% of total revenues.

Sales and Marketing Expenses

     Sales and marketing expenses increased by $40.8 million, or 72%, in the first quarter of 2004 from the first quarter of 2003. The increase in absolute dollars was primarily due to increased employee expenses, including commissions, resulting from the acquisition of Crystal Decisions and the addition of approximately 650 sales and marketing employees. This represents an approximate 50% increase in total sales and marketing headcount. Sales and marketing expenses decreased by 3% of revenues due to a overall change in commission structure and a lower average cost structure per employee. Sales and marketing expenses also increased in conjunction with the 2004 sales kickoff and the costs associated with marketing and advertising of the acquisition of Crystal Decisions and our integrated product road map, which took place in January 2004, with no comparable prior expense in the first quarter. In addition, approximately $7.4 million of this increase resulted from unfavorable foreign exchange movements if the first quarter of 2004 expense had been calculated at exchange rates for the first quarter of 2003.

Research and Development Expenses

     Research and development expense increased by $17.1 million, or 76%, and decreased by 1% of total revenues. The increase in absolute dollars was the result of ongoing research and development for both product groups and new costs associated with developing our integrated product suite, including increased headcount. Approximately $4.8 million of this increase resulted from unfavorable foreign exchange movements on this expense for the first quarter of 2004 compared to the first quarter of 2003. The decrease as a percentage of total revenues reflects higher research and development costs incurred in the first quarter of 2003 associated with the integration of Acta’s product lines. As we continue to invest in our integrated product suite, we expect research and development costs to increase in absolute dollars and fluctuate as a percentage of total revenues in future periods.

General and Administrative Expenses

     General and administrative expense increased by $13.5 million, or 165%, and increased by 4% as a percentage of total revenues in the first quarter of 2004 compared to the first quarter of 2003. This increase resulted from increased employee related costs, integration expenses, professional fees related to information technology, consulting and the defense of legal proceedings, and an increase in bad debt expense for accounts receivable identified as doubtful of approximately $2.0 million, all primarily associated with our acquisition of Crystal Decisions. General and administrative expense includes amortization expense related to trade names acquired in the Crystal Decisions Acquisition. Amortization is expected to be approximately $310,000 for each quarter over the next five years, subject to foreign currency fluctuations.

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Interest and Other Income (Expense), Net

     Interest and other income (expense), net were comprised of the following:

     Interest and other income (expense), net represented (2%) of total revenues in the first quarter of 2004 and 3% in the first quarter of 2003. Net interest income decreased during the quarter ended March 31, 2004 compared to the same period in 2003, as the average balance of invested cash and short-term investments for the first quarter of 2004 was on average lower than the average balance in the first quarter of 2003. The patent infringement settlement income results from payments received on the settlement of our patent infringement lawsuit against Cognos for Cognos’ future use of our patented technology under U.S. Patent No. 5,555,403. The payment terms included the payment of $1.8 million each quarter commencing in the quarter ended September 30, 2002 up to and including the quarter ended June 30, 2004.

     The net foreign exchange loss for the first quarter of 2004 represented non-operating net currency exchange losses which were primarily caused by the effect of a stronger U.S. dollar on our euro-denominated intercompany U.S. dollar loans, which occurred as part of the Crystal Decisions Acquisition and integration process. These intercompany loans and the interest thereon is eliminated on consolidation, however, we incurred a “mark to market” loss on the translation of these loans from U.S. dollars to euros on the euro-denominated statutory books. These currency translation losses are recorded in other income (expense).

Income Taxes

     Our effective tax rate was 38% for the first quarters of 2004 and 2003. We provide for income taxes for each interim period based on the estimated annual effective tax rate for the year.

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Liquidity and Capital Resources

     The following table shows our cash flow and changes in cash, cash equivalents and short-term investments:

     Operating Activities. Our principal source of liquidity has been our operating cash flow and funds provided by stock option exercises. During the quarter ended March 31, 2004 we used greater cash resources than we generated. The decrease in cash provided by operations was attributable to: cash payments of restructuring charges; a net decrease of $24.4 million in accrued payroll and related expenses which included severance payments to former Crystal Decisions employees, offset by normal course accruals; and slower collection of accounts receivable which is reflected in the increase in days sales outstanding from 53 days at March 31, 2003 to 75 days at March 31, 2004, and resulted in $24.5 million less cash from operations in the first quarter of 2004 compared to 2003. These uses of cash were offset by cash received from deferred revenues, which will be recognized over the next year.

     Investing Activities. The decrease in net cash provided by investing activities resulted from $7.7 million of capital purchases in the first quarter of 2004 and the absence of any sales of short-term investments, which were $9.4 million during the quarter ended March 31, 2003. Capital expenditures for the first quarter of 2004 included costs related to the continued implementation of financial systems and information technology infrastructures.

     Financing Activities. The increase in net cash provided by financing activities was attributable to cash received of $13.9 million from the issuance of ordinary shares or ADSs under our stock option and employee stock option plans. Exercises by former Crystal Decisions’ optionees, including certain former executive officers, account for the majority of the increase in activity. We cannot predict when our employees will exercise their stock options and as such, this source of cash is expected to vary.

     Cash, cash equivalents and short-term investments totaled $245.9 million at March 31, 2004, an increase of $10.5 million from December 31, 2003. On December 11, 2003, we completed the acquisition of Crystal Decisions and paid as partial consideration approximately $307.6 million in cash. At March 31, 2004, approximately 42% of our cash and cash equivalents were denominated in currencies other than the U.S. dollar.

Future Liquidity Requirements

     Changes in the demand for our products and services could impact our operating cash flow. However, based on our forecasts, we believe that our existing cash and cash equivalents will be sufficient to meet our consolidated cash requirements (for working capital, capital expenditures and lease commitments) for the foreseeable future. Although we expect to continue to generate cash from operations, we may seek additional financing from debt or equity issuances which we believe would be available on reasonable terms. In order to provide flexibility to obtain cash availability on a short-term basis, we obtained a €60 million line of credit in

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the fourth quarter of 2003 which can be drawn in euros, U.S. dollars or Canadian dollars to support our cash management practices. At March 31, 2004 and December 31, 2003, no amount was outstanding under this line of credit.

     On April 28, 2004, we entered into a Pledge and Security Agreement pursuant to which a bank will provide foreign exchange services to us. In order to secure this agreement we are required to maintain at least $33.3 million with the bank as collateral, which is to be held in a money market fund. This agreement grants the bank a security interest in the collateral as security for the prompt performance of all obligations with respect to, or arising out of, the foreign exchange agreements.

     Our contractual obligations have not changed materially from those presented at December 31, 2003.

Guarantees

     From time to time, we enter into certain types of contracts that require us to indemnify parties contingently against third party claims. These contracts primarily relate to: (i) certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities, and other claims arising from our use of the applicable premises; (ii) certain agreements with our officers, directors and employees and third parties, under which we may be required to indemnify such persons for liabilities arising out of their duties to us; and (iii) agreements under which we indemnify customers and partners for claims arising from intellectual property infringement.

     The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of March 31, 2004 or at December 31, 2003. Additionally, we warrant that our software products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties are generally 30 days but may vary depending upon the country in which the software is sold. We accrue for known warranty issues if a loss is probable and can be reasonably estimated, and accrue for estimated incurred but unidentified warranty issues based on historical activity. To date we have had no material warranty claims. Due to extensive product testing, the short time between product shipments and the detection and correction of product failures, no history of material warranty claims, and the fact that no significant warranty issues have been identified, we have not recorded a warranty accrual to date.

     Environmental Liabilities. We only engage in the development, marketing and distribution of software, and we have never had any environment related claim. Therefore, the likelihood of incurring a loss related to these environmental indemnifications is remote and thus we are unable to reasonably estimate the amount. As a result, we have not recorded a related liability in accordance with the recognition and measurement provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” (“FAS 143”).

     Other Liabilities and Other Claims. We are responsible for certain costs of restoring leased premises to their original condition, and in accordance with the recognition and measurement provisions of FAS 143, we measured the fair value of these obligations at period end. We recorded approximately $200,000 of expenses related to one lease which we expect to vacate in the second quarter of 2004. No other amounts were determined to be material at March 31, 2004 and at December 31, 2003.

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ACQUISITIONS and Restructuring Charges

Crystal Decisions Acquisition

     Transaction. The total purchase price of $1.229 billion consisted of $307.6 million in cash, $768.6 million in newly issued shares, $139.1 million in stock options assumed and $13.9 million in estimated direct transaction costs. The total purchase price was allocated to the following fair values of Crystal Decisions’ assets and liabilities as of December 11, 2003 (in millions):

     During the quarter ended March 31, 2004, an adjustment was made to the net tangible assets acquired to reflect an under accrual of commissions due at the date of purchase. This adjustment of $346,000 resulted in a decrease to net tangible assets acquired and an increase to goodwill. The purchase price allocation is preliminary and the final amounts of net tangible assets and estimated transaction costs may change based on new information during the purchase price allocation period.

     Restructuring. Prior to the Crystal Decisions Acquisition, we began to assess and formulate a plan to restructure the combined company’s operations to eliminate duplicative activities, focus on strategic products and reduce the company’s cost structure. Our board of directors approved and committed to the plan shortly after the completion of the acquisition. The restructuring charge is discussed in detail in Note 8 to the Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.

     The restructuring accruals were based on our best estimates. However, if actual amounts paid for Crystal Decisions restructuring activities differ from those we estimated, the purchase price allocation may be adjusted in future periods. If actual amounts paid for the restructuring related to the pre-acquisition Business Objects organization differ from those we estimated, our liability would be adjusted as an increase or decrease to expense in the period that we change the estimate.

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     Restructuring Costs Included as a Cost of the Crystal Decisions Acquisition

     In December 2003, we accrued severance and other related benefits in connection with the involuntary termination of 194 Crystal Decisions employees and other restructuring costs in connection with the abandonment of facilities. Qualifying restructuring costs related to Crystal Decisions were accounted for in the purchase price allocation. During the first quarter of 2004, we paid $4.7 million in severance and other related benefits to 65 employees, and $222,000 in net minimum lease payment and settlement costs related to properties vacated. We expect to pay the remaining liability during 2004 as employees are terminated and facilities are vacated. The balance of accrued restructuring charges related to Crystal Decisions was as follows at March 31, 2004 (in millions):

Restructuring Costs Expensed Under FAS 146

     As a result of the acquisition of Crystal Decisions, we accrued approximately $7.8 million to expense related to restructuring costs for severance and other related benefits for 159 Business Objects employees across all functions worldwide. During the first quarter of 2004, the accrual was reduced by $2.9 million in cash payments related to the termination of 52 of these employees. We anticipate approximately $5.5 million of additional costs related to the exit of Business Object facilities that we occupied prior to the Crystal Decisions Acquisition. As these leased facilities have not as yet been exited, the restructuring or other expense related to these events has not been recorded in accordance with FAS 146, “Cost Associated with Exit or Disposal Activities”. We expect these costs to be incurred during 2004.

     The balance of accrued restructuring associated with Business Objects employees prior to the Crystal Decisions Acquisition was as follows at March 31, 2004 (in millions):

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Acquisition of Acta Technology, Inc. (“Acta”)

     Transaction. On August 23, 2002, we acquired Acta, a privately held data integration software vendor. The acquisition provided us with a comprehensive enterprise analytic platform for the delivery of custom-developed and pre-packaged analytic applications. The purchase price of $65.5 million in cash was allocated to the following fair values of Acta’s net tangible and intangible assets as of the date of the acquisition (in millions):

     Restructuring. Immediately prior to our acquisition of Acta, Acta’s management initiated and approved plans to restructure Acta’s operations. The restructuring plan reduced Acta’s cost structure and better aligned product and operating expenses with existing general economic conditions. Acta capitalized approximately $13.5 million of restructuring costs which were recorded as liabilities as part of the purchase price allocation. The restructuring liability consisted primarily of severance and other employee benefits and the costs of vacating duplicate facilities.

     During 2003 the lease for Acta’s Mountain View, California facility was terminated through an action to take the property by eminent domain by the Santa Clara Valley Transportation Authority. Upon termination of the lease, the remaining $2.7 million accrual related to this facility was reversed as an adjustment to goodwill. The balance of the accrued restructuring charges was capitalized as a cost of acquisition and was as follows to March 31, 2004 was (in millions):

     The remaining accrual of $0.6 million at March 31, 2004 represents estimated future minimum lease payments for Acta’s U.K. facility, which includes payments until 2005.

Other Restructuring Costs

In 2002, we implemented a restructuring plan to eliminate approximately 50 positions in our European field operations to better align the revenue and cost structure in Europe in response to the region’s overall weak IT spending environment. In addition, we eliminated excess office space in France, Italy, Spain and Switzerland. The total expense related to the involuntary termination of employees and the exit of facilities was $3.9 million. The remaining $0.5 million accrual as of March 31, 2004 represented estimated remaining legal costs or payments to terminated employees who have initiated legal action against us. There have been no changes in this balance since December 31, 2003.

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Off-Balance Sheet Arrangements

     We did not have any off-balance sheet arrangements at March 31, 2004 or December 31, 2003.

Recent Pronouncements

     See Note 1 in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

     We believe there have been no significant changes in our critical accounting policies during the quarter ended March 31, 2004 to what was previously disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2003.

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Factors Affecting Future Operating Results

   Risks Related to the Crystal Decisions Acquisition

We may not realize the benefits that we anticipate from the Crystal Decisions Acquisition within the time periods that we expect, or at all, because of integration and other challenges.

     On December 11, 2003, we acquired Crystal Decisions for total consideration of $307.6 million in cash and approximately 23.3 million of our ADSs. If we fail to successfully integrate Crystal Decisions into our operations or fail to realize any of the anticipated benefits of the acquisition, our business and results of operations severely could be harmed. Realizing the benefits of the acquisition will depend in part on the integration of our operations, people and technology. This integration effort is a complex, time-consuming and expensive process that could significantly disrupt our business. We may be unable to integrate the two companies successfully in a timely manner, if at all.

     Combining our product offerings is a complex and lengthy process involving a number of intermediate steps in which we will seek to achieve increasing degrees of integration of our products. We have informed our customers of our expected timing for various key milestones in our product integration efforts. Technical or other challenges in integrating our products could delay or prevent the successful integration of our products or cause us to incur unanticipated costs. If we fail to achieve one or more of these milestones as planned, our ability to market our products and our revenues and operating results could be seriously harmed.

     To market our products effectively, we are training our sales and marketing employees, who have historically marketed either Business Objects’ or Crystal Decisions’ products and services, to market our combined product and service offerings. While we are devoting significant efforts to training our employees to market our combined products, we cannot be sure that these efforts will be successful. If we do not successfully integrate and train our sales and marketing force, our ability to market our products and services and our revenues could suffer.

     The challenges involved in this integration effort also include the following:

•		demonstrating to our customers that the acquisition will not result in adverse changes in our client service standards or business focus;
•		preserving distribution, marketing or other important relationships of both companies and resolving potential conflicts that may arise;
•		coordinating and rationalizing research and development efforts to integrate our overlapping products and technologies successfully;
•		integrating the research and development teams, which is made more difficult because they are located in disparate geographies;
•		aligning the business cultures of the two companies while maintaining employee morale and retaining key employees;
•		dedicating significant management attention and financial resources needed to integrate the two companies without harming existing businesses;

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•		consolidating and rationalizing information technology, enterprise resource planning and administrative infrastructures while avoiding significant errors, delays or other breakdowns in our business processes such as order processing or technical support; and
•		managing a more complex corporate structure which requires additional resources for such responsibilities as tax planning, foreign currency management, financial reporting and risk management.

The market price of our shares may decline as a result of the Crystal Decisions Acquisition.

A number of factors could cause the market price of our shares to decline as a result of the Crystal Decisions Acquisition, including if:

•		our integration effort is not completed in a timely and efficient manner;
•		our assumptions about the business model and operations of Crystal Decisions were incorrect, or its role in our business does not develop as we planned;
•		the effect of the Crystal Decisions Acquisition on our financial results is not consistent with the expectations of financial or industry analysts; or
•		shareholders that hold relatively large interests in our company decide to dispose of their shares because the results of the Crystal Decisions Acquisition are not consistent with their expectations.

Charges to earnings resulting from the Crystal Decisions Acquisition may adversely affect the market value of our shares.

     In accordance with U.S. GAAP, we have accounted for the Crystal Decisions Acquisition using the purchase method of accounting. The impact of one-time and future charges associated with this acquisition, including any charges for impairment of goodwill, could have a material adverse effect on the market value of our shares. Under purchase accounting, we recorded as the cost of the transaction the market value of the acquisition consideration and the amount of direct transaction costs. We have allocated the cost of the transaction to our net tangible assets, amortizable intangible assets, intangible assets with indefinite lives and in-process research and development, based on their fair values as of the date of completion of the transaction, and recorded the excess of the purchase price over those fair values as goodwill. The portion of the estimated purchase price allocated to in-process research and development was expensed in the quarter ended December 31, 2003. We expect to incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the acquisition, which will reduce our operating results through 2008. In addition, we recorded goodwill of $978 million in connection with the Crystal Decisions Acquisition. If this goodwill, other intangible assets with indefinite lives or other assets acquired in the Crystal Decisions Acquisition become impaired, we may be required to incur material charges relating to the impairment of those assets. Any significant impairment charges will have a negative effect on our operating results and could reduce the market price of our shares.

     In addition, we expect to incur restructuring expenses and other charges to exit duplicative facilities during 2004, which we currently estimate to be approximately $5.5 million. We cannot be sure that these expenses and charges will not be higher than we currently anticipate. Our results of operations could be adversely affected by these and any additional restructuring or operating expenses and charges.

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The Crystal Decisions Acquisition could have an adverse effect on our revenues and profitability in the near term if customers delay, defer or cancel purchases as a result of the transaction.

     In response to the Crystal Decisions Acquisition and our product transition announcements, customers may seek to cancel existing purchases or delay or defer purchasing decisions which could have an adverse effect on our business. Prospective customers could determine not to purchase our products or services until we have demonstrated our ability to integrate our products with Crystal Decisions’ or until we release one or more future products that integrate capabilities and features of both Business Objects’ and Crystal Decisions’ products. In addition, prospective customers could be reluctant to purchase licenses for our products or services if the customers are uncertain about our strategic direction, the continuation of specific product offerings or our willingness to support and maintain existing products. These factors could cause a significant customer or a significant number of customers not to purchase or to delay purchase decisions, which could have an adverse effect on our results of operations and quarterly revenues such that they could be substantially below the expectations of market analysts, which could reduce the market price of our shares.

Uncertainty regarding the effects of the Crystal Decisions Acquisition could cause our strategic partners or key employees to make decisions which could adversely affect our business and operations.

     Some of our original equipment manufacturers, distributors and other strategic partners could decide to terminate their existing arrangements, or fail to renew those arrangements, as a result of the Crystal Decisions Acquisition. In addition, our key employees may decide to terminate their employment due to the Crystal Decisions Acquisition and other employees may experience uncertainty about their future with us, which could adversely affect our ability to retain key management, sales, technical and marketing personnel.

     Risks Related to Our Business

Our quarterly operating results will be subject to fluctuations.

     Historically, both our quarterly operating results and Crystal Decisions’ quarterly operating results have varied substantially from quarter to quarter, and we anticipate that this will continue as we operate as a combined company. The fluctuation occurred principally because our net license fees vary from quarter to quarter, while a high percentage of our operating expenses are relatively fixed and are based on anticipated levels of revenues. While the variability of our net license fees is partially due to factors that would influence the quarterly results of any company, our business is particularly susceptible to quarterly variations because:

•		we expect to receive a substantial amount of our revenues in the last weeks of the last month of a quarter, rather than evenly throughout the quarter;
•		our customers typically wait until the fourth quarter, the end of their annual budget cycle, before deciding whether to purchase new software;
•		economic activity in Europe generally slows during the summer months;
•		customers may delay purchasing decisions in anticipation of our new pricing structure and integrated product line, which reflects both Business Objects and Crystal Decisions products, other new products, product enhancements or platforms or in response to announced pricing changes by us or our competitors;
•		we expect our revenues may vary based on the mix of products and services of, and the amount of consulting services, our customers orders;

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•		we partly depend on large orders and any delay in closing a large order may result in the realization of potentially significant net license fees being postponed from one quarter to the next; and
•		we expect our revenues to be sensitive to the timing of offers of new products that successfully compete with our products on the basis of functionality, price or otherwise.

     General market conditions and other domestic or international macroeconomic and geopolitical factors unrelated to our performance also affect our quarterly revenues and operating results. For these reasons, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and you should not rely on them as indicative of our future performance.

The market price of our shares will be susceptible to changes in our operating results and to stock market fluctuations.

     Our operating results may be below the expectations of public market analysts and investors; and therefore, the market price of our shares may fall. In addition, the stock markets in the United States and France have experienced significant price and volume fluctuations in recent periods, which have particularly affected the market prices of many software companies and which have often been unrelated to the operating performance of these companies. The market fluctuations have affected our stock price in the past and could affect our stock price in the future.

We may be unable to sustain or increase our profitability.

     While we were profitable in our most recent quarter, our ability to sustain or increase profitability on a quarterly or annual basis will be affected by changes in our business. We expect our operating expenses to increase as our business grows, and we anticipate that we will make investments in our business. Therefore, our results of operations will be harmed if our revenues do not increase at a rate equal to or greater than increases in our expenses or are insufficient for us to sustain profitability.

If we overestimate revenues, we may be unable to reduce our expenses to avoid or minimize a negative impact on our quarterly results of operations.

     Our revenues will be difficult to forecast and are likely to fluctuate significantly from quarter to quarter. Our estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of our sales prospects into actual licensing revenues could cause us to plan or budget inaccurately and those variations could adversely affect our financial results. In particular, delays, reductions in amount or cancellation of customers’ purchases would adversely affect the overall level and timing of our revenues and our business, results of operations and financial condition could be harmed.

     In addition, because our costs will be relatively fixed in the short term, we may be unable to reduce our expenses to avoid or minimize the negative impact on our quarterly results of operations if anticipated revenues are not realized. As a result, our quarterly results of operations could be worse than anticipated.

Our market is highly competitive and competition could harm our ability to sell products and services and reduce our market share.

     The market in which we compete is intensely competitive, highly fragmented and characterized by changing technology and evolving standards. Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Increased competition

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may cause price reductions and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

     Some of our competitors may have greater financial, technical, sales, marketing and other resources. In addition, some of these competitors may enjoy greater name recognition and a larger installed customer base than we do. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, sale and support of their products. In addition, some of our competitors may be more successful than we are in attracting and retaining customers. Moreover, some of our competitors, particularly companies that offer relational database management software systems, enterprise resource planning software systems and customer relationship management systems may have well-established relationships with some of our existing and targeted customers. This competition could harm our ability to sell products and services, which may lead to lower prices for our products, reduced revenues and reduced gross margins.

     Additionally, we may face competition from many companies with whom we have strategic relationships, including Hyperion Solutions Corporation, International Business Machines Corporation, Lawson Software, Inc., Microsoft Corporation, PeopleSoft, Inc. and SAP AG, all of whom offer Business Intelligence products that compete with our products. For example, Microsoft has extended its SQL Server Business Intelligence platform to include reporting capabilities which compete with our enterprise reporting solutions. These companies could bundle their Business Intelligence software with their other products at little or no cost, giving them a potential competitive advantage over us. Because our products will be specifically designed and targeted to the Business Intelligence software market, we may lose sales to competitors offering a broader range of products.

Acquisitions of, or other strategic transactions by, our competitors could weaken our competitive position or reduce our revenues.

     If one or more of our competitors were to acquire, merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. For example, in October 2003, Hyperion acquired Brio Software. Furthermore, companies larger than ours could enter the market through internal expansion or by strategically aligning themselves with one of our competitors and providing products that cost less than our products. Our competitors may also establish or strengthen cooperative relationships with our current or future distributors, resellers, original equipment manufacturers or other parties with whom we have relationships, thereby limiting our ability to sell through these channels and reducing promotion of our products.

We have strategic relationships with Microsoft and SAP which, if terminated, could reduce our revenues and harm our operating results.

     As a result of the Crystal Decisions Acquisition, we have additional strategic relationships with Microsoft and SAP that enable us to bundle our products with those of Microsoft and SAP, and we are also developing certain utilities and products to be a part of Microsoft’s and SAP’s products. We will have limited control, if any, as to whether Microsoft or SAP will devote adequate resources to promoting and selling our products. Microsoft and SAP have designed their own Business Intelligence software. If either Microsoft or SAP reduces its efforts on our behalf or discontinues its relationship with us and instead develops a relationship with one of our competitors or increases its selling efforts of its own Business Intelligence software, our revenues and operating results may be reduced. For example, recently Microsoft began actively marketing its reporting product for its SQL Server Business Intelligence platform.

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We target our products solely to the Business Intelligence software market and, if sales of our products in this market decline, our operating results will be seriously harmed.

     We generate substantially all of our revenues from licensing, support and service fees in conjunction with the sale of our products in the Business Intelligence software market. Accordingly, our future revenues and profits will depend significantly on our ability to further penetrate the Business Intelligence software market. If we are not successful in selling our products in our targeted market due to competitive pressures, technological advances by others or other reasons, our operating results would suffer.

If the market in which we sell Business Intelligence software does not grow as anticipated, our future profitability could be negatively affected.

     The Business Intelligence software market is still emerging, and our success depends upon the growth of this market. Our potential customers may:

•		not fully value the benefits of using Business Intelligence products;
•		not achieve favorable results using Business Intelligence products;
•		experience technical difficulty in implementing Business Intelligence products; or
•		use alternative methods to solve the problems addressed by Business Intelligence software.

     These factors may cause the market for Business Intelligence software not to grow as quickly or become as large as we anticipate, which may adversely affect our revenues.

If the current economic uncertainty continues, our customers may reduce, delay or cancel purchases of our products and services, in which case our results of operations will be harmed.

     We cannot predict what impact the current economic uncertainty will have on the Business Intelligence software market or our business, but it may result in fewer purchases of licenses of our software, extended sales cycles, downward pricing pressures or lengthening of payment terms. Our customers may also discontinue their renewals of our maintenance and technical support services due to shrinking budgets. If our customers reduce, delay or cancel purchases of our products and services, our results of operations will be harmed.

Our software may have defects and errors which may lead to a loss of revenues or product liability claims.

     Our products and platforms are internally complex and may contain defects or errors, especially when first introduced or when new versions or enhancements are released. Despite extensive testing, we may not detect errors in our new products, platforms or product enhancements until after we have commenced commercial shipments. If defects and errors are discovered after commercial release of either new versions or enhancements of our products and platforms:

•		potential customers may delay purchases;
•		customers may react negatively, which could reduce further sales;
•		our reputation in the marketplace may be damaged;

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•		we may have to defend product liability claims;
•		we may be required to indemnify our customers, distributors, original equipment manufacturers or other resellers;
•		we may incur additional service and warranty costs; and
•		we may have to divert additional development resources to correct the defects and errors.

     If any or all of the foregoing occur, we may lose revenues, incur higher operating expenses and lose market share, any of which could severely harm our financial condition and operating results.

We may have difficulties providing and managing large-scale deployments, which could cause a decline or delay in recognition of our revenues and an increase in our expenses.

     We generally depend on large-scale deployments of our products for a substantial portion of our revenues. We may have difficulty managing the timeliness of these large-scale deployments and our internal allocation of personnel and resources. Any difficulty could cause us to lose existing customers, face potential customer disputes or limit the number of new customers who purchase our products or services, which could cause a decline in or delay in recognition of revenues, and could cause us to increase our research and development and technical support costs, either of which could adversely affect our operating results.

     In addition, we generally have long sales cycles for our large-scale deployments. During a long sales cycle, events may occur that could affect the size, timing or completion of the order. For example, the potential customer’s budget and purchasing priorities may change, the economy may experience a downturn or new competing technology may enter the marketplace, any of which could reduce our revenues.

The software market in which we operate is subject to rapid technological change and new product introductions, which could negatively affect our product sales.

     The market for Business Intelligence software is characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. To be successful, we must develop new products, platforms and enhancements to our existing products that keep pace with technological developments, changing industry standards and the increasingly sophisticated requirements of our customers. If we are unable to respond quickly and successfully to these developments and changes, we may lose our competitive position. In addition, even if we are able to develop new products, platforms or enhancements to our existing products, these products, platforms and product enhancements may not be accepted in the marketplace. Further, if we do not adequately time the introduction or the announcement of new products or enhancement, to our existing products, or if our competitors introduce or announce new products, platforms and product enhancements, our customers may defer or forego purchases of our existing products.

We are currently a party to several lawsuits with MicroStrategy. The prosecution of these lawsuits could have a substantial negative impact on our business. Should MicroStrategy prevail, we may be required to pay substantial monetary damages or be prevented from selling some of our products.

     On October 17, 2001, we filed a lawsuit in the United States District Court for the Northern District of California against MicroStrategy for alleged patent infringement. The lawsuit alleges that MicroStrategy infringes on our U.S. Patent No. 5,555,403 by making, using, offering to sell and selling its product currently known as MicroStrategy Version 7.0. Our complaint requests that MicroStrategy be enjoined from further infringing the patent and seeks an as-yet undetermined amount of damages. On June 27, 2003, MicroStrategy

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filed a motion for summary judgment that its products do not infringe our patent. On August 29, 2003, the Court ruled that our patent was not literally infringed and that we were estopped from asserting the doctrine of equivalents and dismissed the case. We have appealed the Court’s judgment to the Court of Appeals for the Federal Circuit and anticipate a ruling on the appeal in early 2005. We cannot reasonably estimate at this time whether a monetary settlement will be reached.

     On October 30, 2001, MicroStrategy filed an action for alleged patent infringement in the United States District Court for the Eastern District of Virginia against us and our subsidiary, Business Objects Americas. The complaint alleges that our software products, BusinessObjects Broadcast Agent Publisher, BusinessObjects Broadcast Agent Scheduler and BusinessObjects Infoview, infringe MicroStrategy’s U.S. Patent Nos. 6,279,033 and 6,260,050. In December 2003, the Court dismissed MicroStrategy’s claim of infringement on U.S. Patent No. 6,279,033 without prejudice. Trial on U.S. Patent No. 6,260,050 originally set for April 12, 2004 has been continued by the Court to June 16, 2004. We believe we have valid defenses and will continue vigorously to defend the action. Were an unfavorable outcome to arise, there can be no assurance that such outcome would not have a material adverse affect on our liquidity, financial position or results of operations. The outcome of this matter and amount of related claims are not determinable at this time.

     In April 2002, MicroStrategy obtained leave to amend its patent claims against us to include claims for misappropriation of trade secrets, violation of the Computer Fraud and Abuse Act, tortuous interference with contractual relations and conspiracy in violation of the Virginia Code seeking injunctive relief and damages. On December 30, 2002 the Court granted our motion for summary judgment and rejected MicroStrategy’s claims for damages as to the causes of action for misappropriation of trade secrets, Computer Fraud and Abuse Act and conspiracy in violation of the Virginia Code. Trial of the trade secret claim for injunctive relief and the sole remaining damages claim for tortious interference with contractual relations started on October 20, 2003. On October 28, 2003, the Court granted judgment as a matter of law in our favor and dismissed the jury trial on MicroStrategy’s allegations that we tortiously interfered with certain employment agreements between MicroStrategy and its former employees. The Court took MicroStrategy’s claim for misappropriation of trade secrets under submission and has yet to rule. The only relief which remains available under the Court’s prior rulings is for an injunction. MicroStrategy also seeks an award of its attorneys’ fees in an undisclosed amount, should they prevail on the injunction claim. We do not believe that any attorneys’ fees awarded will be material. We believe that MicroStrategy’s claims are meritless and will continue to defend the lawsuits vigorously.

     On December 10, 2003, MicroStrategy filed an action for patent infringement against Crystal Decisions in the United States District Court for the District of Delaware. We became a party to this action when we acquired Crystal Decisions. The complaint alleges that the Crystal Decisions software products: Crystal Enterprise, Crystal Reports, Crystal Analysis and Crystal Applications, infringe MicroStrategy’s U.S. Patent Nos. 6,279,033, 6,567,796 and 6,658,432. The complaint seeks relief in the form of an injunction, unspecified damages, an award of treble damages and attorneys fees. Our investigation of this matter is at a preliminary stage and no discovery has been obtained. We intend vigorously to defend this action. Were an unfavorable outcome to arise, there can be no assurance that such outcome would not have a material adverse affect on our liquidity, financial position or results of operations.

     We believe that we have meritorious defenses to MicroStrategy’s various allegations and claims in each of the suits and we intend to continue to defend ourselves vigorously. However, because of the inherent uncertainty of litigation in general, and the fact that the discovery related to certain of these suits is ongoing, we cannot assure you that we will ultimately prevail. Should MicroStrategy ultimately succeed in the prosecution of its claims, we could be permanently enjoined from selling some of our products and deriving related maintenance revenues. In addition, we could be required to pay substantial monetary damages to MicroStrategy. Litigation such as the suits MicroStrategy has brought against us can take years to resolve and can be expensive to defend. An adverse judgment, if entered in favor of any MicroStrategy claim, could seriously harm our business, financial position and results of operations and cause our stock price to decline

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substantially. In addition, the MicroStrategy litigation, even if ultimately determined to be without merit, will be time consuming to defend, divert our management’s attention and resources and could cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements may not be available on terms acceptable to us, if at all, and the prosecution of the MicroStrategy allegations and claims could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially.

We are a party to litigation with Vedatech Corporation and in the event of an adverse judgment against us, we may have to pay damages, which could adversely affect our financial position and results of operations.

     We became a party to the following action when we acquired Crystal Decisions in December 2003. In November 1997, Vedatech commenced an action in the Chancery Division of the High Court of Justice in the United Kingdom against Crystal Decisions (UK) Limited, now a wholly owned subsidiary of Business Objects Americas. The liability phase of the trial was completed in March 2002, and Crystal Decisions prevailed on all claims except for the quantum meruit claim. The court ordered the parties to mediate the amount of that claim and, in August 2002, the parties came to a mediated settlement. The mediated settlement was not material to Crystal Decisions’ operations and contained no continuing obligations. In September 2002, however, Crystal Decisions received a notice that Vedatech was seeking to set aside the settlement. The mediated settlement and related costs were accrued in the consolidated financial statements. In April 2003, Crystal Decisions filed an action in the High Court of Justice seeking a declaration that the mediated settlement agreement is valid and binding. In connection with this request for declaratory relief Crystal Decisions paid the agreed settlement amount into court.

     In October 2003, Vedatech and Mani Subramanian filed an action against Crystal Decisions, Crystal Decisions (UK) Limited and Susan J. Wolfe, Vice President, General Counsel and Secretary of Crystal Decisions, in the United States District Court, Northern District of California, San Jose Division, alleging that the August 2002 mediated settlement was induced by fraud and that the defendants engaged in negligent misrepresentation and unfair competition. In October 2003, Crystal Decisions (UK), Crystal Decisions (Japan) K.K. and Crystal Decisions, Inc. filed an application with the High Court of Justice claiming the proceedings in United States District Court, Northern District of California, San Jose Division were commenced in breach of an exclusive jurisdiction clause in the settlement agreement and requesting injunctive relief to restrain Vedatech from pursuing the United States District Court proceedings. A hearing in the High Court of Justice took place in January 2004 to determine whether the injunction should be granted. The hearing was continued, and concluded on March 9, 2004. The court has not yet rendered its decision, and we cannot assure you that the outcome will be favorable to us.

     Although we believe that Vedatech’s basis for seeking to set aside the mediated settlement and its claims in the October 2003 complaint is meritless, the outcome cannot be determined at this time. If the mediated settlement were to be set aside, an ultimate damage award could adversely affect our financial position, liquidity and results of operations.

We are a party to litigation with Informatica and, in the event of an adverse judgment against us, we may have to pay damages or be prevented from selling some of our products, which could adversely affect our financial position and results of operations.

     On July 15, 2002, Informatica filed an action for alleged patent infringement in the United States District Court for the Northern District of California against Acta. We became a party to this action when we acquired Acta in August 2002. The complaint alleges that the Acta software products infringe Informatica’s U.S. Patents Nos. 6,014,670, 6,339,775 and 6,208,990. On July 17, 2002, Informatica filed an amended complaint alleging that the Acta software products also infringe U.S. Patent No. 6,044,374. The complaint seeks relief in the form of an injunction, unspecified damages, an award of treble damages and attorneys fees. We have answered the suit, denying infringement and asserting that the patents are invalid and other defenses. The parties are currently engaged in discovery and are awaiting a claim construction order to be issued by the

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Court. The August 16, 2004 trail date previously set has been vacated by the Court and will probably not be set again until the Court issues its claim construction order. We intend to vigorously defend the action. Were an unfavorable outcome to arise, there can be no assurance that such outcome would not have a material adverse affect on our liquidity, financial position or results of operations.

     Although we believe that Informatica’s basis for its suit is meritless, the outcome cannot be determined at this time. Because of the inherent uncertainty of litigation in general and that fact that this litigation is ongoing, we cannot assure you that we will prevail. Should Informatica ultimately succeed in the prosecution of its claims, we could be permanently enjoined from selling some of our products and be required to pay damages.

The protection of our intellectual property rights is crucial to our business and, if third parties use our intellectual property without our consent, our business could be damaged.

     Our success is heavily dependent on protecting intellectual property rights in our proprietary technology, which is primarily our software. It is difficult for us to protect and enforce our intellectual property rights for a number of reasons, including:

•		policing unauthorized copying or use of our products is difficult and expensive;
•		software piracy is a persistent problem in the software industry;
•		our patents may be challenged, invalidated or circumvented; and
•		our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.

     In addition, the laws of many countries do not protect intellectual property rights to as great an extent as those of the United States and France. We believe that effective protection of intellectual property rights is unavailable or limited in certain foreign countries, creating an increased risk of potential loss of proprietary technology due to piracy and misappropriation. For example, we began doing business in the Peoples Republic of China recently, where the status of intellectual property law is unclear, and we may expand our presence there in the future.

     Although our name, together with our logo, is registered as a trademark in France, the United States and a number of other countries, we may have difficulty asserting our trademark rights in the name “Business Objects” as some jurisdictions consider the name “Business Objects” to be generic or descriptive in nature. As a result, we may be unable to effectively police the unauthorized use of our name or otherwise prevent our name from becoming a part of the public domain.

     We are involved in litigation to protect our intellectual property rights, and we may become involved in further litigation in the future. This type of litigation is costly and could negatively impact our operating results. For example, we are currently involved in a patent infringement action against MicroStrategy.

Third parties have asserted that our technology infringes upon their proprietary rights, and other may do so in the future, which has resulted in costly litigation and could adversely affect our ability to distribute our products.

     From time to time, companies in the industry in which we compete receive claims that they are infringing upon the intellectual property rights of third parties. We believe that software products that are offered in our target markets will increasingly be subject to infringement claims as the number of products and competitors in the industry segment grows and product functionalities begin to overlap. For example, we are defending one patent infringement suit brought by Informatica, one brought by MicroStrategy against us and one brought by MicroStrategy against Crystal Decisions.

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     The potential effects on our business operations resulting from third party infringement claims that have been filed against and may be filed against us in the future include the following:

•		we could be forced to cease selling our products;
•		we are forced to commit management resources in defense of the claim;
•		we may incur substantial litigation costs in defense of the claim;
•		we may have to expend significant development resources to redesign our products; and
•		we may be required to enter into royalty and licensing agreements with such third party under unfavorable terms.

     We may also be required to indemnify customers, distributors, original equipment manufacturers and other resellers for third-party products incorporated in our products if such third party’s products infringe upon the intellectual property rights of others. Although many of these third parties will be obligated to indemnify us if their products infringe the intellectual property rights of others, the indemnification may not be adequate.

     In addition, from time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties challenging ownership of what we believe to be our proprietary software. Any of this litigation could be costly for us to defend, have a negative effect on our results of operations and financial condition or require us to devote additional research and development resources to redesign our products.

Our loss of rights to use software licensed from third parties could harm our business.

     We license software from third parties and sub-license this software to our customers. In addition, we license software from third parties and incorporate it into our products. In the future, we may be forced to obtain additional third party software licenses to enhance our product offerings and compete more effectively. By utilizing third party software in our business, we incur risks that are not associated with developing software internally. For example, third party licensors may discontinue or modify their operations, terminate their relationships with us, or generally become unable to fulfill their obligations to us. If any of these circumstances were to occur, we might be forced to seek alternative technology of inferior quality, which has lower performance standards or which might not be available on commercially reasonable terms. If we are unable to maintain our existing licenses or obtain alternate third party software licenses on commercially reasonably terms, our revenues could be reduced, our costs could increase and our business could suffer.

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We depend on strategic relationships and business alliances for continued growth of our business.

     Our development, marketing and distribution strategies depend on our success to create and maintain long-term strategic relationships with major vendors, many of whom are substantially larger than us. These business relationships often consist of joint marketing programs or partnerships with original equipment manufacturers or value added resellers. Although certain aspects of these relationships are contractual in nature, many important aspects of these relationships depend on the continued cooperation of each party. Divergence in strategy, change in focus, competitive product offerings or contract defaults by any of these companies might interfere with our ability to develop, market, sell or support our products, which in turn could harm our business.

     Although no one of our resellers currently accounts for a material percentage of our total revenues, if one or more of our other large resellers were to terminate their co-marketing agreements with us it could have an adverse effect on our business, financial condition and results of operations. In addition, our business, financial condition and results of operations could be adversely affected if major distributors, such as Ingram Micro, Inc., that formerly purchased products from Crystal Decisions were to materially reduce their purchases from us. Business Objects had no customers who accounted for 10% or more of our sales in the first quarters of 2004 or 2003.

     Our distributors and other resellers generally carry and sell product lines that are competitive with ours. Because distributors and other resellers generally are not required to make a specified level of purchases from us, we cannot be sure that they will prioritize selling our products. We rely on our distributors and other resellers to sell our products, report the results of these sales to us and to provide services to certain of the end user customers of our products. If the distributors and other resellers do not sell our products, report sales accurately and in a timely manner and adequately service those end user customers, our revenues and the adoption rates of our products could be harmed.

We may pursue strategic acquisitions and investments that could have an adverse effect on our business if they are unsuccessful.

     As part of our business strategy, we have acquired companies, technologies and product lines in the past to complement our internally developed products. We expect that we will have a similar business strategy going forward. Critical to the success of this strategy in the future and, ultimately, our business as a whole, is the orderly, effective integration of acquired businesses, technologies and product lines into our organization. If our integration of future acquisitions is unsuccessful, our business will suffer.

Our executive officers and key employees are crucial to our business, and we may not be able to recruit and retain the personnel we need to succeed.

     Our success depends upon a number of key management and technical personnel, including our co-founder, Bernard Liautaud, who is our chairman of the board of directors and chief executive officer, the loss of whom could adversely affect our business. The loss of the services of any key personnel or the inability to attract and retain highly skilled technical, management, sales and marketing personnel could also harm our business. Competition for such personnel in the computer software industry is intense, and we may be unable to attract and retain such personnel successfully.

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We have multinational operations that are subject to risks inherent in international operations.

     We have significant international operations including development facilities, sales personnel and customer support operations. Our international operations are subject to certain inherent risks including:

•		technical difficulties associated with product localization;
•		challenges associated with coordinating product development efforts among geographically dispersed development centers;
•		lack of experience in certain geographic markets;
•		longer payment cycles for sales in certain foreign countries;
•		seasonal reductions in business activity in the summer months in Europe and certain other countries;
•		the significant presence of some of our competitors in some international markets;
•		potentially adverse tax consequences;
•		management, staffing, legal and other costs of operating an enterprise spread over various countries;
•		political instability in the countries where we are doing business; and
•		fears concerning travel or health risks that may adversely affect our ability to sell our products and services in any country in which the business sales culture encourages face-to-face interactions.

     These factors could have an adverse effect on our business, results of operations and financial condition.

Fluctuations in exchange rates between the euro, the U.S. dollar and the Canadian dollar, as well as other currencies in which we do business, may adversely affect our operating results.

     We may experience substantial foreign exchange gains or losses due to the volatility of other currencies compared to the U.S. dollar. We generate expenses in the Canadian dollar that are substantially larger than our Canadian dollar revenues, and we generate a substantial portion of our revenues and expenses in currencies other than the U.S. dollar. We have partially hedged these exposures as of March 31, 2004 with the use of Canadian dollar forward contracts in the nominal amount of $86.7 million. In addition, we have balance sheet items such as inter-company obligations outstanding between our parent and subsidiary companies that are, in some cases, held in currencies different than the currency in which they report their results. During the quarter ended March 31, 2004, a significant portion of the $6.8 million net foreign exchange loss resulted from “mark to market” currency losses on these intercompany loans. Subsequent to March 31, 2004, we entered into forward contracts to hedge various currencies against the euro to mitigate this risk. Failure to hedge successfully or otherwise manage foreign currency risks properly could adversely affect our operating results.

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Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

     A number of factors, including natural disasters, computer viruses or failure to successfully evolve operational systems to meet evolving business conditions, could disrupt our business, which could seriously harm our revenues or financial condition and increase our costs and expenses. For example, some of our offices are located in potential earthquake or flood zones that could subject these offices, product development facilities and associated computer systems to disruption.

     We currently have proprietary applications running key pieces of our manufacturing systems. These technologies were developed internally and we have only a small number of people that know and understand them. Should we lose those individuals before these systems can be replaced with non-proprietary solutions, we may experience business disruption resulting from an inability to manufacture and ship product.

     In addition, experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or temporarily disrupt our operations. As a result, we could incur significant expenses in addressing problems created by security breaches of our own network. The costs to eliminate computer viruses and alleviate other security problems could be significant. The efforts to address these problems could result in interruptions, delays or cessation of our operations. Further, we work continually to upgrade and enhance our computer systems, and anticipate implementing several system upgrades during the coming years. Failure to smoothly migrate existing systems to newer systems could cause business disruptions.

     Even short-term disruptions from any of the above mentioned causes or other causes could result in revenue disruptions, delayed product deliveries or customer service disruptions, which could result in decreases in revenues or increases in costs of operations.

The SEC has contacted us regarding an informal inquiry.

     The Securities and Exchange Commission has initiated an informal inquiry which we believe relates to our practices with respect to backlog. We are cooperating fully with the Securities and Exchange Commission. While we believe our practices are proper and in accordance with generally accepted accounting principles in the United States, we can give no assurance as to the outcome of this inquiry.

   Risks Related to Ownership of Our Ordinary Shares or ADSs

New SAC and certain of its affiliates own a substantial percentage of our shares and their interests could conflict with those of our other shareholders. In addition, if New SAC and these other parties were to sell significant amounts of these shares in the future it could adversely affect the market price of our shares.

     New SAC and certain of its affiliates own a significant percentage of our company as a result of the Crystal Decisions Acquisition, and their interests could conflict with those of our other shareholders. As a result of Crystal Decisions Acquisition, New SAC and certain of its affiliates beneficially owned approximately 24% of our shares as of March 31, 2004. The interests of these shareholders could conflict with those of our other shareholders. As a result of their ownership position, New SAC and these other parties collectively are able to significantly influence all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of our company. In addition, sales of significant amounts of shares held by New SAC and these other parties, or the prospect of these sales, could adversely affect the market price of our shares.

Provisions of our organizational documents and French law could have anti-takeover effects and could deprive shareholders who do not comply with such provisions of some or all of their voting rights.

     Provisions of our organizational documents and French law may impede the accumulation of our shares by third parties seeking to gain a measure of control over our company. For example, French law provides that any individual or entity directly or indirectly holding more than 5%, 10%, 20%, 33 1/3%, 50% or 66 2/3% of the share capital or voting rights of our company or that increases or decreases our shareholding or voting rights by any of the percentage thresholds, is required to notify us and the AMF, within five trading

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days of crossing any of the applicable percentage thresholds, of the number of shares and voting rights held by it. Additionally, any person acquiring more than 10% or 20% of the share capital or voting rights of our company must notify us and the AMF within 10 trading days of crossing any of these thresholds, and file a statement of their intentions relating to future acquisitions or participation in the management of our company for the following 12-month period. Any shareholder who fails to comply with these requirements will have voting rights for all shares in excess of the relevant threshold suspended for two years following the completion of the required notification and may have all or part of its voting rights within our company suspended for up to five years by the relevant commercial court at the request of our chairman, any of our shareholders or the AMF. In addition, such shareholders may be subject to a fine of €18,000 for violation of the share ownership notification requirement and up to €1,500,000 for violation of the notification requirement regarding the statement of intentions.

     Furthermore, our articles of association provide that the notification obligation will apply each time the percentage reaches 5% of the share capital or voting rights of our company, or any multiple thereof. In the event any shareholder fails to notify us within 15 days of crossing any of the applicable thresholds, such shareholder may, at the request of one or more shareholders holding together at least 5% of the share capital or voting rights of our company, be deprived of voting rights for all shares in excess of the relevant notification threshold for two years.

     Under the terms of the deposit agreement relating to our ADSs, if a holder of ADSs fails to instruct the depositary in a timely and valid manner how to vote such holder’s ADSs with respect to a particular matter, the depositary will deem that such holder has given a proxy to the chairman of the meeting to vote in favor of each proposal recommended by our board of directors and against each proposal opposed by our board of directors and will vote the ordinary shares underlying the ADSs accordingly. Such provision of the depositary agreement could deter or delay hostile takeovers, proxy contests and changes in control or management of our company.

Holders of our shares have limited rights to call shareholders’ meetings or submit shareholder proposals, which could adversely affect their ability to participate in governance of our company.

     In general, our board of directors may call a meeting of our shareholders. A shareholders’ meeting may also be called by a court-appointed agent, in limited circumstances, such as at the request of the holders of 5% or more of our outstanding shares held in the form of ordinary shares. In addition, only shareholders holding a defined number of shares held in the form of ordinary shares or groups of shareholders holding a defined number of voting rights underlying their ordinary shares may submit proposed resolutions for meetings of shareholders. The minimum number of shares required depends on the amount of the share capital of our company and is equal to 2,190,002 ordinary shares based on our share capital as of March 31, 2004. Similarly, a duly qualified association, registered with the AMF and us, of shareholders who have held their ordinary shares in registered form for at least two years and together hold at least a defined percentage of our voting rights, equivalent to 1,783,698 ordinary shares based on our company’s voting rights as of March 31, 2004, may submit proposed resolutions for meetings of shareholders. As a result, the ability of our shareholders to participate in and influence the governance of our company will be limited.

Interests of our shareholders will be diluted if they are not able to exercise preferential subscription rights for our shares.

     Under French law, shareholders have preferential subscription rights (droits preferentiels de souscription) to subscribe for cash for issuances of new shares or other securities giving preferential subscription rights, directly or indirectly, to acquire additional shares on a pro rata basis. Shareholders may waive their rights specifically in respect of any offering, either individually or collectively, at an extraordinary general meeting. Preferential subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares and may be quoted on the exchange for such securities in Paris. Holders of our ADSs may not be able to exercise preferred subscription rights for these shares unless a

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registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirements is available.

     If these preferential subscription rights cannot be exercised by holders of ADSs, we will make arrangements to have the preferential subscription rights sold and the net proceeds of the sale paid to such holders. If such rights cannot be sold for any reason, we may allow such rights to lapse. In either case, the interest of holders of ADSs in our company will be diluted, and, if the rights lapse, such holders will not realize any value from the granting of preferential subscription rights.

It may be difficult for holders of our ADSs rather than our ordinary shares to exercise some of their rights as shareholders.

     It may be more difficult for holders of our ADSs to exercise their rights as shareholders than it would be if they directly held our ordinary shares. For example, if we offer new ordinary shares and a holder of our ADSs has the right to subscribe for a portion of them, the depositary is allowed, in its own discretion, to sell for such ADS holder’s benefit that right to subscribe for new ordinary shares of our company instead of making it available to such holder. Also, to exercise their voting rights, holders of our ADSs must instruct the depositary how to vote their shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for a holder of our ADSs than it would for holders of our ordinary shares.

Fluctuation in the value of the US dollar relative to the euro may cause the price of our ordinary shares to deviate from the price of our ADSs.

     Our ADSs trade in U.S. dollars and our ordinary shares trade in euros. Fluctuations in the exchange rates between the U.S. dollar and the euro may result in temporary differences between the value of our ADSs and the value of our ordinary shares, which may result in heavy trading by investors seeking to exploit such differences.

We have not distributed any cash dividends to our shareholders and do not anticipate doing so in the near future.

     We currently intend to use all of our operating cash flow to finance our business for the foreseeable future. We have never distributed cash dividends to our shareholders, and we do not anticipate distributing cash dividends in the near term. Although we may in the future distribute a portion of our earnings as dividends to shareholders, the determination of whether to declare dividends and, if so, the amount of such dividends will be based on facts and circumstances existing at the time of determination. We may not distribute dividends in the near future, or at all.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes. For interest rate sensitivity and foreign currency exchange risk, reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk", in our Annual Report on Form 10-K for the year ended December 31, 2003. We believe there have been no significant changes in our market risk during the quarter ended March 31, 2004 as compared to what was previously disclosed in our Annual Report for the year ended December 31, 2003. Further information on the impact of foreign currency exchange rate fluctuations is further described in Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations – Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations” to this Form 10-Q.

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Item 4. Controls and Procedures

     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded these disclosure controls and procedures are effective.

     There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended March 31, 2004 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

     Information regarding this Item may be found in Note 9 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. This information is incorporated by reference to this Item.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K