UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

or

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 July 31, 2004, the number of issued ordinary shares was 95,398,825, €0.10 nominal value, (including 27,101,871 American depository shares, each corresponding to one ordinary share, 2,067,675 treasury shares and 4,500,514 shares held by Business Objects Option LLC). As of July 31, 2004, we had issued and outstanding 90,898,311 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

4

BUSINESS OBJECTS S.A.

See accompanying notes to Condensed Consolidated Financial Statements

5

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 annual 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, as amended on Form 10-K/A as filed with the SEC on April 29, 2004.

     The consolidated financial statements reflect, in the opinion of the Company, 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 three and six months ended June 30, 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 the Company 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 and other taxes. Actual results could differ from those estimates.

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

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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 system integrators, (“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, revenues are recognized as the products are sold to the distributor net of reserves of an amount 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.

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, payroll deductions from international employee stock purchase plan participants, current deferred tax liabilities and other accruals, none of which individually account for more than five percent of total current liabilities.

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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 dollar cash flows resulting from Canadian dollar (“Cdn”) expenses will be adversely affected by changes in the exchange rates. As of June 30, 2004 and December 31, 2003, respectively, the Company held Canadian dollar foreign exchange forward contracts to purchase Cdn $70.1 million and Cdn $40.3 million with U.S. dollars at a future date. The forward contracts held at June 30, 2004 have monthly maturities from July 2, 2004 to December 13, 2004. These forward contracts do not qualify for hedge accounting; therefore, the change in the fair value of the forward contracts at each period end is reflected in other income (expense) and partially offsets the foreign exchange variation in the corresponding Cdn dollar operating expense during the same period. At June 30, 2004 and December 31, 2003, forward contract assets of $1.1 million and $2.2 million, respectively, were recorded in other current assets on the balance sheet.

     During the six months ended June 30, 2004, the Company entered into Euro-denominated foreign exchange forward contracts to purchase U.S. dollars, Canadian dollars and British pounds at a future date to enable its Irish subsidiary to settle intercompany loan obligations in those currencies. The forward contracts held at June 30, 2004 have maturity dates that coincide with the payment of intercompany loan obligations. At June 30, 2004, the Company held forward contracts to purchase U.S. $151.0 million, Cdn $9.9 million and £25.3 million against the euro to settle obligations under intercompany loans. These forward contracts do not qualify for hedge accounting. At June 30, 2004, a forward contract liability of $3.9 million was recorded in other current liabilities on the balance sheet.

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.

     The following table provides pro forma disclosures of the effect on net income and net income per ordinary share and American depository share (“ADS”) as if the fair-value based method had been applied in measuring compensation expense. The fair-value 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”).

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     The stock-based compensation expense included in reported net income for the three and six months ended June 30, 2004 represented amortization of unearned compensation on unvested stock options that arose as a result of the Crystal Decisions Acquisition and compensation expense on the modification of terms of certain stock option agreements.

     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 net income per share would have been $0.04 and $0.01 for the three months ended June 30, 2004 and 2003, respectively, and pro forma diluted net income per share would have been $0.04 and $0.01 for the three months ended June 30, 2004 and 2003, respectively. 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 $(0.01) and $0.02 for the six months ended June 30, 2004 and 2003, respectively, and pro forma diluted income (loss) per share would have been $(0.01) and $0.02 for the six months ended June 30, 2004 and 2003, respectively.

     Pro forma information regarding net income and net income per ordinary share and American depository share (“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 and warrants to outside directors 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 the Company’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

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     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 or warrants issued varies from period to period and the Black-Scholes fair value of each grant depends on the assumptions at the grant date. In addition, as the stock options and warrants are issued in euros the conversion of the compensation costs amortized to each period fluctuates based on the exchange rate used for the period reported. For purposes of the pro forma disclosures, the estimated stock-based employee compensation was amortized over the vesting periods.

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

     There were no stock options granted under the International or French Employee Stock Purchase Plans during the three months ended June 30, 2004 or 2003. The weighted average fair value of shares purchased under the employee stock purchase plans during the three months ended June 30, 2004 and 2003, respectively, was $6.51 and $4.32, respectively. Assumptions used include an expected life of 6 months, volatility of 42% and a risk-free interest rate of 1.0% for the three months ended March 31, 2004. For the three months ended March 31, 2003, assumptions used in determining the fair value include an expected life of 6 months, volatility of 71% and a risk-free interest rate of 2.0%. For pro forma presentation purposes the resulting option expense will be amortized over the expected life of these shares which is six months.

Recent Pronouncements

     Share Based Payments. 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 of 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 statements 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. The FASB has concluded that a binomial model such as a lattice model is preferred over the Black-Scholes valuation model in determining the fair value of an option at grant date. The comment period for the exposure draft ended on 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.

     Disclosure Requirements Related to Pensions and Other Postretirement Benefits. In December 2003, the FASB issued FAS No. 132 (Revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefit — an amendment of FASB Statements No. 87, 88, and 106” (“FAS 132R”). A revision of the pronouncement originally issued in 1998, FAS 132R expands employers’ disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments, contributions, and net benefit cost. The statement does not change the measurement or recognition provisions for pensions and other postretirement benefits. This statement was effective for fiscal years ended after December 15, 2003, except in cases where a Company only has a foreign plan, in which case the statement is effective for interim periods beginning after June 15, 2004. The Company currently only has a foreign plan.

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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 the recording of $978.0 million of 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 six months ended June 30, 2004, there was a $10.1 million adjustment made to increase goodwill. This increase was the result of increases in estimates of liabilities that existed at the date of the purchase consisting mainly of a $9.0 million increase in income taxes payable and a $1.1 million increase for the under accrual of various liabilities and certain restructuring costs (see note 8). 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.

3.

Goodwill and Other Intangible Assets

     In accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), the Company tests for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill or other intangible assets may not be recoverable, or at least annually at June 30 of each year. These tests are performed at the reporting unit level using a two-step, fair-value based approach. Business Objects has determined that it has only one reporting unit. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess. The Company completed the annual impairment tests and concluded that no impairment existed at June 30, 2004.

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     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 the Company’s foreign subsidiaries and are revalued at each reporting period which may result in a higher or lower U.S. dollar cost base than originally recorded. There were no additions or impairment of long-lived assets during the six months ended June 30, 2004. The total intangible amortization expense was $7.6 million for the three months ended June 30, 2004 and $668,000 for the three months ended June 30, 2003. The total intangible amortization expense was $15.4 million for the six months ended June 30, 2004 and $1.4 million for the six months ended June 30, 2003.

     Amortization of $5.0 million and $10.2 million is included in cost of net license fees for the three and six months ended June 30, 2004, respectively, compared to $469,000 and $938,000 for the three and six months ended June 30, 2003. Amortization of $2.3 million and $4.7 million is included in cost of service revenues for the three and six months ended June 30, 2004, compared to $199,000 and $398,000 for the three and six months ended June 30, 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 fluctuations in amortization expense of foreign owned intangible assets.

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4.

Accounts Receivable

     Accounts receivable are stated net of allowance of doubtful accounts and distribution channel returns of $11.8 million at June 30, 2004 and $9.9 million at December 31, 2003. These allowances included bad debt reserves of $8.1 million at June 30, 2004 and $6.2 million at December 31, 2003.

5.

Net Income per Ordinary Share and ADS

     The components of basic and diluted net income 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 three and six months ended June 30, 2004, respectively, approximately 605,000 and 1.7 million shares were issued on the exercise of stock options under stock option and employee purchase plans. For the three months ended June 30, 2004 and 2003, respectively, 8.8 million and 4.5 million ordinary shares or ADSs were excluded from the calculation of diluted net income per share because they were anti-dilutive. For the six months ended June 30, 2004 and 2003, respectively, 8.0 million and 4.7 million ordinary shares or ADSs were excluded from the calculation of diluted net income per share because they were anti-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 six months ended June 30, 2004, optionees acquired approximately 1.2 million ADSs upon exercise of these options.

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     Treasury Stock

     On May 14, 2004, the Company’s Board of Directors decided to implement a share repurchase of up to 3.5 million ordinary shares at or below €25.00 per share in accordance with a share repurchase program authorized by shareholders on May 15, 2003. During May 2004, the Company repurchased 1 million ordinary shares of its own stock which it has accounted for as treasury stock. The total U.S. dollar equivalent purchase price was $21.0 million with the average share price at purchase of €17.51. This purchase results in an increase in treasury shares held by 1 million ordinary shares. The calculation of net income per share for the three and six months ended June 30, 2004, excludes the weighted average number of treasury shares repurchased in the three months ended June 30, 2004.

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):

7.

Business Segment and Geographic Information

     The Company has one reportable segment — business intelligence software products.

     The following is a summary of the Company’s revenues by geographic region (in thousands):

(*) Europe, Middle East and Africa

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8.

Business Restructuring Charge

Acquisition-related Restructuring Liabilities

Crystal Decisions Acquisition

     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. The Board of Directors and 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 employees and the exit of certain facilities.

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 three months ended March 31, 2004, and $1.8 million to 34 of these employees during the six months ended June 30, 2004. The Company 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 incurred approximately $782,000 of additional charges in the three months ended June 30, 2004 related to the exit of certain facilities. Approximately $712,000 of the $782,000 remains as a restructuring accrual at June 30, 2004. The Company anticipates that there will be additional charges related to exiting certain facilities previously leased by Business Objects prior to the Crystal Decisions Acquisition, which are estimated at approximately $2.6 million and 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 June 30, 2004 (in thousands):

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Restructuring Costs Included as a Cost of the Crystal Decisions Acquisition

     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. The charge of $13.5 million related primarily to 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 three months ended March 31, 2004, and $2.9 million to 63 employees across all regions during the three months ended June 30, 2004. The Company expects to pay the remaining restructuring liability during 2004. During the three months ended June 30, 2004, the Company accrued an additional $542,000 related to additional costs for termination. This amount was recorded as an increase to goodwill. There are no significant additional expected terminations associated with this restructuring plan.

     At December 31, 2003, 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 three and six months ended June 30, 2004, relate to minimum lease payments net of estimated sublease income of $268,000 and settlement costs related to properties vacated prior to quarter end.

     The balances of accrued restructuring charges included as a cost of acquisition related to Crystal Decisions were as follows at June 30, 2004 (in thousands):

Acta Technology, Inc. Acquisition

     In August 2002, Acta Technology, Inc. (“Acta”) management and Board of Directors initiated and approved plans to restructure Acta’s operations immediately prior to the Company’s acquisition of Acta. 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.

     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

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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 June 30, 2004 (in thousands):

     Upon termination of Acta’s Mountain View lease, the remaining $2.8 million accrual related to this property was reversed to goodwill. The remaining accrual of $490,000 at June 30, 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 2002, the Company implemented a restructuring plan to eliminate certain positions and facilities related to its European field operations. The Company has completed the implementation of this restructuring plan and at June 30, 2004 $544,000 of the restructuring liability remains. The $544,000 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 claims before at least the fourth quarter of 2004. No amounts were paid during the three or six months ended June 30, 2004. The change in the balance from December 31, 2003 of $31,000 is due solely to the translation of this foreign denominated liability into U.S. dollars.

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 as-yet 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,

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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 was scheduled to begin on June 14, 2004. On June 7, 2004, the Court sent a letter to all counsel informing the parties that the Court was of the opinion that summary judgment should be granted in the Company’s favor as to infringement. As a consequence, the Court canceled the trial. On August 6, 2004, the Court entered a formal opinion and order formalizing this decision.

     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. On August 6, 2004, the Court issued a formal opinion and order rejecting all of MicroStrategy’s claims for misappropropriation of trade secrets except for a finding that a former employee of the Company had misappropriated two documents. The Court issued a very limited injunction requiring the Company not to possess, use or disclose the two documents as to which it found misappropriation. The Court also denied MicroStrategy’s request for attorney fees. The Court’s finding and injunction as to the two documents will not affect in any manner the Company’s ability to sell or support its products.

     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 and discovery are at a preliminary stage. 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

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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 July 2004, the United States District Court, Northern District of California, San Jose Division granted the defendants’ motion to stay any proceedings before such court pending resolution of the matters currently submitted to the English Court. 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 on various dates between January 29, 2004 and March 9, 2004. On August 3, 2004, the U.K. High Court of Justice granted the anti-suit injunction but provided that the United States District Court, Northern District of California, San Jose Division could complete its determination of any matter that may be pending.

     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 a trial date 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.

     Between June 2 and July 1, 2004, several purported class action complaints were filed in the United States District Courts for the Northern District of California, the Southern District of California, and the Southern District of New York against the Company and certain of its officers. The complaints allege violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The plaintiffs seek to represent a putative class of investors in the Company’s American depository receipts (“ADRs”) who purchased the ADRs between April 23, 2003 and May 5, 2004 (the “Class Period”). The complaints generally allege that, during that Class Period, the Company and the individual defendants made false or misleading statements in press releases and SEC filings regarding, among other things, the Company’s acquisition of Crystal Decisions, its Enterprise 6 product and the Company’s forecasts and financial results for the three months ended March 31, 2004. The complaints have all been transferred to United States District Court for the Northern District of California. The actions are in the early stages, and the Company’s time to respond to the various complaints has not yet expired. The Company advises that it intends to contest these actions vigorously. The Company is unable to predict the outcome of these actions.

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     On July 23, 2004, two purported shareholder derivative actions were filed in Santa Clara County Superior Court against certain of the Company’s current officers and directors, styled Bryan Aronoff, et al. v. Bernard Liautaud, et al. and Ken Dahms v. Bernard Liautaud, et al. The derivative complaints allege violations of California Corporations Code Sections 25402 and 25502.5, breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The derivative complaints are based on the same facts and events alleged in the purported class action complaints. The derivative plaintiffs seek damages, disgorgement of profits, equitable, injunctive, restitutionary and other relief. The actions are in the very early stages. The Company intends to contest these actions vigorously, but is unable to predict the outcome of these actions.

     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.

Escrows Payable and Restricted Cash

     At December 31, 2003, the Company held an aggregate of $9.7 million in escrows payable related to its August 2002 purchase of Acta, which were secured by restricted cash. These amounts which are subject to indemnification obligations were originally due in February 2004. In July 2002, Informatica filed an action for alleged patent infringement against Acta, which was not resolved at June 30, 2004. In accordance with the escrow agreement, one-third ($3.3 million) of the total amount in escrow available to former Acta shareholders and employees was paid during the three months ended June 30, 2004. The remaining balance will be distributed once all indemnification obligations have been released. The escrow agreement provides that the remaining two-thirds in the escrow account may be used by the Company to offset costs incurred in defending itself against this suit.

     During April 2004, the Company entered into a Pledge and Security Agreement pursuant to which a bank will provide foreign exchange contract services to the Company. At June 30, 2004, a $33.3 million deposit was required to be maintained at the bank as collateral. The required amount was held on account with the bank at June 30, 2004 and was classified as restricted cash. Restricted cash also includes $355,000 subject to withdrawal restrictions for bonuses to be paid to Acta employees subject to employment related contingencies, $2.0 million which secured 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 June 30, 2004 or at December 31, 2003. The agreement restricts certain of the Company’s activities including the extension of a mortgage, 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.

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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 were recorded for these obligations on its balance sheet as of June 30, 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 six months ended June 30, 2004, the Company recorded a $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 was not material at June 30, 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.

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     The Company’s effective tax rate was 38% for the three and six months ended June 30, 2004 and 2003. The Company provides for income taxes for each interim period based on the estimated annual effective tax rate for the year.

14.

Subsequent Event

     On July 28, 2004, the Company entered into the First Amendment to the Pledge and Security Agreement with a bank that required the Company to hold $33.3 million at June 30, 2004 in restricted cash as collateral against the forward contracts held with the bank. At July 28, 2004 and thereafter the agreement requires the Company to hold a balance equal to 10% of the aggregate amount of all foreign exchange transactions entered into with the bank. Based on the Company’s outstanding forward contracts with the bank at July 31, 2004, restricted cash will be reduced to $22.9 million.

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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 us and our industry. These forward-looking statements include, but are not limited to, statements concerning risks and uncertainties. Our 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. We undertake 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 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 acquisition of Crystal Decisions did not result in any new reportable segments, nor do we track the business operations from the former Crystal Decisions or the former Business Objects. We will incur certain acquisition related charges in the future, the magnitude of which we have not experienced in the past.

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     We estimated the following Crystal Decisions acquisition related expenses for 2004 to 2008 at December 31, 2003 (in millions):

     During the three and six months ended June 30, 2004, respectively, we expensed $5.0 million and $10.2 million of amortization of developed technology, $2.6 million and $5.3 million of amortization of other intangible assets and $1.7 million and $3.8 million of amortization of unearned stock-based compensation. During the three months ended June 30, 2004, we incurred $1.5 million of restructuring costs of the $5.5 million originally estimated. Any remaining charges, which are currently expected to be approximately $2.6 million, will be incurred during the remainder of 2004.

     For 2004, our results as reported under generally accepted accounting principles in the United States, or U.S. GAAP, are not comparable to 2003 as a result of our acquisition of Crystal Decisions. The corresponding periods of the prior year do not reflect revenues and expenses related to Crystal Decisions. Our historical results before 2004 are not expected to be indicative of our future results for the combined company. While we have presented the required comparison of the three and six months ended June 30, 2004 to the three and six months ended June 30, 2003, the majority of the changes from the comparative periods are as the result of the addition of revenues and expenses in 2004 from the former Crystal Decisions. Our operating results for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 appear in our condensed consolidated statements of income. We have not reproduced these statements here as the periods are not comparable and provide no further insight into our operations. Instead, in order to provide more meaningful analysis to readers, we have presented financial information comparing the three months ended June 30, 2004 to the three months ended March 31, 2004 and provided analysis on the change between these periods.

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. We generate a significant portion of our revenues and incur a significant portion of our expenses in euro, British pounds and Japanese yen. Historically, this has resulted in a natural hedge of our foreign exchange exposure. As a result of our acquisition of Crystal Decisions, we incur a significant portion of our expenses in Canadian dollars without offsetting amounts of Canadian dollar revenues.

     As we conduct a significant number of transactions in currencies other than the U.S. dollar, we have presented constant currency information where meaningful to provide information for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations. As currency rates change from quarter to quarter and year-over-year, our results of operations may be impacted largely as a result of these changes. For example, our results may show an increase in costs for a period; however, when the portion of those costs denominated in foreign currencies are translated into U.S. dollars at the same rate as the previous quarter or comparative period, the result may be a decrease in cost, with the change being principally the result of fluctuations in the foreign currency rates.

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Results excluding the effect of foreign currency translation (also referred to constant currency) may be calculated by translating current period results at prior quarter or prior year average exchange rates.

     On a constant currency basis against the rates for the three and six months ended June 30, 2003, total operating income for the six months ended June 30, 2004 would have been higher by approximately $1.2 million than reported results.

Results of Operations

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

* Certain percentages rounded for presentation.

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Revenues

     Net License Fees. Net license fees increased by $112.8 million, or 95%, to $231.7 million for the six months ended June 30, 2004 from $118.9 million for the six months ended June 30, 2003. Net license fees increased by $54.5 million, or 87%, to $117.2 million for the three months ended June 30, 2004 from $62.7 million for the three months ended June 30, 2003.

     Net license fees increased by $2.7 million, or 2%, to $117.2 million in the three months ended June 30, 2004 from $114.5 million in three months ended March 31, 2004. On a constant currency basis against the three months ended March 31, 2004, we would have recorded an additional $2.8 million in net license fees to those reported for the three months ended June 30, 2004. We derive the largest portion of our license revenues from our business intelligence platform products, which include all current versions of the Crystal Decisions’ product suites. We continue to see growth in our license revenues which 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 three months ended June 30, 2003.

     Approximately 9% of our net license fees were derived from our analytic applications and data integration license fees in the three months ended June 30, 2004, a decrease of $2.4 million from the three months ended March 31, 2004. During the first half of 2004 we focused our cross-selling efforts mainly on business intelligence platform products which we believe resulted in the decrease of non-business intelligence products, such as analytic applications and data integration applications.

     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. Historically, we have generated the majority of our consolidated net license fees through our direct sales force. Our 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 partners comprised 45% of total net license fees in the three months ended June 30, 2004 compared to 40% in the three months ended June 30, 2003. Net license fees from partners comprised 46% of total net license fees in the six months ended June 30, 2004 compared to 40% in the six months ended June 30, 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. For example, during the three months ended March 31, 2004, 25% of our license deals over $1 million were indirect sales when only 18% of our license deals over $1 million were indirect sales during the three months ended June 30, 2004. No single customer or single channel partner represented more than 10% of total revenues during any of the periods presented.

     Service Revenues. Service revenues increased by $79.2 million, or 62%, for the six months ended June 30, 2004 from $128.6 million for the six months ended June 30, 2003. Services revenues increased by $38.8 million, or 58%, for the three months ended June 30, 2004 from $66.3 million for the three months ended June 30, 2003. Service revenues increased by $2.3 million, or 2%, in the three months ended June 30, 2004 from the three months ended March 31, 2004, with $1.9 million of this increase attributable to maintenance and support revenues. On a constant currency basis against the three months

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ended March 31, 2004, we would have recorded an additional $2.2 million of services revenues to those reported for the three months ended June 30, 2004. We expect our services revenues to increase in absolute dollars as we continue to support a large installed customer base and continue to gain new customers.

     As a percentage of total revenues, services revenues have decreased to 47% of total revenues for the six months ended June 30, 2004 from 52% for the six months ended June 30, 2003, while net license fees increased from 48% to 53% of total revenues for the same period. This change was primarily attributable to the addition of Crystal Decisions’ product and services revenues which had a historical split between license and services revenues at the ratio of 60-65% for net license fees and 35-40% for services revenues. The historical trend for Crystal Decisions was the result of the large percentage of revenue sold through distributors for which no consulting or training was sold.

    Geographic Revenues Mix

     The following shows the geographic mix of our total revenues:

* Europe, Middle East and Africa

     The changes in revenue by geography in the three and six months ended June 30, 2004 over the three and six months ended June 30, 2003 were the result of the strength of Crystal Decisions’ product sales in geographies previously not strongly served by Business Objects. Total revenues from the Americas increased 84% and 92% in the three and six months ended June 30, 2004, respectively, over the three and six months ended June 30, 2003, and increased as a percentage of total revenues to 47% from 44%. Crystal Decisions historically earned approximately 70% of its revenues from the Americas region. Because of the overlap of sales forces in the Americas, this has been the most difficult geography to integrate. This is evidenced by the decrease in Americas’ net license fees to $55.5 million in the three months ended June 30, 2004 from $58.6 million in the three months ended March 31, 2004. We believe that the decrease in net license fees during the three months ended June 30, 2004, is in part due to weaker IT spending experienced in the Americas in the second quarter of 2004 compared to the rest of world. Total revenues for the Americas increased by less than $0.1 million in the three months ended June 30, 2004 from the three months ended March 31, 2004, as the result of increased maintenance revenues offset by decreased net license fees.

     Increased revenues in EMEA, were driven by large transactions in Europe and the overall strength of the European operations. Total revenues from EMEA increased 58% and 62% in the three and six months ended June 30, 2004, respectively, over the three and six months ended June 30, 2003, and decreased as a percentage of total revenues to 45% from 49%. The EMEA region was historically the strongest region for Business Objects and we anticipate that revenues from EMEA will continue to grow and in absolute dollars may exceed revenues from the Americas in future periods. In euros, total revenues from EMEA increased by 8% in the three months ended June 30, 2004 from the three months ended March 31, 2004 as compared to the 3% increase in these revenues

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when translated to U.S. dollars. The loss of 5% in total revenues evidences the overall unfavorable impact of foreign exchange fluctuations on these revenues.

     Total revenues from Asia Pacific including Japan increased 95% and 92% in the three and six months ended June 30, 2004, respectively, over the three and six months ended June 30, 2003, and increased as a percentage of total revenues to 8% from 7%. We have continued to record strong results in this region with our acquisition of Crystal Decisions providing us with a greater proportion of revenues from this region. Revenues from this region increased by 10% for the three months ended June 30, 2004 from the three months ended March 31, 2004 with the largest growth in the Asia Pacific countries, offset by a decrease in revenues from our Japan operations.

Cost of Revenues

     Cost of revenues as a percentage of total revenues increased to 22% in the six months ended June 30, 2004 from 17% in the six months ended June 30, 2003. Cost of revenues as a percentage of total revenues increased to 21% in the three months ended June 30, 2004 from 17% in the three months ended June 30, 2003. Approximately two-thirds of the increase for the three and six months ended June 30, 2004 was attributable to the amortization of intangible assets including developed technology and maintenance and support contracts acquired in our acquisition of Crystal Decisions. The majority of the remaining increase in cost of revenues was the result of the addition of costs associated with revenues for Crystal Decisions’ products and services which had lower services margins than historical Business Objects’ products. Total costs of revenues decreased by $1.9 million to $47.4 million for the three months ended June 30, 2004 from $49.3 million for the three months ended March 31, 2004. On a constant currency basis against the three months ended March 31, 2004, we would have recorded an additional $0.8 million of cost of revenues to those reported for the three months ended June 30, 2004.

     Cost of net license fees. Gross margins on net license fees were 94% for the six months ended June 30, 2004 compared to 99% for the six months ended June 30, 2003. Cost of net license fees increased $11.9 million in the six months ended June 30, 2004, primarily due to $9.2 million in amortization of developed technology from our acquisition of Crystal Decisions in December 2003. The remaining increase is the result of the costs associated with higher license revenues and additional costs related to the release of new versions of our products, offset by savings in third party royalty costs as a result in changes in relationships. Cost of net license fees decreased by $1.7 million to $6.0 million for the three months ended June 30, 2004 from $7.7 million for the three months ended March 31, 2004. The decrease is in part associated with the release of the Crystal 10 suite in January 2004 with no comparable expense in the three months ended June 30, 2004 and fewer third party royalty costs.

     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 $42.3 million, or 104%, to 40% of services revenues in the six months ended June 30, 2004 from 32% of services revenues in the six months ended June 30, 2003. Cost of services revenues increased $20.7 million, or 100%, to $41.4 million for the three months ended June 30, 2004 from $20.7 million for the three months ended June 30, 2003. The majority of the increase from the three and six months ended June 30, 2003 to the three and six months ended June 30, 2004 was the result of increased headcount costs. Approximately $2.2 million and $4.4 million of the absolute dollar increase related to amortization

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of maintenance and support contracts acquired through the acquisition of Crystal Decisions for the three and six months ended June 30, 2004, respectively. In addition, as part of our acquisition of Crystal Decisions and under purchase accounting, we were unable to recognize approximately $21.3 million of deferred revenues from Crystal Decisions which would have been earned in the six months ended June 30, 2004. As there are related costs to performing the services associated with the deferred revenues, costs of services revenues as a percentage of services revenues have increased as anticipated. Cost of services revenues decreased by $0.2 million for the three months ended June 30, 2004 from the three months ended March 31, 2004 with no one factor in isolation being material.

     Gross margin on services revenues were 60% for the six months ended June 30, 2004 compared to 68% for the six months ended June 30, 2003. The decrease in gross margin is primarily due to the $21.3 million of customer support revenues that would have been earned in the six months ended June 30, 2004, the mix of required outsourcing for our consulting and training group, and to a lesser extent, to an increase in the level of amortization expense due to the acquisition of Crystal Decisions. Gross margin on services revenues were 61% for the three months ended June 30, 2004 compared to 59% for the three months ended March 31, 2004 as the result of additional revenues without additional corresponding costs.

OPERATING EXPENSES

     For the three and six months ended June 30, 2004, respectively, total operating expenses included $1.4 million and $3.1 million of the $1.7 million and $3.8 million of amortization of unearned stock-based compensation cost related to the assumption of options on the acquisition of Crystal Decisions. The total expense represented the realization of the benefit by the employee on vesting of a portion of these stock options, and was expensed by operating expense line associated with the employees’ department. There was no comparable expense during the three or six months ended June 30, 2003. Total operating expenses decreased as a percentage of total revenues by 1% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 despite the additional costs associated with the integration. Total operating costs decreased by $2.1 million to $156.5 million for the three months ended June 30, 2004 from $158.6 million for the three months ended March 31, 2004. On a constant currency basis against the three months ended March 31, 2004, total operating expenses would have been approximately $3.0 million higher than reported results for the three months ended June 30, 2004.

Sales and Marketing Expenses

     Sales and marketing expenses increased $81.8 million, or 71%, and decreased by 1% of total revenues in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. Sales and marketing expenses increased $41.0 million, or 70%, and remained constant at 45% of total revenues for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. The increase in absolute dollars for the three and six months ended June 30, 2004 compared to the three and six months ended June 30, 2003 was primarily due to increased employee expenses, including commissions, resulting from the acquisition of Crystal Decisions and the resultant addition of approximately 650 sales and marketing employees.

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     Sales and marketing expenses increased by $2.1 million, or 2%, in the three months ended June 30, 2004 from the three months ended March 31, 2004. On a constant currency basis against the three months ended March 31, 2004, we would have recorded an additional $1.7 million of expenses to those results reported for the three months ended June 30, 2004. For the three months ended June 30, 2004, sales and marketing costs increased as the result of additional headcount and travel expenses compared to the three months ended March 31, 2004. During the three months ended March 31, 2004, we incurred costs associated with the 2004 sales kickoff event and the marketing of our integrated product road map which did not recur in the three months ended June 30, 2004.

Research and Development Expenses

     Research and development expenses increased by $30.1 million, or 65%, and decreased by 2% of total revenues in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Research and development expenses increased by $13.0 million, or 55%, and decreased by 2% of total revenues in the three months ended June 30, 2004 compared to the three months ended June 30, 2003. As the majority of research and development expenses relate to compensation, the majority of the increase was the resultant addition of approximately 450 research and development employees.

     Research and development expenses decreased by $3.2 million, or 8%, and decreased by 2% of total revenues in the three months ended June 30, 2004 from the three months ended March 31, 2004. The decrease in absolute dollars for the sequential quarter was the result of additional headcount reductions and related compensation savings in this group throughout the six months ended June 30, 2004. These reductions are in line with the restructuring plan set by management. We expect to gain further synergies as we develop one integrated product line and complete the remainder of the planned terminations. A large portion of our research and development activities are situated in Canada and France. As a result, we may experience either favorable or unfavorable impacts as the result of foreign exchange movements related to this expense. On a constant currency basis against the three months ended March 31, 2004, we would have recorded an additional $1.1 million of expenses to those results reported for the three months ended June 30, 2004.

General and Administrative Expenses

     General and administrative expenses increased by $22.2 million, or 118%, and increased by 1% as a percentage of total revenues in the six months ended June 30, 2004 from the six months ended June 30, 2003. General and administrative expenses increased by $8.6 million, or 81%, and increased by 1% as a percentage of total revenues in the three months ended June 30, 2004 from the three months ended June 30, 2003. These increases resulted from increased employee related costs, integration expenses, professional fees, consulting and the defense of legal proceedings, and an increase in bad debt expense for accounts receivable identified as doubtful, all primarily associated with our acquisition of Crystal Decisions.

     General and administrative expenses decreased by $2.5 million, or 11%, and decreased by 1% as a percentage of total revenues in the three months ended June 30, 2004 from the three months ended March 31, 2004. The decrease was the result of decreased headcount associated costs in the three months ended June 30, 2004, reduced bad debt expense, offset by additional legal fees in conjunction with the MicroStrategy suit and accounting fees related to various regulatory filings related to our annual general meeting. For both quarters in 2004, general and administrative expenses included amortization expense of approximately $0.3 million related to trade names acquired.

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Restructuring Costs

     As disclosed in the section “Acquisitions and Restructuring Charges – Crystal Decisions Acquisition “Restructuring Costs Expensed under FAS 146” restructuring costs of $1.5 million were incurred during the three months ended June 30, 2004 related to additional expenses identified during the quarter associated with the integration. These charges were associated with the planned facility abandonment or closure of specific office locations occupied by Business Objects prior to the acquisition of Crystal Decisions. We currently anticipate that all planned closures will be completed by the end of 2004 at an additional cost of approximately $2.6 million.

Interest and Other Income (Expense), Net

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

     Net interest income decreased during the three and six months ended June 30, 2004 compared to the same periods in 2003, as the result of the combination of lower average balances of invested cash and short-term investments and lower interest rates over the comparative period. Net interest income remained consistent from the three months ended March 31, 2004 to the three months ended June 30, 2004.

     The patent infringement settlement income resulted 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 three months ended June 30, 2004. We do not expect any further income from this source.

Foreign Exchange Gains (Losses)

     The section “Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations” describes the change in our operations related to foreign currency as a result of the acquisition of Crystal Decisions. For the three and six months ended June 30, 2003, net foreign exchange gains (losses) were minimized by the natural hedge of our revenues and expenses.

     During the six months ended June 30, 2004, we recognized $9.1 million of net foreign exchange losses, $6.8 million which were recognized in the three months ended March 31, 2004. The majority of this loss related to the translation of the U.S. dollar denominated intercompany loans into the local currencies of our subsidiaries. In order to mitigate the risk of these foreign exchange losses occurring in the future, in April 2004, we entered into forward contracts for the purchase of U.S. dollars, Canadian dollars and British pounds in exchange for euros at a future date to settle various intercompany loans. This future date coincides with the maturity of these intercompany loans. The majority of the net foreign exchange loss for the three months ended June 30, 2004 was attributable to the reversal of the March 31, 2004 unrealized gain of $3.4 million. This foreign exchange loss was partially offset by a gain on these forward contracts of $0.3 million in April 2004. At June 30, 2004, we held forward contracts to purchase U.S. $151.0 million, Cdn $9.9 million and £25.3 million against the euro to settle obligations under

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intercompany loans. Since the implementation of our forward contract strategy in May 2004, we do not anticipate material exchange gains or losses from intercompany loans.

     As our Canadian operations continue to incur more expenses than earn revenues, we hold forward contracts for the purchase of Canadian dollars. At June 30, 2004, we held forward contracts to purchase Canadian $70.1 million using U.S. dollars at various dates to December 13, 2004. Since the acquisition of Crystal Decisions, we have and expect to continue to recognize either foreign exchange gains or losses on a combination of events including forward exchange contract gains or losses settled during and outstanding at period end and other transactions involving the purchase of currencies.

Income Taxes

     Our effective tax rate was 38% for the three and six months ended June 30, 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 six months ended June 30, 2004 we generated greater cash resources than we used from operations. The major uses of cash in the six months ended June 30, 2004 include: cash payments of approximately $13.0 million for restructuring charges; a net cash payment of $21.5 million in accrued payroll and related expense accruals which included severance payments to former employees, and cash payments of approximately $11.9 million for normal course tax liabilities.

     As a result of the integration of the two companies and the consolidation of certain portions of our collections team in the three months ended June 30, 2004, we collected less cash in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 which was reflected in the increase in days sales outstanding to 81 days at June 30, 2004, from 75 days at March 31, 2004 and 57 days at June 30, 2003. Our deferred revenue balance increased by $41.6 million from December 31, 2003 which comprises a large portion of the overall increase in cash provided by operations.

     Investing Activities. The decrease in net cash used in investing activities resulted from the absence of any net purchases of short-term investments in the six months ended June 30, 2004, which resulted in an increase in cash used of $25.3 million during the six months ended June 30, 2003. This decrease in net cash used for the six months ended June 30, 2004 was offset by greater capital expenditures during the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Capital expenditures of $16.3 million for the six months ended June 30, 2004 included costs related to the continued implementation of financial systems and information technology infrastructure and the continued expansion of our facilities.

     Financing Activities. During the six months ended June 30, 2004, the net use in cash from financing activities related to the transfer of $33.3 million of cash to a restricted account in accordance with a pledge and security agreement to collateralize forward contracts, the repurchase of 1 million of our shares for $21.0 million, offset by cash received of $20.7 million from the exercise of options under our stock option plans and the issuance of shares under our employee stock purchase plans. Our board of directors authorized the share repurchase of 3.5 million ordinary shares at prices not to exceed €25.00 per share on May 14, 2004, pursuant to the share repurchase program authorized by shareholders on May 15, 2003. These shares have been appropriately accounted for as treasury stock.

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     During the six months ended June 30, 2003, we received cash of $6.3 million from the exercise of options under our stock option plans and the issuance of shares under our employee stock purchase plans. The majority of the increase in cash provided by stock option exercises and stock purchases under our employee stock purchase plans for the six months ended June 30, 2004 results from exercises by former Crystal Decisions’ optionees. We expect this source of cash to vary because we cannot predict when our employees will exercise their stock options.

     Cash, cash equivalents and short-term investments totaled $202.6 million at June 30, 2004, a decrease of $32.8 million from December 31, 2003. Excluding the movement of the $33.3 million collateralized under the pledge and security agreement, cash and cash equivalents increased by $0.5 million from December 31, 2003 and decreased $10.0 million from March 31, 2004.

  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 on a short-term basis, we obtained a €60 million line of credit in the three months ended December 31, 2003 which can be drawn in euros, U.S. dollars or Canadian dollars to support our cash management practices. At June 30, 2004 and December 31, 2003, no balance was outstanding under this line of credit.

     On April 28, 2004, we entered into a pledge and security agreement covering certain forward contract services. In order to secure this agreement we were required to maintain $33.3 million at June 30, 2004 in a money market fund with the bank as collateral. 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. On July 28, 2004, we signed a first amendment to this agreement that changes the requirement to hold the $33.3 million. On July 28, 2004 and thereafter the agreement requires us to hold a balance equal to 10% of the aggregate amount of all foreign exchange transactions entered into with the bank. Based on our outstanding forward contracts at July 31, 2004 with the bank, our restricted cash will be reduced to $22.9 million.

     Our contractual obligations have not changed materially from those presented as of December 31, 2003 in our Annual Report on Form      10-K.

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 June 30, 2004 or at December 31, 2003.

      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

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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 $0.2 million of expenses related to one lease which we vacated in the three months ended June 30, 2004. No other amounts were determined to be material at June 30, 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 six months ended June 30, 2004, an adjustment was made to the net tangible assets acquired to increase goodwill. This increase was the result of increases in estimates of liabilities that existed at the date of purchase consisting mainly of a $9.0 million increase in income taxes payable and $1.1 million for the under accrual of various liabilities and certain restructuring costs. 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. We expect, with the exception of items related to open tax years, that the purchase price allocation period will end prior to the end of 2004.

     Restructuring. Prior to the acquisition of Crystal Decisions, 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 we completed 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, then 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, then our liability would be adjusted as an increase or decrease to expense in the period that we change the estimate.

     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 three months ended March 31, 2004, we paid approximately $4.7 million in severance and other related benefits to 65 employees, and $0.2 million in net minimum lease payment and settlement costs related to properties vacated. During the three months ended June 30, 2004, we paid approximately $2.9 million to 63 employees across all regions, and $0.1 million 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.

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     The balance of accrued restructuring charges included as a cost of acquisition related to Crystal Decisions were as follows at June 30, 2004 (in millions):

     Restructuring Costs Expensed Under FAS 146

     As a result of the acquisition of Crystal Decisions, we accrued approximately $7.8 million of expenses related to restructuring costs for severance and other related benefits for 159 Business Objects’ employees across all functions worldwide. During the three months ended March 31, 2004, the accrual was reduced by $2.9 million in cash payments related to the termination of 52 of these employees. During the three months ended June 30, 2004, we paid cash of $1.8 million related to the termination of 34 employees. We anticipate paying the remaining balance during the remainder of the year. These costs will be recognized as the facilities are vacated during 2004 as required by FAS 146.

     The balance of accrued restructuring costs associated with Business Objects’ employees prior to our acquisition of Crystal Decisions was as follows at June 30, 2004 (in millions):