##### 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 September 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
(State or other jurisdiction of 
incorporation or organization)
    
    98-0355777
(I.R.S. Employer
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 INFORMATION
    
    
    3Item 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
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 INFORMATION
    
    
    37Item 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    56Item 6.
    
    Exhibits
    
    
    56SIGNATURES
    
    
    
    
    57EXHIBIT 10.66EXHIBIT 10.75EXHIBIT 10.75.1EXHIBIT 10.76EXHIBIT 10.77EXHIBIT 10.78EXHIBIT 10.79EXHIBIT 10.80EXHIBIT 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)
 September 30,
    
    
    December 31,2006
    
    
    2005 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    499,128
    
    
    $
    332,777Short-term investments
    
    
    5,194
    
    
    
    4,651Restricted cash
    
    
    19,513
    
    
    
    22,157Accounts receivable, net
    
    
    250,269
    
    
    
    265,672Deferred tax assets
    
    
    13,187
    
    
    
    13,605Prepaid and other current assets
    
    
    67,619
    
    
    
    60,880Total current assets
    
    
    854,910
    
    
    
    699,742Goodwill
    
    
    1,218,048
    
    
    
    1,166,043Other intangible assets, net
    
    
    115,091
    
    
    
    110,512Property and equipment, net
    
    
    90,445
    
    
    
    74,116Deposits and other assets
    
    
    24,522
    
    
    
    34,945Long-term restricted cash
    
    
    24,388
    
    
    
    20,858Long-term deferred tax assets
    
    
    19,906
    
    
    
    17,142Total assets
    
    $
    2,347,310
    
    
    $
    2,123,358LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    48,499
    
    
    $
    45,777Accrued payroll and related expenses
    
    
    86,483
    
    
    
    83,332Income taxes payable
    
    
    110,304
    
    
    
    79,820Deferred revenues
    
    
    253,243
    
    
    
    201,788Other current liabilities
    
    
    84,717
    
    
    
    72,098Escrows payable
    
    
    14,154
    
    
    
    21,728Total current liabilities
    
    
    597,400
    
    
    
    504,543Long-term escrows payable
    
    
    17,911
    
    
    
    10,902Other long-term liabilities
    
    
    7,621
    
    
    
    8,871Long-term deferred tax liabilities
    
    
    2,497
    
    
    
    2,853Long-term deferred revenues
    
    
    8,447
    
    
    
    6,734Total liabilities
    
    
    633,876
    
    
    
    533,903Commitments and contingenciesShareholders equity:Ordinary shares, 0.10 nominal value ($0.13
at September 30, 2006 and $0.12 at December 31,
2005): authorized 265,394 and 120,842; issued
96,697 and 95,304; issued and outstanding
93,996 and 92,262; respectively at September
30, 2006 and December 31, 2005
    
    
    10,582
    
    
    
    10,359Additional paid-in capital
    
    
    1,274,943
    
    
    
    1,217,473Treasury, Business Objects Option LLC, and
Employee Benefit Sub-Plan Trust shares: 2,701
shares at September 30, 2006 and 3,041 shares
at December 31, 2005
    
    
    (5,030
    )
    
    
    (3,223
    )Retained earnings
    
    
    382,200
    
    
    
    342,345Unearned compensation
    
    
    
    
    
    
    (12,243
    )Accumulated other comprehensive income
    
    
    50,739
    
    
    
    34,744Total shareholders equity
    
    
    1,713,434
    
    
    
    1,589,455Total liabilities and shareholders equity
    
    $
    2,347,310
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006 (1)
    
    
    2005
    
    
    2006 (1)
    
    
    2005(unaudited)
    
    
    (unaudited)Revenues:Net license fees
    
    $
    131,602
    
    
    $
    120,308
    
    
    $
    380,606
    
    
    $
    360,317Services
    
    
    178,833
    
    
    
    141,073
    
    
    
    502,584
    
    
    
    412,248Total revenues
    
    
    310,435
    
    
    
    261,381
    
    
    
    883,190
    
    
    
    772,565Cost of revenues:Net license fees
    
    
    10,870
    
    
    
    7,169
    
    
    
    29,122
    
    
    
    21,586Services
    
    
    67,607
    
    
    
    54,854
    
    
    
    194,397
    
    
    
    159,016Total cost of revenues
    
    
    78,477
    
    
    
    62,023
    
    
    
    223,519
    
    
    
    180,602Gross profit
    
    
    231,958
    
    
    
    199,358
    
    
    
    659,671
    
    
    
    591,963Operating expenses:Sales and marketing
    
    
    121,451
    
    
    
    103,622
    
    
    
    362,074
    
    
    
    312,131Research and development
    
    
    50,633
    
    
    
    42,849
    
    
    
    147,014
    
    
    
    123,550General and administrative
    
    
    30,379
    
    
    
    22,799
    
    
    
    89,707
    
    
    
    69,830Total operating expenses
    
    
    202,463
    
    
    
    169,270
    
    
    
    598,795
    
    
    
    505,511Income from operations
    
    
    29,495
    
    
    
    30,088
    
    
    
    60,876
    
    
    
    86,452Interest and other income, net
    
    
    4,726
    
    
    
    2,895
    
    
    
    10,589
    
    
    
    10,473Income before provision for income taxes
    
    
    34,221
    
    
    
    32,983
    
    
    
    71,465
    
    
    
    96,925Provision for income taxes
    
    
    (14,652
    )
    
    
    (13,416
    )
    
    
    (31,610
    )
    
    
    (39,213
    )Net income
    
    $
    19,569
    
    
    $
    19,567
    
    
    $
    39,855
    
    
    $
    57,712Basic net income per ordinary share and ADS
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.43
    
    
    $
    0.64Diluted net income per ordinary share and ADS
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.63Ordinary shares and ADSs used in computing
basic net income per ordinary share and ADS
    
    
    93,685
    
    
    
    90,552
    
    
    
    93,204
    
    
    
    90,005Ordinary shares and ADSs and equivalents
used in computing diluted net income per
ordinary share and ADS
    
    
    94,976
    
    
    
    93,455
    
    
    
    94,922
    
    
    
    92,286
 
 (1)
    
    Costs and expenses for the three and nine months ended September 30, 2006 include stock-based
compensation expense recorded in accordance with FAS 123R. See Notes 1 and 4 to the Condensed
Consolidated Financial Statements for additional information.  4




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BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005(unaudited)Operating activities:Net income
    
    $
    39,855
    
    
    $
    57,712Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    23,078
    
    
    
    24,016Amortization of other intangible assets
    
    
    29,937
    
    
    
    23,865Stock-based compensation expense
    
    
    37,853
    
    
    
    3,922Acquired in-process research and development
    
    
    3,600
    
    
    
    2,384Loss on disposal of assets
    
    
    244
    
    
    
    831Deferred income taxes
    
    
    (10,754
    )
    
    
    4,030Changes in operating assets and liabilities:Accounts receivable, net
    
    
    33,453
    
    
    
    40,331Prepaid and other current assets
    
    
    (2,159
    )
    
    
    (13,340
    )Deposits and other assets
    
    
    10,492
    
    
    
    11,379Accounts payable
    
    
    (1,245
    )
    
    
    1,616Accrued payroll and related expenses
    
    
    (9,172
    )
    
    
    (15,645
    )Income taxes payable
    
    
    29,821
    
    
    
    (1,270
    )Deferred revenues
    
    
    34,517
    
    
    
    3,237Other liabilities
    
    
    1,196
    
    
    
    (13,111
    )Short-term investments classified as trading
    
    
    (543
    )
    
    
    (970
    )Net cash provided by operating activities
    
    
    220,173
    
    
    
    128,987Investing activities:Purchases of property and equipment
    
    
    (34,251
    )
    
    
    (22,477
    )Business acquisitions, net of acquired cash
    
    
    (65,233
    )
    
    
    (95,858
    )Increase (decrease) in escrows payable
    
    
    (1,031
    )
    
    
    17,957Transfer of cash to restricted cash accounts
    
    
    (694
    )
    
    
    (17,955
    )Proceeds
from sale of assets
    
    
    2,625
    
    
    
    Net cash used in investing activities
    
    
    (98,584
    )
    
    
    (118,333
    )Financing activities:Issuance of shares
    
    
    32,411
    
    
    
    30,095Net cash provided by financing activities
    
    
    32,411
    
    
    
    30,095Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    12,351
    
    
    
    (1,770
    )Net increase in cash and cash equivalents
    
    
    166,351
    
    
    
    38,979Cash and cash equivalents, beginning of the period
    
    
    332,777
    
    
    
    293,485Cash and cash equivalents, end of the period
    
    $
    499,128
    
    
    $
    332,464
  5




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Business Objects S.A.
 
 Notes to Condensed Consolidated Financial Statements
 September 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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Significant Accounting Policies
 Revenue Recognition
   Modification of SOP No. 97-2 with Respect
to Certain Transactions.
    7




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Accounting for Stock-Based Compensation
     Net Income per Ordinary Share and ADS
 Earnings per Share
 Recent Pronouncements
 Fair Value Measurements.
 8




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Employers Accounting for Defined Benefit Pension and Other Postretirement Plan.
  a.
    
    Recognize the funded status of a benefit planmeasured as the difference between plan
assets at fair value (with limited exceptions) and the benefit obligationin its statement
of financial position. For a pension plan, the benefit obligation is the projected benefit
obligation; for any other postretirement benefit plan, such as a retiree health care plan,
the benefit obligation is the accumulated postretirement benefit obligation.b.
    
    Recognize as a component of other comprehensive income, net of tax, the gains or losses
and prior service costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87, Employers
Accounting for Pensions,or No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions.Amounts recognized in accumulated other comprehensive income,
including the gains or losses, prior service costs or credits, and the transition asset or
obligation remaining from the initial application of Statements 87 and 106, are adjusted as
they are subsequently recognized as components of net periodic benefit cost pursuant to the
recognition and amortization provisions of those Statements.c.
    
    Measure defined benefit plan assets and obligations as of the date of the employers
fiscal year-end statement of financial position (with limited exceptions).d.
    
    Disclose in the notes to financial statements additional information about certain
effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation.
 Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, Employers Disclosures about Pensions and
Other Postretirement Benefits,
 Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.
 9




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2. Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
   September 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
    
    $
    47.2
    
    
    ($
    0.1
    )
    
    $
    67.8
    
    
    $
    0.1U.S. dollar equivalent of derivatives designated as cash flow
hedges
    
    $
    72.1
    
    
    $
    0.3
    
    
    $
    19.8
    
    
    $
    0.2
  3. Accounts Receivable
  4. Shareholders Equity
  10




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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net income  as reported for prior periods (1)
    
    
    N/A
    
    
    $
    19,567
    
    
    
    N/A
    
    
    $
    57,712Add: Amortization of stock-based compensation expense included in reported net
income, net of estimated tax related benefits
    
    
    N/A
    
    
    
    708
    
    
    
    N/A
    
    
    
    2,224Deduct: Stock-based compensation expense determined under the fair-value based
method for all awards, net of estimated tax related benefits for the three and
nine months ended September 30, 2005 of $1,077 and $3,159, respectively (2)
    
    
    N/A
    
    
    
    (10,676
    )
    
    
    N/A
    
    
    
    (31,336
    )Net income, including the effect of stock-based compensation expense  pro forma
in 2005 (3)
    
    $
    19,569
    
    
    $
    9,599
    
    
    $
    39,855
    
    
    $
    28,600Net income per ordinary share and ADS  as reported Basic for prior periods (1)
    
    
    N/A
    
    
    
    0.22
    
    
    
    N/A
    
    
    
    0.64Net income per ordinary share and ADS  as reported Diluted for prior periods (1)
    
    
    N/A
    
    
    
    0.21
    
    
    
    N/A
    
    
    
    0.63Net income per ordinary share and ADS  Basic, including the effect of
stock-based compensation  pro forma in 2005 (3)
    
    
    0.21
    
    
    
    0.11
    
    
    
    0.43
    
    
    
    0.32Net income per ordinary share and ADS  Diluted, including the effect of
stock-based compensation  pro forma in 2005 (3)
    
    
    0.21
    
    
    
    0.10
    
    
    
    0.42
    
    
    
    0.31
 
 (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 September 30, 2006 included
stock-based compensation expense of $11,282 net of tax benefits of $1,655. Net income and net
income per share for the nine months ended September 30, 2006 included stock-based
compensation expense of $33,461 net of tax benefits of $4,392. Net income and net income per
share prior to 2006 represent pro forma information based on FAS 123. 11




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Three months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2006Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPP
    
    Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    49
    %
    
    
    50
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/A
    
    
    
    49
    %
    
    
    48
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.86
    %
    
    
    3.73
    %
    
    
    N/A
    
    
    
    3.03
    %
    
    
    N/A
    
    
    
    3.86
    %
    
    
    3.71
    %
    
    
    N/A
    
    
    
    2.70
    %
    
    
    N/ATurnover rateFrance
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers / Directors
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    11
    %
    
    
    N/ARest of the world
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    11
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value in
    
    $
    12.51
    
    
    
    10.08
    
    
    
    23.80
    
    
    
    8.04
    
    
    
    11.00
    
    
    
    12.51
    
    
    
    12.60
    
    
    
    31.15
    
    
    
    8.23
    
    
    
    7.01Weighted average expected life
(years)
    
    
    5.28
    
    
    
    4.44
    
    
    
    2.00
    
    
    
    0.50
    
    
    
    N/A
    
    
    
    5.28
    
    
    
    4.74
    
    
    
    1.72
    
    
    
    0.50
    
    
    
    N/A
 
 (1)
    
    The Company used the five to seven years IBoxx Eurozone interest rate for the stock options
and warrants with exercise prices denominated in Euro granted to French employees and
Directors, and the three to five years IBoxx Eurozone interest rate for the options with
exercise prices denominated in Euro granted to rest of the world. The
Company used the Euribor
six month interest rate for the IESPP with a subscription price denominated in Euro.    12




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Three months ended
    
    Nine months endedSeptember 30, 2005
    
    September 30, 2005Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPP
    
    Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    54
    %
    
    
    53
    %
    
    
    N/A
    
    
    
    41
    %
    
    
    N/A
    
    
    
    54
    %
    
    
    54
    %
    
    
    N/A
    
    
    
    42
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    2.5
    %
    
    
    2.9
    %
    
    
    N/A
    
    
    
    2.2
    %
    
    
    N/A
    
    
    
    2.5
    %
    
    
    2.9
    %
    
    
    N/A
    
    
    
    2.0
    %
    
    
    N/ATurnover rateFrance
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ARest of the world
    
    
    N/A
    
    
    
    20
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    20
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair
value in
    
    $
    11.90
    
    
    
    14.14
    
    
    
    35.88
    
    
    
    6.52
    
    
    
    11.39
    
    
    
    11.90
    
    
    
    12.40
    
    
    
    35.88
    
    
    
    6.18
    
    
    
    8.86Expected life (years)
    
    
    4.26
    
    
    
    4.81
    
    
    
    N/A
    
    
    
    0.50
    
    
    
    N/A
    
    
    
    4.26
    
    
    
    4.74
    
    
    
    N/A
    
    
    
    0.50
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, and Euribor six month
rate for the IESPP.   Weighted-averageWeighted
    
    
    
    
    
    remainingNumber of awards
    
    average
    
    Aggregate
    
    contractualStock
    
    
    
    
    
    exercise price
    
    intrinsic
    
    term (inWarrants
    
    options
    
    RSUs
    
    (in $) (1)
    
    value (in $) (2)
    
    years)Outstanding at January 1, 2006
    
    
    435
    
    
    
    13,100
    
    
    
    389
    
    
    
    27.77
    
    
    
    200,697
    
    
    
    7.10Granted (3)
    
    
    45
    
    
    
    2,346
    
    
    
    305
    
    
    
    27.33
    
    
    
    8,965Cancelled / Expired
    
    
    (45
    )
    
    
    (1,520
    )
    
    
    (42
    )
    
    
    31.91
    
    
    
    8,084Exercised
    
    
    (30
    )
    
    
    (1,336
    )
    
    
    (122
    )
    
    
    16.05
    
    
    
    26,919Outstanding at September 30, 2006
    
    
    405
    
    
    
    12,590
    
    
    
    530
    
    
    
    30.29
    
    
    
    103,323
    
    
    
    6.54Exercisable at September 30, 2006
    
    
    255
    
    
    
    7,201
    
    
    
    
    
    
    
    31.98
    
    
    
    59,767
    
    
    
    5.64Unvested expected to vest at
September 30, 2006
    
    
    150
    
    
    
    4,565
    
    
    
    440
    
    
    
    28.03
    
    
    
    41,426
    
    
    
    7.61
 
 (1)
    
    translated to 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 for the outstanding options.(2)
    
    computed as the difference between the closing quote on NASDAQ on
January 1, 2006, at the grant date, at the cancellation date, at the exercise date or at
September 30, 2006 respectively, and the option exercise price translated in U.S. dollars as
per (1) above. The intrinsic value cannot be negative and may
equal zero when the option price exceeds the closing quote on the
NASDAQ.(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




---



##### Table of Contents



Weighted-Number of
    
    average grantawards (in
    
    date fair valuethousands)
    
    (in $)Unvested at January 1, 2006
    
    
    389
    
    
    
    36.49Granted
    
    
    305
    
    
    
    29.70Vested
    
    
    (122
    )
    
    
    36.88Forfeited
    
    
    (42
    )
    
    
    36.81Unvested at September 30, 2006
    
    
    530
    
    
    
    32.47
   StockWarrants
    
    
    options
    
    
    RSUs
    
    
    IESPP
    
    
    ESPP
    
    
    TotalCost of license fees
    
    
    
    
    
    $
    11
    
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    12Cost of services
    
    
    
    
    
    
    1,198
    
    
    $
    37
    
    
    
    164
    
    
    $
    101
    
    
    
    1,500Sales and marketing
    
    
    
    
    
    
    3,371
    
    
    
    198
    
    
    
    397
    
    
    
    201
    
    
    
    4,167Research and development
    
    
    
    
    
    
    1,427
    
    
    
    29
    
    
    
    162
    
    
    
    176
    
    
    
    1,794General and administrative
    
    $
    250
    
    
    
    3,921
    
    
    
    1,147
    
    
    
    65
    
    
    
    81
    
    
    
    5,464Total compensation expense
    
    
    250
    
    
    
    9,928
    
    
    
    1,411
    
    
    
    789
    
    
    
    559
    
    
    
    12,937Income tax benefit
    
    
    
    
    
    
    (1,540
    )
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    (1,655
    )Total compensation expense, net of tax
    
    $
    250
    
    
    $
    8,388
    
    
    $
    1,296
    
    
    $
    789
    
    
    $
    559
    
    
    $
    11,282
  StockWarrants
    
    
    options
    
    
    RSUs
    
    
    IESPP
    
    
    ESPP
    
    
    TotalCost of license fees
    
    
    
    
    
    $
    30
    
    
    
    
    
    
    $
    4
    
    
    
    
    
    
    $
    34Cost of services
    
    
    
    
    
    
    3,604
    
    
    $
    48
    
    
    
    533
    
    
    $
    107
    
    
    
    4,292Sales and marketing
    
    
    
    
    
    
    9,489
    
    
    
    298
    
    
    
    1,369
    
    
    
    216
    
    
    
    11,372Research and development
    
    
    
    
    
    
    4,682
    
    
    
    50
    
    
    
    516
    
    
    
    208
    
    
    
    5,456General and administrative
    
    $
    691
    
    
    
    10,591
    
    
    
    5,103
    
    
    
    224
    
    
    
    90
    
    
    
    16,699Total compensation expense
    
    
    691
    
    
    
    28,396
    
    
    
    5,499
    
    
    
    2,646
    
    
    
    621
    
    
    
    37,853Income tax benefit
    
    
    
    
    
    
    (4,203
    )
    
    
    (189
    )
    
    
    
    
    
    
    
    
    
    
    (4,392
    )Total compensation expense, net of tax
    
    $
    691
    
    
    $
    24,193
    
    
    $
    5,310
    
    
    $
    2,646
    
    
    $
    621
    
    
    $
    33,461
 14




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##### Table of Contents



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
    
    
    $
    (8.4
    )
    
    $
    28.2
    
    
    $
    3.6
    
    
    $
    42.5
   Maintenance Contracts and
    
    License Contracts
    
    Non-CompeteDeveloped Technology
    
    Consulting Relationships
    
    and Relationships
    
    AgreementsEstimated
    
    
    
    
    
    Estimated
    
    
    
    
    
    Estimated
    
    
    
    
    
    EstimatedUseful Life
    
    
    
    
    
    Useful Life
    
    
    
    
    
    Useful Life
    
    
    
    
    
    Useful LifeFair Value
    
    (in Years)
    
    Fair Value
    
    (in Years)
    
    Fair Value
    
    (in Years)
    
    Fair Value
    
    (in Years)
    
    TotalFirstlogic, Inc.
    
    $
    23.5
    
    
    
    5
    
    
    $
    2.9
    
    
    
    6
    
    
    $
    1.6
    
    
    
    2
    
    
    $
    0.2
    
    
    
    2
    
    
    $
    28.2
  15




---



##### Table of Contents



6. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  September 30,
    
    
    December 31,2006
    
    
    2005Balance, beginning of the year
    
    $
    1,166,043
    
    
    $
    1,067,694Goodwill acquired during the period (1)
    
    
    50,412
    
    
    
    114,119Goodwill adjustments relating to prior year acquisitions
    
    
    934
    
    
    
    (15,617
    )Impact of foreign currency fluctuations on goodwill
    
    
    659
    
    
    
    (153
    )Balance, end of the period
    
    $
    1,218,048
    
    
    $
    1,166,043
 
 (1)
    
    Includes adjustments during the period.   September 30,
    
    
    December 31,2006
    
    
    2005Developed technology
    
    $
    150,957
    
    
    $
    120,972Maintenance and support contracts
    
    
    54,423
    
    
    
    50,837Trade names
    
    
    7,168
    
    
    
    6,043Other
    
    
    3,063
    
    
    
    Total other intangible assets, at cost
    
    
    215,611
    
    
    
    177,852Accumulated amortization on other intangible assets
    
    
    (100,520
    )
    
    
    (67,340
    )Other intangible assets, net
    
    $
    115,091
    
    
    $
    110,512
 16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amortization of:Developed technology (included in cost of net license fees)
    
    $
    7,934
    
    
    $
    5,158
    
    
    $
    20,939
    
    
    $
    15,891Maintenance and support contracts (included in cost of services)
    
    
    2,268
    
    
    
    2,358
    
    
    
    7,740
    
    
    
    6,989Trade names (included in operating expenses)
    
    
    384
    
    
    
    309
    
    
    
    1,053
    
    
    
    985Other
    
    
    205
    
    
    
    
    
    
    
    205
    
    
    
    Total other intangibles amortization expense
    
    $
    10,791
    
    
    $
    7,825
    
    
    $
    29,937
    
    
    $
    23,865
  Remainder of 2006
    
    $
    10,7482007
    
    
    41,5292008
    
    
    38,8462009
    
    
    11,3262010
    
    
    9,859Thereafter
    
    
    2,783Total
    
    $
    115,091
 7. Net Income per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    

September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Basic net income per share:Numerator:Net income
    
    $
    19,569
    
    
    $
    19,567
    
    
    $
    39,855
    
    
    $
    57,712Denominator:Weighted average shares outstanding
    
    
    93,685
    
    
    
    90,552
    
    
    
    93,204
    
    
    
    90,005Net income per share  basic
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.43
    
    
    $
    0.64Diluted net income per share:Numerator:Net income
    
    $
    19,569
    
    
    $
    19,567
    
    
    $
    39,855
    
    
    $
    57,712Denominator:Weighted average shares outstanding
    
    
    93,685
    
    
    
    90,552
    
    
    
    93,204
    
    
    
    90,005Incremental shares attributable to shares under employee
stock option plans, warrants and RSUs (treasury stock
method)
    
    
    1,291
    
    
    
    2,903
    
    
    
    1,718
    
    
    
    2,281Weighted average shares outstanding plus incremental shares
    
    
    94,976
    
    
    
    93,455
    
    
    
    94,922
    
    
    
    92,286Net income per share  diluted
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.63
  17




---



##### Table of Contents



8. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    19,569
    
    
    $
    19,567
    
    
    $
    39,855
    
    
    $
    57,712Other comprehensive income:Foreign currency translation adjustments
    
    
    (1,470
    )
    
    
    (190
    )
    
    
    15,942
    
    
    
    (5,081
    )Unrealized net gains (losses) on cash flow hedges, net of tax
    
    
    319
    
    
    
    740
    
    
    
    (130
    )
    
    
    1,602Realized net (gains) losses on cash flow hedges, net of tax,
reclassified into earnings
    
    
    61
    
    
    
    (542
    )
    
    
    183
    
    
    
    (710
    )Total comprehensive income
    
    $
    18,479
    
    
    $
    19,575
    
    
    $
    55,850
    
    
    $
    53,523
 9. Business Segment Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    

September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net license fees (1):Business Intelligence Platform
    
    $
    99,690
    
    
    $
    104,866
    
    
    $
    300,669
    
    
    $
    315,053Enterprise Performance Management Solutions
    
    
    18,795
    
    
    
    7,884
    
    
    
    48,151
    
    
    
    25,054Enterprise Information Management Solutions
    
    
    13,117
    
    
    
    7,558
    
    
    
    31,787
    
    
    
    20,210Total net license fees
    
    $
    131,602
    
    
    $
    120,308
    
    
    $
    380,606
    
    
    $
    360,317Total service revenues
    
    
    178,833
    
    
    
    141,073
    
    
    
    502,584
    
    
    
    412,248Total revenues
    
    $
    310,435
    
    
    $
    261,381
    
    
    $
    883,190
    
    
    $
    772,565
 
 (1)
    
    The Company does not have VSOE 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    165,268
    
    
    $
    126,840
    
    
    $
    457,911
    
    
    $
    350,319Europe, Middle East and Africa (EMEA), excluding France
    
    
    89,834
    
    
    
    83,378
    
    
    
    260,579
    
    
    
    262,644France
    
    
    22,849
    
    
    
    21,580
    
    
    
    71,145
    
    
    
    69,975Americas, excluding the United States
    
    
    9,882
    
    
    
    10,649
    
    
    
    31,882
    
    
    
    28,895Asia Pacific
    
    
    22,602
    
    
    
    18,934
    
    
    
    61,673
    
    
    
    60,732Total revenues
    
    $
    310,435
    
    
    $
    261,381
    
    
    $
    883,190
    
    
    $
    772,565
 18




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##### Table of Contents



10. Commitments and Contingencies
 Legal matters
     19




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20




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##### Table of Contents



Decision Warehouse Consultoria E Importacao Ltda Business Objects Do Brasil, Ltda.
 Business Objects Do Brasil, Ltda Decision
Warehouse Consultoria E Importacao Ltda
   21




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##### Table of Contents



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




---



##### Table of Contents



 
  
 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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##### Table of Contents



14. Income Taxes
   15. Subsequent Events
 Acquisition of ALG Software
   
 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
  24




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Key Performance Indicators
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions, except for percentages and per share amounts)
    
    2006 (1)
    
    2005
    
    2006 (1)
    
    2005Revenues
    
    $
    310.4
    
    
    $
    261.4
    
    
    $
    883.2
    
    
    $
    772.6Growth in revenues (compared to prior year comparative period)
    
    
    19
    %
    
    
    19
    %
    
    
    14
    %
    
    
    17
    %Income from operations
    
    $
    29.5
    
    
    $
    30.1
    
    
    $
    60.9
    
    
    $
    86.5Income from operations as a percentage of total revenues
    
    
    10
    %
    
    
    12
    %
    
    
    7
    %
    
    
    11
    %Diluted net income per share
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.63
 
 (1)
    
    Income from operations in the three and nine months ended September 30, 2006, reflect
stock-based compensation expense recorded in accordance with FAS 123R Share-Based Payment, an
Amendment of FASB Statements No. 123 and 95 (FAS 123R). See notes 1 and 4 to the condensed
consolidated financial statements for additional information.  25




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006 (1)
    
    2005
    
    2006 (1)
    
    2005Net license fees:Business Intelligence Platform
    
    
    32
    %
    
    
    40
    %
    
    
    34
    %
    
    
    41
    %Enterprise Performance Management Solutions
    
    
    4
    
    
    
    3
    
    
    
    4
    
    
    
    3Enterprise Information Management Solutions
    
    
    6
    
    
    
    3
    
    
    
    5
    
    
    
    3Total net license fees
    
    
    42
    
    
    
    46
    
    
    
    43
    
    
    
    47Services revenues:Maintenance and technical support
    
    
    41
    
    
    
    40
    
    
    
    41
    
    
    
    39Professional services
    
    
    17
    
    
    
    14
    
    
    
    16
    
    
    
    14Total services fees
    
    
    58
    
    
    
    54
    
    
    
    57
    
    
    
    53Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of net license fees
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Cost of services
    
    
    22
    
    
    
    21
    
    
    
    22
    
    
    
    20Total cost of revenues
    
    
    25
    
    
    
    24
    
    
    
    25
    
    
    
    23Gross margin
    
    
    75
    
    
    
    76
    
    
    
    75
    
    
    
    77Operating expenses:Sales and marketing
    
    
    39
    
    
    
    40
    
    
    
    41
    
    
    
    41Research and development
    
    
    16
    
    
    
    16
    
    
    
    17
    
    
    
    16General and administrative
    
    
    10
    
    
    
    9
    
    
    
    10
    
    
    
    9Total operating expenses
    
    
    65
    
    
    
    65
    
    
    
    68
    
    
    
    66Income from operations (operating margin)
    
    
    10
    
    
    
    11
    
    
    
    7
    
    
    
    11Interest and other income (expense), net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Income before provision for income taxes
    
    
    11
    
    
    
    12
    
    
    
    8
    
    
    
    12Provision for income taxes
    
    
    (5
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    (5
    )Net income
    
    
    6
    %
    
    
    7
    %
    
    
    4
    %
    
    
    7
    %
 
 (1)
    
    Costs and expenses for the three and nine months ended September 30, 2006 include stock-based
compensation expense recorded in accordance with FAS 123R. 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
   26




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Total revenues
    
    $
    6.5
    
    
    $
    2.1
    
    
    $
    (7.1
    )
    
    $
    17.1Total cost of revenues
    
    
    2.2
    
    
    
    0.7
    
    
    
    (0.9
    )
    
    
    4.7Sales and marketing expenses
    
    
    3.4
    
    
    
    1.8
    
    
    
    1.4
    
    
    
    9.8Research and development expenses
    
    
    1.7
    
    
    
    1.2
    
    
    
    0.8
    
    
    
    5.5General and administrative expenses
    
    
    0.8
    
    
    
    0.2
    
    
    
    (0.3
    )
    
    
    1.6
   Revenues
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Net license fees (1):Business Intelligence Platform
    
    $
    99.7
    
    
    $
    104.9
    
    
    $
    300.7
    
    
    $
    315.1Enterprise Performance Management Solutions
    
    
    18.8
    
    
    
    7.8
    
    
    
    48.1
    
    
    
    25.0Enterprise Information Management Solutions
    
    
    13.1
    
    
    
    7.6
    
    
    
    31.8
    
    
    
    20.2Total net license fees
    
    $
    131.6
    
    
    $
    120.3
    
    
    $
    380.6
    
    
    $
    360.3Service revenues:Maintenance and technical support
    
    $
    128.5
    
    
    $
    103.4
    
    
    $
    360.6
    
    
    $
    304.2Professional services
    
    
    50.3
    
    
    
    37.7
    
    
    
    142.0
    
    
    
    108.1Total service revenues
    
    
    178.8
    
    
    
    141.1
    
    
    
    502.6
    
    
    
    412.3Total revenues
    
    $
    310.4
    
    
    $
    261.4
    
    
    $
    883.2
    
    
    $
    772.6
 
 (1)
    
    We do not have vendor specific objective evidence (VSOE) 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 .
  27




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Services Revenues .
   Geographic Revenues Mix
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Americas (1)
    
    $
    175.1
    
    
    $
    137.5
    
    
    $
    489.8
    
    
    $
    379.3Europe, Middle East and Africa (EMEA)(2)
    
    
    112.7
    
    
    
    105.0
    
    
    
    331.7
    
    
    
    332.6Asia Pacific
    
    
    22.6
    
    
    
    18.9
    
    
    
    61.7
    
    
    
    60.7Total revenues
    
    $
    310.4
    
    
    $
    261.4
    
    
    $
    883.2
    
    
    $
    772.6
 
 (1)
    
    Includes revenues in the United States of $165.3 million and $126.8 million for the three
months ended September 30, 2006 and 2005, respectively. Includes revenues in the United States
of $457.9 million and $350.3 million for the nine months ended September 30, 2006 and 2005,
respectively.(2)
    
    Includes revenues in France of $22.8 million and $21.6 million for the three months ended
September 30, 2006 and 2005, respectively. Includes revenues in France of $71.1 million and
$70.0 million for the nine months ended September 30, 2006 and 2005, respectively. 28




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Cost of Revenues
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Cost of revenues:Net license fees
    
    $
    10.9
    
    
    $
    7.2
    
    
    $
    29.1
    
    
    $
    21.6Services
    
    
    67.6
    
    
    
    54.9
    
    
    
    194.4
    
    
    
    159.0Total cost of revenues
    
    $
    78.5
    
    
    $
    62.1
    
    
    $
    223.5
    
    
    $
    180.6
  Cost of net license fees .
 29




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Cost of services revenues .
   Operating Expenses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Sales and marketing
    
    $
    121.5
    
    
    $
    103.6
    
    
    $
    362.1
    
    
    $
    312.1Research and development
    
    
    50.6
    
    
    
    42.8
    
    
    
    147.0
    
    
    
    123.6General and administrative
    
    
    30.4
    
    
    
    22.8
    
    
    
    89.7
    
    
    
    69.8Total operating expenses
    
    $
    202.5
    
    
    $
    169.2
    
    
    $
    598.8
    
    
    $
    505.5
   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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in millions)
    
    
    (in millions)Net interest income
    
    $
    4.4
    
    
    $
    2.5
    
    
    $
    11.0
    
    
    $
    6.2Net foreign exchange gains (losses)
    
    
    0.3
    
    
    
    0.3
    
    
    
    (0.5
    )
    
    
    4.8Other income (expense)
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (0.5
    )Interest and other income, net
    
    $
    4.7
    
    
    $
    2.9
    
    
    $
    10.6
    
    
    $
    10.5
 Net interest income
 31




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Net foreign exchange gains (losses)
  Income Taxes
  Liquidity and Capital Resources
  Nine Months EndedSeptember 30,2006
    
    
    2005(in millions)Cash flow provided by operating activities
    
    $
    220.2
    
    
    $
    129.0Cash flow used in investing activities
    
    
    (98.6
    )
    
    
    (118.3
    )Cash flow provided by financing activities
    
    
    32.4
    
    
    
    30.1Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    12.4
    
    
    
    (1.8
    )Net increase in cash and cash equivalents from December 31
    
    $
    166.4
    
    
    $
    39.0
   Operating Activities .
  32




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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
 34




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Critical Accounting Policies
  
    
    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
     Three months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2006Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPP
    
    Warrants
    
    Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    49
    %
    
    
    50
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/A
    
    
    
    49
    %
    
    
    48
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.86
    %
    
    
    3.73
    %
    
    
    N/A
    
    
    
    3.03
    %
    
    
    N/A
    
    
    
    3.86
    %
    
    
    3.71
    %
    
    
    N/A
    
    
    
    2.70
    %
    
    
    N/ATurnover rateFrance
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers / Directors
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    14
    %
    
    
    14
    %
    
    
    11
    %
    
    
    N/ARest of the world
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    8
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    20
    %
    
    
    20
    %
    
    
    11
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value in
    
    $
    12.51
    
    
    
    10.08
    
    
    
    23.80
    
    
    
    8.04
    
    
    
    11.00
    
    
    
    12.51
    
    
    
    12.60
    
    
    
    31.15
    
    
    
    8.23
    
    
    
    7.01Weighted average expected life
(years)
    
    
    5.28
    
    
    
    4.44
    
    
    
    2.00
    
    
    
    0.50
    
    
    
    N/A
    
    
    
    5.28
    
    
    
    4.74
    
    
    
    1.72
    
    
    
    0.50
    
    
    
    N/A
 
 (1)
    
    We used the five to seven years IBOXX Eurozone interest rate
for the stock options and warrants with exercise prices denominated
in Euro granted to French employees and Directors, and the three to
five years IBOXX Eurozone interest rate for the options with exercise prices
denominated in Euro granted to the rest of the world. We used the
Euribor six month interest rate for the IESPP with a subscription
price denominated in Euro. 35




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Recent Pronouncements
 Fair Value Measurements.
 Employers Accounting for Defined Benefit Pension and Other Postretirement Plan.
  a.
    
    Recognize the funded status of a benefit planmeasured as the difference between plan
assets at fair value (with limited exceptions) and the benefit obligationin its statement
of financial position. For a pension plan, the benefit obligation is the
projected benefit obligation; for any other postretirement benefit plan, such as a retiree
health care plan, the benefit obligation is the accumulated postretirement benefit
obligation.b.
    
    Recognize as a component of other comprehensive income, net of tax, the gains or losses
and prior service costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87, Employers
Accounting for Pensions,or No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions.Amounts recognized in accumulated other comprehensive income,
including the gains or losses, prior service costs or credits, and the transition asset or
obligation remaining from the initial application of Statements 87 and 106, are adjusted as
they are subsequently recognized as components of net periodic benefit cost pursuant to the
recognition and amortization provisions of those Statements.c.
    
    Measure defined benefit plan assets and obligations as of the date of the employers
fiscal year-end statement of financial position (with limited exceptions).d.
    
    Disclose in the notes to financial statements additional information about certain
effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation.
 36




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Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, Employers Disclosures about Pensions and
Other Postretirement Benefits,
 Accounting for Uncertainty in Income Taxes. Accounting for Income
Taxes.
 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.
 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 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;
    
    the mix of products and services and the amount of consulting services that our customers
order, and the associated revenue, varies from quarter to quarter and we expect this revenue
mix to continue to vary 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.
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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.
    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.
   39




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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 2005 Document de Référence 2005 Bulletin des Annonces Légales Obligatoires
  40




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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
  As a result of our adoption of FAS 123R, 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.
   42




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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.
   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.
  43




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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 little experience in the on-demand services market;§
    
    We may not be able to deliver these services or any enhancements to these services 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 our on-demand services;§
    
    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;§
    
    We may not be able to comply in a timely or cost effective manner with privacy and other
regulatory requirements that apply to these services;§
    
    We may not realize anticipated market demand and acceptance of this on demand offering;
and§
    
    Sales of the on-demand services 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.
  44




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
    
    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 customer 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.
      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.
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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.
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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.
     47




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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.
     48




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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.
   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.
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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.
      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.
  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.
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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.
   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.
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We are subject to frequent tax audits, where the ultimate resolution may result in additional
taxes.
    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.
 Autorité des Marchés Financiers
 
 53




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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.
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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
   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.
  We have not declared or paid cash dividends to our shareholders and do not anticipate doing so in
the near future.
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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
 
 
 Item 6. Exhibits
 ExhibitNo.
    
    Description3.1 (1)
    
    Amended and Restated Bylaws of
Business Objects S.A., as amended November 2, 2006 (English
translation).10.52 (2)
    
    Business Objects S.A. 2004 International Employee Stock Purchase Plan, as amended October 19, 2006.10.66
    
    Business Objects S.A. 2001 Stock Incentive Plan  Subsidiary Stock Incentive Sub-Plan Restricted
Stock Award Agreement, as amended September 27, 2006.10.74 (3)
    
    Business Objects S.A. 2006 Stock
Plan.10.75
    
    Guaranty by Business Objects S.A. in favor of Citigroup Inc. dated August 30, 2006.10.75.1
    
    Amendment to Guaranty by Business
Objects S.A. in favor of Citigroup Inc. dated November 2, 2006.10.76+
    
    Business Objects S.A. Form of Change of Control Agreement for U.S. Executives.10.77+
    
    Business Objects S.A. Form of Change of Control Agreement for Canadian Executives.10.78+
    
    Business Objects S.A. Form of Change of Control Agreement for French Executives.10.79+
    
    Change of Control Agreement between Business Objects S.A. and Susan J. Wolfe.10.80+
    
    Change of Control Agreement between Business Objects S.A. and James R. Tolonen.14.1 (4)
    
    Business Objects S.A. Code of Business Conduct and Ethics.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 November 6, 2006.(2)
    
    Incorporated by reference to Exhibit 10.53 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.(3)
    
    Incorporated by reference to Exhibit 10.74 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.(4)
    
    Incorporated by reference to Exhibit 14.1 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.+
    
    Management contract or compensatory plan, contract or arrangement. 
 56




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##### Table of Contents



SIGNATURES
  Business Objects S.A.
(Registrant)Date: November 9, 2006
    By:
    /s/ John G. SchwarzJohn G. SchwarzChief Executive Officer Date: November 9, 2006
    By:
    /s/ James R. TolonenJames R. TolonenChief Financial Officer and Senior Group
Vice President 57




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1 (1)
    
    Amended and Restated Bylaws of
Business Objects S.A., as amended November 2, 2006 (English
translation).10.52 (2)
    
    Business Objects S.A. 2004 International Employee Stock Purchase Plan, as amended October 19, 2006.10.66
    
    Business Objects S.A. 2001 Stock Incentive Plan  Subsidiary Stock Incentive Sub-Plan Restricted
Stock Award Agreement, as amended September 27, 2006.10.74 (3)
    
    Business Objects S.A. 2006 Stock
Plan.10.75
    
    Guaranty by Business Objects S.A. in favor of Citigroup Inc. dated August 30, 2006.10.75.1
    
    Amendment to Guaranty by Business
Objects S.A. in favor of Citigroup Inc. dated November 2, 2006.10.76+
    
    Business Objects S.A. Form of Change of Control Agreement for U.S. Executives.10.77+
    
    Business Objects S.A. Form of Change of Control Agreement for Canadian Executives.10.78+
    
    Business Objects S.A. Form of Change of Control Agreement for French Executives.10.79+
    
    Change of Control Agreement between Business Objects S.A. and Susan J. Wolfe.10.80+
    
    Change of Control Agreement between Business Objects S.A. and James R. Tolonen.14.1 (4)
    
    Business Objects S.A. Code of Business Conduct and Ethics.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 November 6, 2006.(2)
    
    Incorporated by reference to Exhibit 10.53 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.(3)
    
    Incorporated by reference to Exhibit 10.74 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.(4)
    
    Incorporated by reference to Exhibit 14.1 filed with our Current Report on Form 8-K
filed with the SEC on October 25, 2006.+
    
    Management contract or compensatory plan, contract or arrangement.