##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from:  to
 Commission File Number 0-24720
 Business Objects S.A.
  Republic of France
    
    98-0355777(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 157-159 rue Anatole France, 92300 Levallois-Perret, France
 (408) 953-6000
 þ o
  þ o o
 o þ
  




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##### 



Business Objects S.A.
Index
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    37PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    58Item 6.
    
    Exhibits
    
    
    61SIGNATURES
    
    
    62EXHIBIT 10.73EXHIBIT 10.73.1EXHIBIT 10.73.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited)
 BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except nominal value per ordinary share)
 June 30,
    
    
    December 31,2006
    
    
    2005 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    469,490
    
    
    $
    332,777Short-term investments
    
    
    5,041
    
    
    
    4,651Restricted cash
    
    
    30,545
    
    
    
    22,157Accounts receivable, net
    
    
    239,401
    
    
    
    265,672Deferred tax assets
    
    
    13,106
    
    
    
    13,605Prepaid and other current assets
    
    
    60,919
    
    
    
    60,880Total current assets
    
    
    818,502
    
    
    
    699,742Goodwill
    
    
    1,210,775
    
    
    
    1,166,043Other intangible assets, net
    
    
    122,607
    
    
    
    110,512Property and equipment, net
    
    
    85,888
    
    
    
    74,116Deposits and other assets
    
    
    28,766
    
    
    
    34,945Long-term restricted cash
    
    
    26,428
    
    
    
    20,858Long-term deferred tax assets
    
    
    15,230
    
    
    
    17,142Total assets
    
    $
    2,308,196
    
    
    $
    2,123,358LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    52,118
    
    
    $
    45,777Accrued payroll and related expenses
    
    
    73,940
    
    
    
    83,332Income taxes payable
    
    
    95,034
    
    
    
    79,820Deferred revenues
    
    
    265,920
    
    
    
    201,788Other current liabilities
    
    
    78,799
    
    
    
    72,098Escrows payable
    
    
    24,970
    
    
    
    21,728Total current liabilities
    
    
    590,781
    
    
    
    504,543Long-term escrows payable
    
    
    19,951
    
    
    
    10,902Other long-term liabilities
    
    
    8,487
    
    
    
    8,871Long-term deferred tax liabilities
    
    
    2,290
    
    
    
    2,853Long-term deferred revenues
    
    
    8,480
    
    
    
    6,734Total liabilities
    
    
    629,989
    
    
    
    533,903Commitments and contingenciesShareholders equity:Ordinary shares, 0.10 nominal value ($0.13
at June 30, 2006 and $0.12 at December 31,
2005): authorized 265,969 and 120,842; issued
96,396 and 95,304; issued and outstanding
93,569 and 92,262; respectively at June 30,
2006 and December 31, 2005
    
    
    10,524
    
    
    
    10,359Additional paid-in capital
    
    
    1,257,437
    
    
    
    1,217,473Treasury, Business Objects Option LLC, and
Employee Benefit Sub-Plan Trust shares: 2,827
shares at June 30, 2006 and 3,041 shares at
December 31, 2005
    
    
    (4,214
    )
    
    
    (3,223
    )Retained earnings
    
    
    362,631
    
    
    
    342,345Unearned compensation
    
    
    
    
    
    
    (12,243
    )Accumulated other comprehensive income
    
    
    51,829
    
    
    
    34,744Total shareholders equity
    
    
    1,678,207
    
    
    
    1,589,455Total liabilities and shareholders equity
    
    $
    2,308,196
    
    
    $
    2,123,358
 
 (1)
    
    The balance sheet at December 31, 2005 has been derived from the audited consolidated
financial statements at that date.  3




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##### Table of Contents



BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per ordinary share and ADS data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006 (1)
    
    
    2005
    
    
    2006 (1)
    
    
    2005(unaudited)
    
    
    (unaudited)Revenues:Net license fees
    
    $
    123,110
    
    
    $
    124,858
    
    
    $
    249,004
    
    
    $
    240,009Services
    
    
    171,374
    
    
    
    137,551
    
    
    
    323,751
    
    
    
    271,175Total revenues
    
    
    294,484
    
    
    
    262,409
    
    
    
    572,755
    
    
    
    511,184Cost of revenues:Net license fees
    
    
    10,276
    
    
    
    7,249
    
    
    
    18,252
    
    
    
    14,417Services
    
    
    66,023
    
    
    
    52,781
    
    
    
    126,790
    
    
    
    104,162Total cost of revenues
    
    
    76,299
    
    
    
    60,030
    
    
    
    145,042
    
    
    
    118,579Gross profit
    
    
    218,185
    
    
    
    202,379
    
    
    
    427,713
    
    
    
    392,605Operating expenses:Sales and marketing
    
    
    123,123
    
    
    
    104,787
    
    
    
    240,623
    
    
    
    208,509Research and development
    
    
    52,644
    
    
    
    40,427
    
    
    
    96,381
    
    
    
    80,701General and administrative
    
    
    28,965
    
    
    
    22,218
    
    
    
    59,328
    
    
    
    47,031Total operating expenses
    
    
    204,732
    
    
    
    167,432
    
    
    
    396,332
    
    
    
    336,241Income from operations
    
    
    13,453
    
    
    
    34,947
    
    
    
    31,381
    
    
    
    56,364Interest and other income, net
    
    
    3,008
    
    
    
    3,178
    
    
    
    5,863
    
    
    
    7,578Income before provision for income taxes
    
    
    16,461
    
    
    
    38,125
    
    
    
    37,244
    
    
    
    63,942Provision for income taxes
    
    
    (8,512
    )
    
    
    (14,986
    )
    
    
    (16,958
    )
    
    
    (25,797
    )Net income
    
    $
    7,949
    
    
    $
    23,139
    
    
    $
    20,286
    
    
    $
    38,145Basic net income per ordinary share and ADS
    
    $
    0.09
    
    
    $
    0.26
    
    
    $
    0.22
    
    
    $
    0.43Diluted net income per ordinary share and ADS
    
    $
    0.08
    
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.42Ordinary shares and ADSs used in computing
basic net income per ordinary share and ADS
    
    
    93,310
    
    
    
    90,030
    
    
    
    92,946
    
    
    
    89,727Ordinary shares and ADSs and equivalents
used in computing diluted net income per
ordinary share and ADS
    
    
    95,083
    
    
    
    92,089
    
    
    
    95,162
    
    
    
    91,650
 
 (1)
    
    Costs and expenses for the three and six months ended June 30, 2006 include stock-based
compensation expense recorded in accordance with FAS 123(R). See Notes 1 and 4 to the
Condensed Consolidated Financial Statements for additional information.  4




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##### Table of Contents



BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Six Months EndedJune 30,2006
    
    
    2005(unaudited)Operating activities:Net income
    
    $
    20,286
    
    
    $
    38,145Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    15,770
    
    
    
    16,516Amortization of other intangible assets
    
    
    19,146
    
    
    
    16,040Stock-based compensation expense
    
    
    24,917
    
    
    
    2,360Excess tax benefits from stock-based compensation
    
    
    (2,422
    )
    
    
    Acquired in-processes research and development
    
    
    3,300
    
    
    
    Deferred income taxes
    
    
    (5,789
    )
    
    
    3,850Changes in operating assets and liabilities:Accounts receivable, net
    
    
    45,546
    
    
    
    29,019Prepaid and other current assets
    
    
    6,654
    
    
    
    (8,865
    )Deposits and other assets
    
    
    6,282
    
    
    
    7,563Accounts payable
    
    
    2,499
    
    
    
    4,523Accrued payroll and related expenses
    
    
    (21,645
    )
    
    
    (14,389
    )Income taxes payable
    
    
    16,937
    
    
    
    (14,067
    )Deferred revenues
    
    
    45,860
    
    
    
    15,517Other liabilities
    
    
    (1,953
    )
    
    
    (24,943
    )Short-term investments classified as trading
    
    
    (390
    )
    
    
    (15
    )Net cash provided by operating activities
    
    
    174,998
    
    
    
    71,254Investing activities:Purchases of property and equipment
    
    
    (22,807
    )
    
    
    (13,891
    )Business acquisitions, net of acquired cash
    
    
    (55,482
    )
    
    
    Increase in escrows payable
    
    
    12,099
    
    
    
    Transfer of cash to restricted cash accounts
    
    
    (13,766
    )
    
    
    Net cash used in investing activities
    
    
    (79,956
    )
    
    
    (13,891
    )Financing activities:Issuance of shares
    
    
    25,361
    
    
    
    16,057Excess tax benefits from stock-based compensation
    
    
    2,422
    
    
    
    Net cash provided by financing activities
    
    
    27,783
    
    
    
    16,057Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    13,888
    
    
    
    (911
    )Net increase in cash and cash equivalents
    
    
    136,713
    
    
    
    72,509Cash and cash equivalents, beginning of the period
    
    
    332,777
    
    
    
    293,485Cash and cash equivalents, end of the period
    
    $
    469,490
    
    
    $
    365,994
  5




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##### Table of Contents



Business Objects S.A.
 
 Notes to Condensed Consolidated Financial Statements
 June 30, 2006
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
    Use of Estimates
  Other Current Liabilities
  Ordinary Shares, Treasury Shares, Business Objects Option LLC Shares and Employee Benefit Sub Plan
Trust Shares
 Treasury, Business
Objects Option LLC and Employee Benefit Sub-Plan Trust Shares.
 6




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TM
 Significant Accounting Policies
 Revenue Recognition
   Modification of SOP No. 97-2 with Respect
to Certain Transactions.
    7




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##### Table of Contents



Accounting for Stock-Based Compensation
     Net Income per Ordinary Share and ADS
 Earnings per Share
 Recent Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 8




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Accounting for Servicing of Financial Assets.
 Accounting for Certain Hybrid Financial Instruments.
 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards .
 2. Derivative Financial Instruments
   9




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##### Table of Contents



Accounting for Derivative Instruments and Hedging Activities
   June 30, 2006
    
    December 31, 2005Notional Amount
    
    Fair Value
    
    Notional Amount
    
    Fair Value(in millions)
    
    (in millions)U.S. dollar equivalent of derivatives not designated as hedges
    
    $
    14.7
    
    
    $
    0.3
    
    
    $
    67.8
    
    
    $
    0.1U.S. dollar equivalent of derivatives designated as cash flow
hedges
    
    $
    72.7
    
    
    $
    (0.1
    )
    
    $
    19.8
    
    
    $
    0.2
  3. Accounts Receivable
  4. Shareholders Equity
   10




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11




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##### Table of Contents



For the three monthsended
    
    For the six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Net income  as reported for prior periods (1)
    
    
    N/A
    
    
    
    23,139
    
    
    
    N/A
    
    
    
    38,145Add: Amortization of stock-based compensation expense included in reported net
income, net of estimated tax related benefits
    
    
    N/A
    
    
    
    729
    
    
    
    N/A
    
    
    
    1,516Deduct: Stock-based compensation expense determined under the fair-value based
method for all awards, net of estimated tax related benefits for the three and
six months ended June 30, 2005 of $1,036 and $2,082, respectively (2)
    
    
    N/A
    
    
    
    (9,427
    )
    
    
    N/A
    
    
    
    (20,660
    )Net income, including the effect of stock-based compensation expense  pro
forma in 2005 (3)
    
    
    7,949
    
    
    
    14,441
    
    
    
    20,286
    
    
    
    19,001Net income per ordinary share and ADS  as reported Basic for prior periods (1)
    
    
    N/A
    
    
    
    0.26
    
    
    
    N/A
    
    
    
    0.43Net income per ordinary share and ADS  as reported Diluted for prior periods
(1)
    
    
    N/A
    
    
    
    0.25
    
    
    
    N/A
    
    
    
    0.42Net income
per ordinary share and ADS  Basic, including the effect of stock-based compensation  pro forma in 2005 (3)
    
    
    0.09
    
    
    
    0.16
    
    
    
    0.22
    
    
    
    0.21Net income per ordinary share and ADS  Diluted, including the effect of
stock-based compensation  pro forma in 2005 (3)
    
    
    0.08
    
    
    
    0.16
    
    
    
    0.21
    
    
    
    0.21
 
 (1)
    
    Net income and net income per share prior to 2006 did not include stock-based compensation
expense under FAS 123 because the Company did not adopt the recognition provisions of FAS 123.(2)
    
    Stock-based compensation expense prior to 2006 was calculated based on the pro forma
application of FAS 123.(3)
    
    Net income and net income per share for the three months ended June 30, 2006 included
stock-based compensation expense of $10,090, net of tax benefits of $1,418. Net income and net
income per share for the six months ended June 30, 2006 included stock-based compensation
expense of $22,181, net of tax benefits of $2,737. Net income and net income per share prior
to 2006 represent pro forma information based on FAS 123. The reported pro forma net income
for the three and six months ended June 30, 2005 was revised, resulting in a decrease of $5.0
million and $12.3 million, respectively, from previously disclosed amounts to include
stock-based compensation expense related to options assumed in connection with the Crystal
Decisions acquisition, options exchanged under the stock option exchange programs, actual
forfeitures, and revised estimated tax benefits.    For the three months ended
    
    For the six months endedJune 30, 2006
    
    June 30, 20062004
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004Stock options
    
    RSUs
    
    IESPP
    
    ESPP
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    48
    %
    
    
    N/A
    
    
    
    29
    %
    
    
    N/A
    
    
    
    48
    %
    
    
    N/A
    
    
    
    30
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.80
    %
    
    
    N/A
    
    
    
    3.03
    %
    
    
    N/A
    
    
    
    3.70
    %
    
    
    N/A
    
    
    
    2.71
    %
    
    
    N/ATurnover rateFrance
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers
    
    
    14
    %
    
    
    14
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    10
    %
    
    
    N/ARest of the world
    
    
    20
    %
    
    
    20
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    10
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value in $
    
    
    12.13
    
    
    
    29.49
    
    
    
    7.76
    
    
    
    N/A
    
    
    
    13.21
    
    
    
    33.12
    
    
    
    8.08
    
    
    
    1.66Expected life (years)
    
    
    4.96
    
    
    
    2.00
    
    
    
    0.5
    
    
    
    N/A
    
    
    
    4.82
    
    
    
    1.64
    
    
    
    0.5
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, Euribor six month rate
for the 2004 IESPP  12




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For the three months ended
    
    For the six months endedJune 30, 2005
    
    June 30, 20052004
    
    
    
    
    
    
    
    
    
    2004Stock options
    
    IESPP
    
    ESPP
    
    Stock options
    
    IESPP
    
    ESPPExpected volatility
    
    
    55
    %
    
    
    41
    %
    
    
    N/A
    
    
    
    55
    %
    
    
    42
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    2.9
    %
    
    
    2.16
    %
    
    
    N/A
    
    
    
    2.9
    %
    
    
    2.04
    %
    
    
    N/ATurnover rateFrance
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/ARest of the world
    
    
    20
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    20
    %
    
    
    N/A
    
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value in $
    
    
    11.18
    
    
    
    6.52
    
    
    
    N/A
    
    
    
    11.18
    
    
    
    6.18
    
    
    
    7.09Expected life (years)
    
    
    4.73
    
    
    
    0.5
    
    
    
    N/A
    
    
    
    4.73
    
    
    
    0.5
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, Euribor six month rate
for the 2004 IESPP     Weighted-averageWeighted
    
    Aggregate
    
    remainingNumber of awards
    
    average
    
    intrinsic
    
    contractualStock
    
    
    
    
    
    exercise price
    
    value (in
    
    term (inWarrants
    
    options
    
    RSUs
    
    (in $) (1)
    
    $) (2)
    
    years)Outstanding at
January 1, 2006
    
    
    435
    
    
    
    13,100
    
    
    
    389
    
    
    
    27.77
    
    
    
    200,697
    
    
    
    7.10Granted (3)
    
    
    
    
    
    
    1,895
    
    
    
    230
    
    
    
    29.00
    
    
    
    7,152Cancelled / Expired
    
    
    (45
    )
    
    
    (942
    )
    
    
    (24
    )
    
    
    27.98
    
    
    
    7,726Exercised
    
    
    (30
    )
    
    
    (993
    )
    
    
    (63
    )
    
    
    16.65
    
    
    
    20,202Outstanding at June
30, 2006
    
    
    360
    
    
    
    13,060
    
    
    
    532
    
    
    
    30.59
    
    
    
    56,388
    
    
    
    6.83Exercisable at June
30, 2006
    
    
    255
    
    
    
    7,040
    
    
    
    
    
    
    
    32.03
    
    
    
    34,698
    
    
    
    5.67Unvested at June
30, 2006
    
    
    105
    
    
    
    6,020
    
    
    
    532
 
 (1)
    
    translated in U.S. dollars based on the noon buying rate as published by the Federal Reserve
of Bank of New York for grants, exercises and cancellations and based on the closing rate on
June 30, 2006 for outstanding options.(2)
    
    computed based on the closing quote on NASDAQ and the option exercise price translated in
U.S. dollars as per (1) above.(3)
    
    as stock options are granted with an exercise price equal to the closing price on Euronext on
the grant date, the intrinsic value of grants is limited to RSUs. 13




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Weighted-Number of
    
    average grantawards (in
    
    date fair valuethousands)
    
    (in $)Unvested at January 1, 2006
    
    
    6,688
    
    
    
    15.24Granted
    
    
    2,125
    
    
    
    15.10Vested
    
    
    (1,294
    )
    
    
    14.75Forfeited
    
    
    (862
    )
    
    
    13.00Unvested at June 30, 2006
    
    
    6,657
    
    
    
    15.49
   Stock
    
    
    
    
    
    
    2004Warrants
    
    
    options
    
    
    RSUs
    
    
    IESPP
    
    
    ESPP
    
    
    TotalCost of license fees
    
    
    
    
    
    $
    9
    
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    10Cost of services
    
    
    
    
    
    
    1,240
    
    
    $
    10
    
    
    
    203
    
    
    
    
    
    
    
    1,453Sales and marketing
    
    
    
    
    
    
    3,149
    
    
    
    66
    
    
    
    478
    
    
    
    
    
    
    
    3,693Research and development
    
    
    
    
    
    
    1,605
    
    
    
    12
    
    
    
    208
    
    
    
    
    
    
    
    1,825General and administrative
    
    $
    263
    
    
    
    3,383
    
    
    
    798
    
    
    
    83
    
    
    
    
    
    
    
    4,527Total compensation expense
    
    
    263
    
    
    
    9,386
    
    
    
    886
    
    
    
    973
    
    
    
    
    
    
    
    11,508Income tax benefit
    
    
    
    
    
    
    (1,373
    )
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    (1,418
    )Total compensation expense, net of tax
    
    $
    263
    
    
    $
    8,013
    
    
    $
    841
    
    
    $
    973
    
    
    $
    
    
    
    $
    10,090
  Stock
    
    
    
    
    
    
    2004Warrants
    
    
    options
    
    
    RSUs
    
    
    IESPP
    
    
    ESPP
    
    
    TotalCost of license fees
    
    
    
    
    
    $
    20
    
    
    
    
    
    
    $
    2
    
    
    
    
    
    
    $
    22Cost of services
    
    
    
    
    
    
    2,406
    
    
    $
    10
    
    
    
    369
    
    
    $
    5
    
    
    
    2,790Sales and marketing
    
    
    
    
    
    
    6,118
    
    
    
    101
    
    
    
    971
    
    
    
    16
    
    
    
    7,206Research and development
    
    
    
    
    
    
    3,254
    
    
    
    22
    
    
    
    354
    
    
    
    32
    
    
    
    3,662General and administrative
    
    $
    441
    
    
    
    6,671
    
    
    
    3,957
    
    
    
    159
    
    
    
    10
    
    
    
    11,238Total compensation expense
    
    
    441
    
    
    
    18,469
    
    
    
    4,090
    
    
    
    1,855
    
    
    
    63
    
    
    
    24,918Income tax benefit
    
    
    
    
    
    
    (2,663
    )
    
    
    (74
    )
    
    
    
    
    
    
    

    
    
    
    (2,737
    )Total compensation expense, net of tax
    
    $
    441
    
    
    $
    15,806
    
    
    $
    4,016
    
    
    $
    1,855
    
    
    $
    63
    
    
    $
    22,181
 14




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5. Acquisitions
 Acquisition of Firstlogic, Inc.
    Net TangiblePurchase
    
    Liabilities
    
    Fair Value of
    
    In-Process R&DAcquisition
    
    Consideration
    
    Acquired
    
    Intangibles
    
    (IPR&D)
    
    GoodwillFirstlogic, Inc.
    
    $
    65.9
    
    
    $
    (7.9
    )
    
    $
    27.4
    
    
    $
    3.3
    
    
    $
    43.1
   Maintenance Contracts andDeveloped Technology
    
    Consulting Relationships
    
    Non-Compete AgreementsEstimated
    
    
    
    
    
    Estimated
    
    
    
    
    
    EstimatedUseful Life
    
    
    
    
    
    Useful Life
    
    
    
    
    
    Useful LifeFair Value
    
    (in Years)
    
    Fair Value
    
    (in Years)
    
    Fair Value
    
    (in Years)
    
    TotalFirstlogic, Inc.
    
    $
    16.3
    
    
    
    5
    
    
    $
    10.9
    
    
    
    6
    
    
    $
    0.2
    
    
    
    2
    
    
    $
    27.4
  6. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 15




---



##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005Balance, beginning of the year
    
    $
    1,166,043
    
    
    $
    1,067,694Goodwill acquired during the period
    
    
    43,092
    
    
    
    114,119Goodwill adjustments relating to prior year acquisitions
    
    
    914
    
    
    
    (15,617
    )Impact of foreign currency fluctuations on goodwill
    
    
    726
    
    
    
    (153
    )Balance, end of the period
    
    $
    1,210,775
    
    
    $
    1,166,043
   June 30,
    
    
    December 31,2006
    
    
    2005Developed technology
    
    $
    144,542
    
    
    $
    120,972Maintenance and support contracts
    
    
    61,037
    
    
    
    50,837Trade names
    
    
    7,221
    
    
    
    6,043Total other intangible assets, at cost
    
    
    212,800
    
    
    
    177,852Accumulated amortization on other intangible assets
    
    
    (90,193
    )
    
    
    (67,340
    )Other intangible assets, net
    
    $
    122,607
    
    
    $
    110,512
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amortization of:Developed technology (included in cost of net license fees)
    
    $
    6,976
    
    
    $
    5,261
    
    
    $
    13,005
    
    
    $
    10,733Maintenance and support contracts (included in cost of services revenues)
    
    
    2,934
    
    
    
    2,315
    
    
    
    5,472
    
    
    
    4,631Trade names (included in operating expenses)
    
    
    367
    
    
    
    331
    
    
    
    669
    
    
    
    676Total other intangibles amortization expense
    
    $
    10,277
    
    
    $
    7,907
    
    
    $
    19,146
    
    
    $
    16,040
  Remainder of 2006
    
    $
    21,0822007
    
    
    40,6832008
    
    
    38,0262009
    
    
    10,4262010
    
    
    8,958Thereafter
    
    
    3,432Total
    
    $
    122,607
 16




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7. Net Income per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Basic net income per share:Numerator:Net income
    
    $
    7,949
    
    
    $
    23,139
    
    
    $
    20,286
    
    
    $
    38,145Denominator:Weighted average shares outstanding
    
    
    93,310
    
    
    
    90,030
    
    
    
    92,946
    
    
    
    89,727Net income per share  basic
    
    $
    0.09
    
    
    $
    0.26
    
    
    $
    0.22
    
    
    $
    0.43Diluted net income per share:Numerator:Net income
    
    $
    7,949
    
    
    $
    23,139
    
    
    $
    20,286
    
    
    $
    38,145Denominator:Weighted average shares outstanding
    
    
    93,310
    
    
    
    90,030
    
    
    
    92,946
    
    
    
    89,727Incremental shares attributable to shares under employee
stock option plans, warrants and RSUs (treasury stock
method)
    
    
    1,773
    
    
    
    2,059
    
    
    
    2,216
    
    
    
    1,923Weighted average shares outstanding plus incremental shares
    
    
    95,083
    
    
    
    92,089
    
    
    
    95,162
    
    
    
    91,650Net income per share  diluted
    
    $
    0.08
    
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.42
   8. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    7,949
    
    
    $
    23,139
    
    
    $
    20,286
    
    
    $
    38,145Other comprehensive income:Foreign currency translation adjustments
    
    
    14,386
    
    
    
    (4,755
    )
    
    
    17,412
    
    
    
    (4,891
    )Unrealized net gains (losses) on cash flow hedges, net of tax
    
    
    185
    
    
    
    505
    
    
    
    (449
    )
    
    
    862Realized net (gains) losses on cash flow hedges, net of tax,
reclassified into earnings
    
    
    252
    
    
    
    (168
    )
    
    
    122
    
    
    
    (168
    )Total comprehensive income
    
    $
    22,772
    
    
    $
    18,721
    
    
    $
    37,371
    
    
    $
    33,948
 17




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9. Business Segment Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net license fees (1):Business Intelligence Platform
    
    $
    96,141
    
    
    $
    109,278
    
    
    $
    200,979
    
    
    $
    210,188Enterprise Performance Management Solutions
    
    
    15,144
    
    
    
    8,929
    
    
    
    29,355
    
    
    
    17,169Enterprise Information Management Solutions
    
    
    11,825
    
    
    
    6,651
    
    
    
    18,670
    
    
    
    12,652Total net license fees
    
    $
    123,110
    
    
    $
    124,858
    
    
    $
    249,004
    
    
    $
    240,009Total service revenues
    
    
    171,374
    
    
    
    137,551
    
    
    
    323,751
    
    
    
    271,175Total revenues
    
    $
    294,484
    
    
    $
    262,409
    
    
    $
    572,755
    
    
    $
    511,184
 
 (1)
    
    The Company does not have vendor specific objective evidence for its licensed products.
Accordingly, these amounts represent the residual values of contracts and, to the extent that
more than one product was sold in a transaction, the allocation of value between products is
based purely upon the proportionate value ascribed to each product in the arrangement.  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    156,439
    
    
    $
    115,361
    
    
    $
    292,947
    
    
    $
    223,478Europe, Middle East and Africa (EMEA), excluding France
    
    
    82,855
    
    
    
    89,611
    
    
    
    170,441
    
    
    
    179,267France
    
    
    23,908
    
    
    
    26,832
    
    
    
    48,296
    
    
    
    48,395Americas, excluding the United States
    
    
    11,276
    
    
    
    8,339
    
    
    
    22,000
    
    
    
    18,246Asia Pacific
    
    
    20,006
    
    
    
    22,266
    
    
    
    39,071
    
    
    
    41,798Total revenues
    
    $
    294,484
    
    
    $
    262,409
    
    
    $
    572,755
    
    
    $
    511,184
 18




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10. Commitments and Contingencies
 Legal matters
     19




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Commitments
  11. Escrows Payable and Restricted Cash
         12. Credit Agreement
   
 22




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 
 13. Accounting for and Disclosure of Guarantees
 Guarantors Accounting for Guarantees
   Product Warranties.
 Environmental Liabilities. Accounting for Asset Retirement Obligations
 Other Liabilities and Other Claims.
 23




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14. Income Taxes
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read together with our Condensed Consolidated
Financial Statements and the notes to those statements included elsewhere in this Quarterly Report
on Form 10-Q . This discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Business Objects and our industry. These
forward-looking statements include, but are not limited to, statements concerning risks and
uncertainties. 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 Risk
Factors section of 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.
 Overview
  Key Performance Indicators
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions, except for percentages and diluted net income per share)
    
    2006 (1)
    
    2005
    
    2006 (1)
    
    2005Revenues
    
    $
    294.5
    
    
    $
    262.4
    
    
    $
    572.8
    
    
    $
    511.2Growth in revenues (compared to prior year comparative period)
    
    
    12
    %
    
    
    18
    %
    
    
    12
    %
    
    
    16
    %Income from operations
    
    $
    13.5
    
    
    $
    34.9
    
    
    $
    31.4
    
    
    $
    56.4Income from operations as percentage of total revenues
    
    
    5
    %
    
    
    13
    %
    
    
    5
    %
    
    
    11
    %Diluted net income per share
    
    $
    0.08
    
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.42
 
   24




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Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006 (1)
    
    2005
    
    2006 (1)
    
    2005Net license fees:Business Intelligence Platform
    
    
    33
    %
    
    
    42
    %
    
    
    35
    %
    
    
    41
    %Enterprise Performance Management Solutions
    
    
    5
    
    
    
    3
    
    
    
    5
    
    
    
    3Enterprise Information Management Solutions
    
    
    4
    
    
    
    3
    
    
    
    4
    
    
    
    3Total net license fees
    
    
    42
    
    
    
    48
    
    
    
    44
    
    
    
    47Services revenues:Maintenance and technical support
    
    
    42
    
    
    
    38
    
    
    
    40
    
    
    
    39Professional services
    
    
    16
    
    
    
    14
    
    
    
    16
    
    
    
    14Total services fees
    
    
    58
    
    
    
    52
    
    
    
    56
    
    
    
    53Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of net license fees
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Cost of services
    
    
    23
    
    
    
    20
    
    
    
    22
    
    
    
    20Total cost of revenues
    
    
    26
    
    
    
    23
    
    
    
    25
    
    
    
    23Gross margin
    
    
    74
    
    
    
    77
    
    
    
    75
    
    
    
    77Operating expenses:Sales and marketing
    
    
    41
    
    
    
    40
    
    
    
    42
    
    
    
    41Research and development
    
    
    18
    
    
    
    15
    
    
    
    17
    
    
    
    16General and administrative
    
    
    10
    
    
    
    9
    
    
    
    10
    
    
    
    9Total operating expenses
    
    
    69
    
    
    
    64
    
    
    
    69
    
    
    
    66Income from operations (operating margin)
    
    
    5
    
    
    
    14
    
    
    
    6
    
    
    
    11Interest and other income (expense), net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Income before provision for income taxes
    
    
    6
    
    
    
    15
    
    
    
    7
    
    
    
    12Provision for income taxes
    
    
    (3
    )
    
    
    (6
    )
    
    
    (3
    )
    
    
    (5
    )Net income
    
    
    3
    %
    
    
    9
    %
    
    
    4
    %
    
    
    7
    %
 
 (1)
    
    Costs and expenses for the three and six months ended June 30, 2006 include stock-based
compensation expense recorded in accordance with FAS 123(R). See Notes 1 and 4 to the
Condensed Consolidated Financial Statements for additional information. Seasonality
  Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Total revenues
    
    $
    0.3
    
    
    $
    7.6
    
    
    $
    (13.6
    )
    
    $
    15.0Total cost of revenues
    
    
    0.1
    
    
    
    1.9
    
    
    
    (3.1
    )
    
    
    4.0Sales and marketing expenses
    
    
    1.0
    
    
    
    3.6
    
    
    
    (2.0
    )
    
    
    7.9Research and development expenses
    
    
    0.7
    
    
    
    2.3
    
    
    
    (0.8
    )
    
    
    4.4General and administrative expenses
    
    
    (0.4
    )
    
    
    0.6
    
    
    
    (1.0
    )
    
    
    1.3
 25




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Revenues
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Net license fees (1):Business Intelligence Platform
    
    $
    96.1
    
    
    $
    109.3
    
    
    $
    201.0
    
    
    $
    210.2Enterprise
Performance Management Solutions
    
    
    15.2
    
    
    
    8.9
    
    
    
    29.4
    
    
    
    17.2Enterprise
Information Management Solutions
    
    
    11.8
    
    
    
    6.7
    
    
    
    18.6
    
    
    
    12.6Total net license fees
    
    $
    123.1
    
    
    $
    124.9
    
    
    $
    249.0
    
    
    $
    240.0Service revenues:Maintenance and technical support
    
    $
    123.5
    
    
    $
    100.7
    
    
    $
    232.0
    
    
    $
    200.8Professional services
    
    
    47.9
    
    
    
    36.8
    
    
    
    91.8
    
    
    
    70.4Total service revenues
    
    
    171.4
    
    
    
    137.5
    
    
    
    323.8
    
    
    
    271.2Total revenues
    
    $
    294.5
    
    
    $
    262.4
    
    
    $
    572.8
    
    
    $
    511.2
 
 (1)
    
    We do not have vendor specific objective evidence for our licensed products. Accordingly,
these amounts represent the residual values of contracts and, to the extent that more than one
product was sold in a transaction, the allocation of value between products is based purely
upon the proportionate value ascribed to each product in the arrangement. Net License Fees .
  26




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Services Revenues .
   Geographic Revenues Mix
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Americas (1)
    
    $
    167.7
    
    
    $
    123.7
    
    
    $
    314.9
    
    
    $
    241.7Europe, Middle East and Africa (EMEA) (2)
    
    
    106.8
    
    
    
    116.4
    
    
    
    218.8
    
    
    
    227.7Asia Pacific
    
    
    20.0
    
    
    
    22.3
    
    
    
    39.1
    
    
    
    41.8Total revenues
    
    $
    294.5
    
    
    $
    262.4
    
    
    $
    572.8
    
    
    $
    511.2
 
 (1)
    
    Includes revenues in the United States of $156.4 million and $115.4 million for the three
months ended June 30, 2006 and 2005, respectively. Includes revenues in the United States of
$292.9 million and $223.5 million for the six months ended June 30, 2006 and 2005,
respectively(2)
    
    Includes revenues in France of $23.9 million and $26.8 million for the three months ended
June 30, 2006 and 2005, respectively. Includes revenues in France of $48.3 million and $48.4
million for the six months ended June 30, 2006 and 2005, respectively.   28




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Cost of Revenues
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Cost of revenues:Net license fees
    
    $
    10.3
    
    
    $
    7.2
    
    
    $
    18.2
    
    
    $
    14.4Services
    
    
    66.0
    
    
    
    52.8
    
    
    
    126.8
    
    
    
    104.2Total cost of revenues
    
    $
    76.3
    
    
    $
    60.0
    
    
    $
    145.0
    
    
    $
    118.6
  Cost of net license fees .
 29




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Cost of services revenues .
   Operating Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Sales and marketing
    
    $
    123.1
    
    
    $
    104.8
    
    
    $
    240.6
    
    
    $
    208.5Research and development
    
    
    52.6
    
    
    
    40.4
    
    
    
    96.4
    
    
    
    80.7General and administrative
    
    
    29.0
    
    
    
    22.2
    
    
    
    59.3
    
    
    
    47.0Total operating expenses
    
    $
    204.7
    
    
    $
    167.4
    
    
    $
    396.3
    
    
    $
    336.2
   Sales and Marketing Expenses .
 30




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Research and Development Expenses .
  General and Administrative Expenses .
  Interest and Other Income, Net
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Net interest income
    
    $
    3.5
    
    
    $
    1.9
    
    
    $
    6.6
    
    
    $
    3.7Net foreign exchange gains (losses)
    
    
    (0.4
    )
    
    
    1.8
    
    
    
    (0.8
    )
    
    
    4.4Other income (losses)
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    0.1
    
    
    
    (0.5
    )Interest and other income, net
    
    $
    3.0
    
    
    $
    3.2
    
    
    $
    5.9
    
    
    $
    7.6
 31




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Net interest income
 Net foreign exchange gains (losses)
   Income Taxes
  Liquidity and Capital Resources
  Six Months EndedJune 30,2006
    
    
    2005(in millions)Cash flow provided by operating activities
    
    $
    175.0
    
    
    $
    71.3Cash flow used in investing activities
    
    
    (80.0
    )
    
    
    (13.9
    )Cash flow provided by financing activities
    
    
    27.8
    
    
    
    16.0Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    13.9
    
    
    
    (0.9
    )Net increase in cash and cash equivalents from December 31
    
    $
    136.7
    
    
    $
    72.5
   32




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Operating Activities .
  Investing Activities .
 Financing Activities
 Future Liquidity Requirements
   
 Contractual Obligations
  33




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Guarantees
 Guarantors Accounting for Guarantees
   Product Warranties
 Environmental Liabilities Accounting for Asset Retirement Obligations
 Other Liabilities and Other Claims
 Off-Balance Sheet Arrangements
 Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No.
51 Employers Disclosures about Pensions and Other Postretirement Benefit  An
Amendment of FAS Statements No. 87, 88, and 106
 Critical Accounting Policies
  34




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
    
    Recognition of revenues
    
    Business combinations
    
    Impairment of goodwill, intangible assets and long-lived assets
    
    Contingencies and litigation
    
    Accounting for income taxes
    
    Stock-based compensation
 Managements Discussion and Analysis of
Financial Condition and Results of Operations
     For the three months ended
    
    For the six months endedJune 30, 2006
    
    June 30, 20062004
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004Stock options
    
    RSUs
    
    IESPP
    
    ESPP
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    48
    %
    
    
    N/A
    
    
    
    29
    %
    
    
    N/A
    
    
    
    48
    %
    
    
    N/A
    
    
    
    30
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.80
    %
    
    
    N/A
    
    
    
    3.03
    %
    
    
    N/A
    
    
    
    3.70
    %
    
    
    N/A
    
    
    
    2.71
    %
    
    
    N/ATurnover rate
France
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers
    
    
    14
    %
    
    
    14
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    10
    %
    
    
    N/ARest of the world
    
    
    20
    %
    
    
    20
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    10
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value in $
    
    
    12.13
    
    
    
    29.49
    
    
    
    7.76
    
    
    
    N/A
    
    
    
    13.21
    
    
    
    33.12
    
    
    
    8.08
    
    
    
    1.66Expected life (years)
    
    
    4.96
    
    
    
    2.00
    
    
    
    0.5
    
    
    
    N/A
    
    
    
    4.82
    
    
    
    1.64
    
    
    
    0.5
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, Euribor six month rate for
the 2004 IESPP 35




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Recent Pronouncements
 Accounting for Uncertainty in Income Taxes . Accounting for Income
Taxes.
 Accounting for Servicing of Financial Assets.
 36




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Accounting for Certain Hybrid Financial Instrument s .
 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards .
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Quantitative and
Qualitative Disclosures About Market Risk
 
 Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 1A. Risk Factors.
 Factors Affecting Future Operating Results
 We operate in a rapidly changing environment that involves numerous uncertainties and risks.
The following section describes some, but not all, of these risks and uncertainties that may
adversely affect our business, financial condition or results of operations. This section should be
read in conjunction with the unaudited condensed consolidated financial statements and the
accompanying notes thereto, and the other parts of Managements Discussion and Analysis of
Financial Condition and Results of Operations included in this Report on Form 10-Q . Additional
factors and uncertainties not currently known to us or that we currently consider immaterial could
also harm our business, operating results and financial condition.
 Risks Related to Our Business
 Our quarterly operating results have been and will continue to be subject to fluctuation.
  
    
    we typically record a substantial amount of our revenues in the last weeks of the last
month of a quarter, rather than evenly throughout the quarter;
    
    our customers typically wait until their fourth quarter, the end of their annual budget
cycle, before deciding whether to purchase new software;
    
    economic activity in Europe and certain other countries generally slows during the summer
months;
    
    customers may delay purchase decisions in anticipation of (i) changes to our product
line, (ii) new products or platforms, (iii) product enhancements or (iv) in response to
announced pricing changes by us or our competitors;
    
    our revenues typically vary based on the mix of products and services and the amount of
consulting services that our customers order, and we expect this trend to continue for the
foreseeable future;
    
    we depend, in part, on large orders and any delay in closing a large order, such as the
delays we experienced in the three months ended June 30, 2006, may result in the realization
of potentially significant net license fees being postponed from one
quarter to the next; and
    
    we experience longer payment cycles for sales in certain foreign countries.
   Investors may be unable to compare our results after January 1, 2006 with our results in prior
periods due to stock-based compensation expense which may cause our stock price to fall.
  38




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Our revenues may be unpredictable due to the release of our BusinessObjects XI, release 2,
product, and the expected end of life of our separate, existing Business Objects and Crystal
Decisions products.
    39




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If we overestimate revenues, and are unable to sufficiently reduce our expenses in any quarter,
this could have a negative impact on our quarterly results of operations.
   Since we are required to report our consolidated financial results under both the U.S. GAAP and
International Financial Reporting Standards (IFRS) rules, we may incur increased operating
expenses, we may not fulfill the reporting requirements of one or both of these reporting
regimes, we may be subject to inconsistent determinations with respect to our accounting policies
under these regimes and investors may perceive our operating results to be drastically different
under these regimes.
 Autorité des Marchés Financiers Document de
Référence .
  Changes to current accounting policies could have a significant effect on our reported financial
results or the way in which we conduct our business.
  
    
    Recognition of revenues
    
    Business combinations
    
    Impairment of goodwill, intangible assets and long-lived assets
    
    Contingencies and litigation
    
    Accounting for income taxes
    
    Stock-based compensation
 40




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As a result of our adoption of FAS 123(R), which requires us to expense all share-based payments
awards in our income statement, our net income and earnings per share have been and are expected
to continue to be materially adversely affected.
   Changes in our stock-based compensation policy could adversely affect our ability to attract and
retain employees.
  Our market is highly competitive, which could harm our ability to sell products and services and
reduce our market share.
   41




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Some of our competitors may have greater financial, technical, sales, marketing and other
resources than we do. In addition, acquisitions of or other strategic transactions by our
competitors could weaken our competitive position or reduce our revenues.
   We may pursue strategic acquisitions and investments that could have an adverse effect on our
business if they are unsuccessful.
  We have strategic relationships with Microsoft, IBM and Oracle over which we have limited control
and which, if terminated, could reduce our revenues and harm our operating results.
   We depend on strategic relationships and business alliances for continued growth of our business.
  42




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We sell products only in the business intelligence software market; if sales of our products in
this market decline, our operating results will be harmed.
  If the market in which we sell business intelligence software does not grow as anticipated, our
future profitability could be negatively affected.
  
    
    not fully value the benefits of using business intelligence products;
    
    not achieve favorable results using business intelligence products;
    
    experience technical difficulty in implementing business intelligence products; or
    
    decide to use other technologies, such as search engines, to obtain the required business intelligence for their users.
  Our new software as a service offering, crystalreports.com, carries a number of risks, some of
which may be harmful to our business.
  §
    
    We have no experience in the on-demand services market;§
    
    We may not be able to deliver this product or any enhancements to this product in the
manner we have conveyed to customers;§
    
    Customers may question the viability or security of our on demand services offering;§
    
    We may not be able to provide sufficient, continuous customer support for crystalreports.com;§
    
    We may incur higher than anticipated costs as we enter into the on demand services market;§
    
    We could experience service interruptions with respect to this on demand service
offering, which could potentially impact our revenues;
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§
    
    We may not be able to comply in a timely or cost effective manner with privacy and other
regulatory requirements that apply to this product;§
    
    We may not realize anticipated market demand and acceptance of this on demand offering;
and§
    
    Sales of the on-demand sharing platform bundled with license sales may delay the timing
of revenue recognition for license arrangements that would otherwise have been recorded at the time
of delivery.
  Our software may have defects and errors that could lead to a loss of revenues or product
liability claims.
  
    
    potential customers may delay purchases;
    
    customers may react negatively, which could reduce future sales;
    
    our reputation in the marketplace may be damaged;
    
    we may have to defend product liability claims;
    
    we may be required to indemnify our customers, distributors, original equipment manufacturers or other resellers;
    
    we may incur additional service and warranty costs; and
    
    we may have to divert additional development resources to correct the defects and errors,
which may result in the delay of new product releases or upgrades.
  We may have difficulties providing and managing large scale deployments, which could cause a
decline or delay in recognition of our revenues and an increase in our expenses.
   Business disruptions could seriously harm our operations and financial condition and increase our
costs and expenses.
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While we believe that we currently have adequate internal control over financial reporting, we are
exposed to risks from recent legislation requiring companies to evaluate internal control over
financial reporting.
   We cannot be certain that our internal control over financial reporting will be effective or
sufficient in the future.
    45




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The software market in which we operate is subject to rapid technological change and new product
introductions, which could negatively affect our product sales.
  
    
    adapting third party technology, including open source software;
    
    successful education and training of sales, marketing and consulting personnel;
    
    effective marketing and market acceptance;
    
    proper positioning and pricing; and
    
    product quality, including possible defects.
  Failure to structure our business model properly for mid market customers could have a
material adverse effect on our business and results of operations.
  We are currently a party to several lawsuits with MicroStrategy. The prosecution of these lawsuits
could have a negative impact on our business. Should MicroStrategy prevail, we may be required to
pay substantial monetary damages or be prevented from selling some of our products.
  46




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We are a party to litigation with Vedatech Corporation and, in the event of an adverse judgment
against us, we may have to pay damages, which could adversely affect our financial position and
results of operations.
      We are a party to litigation with Informatica and, in the event of an adverse judgment against us,
we may have to pay damages or be prevented from selling some of our products, either of which
could adversely affect our financial position and results of operations.
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We are a party to litigation with Decision Warehouse. The prosecution of this lawsuit could have a
substantial negative impact on our business. Should Decision Warehouse prevail, we may be required
to pay substantial monetary damages.
 Decision Warehouse Consultoria E Importacao Ltda. Business Objects Do Brasil, Ltda.
 Business Objects Do Brasil, Ltda. Decision
Warehouse Consultoria E Importacao Ltda.
 We have committed to undertake certain internal practices in connection with handling of employee
information.
  The protection of our intellectual property rights is crucial to our business and, if third
parties use our intellectual property without our consent, our business could be damaged.
  
    
    policing unauthorized copying or use of our products is difficult and expensive;
    
    software piracy is a persistent problem in the software industry;
    
    our patents may not cover the full scope of our product
offerings and may be challenged, invalidated or circumvented, or may
be enforceable only in certain jurisdictions; and
    
    our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.
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Third parties have asserted that our technology infringes upon their proprietary rights, and
others may do so in the future, which has resulted, and may in the future result, in costly
litigation and could adversely affect our ability to distribute our products.
   
    
    we would need to commit management resources in defense of the claim;
    
    we may incur substantial litigation costs in defense of the claim;
    
    we may have to expend significant development resources to redesign our products;
    
    we may be required to enter into royalty and licensing agreements with such third party under unfavorable terms; and
    
    we could be forced to cease selling or delay shipping our products should an adverse judgment be rendered against us.
    50




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Our loss of rights to use software licensed from third parties could harm our business.
  51




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Our executive officers and key employees are crucial to our business, and we may not be able to
recruit, integrate and retain the personnel we need to succeed.
  We have multinational operations that are subject to risks inherent in international operations.
  
    
    technical difficulties and costs associated with product localization;
    
    challenges associated with coordinating product development efforts among geographically
dispersed development centers;
    
    potential loss of proprietary information due to piracy, misappropriation or laws that
may be less protective of our intellectual property rights;
    
    lack of experience in certain geographic markets;
    
    the significant presence of some of our competitors in some international markets;
    
    potentially adverse tax consequences;
    
    import and export restrictions and tariffs;
    
    foreign laws and other government controls, such as trade and employment restrictions;
    
    management, staffing, legal and other costs of operating an enterprise spread over various countries;
    
    the recent addition of a number of employees in offshore locations for which attrition rates traditionally are believed to be higher than is generally true for North America and Europe;
    
    political instability in the countries where we are doing business;
    
    fears concerning travel or health risks that may adversely affect our ability to sell our
products and services in any country in which the business sales culture encourages
face-to-face interactions; and
    
    different business practices and regulations, which may lead to the need for increased
employee education and supervision.
  Fluctuations in exchange rates between the euro, the U.S. dollar and the Canadian dollar, as well
as other currencies in which we do business, may adversely affect our operating results.
  52




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Our effective tax rate may increase or fluctuate, which could increase our income tax expense and
reduce our net income.
  
    
    changes in forecasted annual operating income;
    
    changes in relative proportions of revenues and income before taxes in the various jurisdictions in which we operate;
    
    changes to the valuation allowance on net deferred tax assets;
    
    changes to actual or forecasted permanent differences between book and tax reporting,
including the tax effects of purchase accounting for acquisitions and non-recurring charges
which may cause fluctuations between reporting periods;
    
    impacts from any future tax settlements with state, federal or foreign tax authorities;
    
    impacts from changes in tax laws, regulations and interpretations in the jurisdictions in
which we operate, as well as the requirements of certain tax rulings;
    
    impacts from acquisitions and related integration activities; or
    
    impacts from new FASB or IFRS requirements.
  We are subject to frequent tax audits, where the ultimate resolution may result in additional
taxes.
  53




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Risks Related to Ownership of Our Ordinary Shares or ADSs
 Provisions of our articles of association and French law could have anti-takeover effects and
could deprive shareholders who do not comply with such provisions of some or all of their voting
rights.
  
   54




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Our
Board of Directors recently obtained authority to implement certain anti-takeover measures which may delay or discourage an acquisition of the Company.
   We cannot be certain that these
 new anti-takeover measures will be efficient.
  Holders of our shares have
 limited rights to call shareholders meetings or submit shareholder
proposals, which could adversely affect their ability to participate in governance of our company.
  Interests of our shareholders will be diluted if they are not able to exercise preferential
subscription rights for our shares.
 droits préférentiels de
souscription
 55




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It may be difficult for holders of our ADSs rather than our ordinary shares to exercise some of
their rights as shareholders.
  Fluctuation in the value of the U.S. dollar relative to the euro may cause the price of our
ordinary shares to deviate from the price of our ADSs.
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We have not declared or paid cash dividends to our shareholders and do not anticipate doing so in
the near future.
  The market price of our shares is susceptible to changes in our operating results and to stock
market fluctuations.
  
    
    announcements of our quarterly operating results and expected results of the future periods;
    
    our failure to achieve the operating results anticipated by analysts or investors;
    
    announcements of technological innovations or new products by us, our customers or competitors;
    
    releases or reports by or changes in security and industry analysts recommendations;
    
    announcements of our competitors or customers quarterly operating results, and expected results of future periods;
    
    addition of significant new customers or loss of current customers;
    
    sales or the perception in the market of possible sales of a large number of our shares
by our directors, officers, employees or principal stockholders; and
    
    developments or disputes concerning patents or proprietary rights or other events.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 
 Material Modification to Rights of Security Holders
  57




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
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Resolution
    
    For
    
    Against
    
    Abstention
    
    ResultWithin the authority of the Ordinary Shareholders Meeting1. Approval of the Companys statutory
financial statements for the year
ended December 31, 2005;
    
    
    37,969,570
    
    
    
    384,268
    
    
    
    3,541
    
    
    Approved2. Approval of the Companys
consolidated financial statements for
the year ended December 31, 2005;
    
    
    37,969,087
    
    
    
    385,051
    
    
    
    3,241
    
    
    Approved3. Allocation of the Companys
earnings for the year ended December
31, 2005;
    
    
    37,533,989
    
    
    
    818,855
    
    
    
    4,535
    
    
    Approved4. Renewal of the term of office of
Mr. Bernard Liautaud, as a Director of
the Company;
    
    
    38,199,432
    
    
    
    152,449
    
    
    
    5,498
    
    
    Approved5. Renewal of the term of office of
Mr. Jean-François Heitz, as a Director
of the Company;
    
    
    37,843,433
    
    
    
    508,308
    
    
    
    5,638
    
    
    Approved6. Renewal of the term of office of
Mr. David Peterschmidt, as a Director
of the Company;
    
    
    37,768,917
    
    
    
    582,293
    
    
    
    6,169
    
    
    Approved7. Ratification of the appointment of
Mr. John Schwarz, as a Director of the
Company;
    
    
    38,120,598
    
    
    
    233,162
    
    
    
    3,619
    
    
    Approved8. Renewal of term of office of Mr.
John Schwarz, as a Director of the
Company;
    
    
    37,849,561
    
    
    
    503,107
    
    
    
    4,711
    
    
    Approved
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##### Table of Contents



Resolution
    
    For
    
    Against
    
    Abstention
    
    Result9. Ratification of regulated
agreements;
    
    
    29,974,229
    
    
    
    7,959,870
    
    
    
    5,868
    
    
    Approved10. Approval of regulated agreements;
    
    
    20,905,923
    
    
    
    17,083,674
    
    
    
    5,373
    
    
    Approved11. Appointment of Auditex, as
Companys alternate statutory auditor
of Ernst & Young Audit, as the
replacement for Mr. Alain Vincent,
Companys alternate statutory auditor;
and
    
    
    37,081,651
    
    
    
    1,269,289
    
    
    
    6,439
    
    
    Approved12. Authorization granted to the Board
of Directors to repurchase Ordinary
Shares of the Company.
    
    
    32,958,926
    
    
    
    5,393,359
    
    
    
    5,094
    
    
    ApprovedWithin the authority of the Extraordinary Shareholders Meeting13. Authorization granted to the Board
of Directors to reduce the Companys
share capital by cancellation of
treasury shares;
    
    
    38,197,570
    
    
    
    156,130
    
    
    
    3,679
    
    
    Approved14. Authorization granted to the Board
of Directors to issue warrants to
subscribe up to a maximum of 45,000
Ordinary Shares reserved for Mr.
Jean-François Heitz;
    
    
    28,008,970
    
    
    
    10,343,523
    
    
    
    4,886
    
    
    Approved15. Authorization granted to the Board
of Directors to issue warrants to
subscribe up to a maximum of 45,000
Ordinary Shares reserved for Mr. David
Peterschmidt;
    
    
    22,495,366
    
    
    
    15,857,149
    
    
    
    4,864
    
    
    Rejected16. Authorization granted to the Board
of Directors to increase the Companys
share capital through the issuance of
Ordinary Shares, with subscription
reserved to the participants in the
Companys Employee Savings Plan;
    
    
    37,275,891
    
    
    
    1,075,140
    
    
    
    6,348
    
    
    Approved17. Delegation of powers granted to
the Board of Directors to increase the
Companys share capital through the
issuance of Ordinary Shares, with
subscription reserved to the 2004
Business Objects S.A. Employee
Benefits Trust under the 2004
International Employee Stock Purchase
Plan;
    
    
    37,177,275
    
    
    
    1,174,058
    
    
    
    6,046
    
    
    Approved18. Authorization granted to the Board
of Directors to grant options to
subscribe or to purchase Ordinary
Shares of the Company and approval of
the amendments of the 2001 Stock
Incentive Plan;
    
    
    27,942,415
    
    
    
    10,044,115
    
    
    
    8,440
    
    
    Approved19. Delegation of powers granted to
the Board of Directors to increase the
Companys share capital through the
issuance of Ordinary Shares, with
subscription reserved to the Business
Objects Employee Benefit Sub- Plan
Trust under the 2001 Stock Incentive
Plan and approval of the amendments of
the 2001 Stock Incentive Sub-Plan;
    
    
    27,455,426
    
    
    
    10,532,494
    
    
    
    7,050
    
    
    Approved20. Authorization granted to the Board
of Directors to allocate, free of
charge, existing Ordinary Shares, or
to issue, free of charge, new Ordinary
Shares, to the employees and certain
officers of the Company and to the
employees of the Companys
subsidiaries;
    
    
    26,893,607
    
    
    
    11,458,935
    
    
    
    4,837
    
    
    Approved21. Delegation of authority granted to
the Board of Directors to increase the
Companys share capital, with
shareholder preferential subscription
rights;
    
    
    38,316,791
    
    
    
    36,905
    
    
    
    3,683
    
    
    Approved22. Delegation of authority granted to
the Board of Directors to increase the
Companys share capital, without
shareholder preferential subscription
rights;
    
    
    28,569,732
    
    
    
    9,784,221
    
    
    
    3,426
    
    
    Approved23. Authorization granted to the Board
of Directors to increase the number of
Ordinary Shares to be issued in the
event of a Companys share capital
increase with or without shareholder
preferential subscription rights;
    
    
    27,444,779
    
    
    
    10,906,343
    
    
    
    6,257
    
    
    Approved
 59




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Resolution
    
    For
    
    Against
    
    Abstention
    
    Result24. Delegation of authority granted to
the Board of Directors to increase the
Companys share capital by
incorporation of reserves, profits,
issuance premiums or any other sum for
which capitalization would be
authorized;
    
    
    38,254,577
    
    
    
    97,846
    
    
    
    4,956
    
    
    Approved25. Delegation of powers granted to
the Board of Directors to increase the
Companys share capital to compensate
contributions in kind that are made to
the Company;
    
    
    36,706,067
    
    
    
    1,645,158
    
    
    
    6,154
    
    
    Approved26. Approval of the amendments of the
Companys articles of association to
conform them to the new provisions of
the French Commercial Code, as amended
by French Law No. 2005-842 dated July
26, 2005;
    
    
    38,297,424
    
    
    
    56,299
    
    
    
    3,656
    
    
    Approved27. Delegation of authority granted to
the Board of Directors to proceed with
the issuance of warrants free of
charge in the event of a public tender
offer/exchange offer for the Company
within the framework of a legal
reciprocity clause; and
    
    
    24,699,725
    
    
    
    13,653,843
    
    
    
    3,811
    
    
    Approved28. Authorization granted to the Board
of Directors in the event of a public
tender offer/exchange offer for the
Company within the framework of a
legal reciprocity clause.
    
    
    26,083,829
    
    
    
    12,268,115
    
    
    
    5,435
    
    
    Approved
 60




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##### Table of Contents



Item 6. Exhibits
 ExhibitNo.
    
    Description3.1 (1)
    
    Amended and Restated Bylaws of Business Objects S.A., as amended July 20, 2006 (English
translation).10.24 (2)
    
    French Employee Savings Plan, as amended June 7, 2006.10.25 (3)
    
    2001 Stock Incentive Plan, as amended July 20, 2006 (English translation of French legal version)10.25.1 (4)
    
    2001 Stock Incentive Plan  Subsidiary Stock Incentive Plan, as amended June 7, 2006 (English
translation of French legal version)10.52 (5)
    
    2004 International Employee Stock Purchase Plan, as amended June 7, 2006.10.72 (6)
    
    Stock Subscription Warrant Agreement for Jean-François Heitz.10.73
    
    Lease dated December 23, 2004 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.10.73.1
    
    Lease Modification Agreement dated September 15, 2005 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.10.73.2
    
    Second Lease Modification Agreement dated April 1, 2006 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification of Chief Executive Officer and of Chief Financial Officer furnished pursuant to
Rule 13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United
States Code (18 U.S.C. 1350).
 
 (1)
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K filed with
the SEC on July 26, 2006.(2)
    
    Incorporated by reference to Exhibit 10.24 filed with our Registration Statement on Form S-8
 filed with the SEC on August 8, 2006 (File No. 333-136418).(3)
    
    Incorporated by reference to Exhibit 10.25 filed with our Current Report on Form 8-K filed
with the SEC on July 26, 2006.(4)
    
    Incorporated by reference to Exhibit 10.25.1 filed with our Current Report on Form 8-K
filed with the SEC on June 13, 2006.(5)
    
    Incorporated by reference to Exhibit 10.52 filed with our Registration Statement on
 Form S-8 filed with the SEC on August 8, 2006 (File No. 333-136418).(6)
    
    Incorporated by reference to Exhibit 10.72 to our Registration Statement on Form S-8 filed with the
SEC on August 8, 2006 (File No. 333-136418). 61




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##### Table of Contents



SIGNATURES
  Business Objects S.A.
(Registrant)Date: August 9, 2006
    By:

/s/ John G. SchwarzJohn G. SchwarzChief Executive Officer Date: August 9, 2006
    By:

/s/ James R. TolonenJames R. TolonenChief Financial Officer and Senior Group Vice
President 62




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1 (1)
    
    Amended and Restated Bylaws of Business Objects S.A., as amended July 20, 2006 (English
translation).10.24 (2)
    
    French Employee Savings Plan, as amended June 7, 2006.10.25 (3)
    
    2001 Stock Incentive Plan, as amended July 20, 2006 (English translation of French legal version)10.25.1 (4)
    
    2001 Stock Incentive Plan  Subsidiary Stock Incentive Plan, as amended June 7, 2006 (English
translation of French legal version)10.52 (5)
    
    2004 International Employee Stock Purchase Plan, as amended June 7, 2006.10.72 (6)
    
    Stock Subscription Warrant Agreement for Jean-François Heitz.10.73
    
    Lease dated December 23, 2004 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.10.73.1
    
    Lease Modification Agreement dated September 15, 2005 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.10.73.2
    
    Second Lease Modification Agreement dated April 1, 2006 among 855 Homer Street Inc., Business Objects Corp. and Business Objects Americas.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification of Chief Executive Officer and of Chief Financial Officer furnished pursuant to
Rule 13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United
States Code (18 U.S.C. 1350).
 
 (1)
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K filed with
the SEC on July 26, 2006.(2)
    
    Incorporated by reference to Exhibit 10.24 filed with our Registration Statement on Form S-8
 filed with the SEC on August 8, 2006 (File No. 333-136418).(3)
    
    Incorporated by reference to Exhibit 10.25 filed with our Current Report on Form 8-K filed
with the SEC on July 26, 2006.(4)
    
    Incorporated by reference to Exhibit 10.25.1 filed with our Current Report on Form 8-K
filed with the SEC on June 13, 2006.(5)
    
    Incorporated by reference to Exhibit 10.52 filed with our Registration Statement on
 Form S-8 filed with the SEC on August 8, 2006 (File No. 333-136418).(6)
    
    Incorporated by reference to Exhibit 10.72 to our Registration Statement on Form S-8 filed with the
SEC on August 8, 2006 (File No. 333-136418).